ENSU Committee Meeting

STANDING COMMITTEE ON ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

COMITÉ PERMANENT DE L'ENVIRONNEMENT ET DU DÉVELOPPEMENT DURABLE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 27, 1997

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[Translation]

The Chairman (the Honourable Charles Caccia (Davenport, Lib.)): Welcome to our committee. Pursuant to Standing Order 108(2), we are ready to resume our work on climate change.

Today, we have four witnesses from the Department of Finance.

[English]

Mr. Don Drummond; Mr. Paul Berg-Dick; Mr. Bill Toms, who we know already from the other Monday; and Steve Tierney, who is somewhere in the room.

We welcome you to the committee. I'm glad you were able to come. We thank you for the substantial document that you put together. Without further delay, if you would like to start to take us through your documentation, Mr. Drummond, we'll then have a good round of questions.

Mr. Don Drummond (Senior Assistant Deputy Minister, Tax Policy Branch, Department of Finance): Thank you very much, Mr. Chairman and members of the committee.

In the invitation that we received, and in looking through the transcripts of some of your recent meetings, there were some very specific questions posed on the taxation field concerning the environment. There was also one fairly more general question that was posed sort of on the nature of how we analyse tax options concerning the environment, how we assess them. If you would permit me, I thought I would address those six specific questions, and also that general question on the process, before opening it up to any other questions you may have.

Those questions are what the material we circulated deals with. It looks fairly thick, but the bulk of that is a report on virgin and recycled material. The material addressing those questions is found just in the first 14 pages of that material. I would like to basically just go through that and summarize it.

Maybe I could start with the general question that I picked up from looking through the transcript. That was a question of how we become aware of tax options that might affect the environment and how we assess those. I think the question was largely whether the initiatives come from us, whether the initiatives come from other departments, or whether they come from people outside the department. Well, I must say to you that there is no standard model for this.

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In particular circumstances, things can work in different ways. The government may identify some points through a Speech from the Throne or through an election campaign document. If it wishes to support a certain theme, in those types of circumstances the department will become very busy figuring out what type of policy measures would support that theme. A good number of those ideas may emanate from the department, so some come from that route.

Many of the measures come from outside representations. Certainly, in the work that we're dealing with here, they could come from the National Round Table on the Environment and the Economy, the Pembina Institute, or the Sierra Club. There are all kinds of representations that we receive through the year. Through those, they would come from parliamentary committee reports. An example is the report that will come out in the next couple of days from the finance committee on its pre-budget consultations. It will no doubt have a whole set of recommendations, and we would, on an annual basis when we receive it, do an assessment on each one of those recommendations.

We would roughly estimate that we would receive, either through letters or formal submissions or telephone calls or meetings we would have with groups, somewhere in the vicinity of probably 500 representations a year, with people suggesting what we should analyse with an eye towards changing various different parameters of the tax system. It probably would therefore be fair to say that the bulk of the measures that would ultimately end up being changed and that we do consider come from outside representations. That would be in terms of the policy parameters.

The more technical changes that we make, particularly in the corporate income tax side or the personal income tax side, where we detect that there are elements of abuse in the tax system, often come from Revenue Canada. As they're doing the administration and as they get involved in doing assessments and audits, they'll notice that somebody is using these provisions of the Income Tax Act in a way that wasn't envisioned when you drafted them, so a number of those changes will come through that way.

The other route, which I didn't mention but which is very much a part of it, is our dealings with other departments. It's fairly typical that each year, sometimes usually a couple of months before the budget, we would receive representation from other departments—in this area, most particularly from Natural Resources Canada and Environment Canada, but not exclusively from them—on some ideas that they've been working on. They would ask us to work together with them on assessments of those ideas.

With that, I thought I would perhaps start with one of the proposals that we have received and which fits into that model. It's the proposal for treating bus passes that have been provided by an employer to an employee as a non-taxable benefit. I'll use that a little bit in two senses, one being the substance of the proposal itself. In going through that, though, perhaps I could sort of present a little bit of a model of how the ideas come to us and what we do with the ideas when they come to us—the sorts of things we analyse.

I'm hoping everybody has a copy of the material that we did circulate. The first two pages are my letter to transfer it to you, and on the next page you'll just see the list of the six questions. With that, I'll just go to the first issue.

Basically, the context on this is that if an employer provides a benefit to an employee, whether it's a monetary reward or something in lieu or a monetary reward, it is taxable. That's the way the Income Tax Act is specified. For example, if the Department of Finance provides me with a subsidized parking spot, that subsidy should be taxed in my hands, and it is in this case. Similarly if an employer was to provide bus passes to employees, those passes would be counted as taxable benefits. Under the Income Tax Act as it now stands, they would be taxed in the hands of the employees.

We've received this representation from a number of sources, including this group, municipalities, environmental groups, and transit industries, with a view to changing an element of the tax code: if an employer provided an employee with a bus pass, we would not count that as being a taxable benefit. Obviously, the objectives of that are to increase ridership on public transit, to reduce congestion, and to reduce the emissions that would come from the use of private automobiles.

I will now just go through some of the considerations. As I said, I'll use this as a little bit of a model, but I'll also get into the specifics of this case. You will understand that although it's sometimes suggested that finance officials make decisions for what goes into the budget and what does not, you'll of course know that's not the case. Our role is to analyse the options, to look at the pros and cons, the cost, and what the economic effects are, so that's sort of the model I'll use.

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As for when we receive a representation like that, here's an indication of some of the things we do think about. Part of the representation is typically a suggestion that Revenue Canada does not effectively enforce the provision that a subsidized parking spot is taxed in the hands of the employee. Of course, if that were the case, that would be a problem because that would not be an enforcement of the Income Tax Act. Of course that would bias the relative-price decision between driving your car and taking the bus.

So we looked into that and dealt with Revenue Canada quite extensively on that. We did receive representations from them. To the best of their ability, they do believe they're enforcing this clause.

We spoke to a number of employer groups inside and outside the government to ensure that in their cases, when they were providing this as a subsidized benefit to employees, it was getting reported for income tax purposes. So there seems to be fairly effective enforcement.

There are some difficult areas, though. For example, take somebody in an industrial park. If you're working in a shopping centre and you're provided with parking, there really isn't a price for that parking, so it's very difficult for Revenue Canada to know what to assess.

So there are some gray areas. But we're more or less reasonably satisfied that this is being enforced to the best of Revenue Canada's ability.

The Chairman: Your two pages are quite comprehensive. Considering that you have to go through a fairly thick range of items, I would perhaps encourage you to move on to the next few items and leave them to the members to come back to this during the question period.

Mr. Don Drummond: Okay, fine.

I can do the second item fairly quickly. There was a question—this is just a factual response—of: what excise taxes do we have in the tax system right now that could have a possible environmental impact, a fairly direct one? I'll just briefly show you the highlights of this.

The first, of course, is the gasoline fuel tax, which is 10¢ per litre of unleaded gas and 11¢ for a leaded litre. Diesel and aviation fuel is at 4¢ per litre.

There's an excise tax on heavy and large automobiles that has been in existence since 1976. You can see the weight limits there in that second-to-last paragraph, which are 2,007 kilograms for an auto and 2,268 kilograms for vans and wagons.

If you estimate the weight of your own automobiles, you realize that those are very heavy automobiles. There aren't that many automobiles caught by this tax provision. That's suggested by the amount of money: you can see $5.4 million. There are some very heavy automobiles, but they tend to be very few.

Then there's the special air conditioner tax of $100 per unit on an air conditioner that would go into a car. You can see the figures there: last year, $109 million was collected from that.

The other aspect on the excise taxes is that there isn't an excise tax on some of the alternative fuels, such as ethanol, methanol, natural gas, and propane.

Would you like me to just go through each one consecutively, or did you want to have any questions and comments?

The Chairman: No, keep on going.

Mr. Don Drummond: Okay, I'll go to the third item. As I mentioned, there is right now a heavy-car tax, but the suggestion has been to have a surcharge on fuel-inefficient vehicles. This could be specified differently from what we have. It could be specified at a lower weight or on the mileage.

Again, these are some of the highlights of the considerations we're giving in terms of analysing proposals such as that.

When somebody is faced with a tax like that, they can make one of two decisions. They can decide to buy the car and pay the additional price. Other than having less money, they would still be driving the same amount, and of course using the same amount of fuel.

If they decided not to pay that tax and by buying a less expensive car, they actually would have more income than they were anticipating having. They would have a more fuel-efficient car, but they may actually use that income to drive it more. In a sense, it's an indirect way of getting at that fuel usage.

There's a third decision that they could possibly make if they did have a large car and wanted to replace it with another large car. They would look at the price, which would have gone up quite a bit because of the tax. They may well decide to keep their older car for a longer period of time. Of course, the newer cars are generally more fuel efficient, so it may have an indirect effect of increasing the age of the stock of automobiles.

Another consideration we would have is: what is the use of the automobiles? Many of these cars that are fuel inefficient and quite heavy can quite often be used in car pooling. We wouldn't want an indirect effect or to give an incentive against using car pooling.

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Another feature of this recommendation is to use the revenue out of that in terms of targeting it toward the sustainability of Canadian transportation. You will note that throughout the tax system we have very few earmarked taxes. In fact, one of the major ones, the air transportation tax, will no longer be in the system.

One of the reasons we've had reservations about having earmarked taxes is that if you decide you have a worthy cause and you want support through the government side, and there is no guarantee that the revenue you've earmarked for that will ever be sufficient, it may be more than you need and it may be less than you need. It may be quite variable as the economy and consumer tastes change.

We've traditionally tried to line up our tax and expenditure systems so we're bringing them in independently. If you have a need on the expenditure side, that's funded out of the consolidated revenue fund rather than directly from an earmarked tax.

The next question was the tax treatment of virgin versus recycled material. The question was, following a report by Professor Mintz that was done some years ago, what action had been taken on this file by the government.

This basically summarizes that the action was a report that the government did put out, a number of departments together—Natural Resources Canada, Finance, and Industry—looking at the tax treatment. We did have a session that was organized by the national round table to look at that report.

There was not a conclusion from that report that there were tax disincentives toward recycling, but they did make a number of recommendations on the government procurement side. I believe the representative who appeared before you a week ago Monday touched on some of the procurement elements coming out of that.

I'll now move to the Canadian exploration and development expenses.

In 1995 a memorandum item included in the tax expenditure report showed the write-off for Canadian development expenses and Canadian exploration expenses. I must acknowledge that since we've put that out, it's been the source of a great deal of confusion. Quite often when you write something and then you see how it's interpreted afterward you wish you had written it differently. What was said—but not, obviously, clearly enough—was that this was not a tax expenditure that was associated with the development and exploration expenses; this was the total value of the write-off.

Traditionally when we're doing the tax expenditure on something like an accelerated depreciation we will take the total value of the tax write-off and compare that against what we call a benchmark system, which could be the financial or book amount of the depreciation. That was not done in this case. That's why it was not included as part of the tax expenditure but was counted as a memorandum item.

So from those amounts of $493 million and $599 million, to get at a tax expenditure we would have to subtract what was the book or financial amount of depreciation that went along with that activity. That was done in the report, but it was done back in an annex. Quite rightly, I think, a lot of people have not made the association between what was in the main text and what was in the annex; there was a fair bit of distance separating the two.

On page 9 we reproduce a calculation that was done in the annex using some data from the Petroleum Monitoring Agency. They looked at the financial reports of these companies to see what kind of book depreciation they were assessing. Then we took the difference between the full depreciation under the tax code and what was on the company's books. You can see the amounts there for 1991 of $9 million, and in 1992, $143 million, obviously very considerably below the $599 million shown for the total value.

Natural Resources Canada has made some estimates from more recent years. In fact, they've added 1993 and 1994. Those have not been published but the results they have show actually minus 55, which shows it's not a tax expenditure. In fact, in this case, the book or financial depreciation exceeded the depreciation under the tax code, and $4 million in 1994. This highlights one of the difficulties we have in doing these calculations.

I'll give a bit of background by way of answering the question of why we changed the methodology in 1997. As you can see, the numbers are very volatile, actually switching from a positive to a negative and then back to a very small positive. It does that because accelerated appreciation is not so much a tax preference as a tax deferral. If the acceleration is higher than the company is counting on its financial books, then you would tend to have a tax preference in the early years, because you're writing it off faster for tax purposes than you're writing it off for your financial statement. In later years you may have exhausted your tax allowance, or your tax acceleration, because you're writing it off so quickly, but you still may have a depreciation on your financial statement. It turns out that switching from a benefit in the early years to the tax provision actually gives you less depreciation in subsequent years.

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So depending on the life of a project and where it is in its life cycle, you can get a positive benefit in the early years and a negative effect in later years. That's why you see the numbers flipping around quite inconsistently. There are a few other reasons for that as well.

In 1997, we thought this area differed quite a bit from our normal treatment of the tax expenditures, where we try to get annual numbers going through time. We thought a more relevant way of looking at it would be to calculate what's called the “net present value”. If you think of it as I described that stream, with accelerated depreciation there's a tax benefit in the early years, but there's actually a disadvantage from a tax perspective in the later years.

Let's suppose that averaged out to be zero over the 20-year life of a project. The net present value would say that if it averaged out to zero over a 20-year period, there's still an advantage to the corporation because it's obviously better to have money up front than to lose money at the end. So you apply a discounted rate to it and it discounts the losses you would have later on in the life of the project and tries to make a calculation of what the net present value was.

To put everything on a comparable basis, in the 1997 report we asked what the net present value of the tax expenditure was for a $100,000 investment. There's a table attached to the material I handed out, after page 12, and the very last line of that table is the relevant one, the exploration cost. What this suggests is that for a $100,000 investment in exploration—going to the right-hand column—the net present value of that would be $4,800, so it's about 4.8%. You can see how that compares to some other investments. Some are lower and some, such as wind-generated electricity, are higher.

The table doesn't include an amount for the Canadian development expense because the 30% depreciation under the tax code is roughly similar to what the companies count on their own financial statements. There's a tax expenditure in this case for the exploration, comparing the 100% write-off, the full write-off in a year, against the 30% declining balance.

I'll go to the oil sands example because that continues with the same concept of net present value. The question that was posed here was: what is the income tax expenditure for the oil sands? I'll show you how we can use this calculation of that $4,800 to make a calculation of that. This $4,800 calculation, of course, deals—

The Chairman: Can you indicate which page you are drawing your figures from?

Mr. Don Drummond: I'm now looking at page 11, which is entitled “Income Tax Expenditures for Oil Sands Projects”.

The Chairman: Thank you.

Mr. Don Drummond: The net present value calculation of $4,800 is for a hypothetical investment of $100,000. To get a total value for the tax expenditure, we obviously have to apply how much expenditures are being made in the oil sands projects. If we look at the various different announcements that have been made recently and at the estimates made by our colleagues at Natural Resources Canada, from here to the period through 2010 the intentions add up to about $17 billion.

It wouldn't change substantially if we used $17 billion, but we actually used $15 billion for this calculation because the historical record would indicate that not all the intentions laid out in early stages come to fruition, through environmental assessments, the company changing its plans, etc.

We've made an assumption of $15 billion worth of investment activity here. If we turn back to that table that's after page 12, about two-thirds of the way down, under the subheading “Mining Assets—Oil sands and in situ oil”, you can see that the net present value of the $100,000 investment is between $500 and $4,000.

I'm sorry to make you jump around, but I'm now going to turn back to the top of page 12. We use that calculation to estimate what the total tax expenditure would be on the net present value for the oil sands activity. We're taking that $500 to $4,000, which is .05% to 4%, and multiplying that by the $15 billion worth of anticipated activity in the oil sands area. That straight multiplication gives you a net present value of $75 million to $600 million.

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Of course, the range depends on the nature of the project, whether it's a new project in which there's no taxable income you can write this off against or whether it was an existing project and you can write it off against the stream of income already existing.

So we end up with the range of $75 million to $600 million. That is a net present value of the tax expenditure and not a concept that will apply year by year. That will be a net present value over the life of the project. These projects would typically be for at least 10 years, and in many cases they could be for longer than that. It's very difficult to relate that back to a year-by-year because we would have to know the exact profile of each one of those projects.

That concludes the summary, just drawing out the highlights of the material I've submitted to you.

The Chairman: That will be very helpful, and we certainly can move on now to some questions in depth.

Mr. Casson, Mr. Lincoln, Madam Carroll, and Mr. Knutson.

Mr. Rick Casson (Lethbridge, Ref.): Thank you, Mr. Chairman.

Thank you, gentlemen. The committee was quite critical of the Department of Finance after the last meeting because we felt we didn't get the information we needed, but now I think we have it. Thank you for addressing each one of our concerns and explaining them quite well.

On the $4.4 billion in revenues you raised from federal excise taxes on gasoline and diesel fuel, is that on an annual basis?

Mr. Don Drummond: Yes.

Mr. Rick Casson: Where does that money go?

Mr. Don Drummond: As with all taxes, other than the former air transport tax, that money would go into a consolidated revenue fund. A dollar is a dollar and money is not earmarked in any fashion. It would be blended with the corporate income tax and the personal income tax. It would go to cover old age security, unemployment insurance, the transfers to the provinces, and the expenditures of the Department of Finance. There's no tracing or earmarking of that fund to any particular expenditure.

Mr. Rick Casson: Is it the same when it comes to licensing fees for trucks, trailers, and what not? Do those fees just go into general revenue as well?

Mr. Don Drummond: There is a very small number of examples, and there's been a slightly higher number in recent years in departments where there are actually some penalties and fees that are earmarked to the exact service. But they are not cross-subsidized in the sense that there isn't a fee levied in an agricultural area that goes to support something outside. It's within a single program, but there are very few examples of that.

Mr. Rick Casson: So a fuel tax is not a tax for transportation improvements. It just goes into general revenue and can go anywhere.

Mr. Don Drummond: That's right, absolutely.

Mr. Rick Casson: In the first presentation we were told there's a provision of $20 million per year for three years toward incentives to promote renewable energy.

Mr. Don Drummond: Yes.

Mr. Rick Casson: Then you state here you get a very high tax break for getting into expenses on energy efficient or renewable solar geothermal power. Is that right? You show $12,800 here on a $100,000 investment in that table.

Mr. Don Drummond: Yes.

Mr. Rick Casson: Is that part of the $20 million? Where does that $20 million go? What's it earmarked for?

Mr. Don Drummond: If I'm not mistaken, you're referring to an announcement in the February 1997 budget that a fund was to be set aside of $20 million per year for three years, adding up to $60 million. That would be new money. It would not be related. In fact, in the budget we showed it could be on the tax expenditure side or on the spending side.

I think the work that's been done by Environment Canada and Natural Resources Canada since then has suggested the money probably could be better allocated through the expenditure side than through the tax side, so I don't anticipate that's going to come back as a tax expenditure. But that would not relate to the $12,800. It's new money that's being devoted to that area.

Mr. Rick Casson: Are there no specifics? Is there a program that will be applied for it?

Mr. Don Drummond: I anticipate there will be an announcement on that from the Minister of Natural Resources in the fairly near future.

Mr. Rick Casson: Thank you, Mr. Chairman.

The Chairman: Thank you.

Mr. Lincoln, please.

Mr. Clifford Lincoln (Lac-Saint-Louis, Lib.): I'm trying as a layman to find out how much goes into the oil and gas industry or the fossil fuel industry and the nuclear industry by way of tax benefits and subsidies from the government to these industries.

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If we look at the oil industry, I have some figures here by Natural Resources Canada for the year 1993, which are the value of tax deductions employed by the oil and gas industry. It shows the different facets: capital cost allowance, Canadian exploration, etc., amounting to a total of $6.247 billion for one year, 1993.

So I take it from your explanations earlier that to find out how much tax benefit was derived from that you'd take about 4% of it, so it's about $250 million. Do I understand it correctly?

Mr. Don Drummond: The problem we're dealing with here is that, if I understand the source of the data you're looking at, that's similar to what we probably a little bit inaccurately represented in 1995 as showing the total value of the deduction—

Mr. Clifford Lincoln: Right.

Mr. Don Drummond: —which I don't think anybody would consider to be the tax expenditure value of that. So, on any of those amounts, you would have to say that in the tax system and in companies' financial statements they do have a normal rate of depreciation applied against their assets, and you would have to subtract that from what the total value of the tax deduction was.

For example, for the Canadian development expense deduction at 30%, that's roughly the same rate as companies were deducting, so in that case you would conclude that there is not a tax preference that's allocated to that measure.

Mr. Clifford Lincoln: How can people like us, who are trying to find out, find out first of all on the one side how much totally the oil and gas industry, as one, the nuclear industry, as two, gets in the way of tax benefits overall on an average year, say between 1990 and 1996? How much does it amount to—$200 million, $300 million, $500 million? Somewhere or another that figure must be available, but it's very hard for us to find out.

Mr. Don Drummond: Can I just have a bit of a conversation about what you would want to include in that amount of tax preference. I'm not trying to be difficult with that.

There are a number of very general tax preferences in the tax system. Let me just take an example. We have a low tax rate for small business and there are small businesses in virtually every sector of the economy. If I looked at a certain amount.... For example, in 1993 the benefit of the small business deduction in the oil and gas sector would be $13 million, but that's not a preference that's assigned specifically to the oil and gas sector.

Mr. Clifford Lincoln: I appreciate that. Maybe I put the question wrongly. I'm talking about the types of taxes that are specific to the energy industry, especially oil and gas as distinct from general taxes.

Mr. Don Drummond: Okay. I could do this in one of two ways. I can go verbally through the tax expenditure report and point them out here or I could submit something to you afterwards.

Mr. Clifford Lincoln: I would appreciate if you could submit something. What I'm trying to find out is how much, on an average year, the oil and gas industry, as one industry, gets in the way of overall tax benefits from the federal government. If you take a stretch of five years, is that $100 million, is it $50 million, is it $250 million? Also, what is the corresponding figure for the nuclear industry?

Second, indirect subsidies. For example, in the nuclear industry, if my memory serves me right, when we took over the government there was an agreement that was running, a four-year agreement, which was worth about $700 million or $775 million for four years. It's been renewed with a declining amount every year, and now it's going to be around $100 million a year.

Is there any way of finding out, for these two industries, in one column how much is derived in the way of tax benefits specific to these industries and in another column indirect subsidies?

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Mr. Don Drummond: Sure. I hesitate a little bit to address the direct subsidy issue because I think I would have to turn to my colleagues from Natural Resources Canada for that, but I can certainly speak to them and try to co-ordinate the two sides. I'll just address your issue on the tax expenditure side.

I can highlight a few of them right now, but I will certainly submit to you a table that will provide the comprehensive numbers. In fact, there are very few tax expenditures that are specific to the oil and gas industry, so the number will tend to be quite low.

The ones in the tax expenditure report that have fairly large numbers, for example, loss carry-forward provisions, apply to the whole corporate tax sector. Obviously, oil and gas companies, being quite large, have a fairly substantial portion of that benefit, but they don't realize that benefit because they're oil and gas companies.

The ones that we would include as being specifically tied to oil and gas would be, for example, the difference between non-deductibility of crown royalties and the resource allowance. In fact, that one flips back and forth, and some years the resource allowance is less generous than they would have had if they had deductibility of crown royalties. In fact, the most recent year of data, 1993, shows that there's actually a negative tax expenditure associated with that.

The other one that we would include there would be earned depletion, where the program is now cancelled but there are still existing pools that corporations can claim. That will be, for example, $40 million.

There would be that amount I referred to before in the Canadian exploration expense, but as I indicated, for 1993 actually that was a negative amount and the Canadian development expense would be roughly zero. I can provide you that table, but the number in aggregate would be very low.

In the nuclear industry, on the taxation side, because of the nature of the nuclear industry, it's virtually entirely public entities, and the federal government does not levy taxes on the provincial public entities. In one sense you could count that as a tax expenditure, I suppose, but there really isn't a tax element of the nuclear business. That's really on the subsidy side.

The Chairman: Thank you.

Madame Carroll, followed by Mr. Knutson.

Ms. Aileen Carroll: I'll let Mr. Knutson go at this time.

Mr. Gar Knutson (Elgin—Middlesex—London, Lib.): Mr. Chairman, on Mr. Lincoln's point, the Minister of Finance has invited his colleagues to give him budget advice, and we're looking for information that is simple, easy to understand, and isn't hidden around obscure examples. We can go and say, by the way, Minister of Finance, this expansion in the Alberta oil sands is great news on the front page of the Financial Post, but it's going to be bad news for the environment and here's the cost to the federal government.

I don't think what we're asking for is really complicated. I don't mean to suggest that you're not acting in good faith when you say you'll bring it, but at the end of the day, speaking as a parliamentarian and somebody who is not an expert nor expected to be an expert, it would make my job a lot easier in terms of giving the Minister of Finance advice if I had some simple, easy-to-work-with numbers. So I'll leave that point.

To go through some specifics, on page 12 you mentioned a range of 0.5% to 4%, depending on whether the mine had profits against which to use the fast write-off. These entities don't report on a single mine, or do they? Can they use their write-offs on one mine against income from another?

Mr. Bill Toms (Chief, Resource Taxation, Business Income Tax Division, Tax Policy Branch, Department of Finance): Generally what happens in this kind of circumstance is that with this particular tax incentive, in order to get the full acceleration, the full deduction, you have to deduct it against the income from the mine. But in general, you're correct that a corporation can have many mines, and other deductions can be taken, but in order to get this accelerated deduction it is very specifically limited to the one mine.

The reason for that, from a policy process, is that the accelerated CCA is actually a replacement for something that existed many years ago, in the late 1970s, which was a mining tax holiday. So the government decided in the late 1970s to get rid of a mining tax holiday that would have otherwise allowed mining companies to have three years tax free from any new mine or major expansion of an existing mine. That was changed to accelerated.

Mr. Gar Knutson: Okay. Is the expansion that was in the Financial Post two days ago going to be at the high end of the use of the write-off or the low end?

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Mr. Bill Toms: That is an expansion of the existing facility. Generally, because it's the income from the expanded facility, the existing mine plus the expanded facility, it will be able to deduct it more quickly because it already has income.

Mr. Gar Knutson: So the value of the subsidy will be relatively high.

Mr. Bill Toms: It will be at the high end of that range.

Mr. Don Drummond: Could I address your first point, about having the numbers? The only reason I wasn't giving you the numbers right now...I have a table and I would be happy to table it, but I don't have copies of it right now. It has all the preferences attributed to the oil and gas industry. It includes things such as the small business tax deduction and the loss carry-forwards that affect the oil and gas industry but affect every other industry as well.

As I understood the question, it was what are the preferences that deal specifically with oil and gas. I just thought it would be more convenient for your subsequent use if I prepared another table that dealt with that specifically rather than trying to tell you to pick up that number and ignore that number.

Mr. Gar Knutson: We are the environment committee. The government is saying it's very concerned about greenhouse gases and fossil fuel emissions and the background issue of running out of oil 50 years down the road, so we're trying to get a sense of why we have perverse policies in play. I can't remember the term they used in business school, but it's a lack of synchronization of objectives, or conflicting objectives. That is what we are after.

I want to talk a little about vehicles. With all due respect, when I'm looking at Department of Finance analyses I often get the sense that someone puts on their thinking cap and says, let's find all the reasons why this is a bad idea.

If you look at this, the middle paragraph, on the gas guzzler tax, it says consumers diverted to more fuel-efficient vehicles by higher prices may increase vehicle usage as a result of lower fuel costs. I just bought a Ford Escort. You are saying I'm more likely to drive that Escort than if I had just bought a Crown Victoria. I don't know if you know the difference. One is a really nice car and one is a basic car. Yet whoever did the analysis said, well, let's load on a reason, so they say if it is fuel efficient you are going to drive it more. Well, if it's smaller and more of an economy car, usually a whole bunch of other things are tied into that.

I guess where I am going is if we were to put a tax on gas guzzlers of, say, $1,000 a vehicle, and we collected from 100,000 cars, and we said we would give a $1,000 subsidy to somebody who is going to trade in their old polluting car, to me there would be an obvious reaction to that. Poor people at the lower end of the scale driving these old, beat-up cars would then have $1,000 they could go and take to the dealer and maybe that would make the difference between buying a new car....

I wonder if I could get your reaction to that sort of idea.

Mr. Don Drummond: Sure. There are a couple of reactions.

The reason we made that point is if somebody didn't buy that heavy car and bought the Ford Escort instead because they wanted to avoid that tax, there obviously is a price sensitivity or else they wouldn't have made that decision. They would have bought the Crown Victoria if they weren't sensitive to the price and the tax element. Given that the person is looking at the fuel costs, maybe it is less enjoyable to drive it, but they are price sensitive. There is going to be a lower cost of driving because it is more fuel efficient and they may drive more.

About the sense that there's a mentality of trying to look at how we can reject every idea that comes in, that's not the way I look at it. In the first instance I look at an idea like this and I ask what objective you're trying to achieve. The objective you're trying to achieve is less emission. You are trying to get a more efficient mileage per litre of the overall car stock and you're trying to get less gas consumed. There are many ways of achieving that. This is one way of achieving it, but there are other ways of achieving it.

• 0950

This sort of makes a very discrete decision for the consumer—either they buy that more expensive car or they don't buy that more expensive car. For all the people who have bought the Ford Escort, such as yourself, this is not going to affect you. We haven't changed your price decision. If you're going to drive 20,000 kilometres a year, you're going to continue to drive 20,000 kilometres a year, because this hasn't affected you.

But there are other ways that could affect you; for example, changing the relative price of gas. I know that has been one of the recommendations this group has looked at in the past. That affects everybody, as opposed to a subset.

My mentality isn't always to try to find why this doesn't work. I try to look beyond this and ask what the objective is and whether there are other more efficient ways of achieving that objective.

Mr. Gar Knutson: Let me just change the subject. I'll ask a narrow question and finish with a general question.

I was approached by the railway companies last week as part of their lobby of MPs on the Hill. They want a faster write-off for railway stock than they currently have. What has to happen for the finance department to say this is a good idea or a bad idea?

Mr. Don Drummond: Well, first I'll make my bureaucratic plea that I, as official, am not the one who recommends whether we should do that or not. We have looked at that, and as I say, I could take you through the steps that we go through in analysing a proposal like that.

Mr. Gar Knutson: But you could provide us with a page similar to what you have on other issues?

Mr. Don Drummond: Sure, I could do that.

Just in two seconds, basically we try to line up the tax depreciation with the economic depreciation. More or less—and the railways have acknowledged it—the current tax depreciation in their case is roughly lined up with their economic depreciation. What is out of line is that the American depreciation is much faster than the economic life would suggest in the United States. So the railways are looking at a Canada-U.S. competitive situation.

Mr. Gar Knutson: But they could say we have chosen to subsidize the oil sands where the Americans have chosen to subsidize railways. Right?

Mr. Don Drummond: Yes. I'm not trying to deal with them versus some other sector, but I'm thinking, is their case legitimate? Obviously there is a competitive advantage if we take the capital consumption allowance alone. Between Canada and the United States, there is a competitive advantage in the case of the U.S.

We have looked at the total tax burden that would face the railways, including property taxes, capital taxes, the fuel tax that they would pay, and more or less they line up with the United States. There are differences—the capital cost goes against them—but there are other taxes that are in their favour.

One of the other aspects that we are very—

Mr. Gar Knutson: At what point do you bring in the issue of climate change and environmental protection? I understand you're saying on a tax fairness basis we're in line with the U.S., but we're out of line on the issue of promoting rail.

Mr. Don Drummond: I'm not sure the capital consumption allowance has a very direct effect on the environment. It may have an indirect effect.

There is a second part of their proposal, which very recently they decided to downplay a bit, but it has been there for years as well with the CCA. That is, they want to eliminate the diesel fuel that's applied to their industry.

Mr. Gar Knutson: Yes. We talked about that.

Mr. Don Drummond: One could argue that goes in the opposite direction, and that's making it less environmentally friendly. We haven't done that.

There are many other considerations. Many of the things that we do in the tax policy—and you'll see there's a bit of that in terms of looking at bus passes—is trying to do this mythical thing of making the tax system fair. The corporate tax burden is higher in Canada than it is in the United States. We know that. There are cases where that's probably not the case, but we can't—

The Chairman: A second round.

Mr. Gar Knutson: We've been cut off.

Mr. Don Drummond: Okay, fine.

[Translation]

The Chairman: Mr. Pierre de Savoye, the floor is yours.

Mr. Pierre de Savoye (Portneuf, BQ): These tax deductions we are discussing today are incentives to encourage industry or consumers to behave in a certain way.

Obviously, as you indicated, there are options. If we do this, we think that that may happen. However, there could be another compensating effect and we would be back at the starting gate. You pointed out, among other things, how this can happen in the way that we use cars. A big car costs more money and uses more gas, but perhaps I will put fewer kilometres on it. A small car costs less money and uses less gas, but perhaps I will put more kilometres on it. When you get right down to it, I wouldn't have done very much to change the situation.

We can encourage investment, we can encourage or discourage use and we can encourage or discourage tendencies, but there is always a limit as to what we can do because there are always alternatives. For example, when there are too many taxes, a black market may develop and the situation goes back to what it was before.

• 0955

I would guess that you make decisions in the hope that you will obtain results. You have objectives in mind and I would imagine that these are measurable objectives. You have a means of measuring to what extent you have met your objectives in order to verify whether you made the appropriate decisions.

As far as the environment is concerned, do you run pilot projects before making your decisions? Do you conduct any statistical studies? Have you defined the measurable objectives to be reached in the various sectors that we have just discussed?

Up until now, we have talked about options. We have heard "we believe that, however", but, in reality, you do not make these decisions thinking one thing and hoping for something. You make these decisions based on solid facts. In this particular case, have you got any solid facts? What are your measurable environmental objectives?

[English]

Mr. Don Drummond: Let me address the more general point you made at the beginning in terms of lining up our objectives with the instruments we have. Many of the representations that come to us, and a couple we talked about here, are of the nature that we should subsidize a certain environmentally friendly product or activity, and the bus passes are an example of this, or we should tax one that's environmentally unfriendly, such as the tax on energy inefficient automobiles.

I can't help the economist in me saying there are two ways of looking at this problem. You have to ask yourself why doesn't everybody in the country now take a bus, why doesn't everybody in the country live in an R-2000 home? The answer, more or less, is because the price of the alternative isn't that high, it doesn't cost you that much more to drive your car to work than it takes to drive a bus. Depending on where you live and your heating preferences, it takes you a lot of years to get an energy saving from buying an R-2000 home.

The Chairman: If you live 20 kilometres away from downtown and there is no public transit, you have no option. Has that occurred to you?

Mr. Don Drummond: In many cases there's not an option, but there are an awful lot of people who drive to work for whom there is an option.

The Chairman: There are a lot of people who have to drive because there is no option—

Mr. Don Drummond: No, I'm not denying that at all.

The Chairman: —because of our land use policies, which is another discussion. But the picture is not as simple as you put it, Mr. Drummond.

Mr. Don Drummond: I'm sure none of us have to look very far away from ourselves to realize that there are many people who drive to work when they do have an option of taking the bus and they don't. In part it comes back to an economic decision of what is the relative cost of each one of them.

The Chairman: It comes down to convenience decisions then.

Mr. Don Drummond: That's an element of it, but there are two ways one can approach this. One can tax the heavy vehicles, one can subsidize the insulated windows, subsidize the R-2000 homes, or one can change the relative prices.

Mr. Pierre de Savoye: Have you done any studies on this? This is the essence of my question. I understand all this, it's obvious, but do you have any reliable studies or numbers, by which you take your decisions and orientations, that could drive us toward this solution or that solution based on facts?

Mr. Don Drummond: It's hard in this thing to do it in facts because it ends up that you're doing it on the basis of inferences because you're doing it on the basis of models that try to predict behaviour.

For example, what would be the end result if we had this tax on a few inefficient vehicles? One can make inferences, but it's hard to base it on facts because we haven't done it.

Mr. Pierre de Savoye: Any successful corporation does exactly that, skilfully.

Mr. Don Drummond: Sure, and there are models of this that would try to predict this behaviour. Whether they're accurate and that's what happened or not, you really have to do the experiment in order to find out.

Mr. Pierre de Savoye: Have you done so?

Mr. Don Drummond: We haven't done the experiment because we don't have the taxes, so we don't know. We have the models, we've looked at the inferences of what would happen if you did various different activities.

Mr. Pierre de Savoye: Are they available to us, not the bulk, the conclusions?

Mr. Don Drummond: Sure, we could draw together literature. It's not just the work that's been done in the Department of Finance, it's been done by a number of the institutes as well. I would say that the bulk of the work has been done by academics and the various different research institutes. But we could see what we could pull together for you on that.

Mr. Pierre de Savoye: My point is from your department, the options you're looking at. You've mentioned some here, but basically we don't have the bottom line. If we do this we will reduce gas emissions by that much according to this model. I understand this is not an absolute science, but it is a better science than just having options and guesses and literature.

• 1000

Mr. Don Drummond: I'm not sure I understand which options you want us to look at.

Take the example of the first one I have in here, about the bus passes, which also draws on the work from the Federation of Canadian Municipalities in terms of the number of new riders. We've looked at the studies that have been done in the United States by the General Accounting Office in order to estimate how many of those would be existing riders versus incremental. So there's an empirical analysis on that option, where we tried to estimate what the new ridership would be and what the costs would be per rider. I'm not sure what other options you were referring to.

Mr. Pierre de Savoye: For that one, what are those numbers? What if we do it? What if we don't? Is it significant? What amount of dollars will we lose or gain? What will be the net effect? What are the other options on a cost-benefit basis?

Mr. Don Drummond: I did briefly summarize that in the material, using those studies that have been done plus the work we've done. It suggests that the revenue cost would be about $75 million a year and that the incremental effect would increase public transit ridership by about 5%. If you put those two together, it suggests an annual cost of about $1,500 per new rider, because—

Mr. Pierre de Savoye: If I were the CEO, what I would like to have is one sheet of paper. Give me the different options and their cost-benefit ratio and I'll pick the ones where my money will give me the biggest bang for my buck. Can you supply us with that?

Mr. Don Drummond: I'm not trying to be difficult, but you would have to give me something a little bit more precise, because there are different objectives. One of the objectives of the bus passes, to come back to that example, is a reduction in the emissions of CO₂, but that's not the only objective. Another is congestion.

Another example is that of shifting an electrical utility from coal to natural gas, and that may have a bigger impact on CO₂ emissions, but it's not going to do anything for the congestion in downtown Vancouver and Toronto. It's sort of hard to match up the different options. They can be so different.

Mr. Pierre de Savoye: I know it's hard. If it were easy, we wouldn't be here.

Thank you, Mr. Chair.

The Chairman: Merci, Mr. de Savoye.

Mr. Drummond, perhaps this is an unfair question to ask you, because probably it should be asked of the officials of Natural Resources, but they declined to appear this morning, so our only vehicle to raise the issue is through you. Where are the data to be found that would indicate, for each specific tax measure, what the resulting reduction in greenhouse gas emissions would be?

For instance, as in the case of Mr. de Savoye a moment ago, if you were to introduce this metro bus pass measure, you can readily calculate the cost, as you did for us, and you could conclude, as you did for us, that it would be perhaps unfair in terms of equity, if you like, as you do in the last paragraph of your presentation. But you do not indicate, and there must be a reason, what potential tonnage could be achieved in the reduction of greenhouse gases. Do you engage in this kind of exercise in the finance department?

Mr. Don Drummond: No. We don't have an estimate of what the reduction would be in that case.

The Chairman: Who in the Government of Canada does?

Mr. Don Drummond: As you indicated at the outset, Natural Resources Canada would be looking at that.

The Chairman: Can you tell us who specifically does this work?

Mr. Don Drummond: Yes. I think it's the gentleman who appeared before you on Monday, November 17, Mike Cleland.

The Chairman: Do you mean Mr. Cleland?

Mr. Don Drummond: Yes. And at Environment Canada there is Avrim Lazar, who is the ADM of the policy group of Environment Canada. I think he appeared before you as well.

The Chairman: It's very regrettable that the Natural Resources people couldn't appear, because the quantification of each possible taxation measure is now becoming necessary, don't you think?

Mr. Don Drummond: Yes, I agree.

The Chairman: Now can we focus for a moment on oil sands?

Suppose that tomorrow the Minister of Finance calls you into the office and says we are now entering a new phase; we have to stabilize soon and then reduce over the next 10, 20, and 30 years. He says, “Mr. Drummond, tell us what measures are needed to discourage oil sands extraction.” Which measures would you recommend to Mr. Martin?

• 1005

Mr. Don Drummond: I'll give you a sample of the nature of my interventions with Minister Martin.

First of all, I guess I wouldn't answer that question directly. Just as you probably don't appreciate it, he usually doesn't appreciate it when I give that answer.

I always come back to the same thing: what is our objective here? If our objective is to reduce CO₂ emissions—

The Chairman: I said to you it's to discourage oil sands extraction because—

Mr. Don Drummond: But if we're reducing oil sands—

The Chairman: —the CO₂ emissions of oil sands are 10 times the emissions of conventional petroleum. So that is the objective; and you're asked only a technical question, not a policy question.

Mr. Don Drummond: That's not usually how our discussions go.

First of all, I don't accept that the emissions from the oil sands are 10 times greater if one looks at it on a comparable basis, because the oil sand is further down the refining process than something coming from conventional oil. But I think the broader question I would try to discuss with him is if our objective is to reduce carbon emissions, what is the most effective way of doing that? It may be reducing the oil sands, but that's not necessarily the case.

I would endeavour first...and I think in some of the other questions what you're trying to get at is you really want an array: for a dollar of activity or a dollar of tax lost or activity, what is the biggest bang in carbon emissions? It may be oil sands. I'm not a physicist. I'm not a scientist. I don't have the evidence right now that suggests the biggest bang for a dollar of activity is in the oil sands area.

The Chairman: All right. We may be wrong, but right now we make that assumption, that oil sands ought to be discouraged. Therefore we need to know which are the tax measures to achieve that goal.

Mr. Don Drummond: I think that leads you to a fairly narrow set, because there aren't a lot of tax measures that apply to it. It would be something in the exploration and development field. It would be changing something to do with the 100% write-off on the exploration expenses, either changing that ratio or changing what you could apply it against, or making the development expenses less than 30%; although I say right now the 30% is roughly in line with what their book depreciation would be, so it probably would be on the exploration side.

The Chairman: What is the loss in revenue at present?

Mr. Don Drummond: It comes to that calculation we did on the net present value. Depending on what the nature of the project would be, if we take that $15 billion of anticipated oil sands, the net present value would be in the range of $150 million to $600 million. Again, that's not the annual figure. That would be the net present value over the life of those projects.

The Chairman: Is the 4.8% the one you're referring to?

Mr. Don Drummond: The 4.8% is the upper end of the range that would give you that number.

The Chairman: And is that the yearly figure, or is it the value for the total project?

Mr. Don Drummond: No, the range of the $150 million to $600 million is the net present value. It's not an annual figure.

The Chairman: So the project that was announced on the front page of the Globe business section on Tuesday of this week, or Monday—

Mr. Don Drummond: The Syncrude project.

The Chairman: —I believe it was Suncor—with a number of other projects listed as well in that clipping: what is the loss of revenue resulting from that particular tax expenditure?

Mr. Don Drummond: As Mr. Toms was explaining in response to the earlier question about the nature of that project, because it's an expansion of an existing site, they would have income on which to claim the deduction again. At the beginning I said the range for $100,000 worth of investment is between 0.5% and 4%. That particular project would be toward the upper end of that range. I'm not sure exactly what their dollar was, but you could basically take the dollar value of the project they announced and take 4% of that and that would be the net present value of the tax expenditure.

The Chairman: So it would be 4% of $15 billion.

Mr. Don Drummond: It would be 4% of whatever their announcement was, $3 billion, I think.

The Chairman: So at present we are engaging in a policy whereby we favour activities that are greenhouse gas producing by way of tax incentives. Is that a fair conclusion?

• 1010

Mr. Don Drummond: What do you mean when you say we're favouring it? Do you mean relative to conventional sources or relative to alternative sources?

The Chairman: You provide subsidies that are not provided to other industries.

Mr. Don Drummond: In the table I handed out at the back of page 12 you can see that the oil sands aren't the only ones that have accelerated appreciation provisions.

For example, if we look at electrical generating equipment using wind, solar, and geothermal energy, which is the second item of that, you'll see for the $100,000 investment the net present value is $12,800.

The Chairman: Is that on page 86?

Mr. Don Drummond: Yes, that's right. It's out of the 1997 tax expenditure report.

There's a range depending on the nature of the asset and what type of baseline tax depreciation rate would be applicable. In this case under electrical generation, if it didn't qualify for class 43.1 it would fall into a class with a 4% depreciation, so the net present value of that tax expenditure would be $12,800.

The Chairman: Could you give this committee a ballpark figure on the total value of deductions that are given to the oil sands industry at the present time?

Mr. Don Drummond: Sure. That was the question on which I endeavoured to give you a summary table. I could read out the numbers. But if I restrict it to preferences that are given because you're an oil and gas company, as opposed to being a small business that gets a small business deduction, and I go through the numbers for 1993, there's a tax loss to the company by not being able to deduct its crown royalties of $387 million. Against that there's a tax preference of $420 million for its resource allowance. So we have to take the net of those two figures, which would be $33 million.

The Chairman: Are you reading from a specific page?

Mr. Don Drummond: No. That's why I hesitated to give you this. I can send it to you separately. I have it here but I don't have copies of it. This table has all the preferences, including the small business tax deduction, so it's not quite in the format you wanted. I tried to ask earlier whether you wanted me to read those out or send you a clean copy of the table afterwards.

The Chairman: But can you not give us the net figure for each year?

Mr. Don Drummond: For the year 1993 it would be $33 million. The difference between the crown royalties and resource allowance and the earned depletion amount would be $40 million.

The Chairman: In 1994.

Mr. Don Drummond: The $40 million of earned depletion is an incentive that is no longer in existence but there are still old pools of earned depletion that corporations can tap into.

The Chairman: So it's $33 million in 1993 and $40 million in 1994.

Mr. Don Drummond: No. This is for 1993. I've given you two items. The net difference between the crown royalties and resource allowance is $33 million. Add to that the value of the earned depletion, which is $40 million, for a total of $73 million in 1993.

The Chairman: What is the amount for 1994?

Mr. Don Drummond: The latest year in which we have detailed figures is 1993.

The Chairman: Would they be higher?

Mr. Don Drummond: I would hesitate to guess at that because the difference between the crown royalties and the resource allowance swings back and forth between positive and negative.

The Chairman: Would it be fair to say that in 1997, because of the latest budgets, the figure would be considerably greater than in 1993 once it is calculated? Is it anticipated to be the same, less, or more?

Mr. Don Drummond: I really can't guess at that because the major determinant is the difference between the crown royalties and the resource allowance, and that difference changes year by year. It swings quite wildly between being positive and being negative. It certainly can swamp an amount such as that earned depletion.

The Chairman: So you don't have a figure for 1994.

Mr. Don Drummond: The latest year in which we have detailed numbers by sector is 1993.

The Chairman: When will you have the 1994 figures?

Mr. Don Drummond: They'll be with the 1998 report, which is anticipated for this spring. It would have one more year.

The Chairman: I have one brief question on what you said earlier about accelerated depreciation. Isn't accelerated depreciation at times also a form of tax expenditure? It may never be paid. It may never be realized.

• 1015

Mr. Paul Berg-Dick (Director, Business Income Tax Division, Tax Policy Branch, Department of Finance): When you have a tax expenditure or an accelerated depreciation, earlier on you're taking more. Later, you've obviously used it up, and in those cases your financial statements will catch up.

The issue is, if you're always growing, then perhaps your tax values will exceed your book values. But as was indicated earlier, we see quite a bit of variation between years as to what was claimed for financial statement purposes, which is what was claimed for tax purposes. In terms of some of those years, we actually had situations where they claimed less for tax purposes than they did for financial purposes, thereby generating a negative number, if you like, in terms of the difference between those two calculations.

It's further complicated, because with this year-over-year business we see that the depletion amounts are still being claimed even though that measure was eliminated back in 1987. So in terms of looking at the amounts that are claimed for tax purposes and trying to match it up to what was claimed for financial purposes and taking the difference as an estimate of the tax expenditure, that has been a very difficult task, given both the flows and ups and downs in this particular sector.

That's really what has led us to try to set out for a typical investment what the benefit would be over the life of the entire project, as a way to try to give Canadians a better sense as to the tax expenditure that's put in place.

Those kinds of differences you're referencing are the kinds of numbers we provided in the submission in terms of looking at that for 1991, 1992, and 1993 for the oil and gas sector.

The Chairman: There are a number of members who would like to question in the second round. Let me conclude quickly with virgin versus recycled.

If the government were to decide to favour recycled materials, what would be the tax measure that you would have to come forward with?

Mr. Paul Berg-Dick: I think the difficulty was that when we had the session last December with the group of various representatives, there really wasn't a consensus as to how—

The Chairman: Yes, we know that. We've seen that in your paper.

I'm asking you what tax measure would you introduce if the government were to decide in favour of giving recycled material a certain tax advantage so as to be better treated than it is now?

Mr. Paul Berg-Dick: Again, you have to go back to this: What types of recycled material are you trying to encourage? What are the difficulties that are being faced currently in the market? What are the mechanisms, not necessarily coming to tax, but what are other alternatives in terms of grants, or other things in terms of trying to encourage whatever element of the recycling business you're suggesting? Then within tax, there's a variety of instruments we use, but you really have to go back to your objective in terms of—

The Chairman: The objective is to favour recycled material.

Mr. Don Drummond: Yes. I guess I could use that by way of an example as to how we approach issues. If those were the instructions we have, to come up with something that would favour recycled materials, we wouldn't immediately start with what tax parameter we could do. We would typically look at what are the barriers facing that industry, and quite often we would look at that.

They're not necessarily directly tax elements. There may be a problem with developing a technology. That might be some change in the scientific and research tax credit. Quite often, and this happens very often in these industries, there's a financing difficulty on which a tax incentive that may come down the road is not necessarily of very much assistance. That's why I was referring to the $20 million per year that was set aside for three years in last year's budget and in this type of area. We didn't preclude that this could be a subsidy versus—

The Chairman: Fine, but let us assume that all these obstacles were not to exist or would have been eliminated. What would be the tax measure that you would propose in order to favour recycled material, period?

We can get at least a straightforward answer from you guys, can't we?

Mr. Don Drummond: Yes, sure.

The Chairman: Then give us an answer.

Mr. Don Drummond: What recycled material are we talking about?

• 1020

The Chairman: Forget about all the other obstacles that have been eliminated in research and other financing.

Mr. Don Drummond: Okay. Without prejudice to what recycled material we're talking about and what the particular problem might be for that industry, typically, what people want is in this area of accelerated depreciation.

The Chairman: Evidently, you have not given much thought to this subject; otherwise you wouldn't be so hesitant in giving an answer. Right?

Mr. Don Drummond: Well, when we look at things, we'll be looking at a specific problem or a specific recycled material.

The Chairman: Choose your specific problem then. I'll leave it to you.

Mr. Don Drummond: As I said, more or less, if there's a problem in terms of the technological development that has traditionally something to do with the scientific tax credits—

The Chairman: Yes, but I just told you that there is no technological problem in this particular instance. Everything has been resolved, but there is a determination on the part of the government of the day in 2004 to provide a taxation incentive for recycled material. What would be the tax measure you would propose?

Mr. Don Drummond: Let me pick an example. Let's just take containers for soft drinks that are not recycled.

The Chairman: Fine.

Mr. Don Drummond: We have containers for soft drinks that are recycled. I guess my temptation in that case would be not to give a tax incentive to the recycled one but to levy a tax on the one that isn't recycled.

In a sense, it comes down to the same thing. It may be a more efficient and direct way of getting at that problem. You have to raise the relative price of the material that's not recycled and lower the relative price of the recycled material. You can either do it through a subsidy or a tax reduction on the recycled material, which is sometimes difficult to make sure they can take advantage of that. It may be more efficient in that case to put an additional tax—it could be an excise tax—on the product that's not recycled.

The Chairman: Has it started to be conducted on that particular example?

Mr. Don Drummond: That hasn't been given consideration, as far as I'm aware.

The Chairman: All right, thank you.

For the second round, Mr. Casson, followed by Mr. Knutson and Mr. Lincoln.

Mr. Rick Casson: Thank you, Mr. Chairman.

We talked a bit. I think where some of us are coming from is that in terms of the tax credits or tax deductions for some of these energy projects, we could lessen or reduce that and use that amount of federal money to finance environmental issues.

What would be the federal government's tax revenue on a $15-billion project spread over ten years? These are the taxes you would get from income tax, all forms of tax. What would that be? What would you net? Maybe in this table you're going to give us on what the deductions are from, you could show us what the expected revenues would be for the federal government. That's not only in oil sands or the oil sector, but for any energy.

Mr. Don Drummond: I'm sorry, but it's just so difficult to answer that particularly in the nature of the corporate profit taxes, because the tax has little or nothing to do with the size of the project. If the project didn't reap a profit, we wouldn't get any taxes on the thing. If it was extraordinarily profitable, we would get a lot of tax. I don't know at the outset what their type of profits would be.

But basically, the oil and gas sector would apply to the full corporate tax rate, so we would get somewhat more than one-quarter of whatever profit flow came from that.

Of course, to answer that question completely, we have to look at what the employment impact and the wages of that would be. Again, on average, these tend to be fairly high-wage jobs, so we would be probably getting between 35% and 40%, on average, of the type of payroll that these corporations would be getting as well. But the number would vary so much with what the profit stream would be.

Mr. Rick Casson: As for $4.4 billion you collect now on fuel taxes, I would suggest that this is a chunk of change and it's enough. Maybe we should be using some of that to fund some of the other things.

We're paying enough taxes. As you indicated, corporate tax, income tax, all forms of tax are high enough. We should be looking at ways of using what we already have instead of trying to find other—

Mr. Don Drummond: You're raising a very fundamental issue, though. It comes down to—this is if we take carbon emissions—where the carbon emissions arise from. Are they arising from production or consumption? No doubt there's a bit of both, but I think it would be fair to say that the majority of the emissions are coming from the consumption side.

• 1025

In analysing that question, what I'd want to look at is what the emissions difference would be between producing the oil in Alberta, say, and consuming it in Ontario, versus still consuming the same quantity of oil in Ontario but having it imported.

Again, I'm not the scientist, but certainly the results I have seen would suggest that there would perhaps even be an increase in the emissions in the imported oil versus the domestically produced oil. If one takes it to the extreme and we shut down the Canadian oil industry I'm not sure that's going to have an awful lot to do with the emissions control if we have the same type of consumption.

Of course, to affect the consumption we wouldn't be talking about changing these types of oil and gas exploration and development incentives. Then you're really getting at the price signal. That's where the excise taxes would come in. That is our mechanism at the moment for affecting that price signal, the only thing that really affects the consumption of the energy that leads to that carbon emission.

Mr. Rick Casson: In terms of the variance you have in this table you showed us after page 12, the one for using wind, solar, and geothermal energy is quite high. Is that based on the fact that it's environmentally friendly? What's that based on? You know, you have vessels as high, railcars....

Mr. Don Drummond: Sure. It really comes from looking at the difference between what's shown in the second and third column.

You mentioned vessels. Vessels are depreciated over a three-year period. It's a 33.3% straight-line depreciation in the tax code, whereas on the baseline case it's 15% declining balance. So you're looking at the difference between 33.3% and 15%.

In the case of electrical generation, you're looking at a difference between 30%, which is the class they fall under in the tax code, and 4%, which is where they would fall in if we didn't have that special tax code for them. There is obviously a very big difference, which leads to the very high number of $12,800.

By the way, that's why you don't see the development expenses here. The tax code is 30% but that's also with the baseline tax depreciation as well. There's no present value or tax expenditure in that case.

On the oil sands, you can see the difference is between 100% and 25%, which is why that number tends to be quite high.

Mr. Rick Casson: Thank you, Mr. Chairman.

The Chairman: Mr. Knutson, followed by Mr. Lincoln.

Mr. Gar Knutson: I don't mean this to sound facetious, but the reputation of our finance department is that it's sort of the lead department in the government. It's the most powerful department in the government. It never loses in its battles against other departments.

I can't say I speak for the other members, but from my own personal viewpoint, if the government is serious about its 12-year commitment on reducing greenhouse gases, first of all, 12 years is not a very long time. Cars that are going to be produced over the next 4 to 6 years are still going to be on the road 12 years from now. We don't have a lot of time. The most powerful ministry in the federal government is going to have to become actively engaged in bringing forth proposals and things that the department would be willing to stand behind and say what gives us the best value for dollar in terms of the issue of reducing greenhouse gases.

The other background assumption I'm making is that the market, if left to its own, will not solve the problem. Governments are going to have to intervene.

The other viewpoint I have—and I don't make these comments lightly—is that it seems at times that, for example, NRCan may be wedded to nuclear and to a whole bunch of other policy considerations that may make it not the best choice for an environmentally friendly or a really aggressive green policy. Unfortunately, the environment department, if left solely on its own, without the support of Finance at a minimum, isn't going to win the battle either.

To follow Mr. de Savoye's point, if the finance minister were to ask you to come to him six months from now with four or five proposals we could implement, do you think you'd be ready to do that?

• 1030

Our objective is to reduce greenhouse gases, to get the best value for dollar at the least amount of cost and the most amount of reduction. That's our objective. I know it's a complex question, but we don't have a lot of time.

Mr. Don Drummond: I welcome the question, because I would seek the same thing that a number of you said you're seeking. I would seek an array of activity that, on a per dollar basis, is going to give the biggest bang on carbon emissions. I think you know the answer I'm going to give you: we don't have that right now. We don't have that at Finance; we don't have that in the government; the country doesn't have that. There are various different views on that, but if I want to get at CO₂, should I concentrate on the coal-generated electrical utility, or should I concentrate on transportation? We don't know the answer to that.

As you asked, are there four or five things that we can implement? I guess my hesitancy is there because there are all kinds of proposals—subsidizing R-2000 homes, insulated windows, the bus passes, and what not. I think we all know that those, by themselves, are not going to achieve the objective. We need something more fundamental in terms of a policy change, and something more fundamental in the behavioural change, but what's going to be the most efficient way of getting that? Is it going to be something operating through the price signal, which could be a consumer end tax change? Is it tradable permits?

There has been a lot of research done on tradable permits. I don't think anybody really knows how they work. We have a very useful experimental program in British Columbia. We have also seen a sulphur program in the United States. It seems to provide a useful model, but on a limited basis for one particular aspect. And then thrown in there and maybe making it more complicated is the aspect of internationally traded tradable permits.

I guess it's just that if we're going to implement something right away, I think we should reflect very long and hard before we implement fairly marginal measures on an ad hoc basis. We should try to get a better handle, from both a scientific perspective and an economic and policy perspective, on what's ultimately going to be needed to achieve these objectives.

Mr. Gar Knutson: If you assume we're at war—if we can use that language—against rising sea levels, or at war to prevent kids from going to hospitals with more asthma attacks or whatever, if we don't act, people are going to die. If we were starting a war, we wouldn't say, “Let's spend eighteen months at study”, which is one number I read in the newspaper; “After Kyoto, we're going to go off to study the issue for eighteen months.”

I understand that, as somebody who wants to do the right thing and understands the importance of study and how big and complex an issue it is. But surely to God there are at least a few things that we can start doing today, whether it's a quicker write-off for railways or putting $100 million into wind turbines or something. Twelve years from now we may look back and say maybe it wasn't the best value for a dollar, but at least we had a sense of urgency about what we were doing and we tried some things. Maybe three or four years down the road some marvellous new technology will come on the scene that cuts the problem in half. We just don't know.

I guess what I'm asking is if the finance department—and you're the senior assistant deputy minister—has a sense of urgency about this. How quickly can we expect that you're going to start contributing some solutions, more than, “Well, we have to consult with the municipalities and we have to consult with the provinces and we have to come out with a co-ordinated policy”. That's all good stuff, but we need some specifics at some point. Unless you folks are on-side, that's not going to happen. Unless you folks are on-side, to me that's a clear signal that the government is not serious about this.

Mr. Don Drummond: Let me deal with that last point, because it was also the first one you raised in terms of the role of Finance.

I completely accept that there is not one shadow of doubt in my mind that the Department of Finance has to be engaged in this. You've described those departments as embattled. I view it as a partnership rather than as battles. I think we all have a common objective in this, and we work very well with Natural Resources Canada and Environment Canada on this file. We are going to be engaged; we have to be, because anything that is done not only has the policy dimension and the fiscal dimension, it's obviously going to have an impact on the economy, which is the lead responsibility of the Minister of Finance—and I take that as a given.

In terms of the sense of urgency, I don't feel a sense of urgency to, within months, start implementing a bunch of measures. But I do feel a sense of urgency—and I don't just feel it for Finance, I feel it for the government and I feel it for the country—as we try to sort out what the best way of doing this is.

• 1035

You came with your analogy of a war. If one were in a war situation and you asked me what I would do immediately, I would just put some extraordinarily high excise tax on the consumption of energy products. You asked for evidence. When we saw the relative price increases in oil in the 1970s, we saw everybody starting to drive small cars. That has an effect.

But I can't say to you right now that's the most efficient way of doing it. There may be a manner of doing it through tradable permits that has the same result and does far less damage to the economy. I think what we need, and it's not going to be done in a matter of a week or so, is to figure out what is the most efficient way of getting to that end point. I feel there's a sense of urgency to try to sort that out.

Mr. Gar Knutson: My point is if part of the solution is building subways and it takes six years to build it—design it, get the land, and build a subway—well, that's not much good if we start putting money into subways in the year 2010. A lot of these things are going to take a long time to come into effect. If we lower the capital cost allowance or increase the write-off for railways, we're not going to have a whole bunch of railways six months after that. It's going to take a long time for that to have an effect. So just as the Governor of the Bank of Canada has to try to tweak interest rates while trying to figure out where the economy's going to be a year and a half down the road, because that's how long it takes to give effect, the longer these take to effect, the more we have to have a sense that we have to do them up front.

I'm not asking for two weeks. I'm asking if we can come up with something, at least a few ideas, six months down the road. Is six months too quick?

Mr. Don Drummond: And I wouldn't want to say anything to preclude that. I would just point out that virtually all these recommendations for something that could be done in the very short term, whether it is bus passes or accelerated depreciation, are all $50 million to $200 million items, so you do want to consider your trade-offs very carefully. I accept your point that if it helps it's a good thing, but on the other hand, there are only a limited number of things you can do, and you really do want to make sure you're doing the most efficient one.

Mr. Gar Knutson: Are we going to school on what other countries are doing? Presumably the Americans, who have announced $5 billion, have done some background analysis. Is there anybody in the finance department...?

Mr. Don Drummond: We're looking very carefully at what they are doing. First of all, the $5 billion is not so big a program. That's $5 billion over a very long period. It's not a huge initiative.

Mr. Gar Knutson: At least it's something, though.

Mr. Don Drummond: We're the most comparable to the United States, in the sense that we're the low-energy-price countries in the world. We're higher than the United States, but we stand out with the United States as opposed to other countries. Many of the other countries are doing it through their price mechanisms, but we're very much following what they are doing.

Mr. Gar Knutson: Maybe you could give us some analysis on what is working in other countries; what makes sense.

Mr. Don Drummond: What is working? Well, I think if you look at the emissions, nothing is working terribly well. We have an ambitious set of objectives set, but we don't have an awful lot—

Mr. Gar Knutson: Could you give us a sense of what bright ideas are coming from other countries?

Mr. Don Drummond: Sure.

The Chairman: Mr. Laliberte, please.

Mr. Rick Laliberte (Churchill River, NDP): I guess as Canadians we are lumped in as a developed country. That means our economy is intact—we're very strong—and we're a role model for the developing countries. At the international table people are looking at the annex I countries, the OECD, and asking how we can make emission controls in India or the African states if poverty is our biggest issue over here. You guys clean up your backyards.

As Canadians, we're 2% emitters, of course, but we're the second-highest per capita. That's what concerns me in my responsibility as a Canadian and as a member of Parliament representing people here. As an individual, I'm being compared internationally as one of the worst enemies to our environment through global gas emissions.

To clean that up, to wean ourselves off this journey.... This is a crossroads we're at here. That brings this journey to Parliament Hill here. This is where all our capital ends up and you're the department that distributes this capital. You have to have a sense of urgency on this issue. You have to have this conscience.

You can't underestimate Canadians, though. You can't take this burden on your own. Can you create an incentive fund? We talked about whether a revolving fund is being used in Canada, as an example—that was raised yesterday—an atmospheric fund such that people can draw investment or borrow to create their own incentives; ideas we don't have.

• 1040

Let's knock each other out here trying to think of ideas, but somebody in Timmins, Ontario, or Yukon, or maybe way up in Inuvik or Old Crow might find an idea. They know Canada cares about people's ideas and they have an access to test this that's sound. You can do your economic spin after that on people's ideas.

Is there such a thing in Canada as an environmental fund?

Mr. Don Drummond: Mr. Chairman, I would like to pose a question to you at this point. That question in particular, but a couple of the recent questions also, have really gone much beyond my role in terms of the tax element. Obviously, I have personal views on some of these issues, but as a government position on environment they're really the responsibility of Natural Resources Canada and Environment Canada.

I'm hesitant to answer these questions outside the tax area. I hesitate and don't like to give you that response, but it's really going well beyond my area of responsibility and certainly my area of expertise within the government.

The Chairman: It's very understandable and I appreciate what you're saying. It may well be that members of this committee look at you as Citizen Drummond.

Mr. Don Drummond: I'll try to answer that question as Citizen Drummond then. I'm not sure that's going to count for anything or illuminate anybody here.

There are some funds. There is a national technology partnership fund. There are programs like IRAP that are available, and of course companies coming through with a technology related to environment are certainly eligible to receive funds from that.

The Chairman: What does that stand for? Can you please give the meaning of the acronym IRAP?

Mr. Paul Berg-Dick: It is the industrial research assistance program and it's administered through NRC, I believe.

Mr. Rick Laliberte: The reason I raise this is that in our nation you'll see certain provinces, such as Saskatchewan, where I come from, and Alberta, are heavy emitters. To produce their energy is their reality, but it's not their fault. The present forms of government there have adopted this whole technology through the journey of their evolution as a province.

But as a nation we're a bubble. The Europeans talk about a bubble, but we're a bubble as well. So within us we have to be responsible in our total efforts for our domestic efforts.

I wanted to mention natural gas. In my constituency, natural gas is not accessible in the northern regions. There's a high cost of energy. Natural gas is in our area and it's pumped to the rest of the North American community, but it's not available 100 miles away. We pay for diesel and propane and here's natural gas, the least of all evils, which could be accessible by an incentive if it was given federally.

The change in provincial policy is because they want to make profit-based decisions as opposed to policy- or environment- or people-based decisions. They're there to distribute natural gas. If it's profitable, they'll take it to your doorstep. If it's not profitable, they won't do it. What can the federal government or your department do to urge the provincial levels of government, the utilities, to extend those efforts?

• 1045

Mr. Don Drummond: On the particular case you cited, I can't think of anything within the arsenal of the federal government in terms of pipeline development, etc. In the area you are speaking of in terms of the natural gas and electric utilities...if something could be developed to switch some of the electric utilities from coal to natural gas, obviously that would be helpful.

I'm sorry, I'm at a bit of a loss to think of the particular problem you have addressed, how there would be a federal instrument to get at the natural gas distribution in the northern areas. I could certainly see it from the company perspective and the provincial perspective, but it hasn't come to me what the federal perspective would be.

The Chairman: Thank you, Mr. Laliberte.

Mr. Lincoln, suivi par M. de Savoye.

Mr. Clifford Lincoln: Mr. Drummond, I must say that I appreciate a lot of what you say, because I suppose you're there to work on taxes and advise about taxes, and I realize these things are pretty fluid and that we're going into realms that are outside of your purview. I suppose that expresses a little of the frustration with the fact that the natural resources people aren't here today to answer questions.

I wanted to ask you a question, but I don't know if it falls into your bailiwick at all. It's very hard for us to know where it starts and where it goes over the line in a ministry.

On the budget figures, to support sustainable development would cost $20 million a year for three years. Can you tell me, for instance, when one of these items comes into the budget, which department does the work to actualize this spending of the money, the distribution of the money, and the criteria for the money? I imagine the first $20 million started in the current fiscal year. Or is it starting next year?

Mr. Don Drummond: It was envisioned that the funding would be starting on January 1, 1998. In terms of the work for the particular one you mentioned, it was very much a partnership between the three departments. Prior to the budget announcement, subsequent to the budget announcement, and in fact continuing right through until now, we have had many meetings of the three departments. There are going to be a couple of different elements of that and different elements of different specializations between the two departments.

For example, with respect to the energy efficiency of buildings, that has been a very heavy involvement for Natural Resources Canada, because their staff has been working with a national building code in terms of what the efficiency standards would be and how one might encourage more companies to meet and actually exceed those standards.

On some of the other aspects it might have a little more involvement from Environment Canada. But I guess, similar to my response to Mr. Knutson—-

Mr. Clifford Lincoln: For the first $20 million that is going to be available on January 1, 1998, are all the parameters in place for this money to be used during the year 1998 in programs that are actually defined and everything so that we're ready with all the framework for it?

Mr. Don Drummond: My understanding is that Mr. Goodale is virtually ready to make an announcement of how the programs will be structured under that fund. He hasn't made it yet, but my understanding is that we should anticipate that fairly soon.

Mr. Clifford Lincoln: Thanks for that information.

On a larger plane I think what just frustrates people...I know it's the case for me, and for many of my colleagues, I think. We're not experts at calculating how to rebalance an economy and fiscal incentives and economic instruments. It's beyond us and we would be silly to say that we know the answers. What we know is all the facts and the statistics that are available to us. For instance, we know that the oil and fossil fuel industry contributes 80% of the carbon dioxide problem and that with respect to the increase between 1990 and 1995, over two-thirds of it was caused by the oil and gas and the carbon side of things, and we know that methane accounts for 22% and nitrous oxide for 11%.

We know the figures. The statistics are well known. But I'm trying to find out from somebody whether it's...but unfortunately the people who do this sort of work and are at it, the environmental groups and so forth, don't have the resources to be able to calculate what we need in the way of the rebalancing of our tax system and our fiscal incentives to show that instead of us getting a contribution of 80% from the oil and gas industry we rebalance it so that wind power, solar power, energy efficiency, and waste energy recovery and so forth...rebalance the stuff so that they get favoured tax treatment as against the others just losing what they get now.

• 1050

I know it can't be done overnight. I always imagine that you are the people with the wherewithal to be able to do these calculations. When we asked the other ministries, if they could have done it they would have provided them. We can't find these figures.

I know, to give you an example, the Danes have decided to replace their total coal production with wind production by 2030. They have all the statistics, which I can furnish to you. How are they going to do it?

I don't know who does this in our government. We go crazy trying to find out how we do this. That's all we want to find out. Maybe it's not you or your ministry that does this. Perhaps you could tell us if it's a combination of you and Natural Resources and Environment, then we'll go to the three of you and have a session and find out how we can do this. All I'm trying to find out is what that kind of rebalancing looks like.

Mr. Don Drummond: Certainly, as you indicate, all three of the departments are involved. In terms of the methodologies and models to analyse them, the models are actually housed within Natural Resources Canada.

The Chairman: Thank you. We have seven minutes left and then we must vacate. We have three questions—Mr. de Savoye, Mr. Pratt, and the chairman.

[Translation]

Mr. Pierre de Savoye: Mr. Drummond, you are an economist. The environment is precious. However, we are selling it at a very low price. It is, therefore, not surprising that the demand is very high. If we want to maximize our profit, we will have to establish the real price of our environment, from various perspectives. We will have to sell the environment at a price so that we can make a profit but it will not cost us too much.

You do not have the information required to assess the cost of using our environment. Consequently, you cannot tell us, by means of a table showing cost-benefit ratios, where we should be putting our money so that we can get the best returns, no more than you can indicate which tax measures we should be implementing in order to obtain results known in advance.

Mr. Chairman, this particular comment is for you. In the case of the human genome, researchers from various countries share responsibilities in order to determine the role of each gene on the genome. We thought that it would take 20 or 30 years to accomplish this task, however, we have realized that things have accelerated considerably.

Could Canada sponsor a similar project to determine the costs of each utilization made of the environment in terms of gas emissions? How much does it cost to run a facility powered by coal-fired electricity? How much does it cost for the tar sands? How much does this cost and how much does that cost? Once we have all of the information, it would be easy to determine where we should be investing to get the most value for our money.

Like Mr. Knutson, I would say that we are, to some extent, waging a war. We will never win by ourselves and, at any rate, this is not only our problem. This is a problem that belongs to the entire planet. As a result of Internet, and because of researchers, we have reports and research has been conducted. Could Canada play a leadership role and gather all of this information together in order to determine that, when we put a dollar into this sector, there will be a reduction of so much? This is how we can get good value for money. This is a suggestion that I would put to you most humbly.

The Chairman: That is a good question, Mr. de Savoye. You could ask this question in the House to Mr. Martin, or you could send him a letter and wait for the Department of Finance to respond.

Mr. Pierre de Savoye: This is not a question. This is an observation and I'm putting it on the table for what it's worth. I am struck by the absence of knowledge. We are ignorant. We are not acting in bad faith. This is not a question of ill-will, it is simply that we are ignorant. We don't have the information. It is essential that we get this information.

• 1055

The Chairman: We agree with you. Thank you.

Mr. Pratt.

[English]

Mr. David Pratt (Nepean—Carleton, Lib.): Thank you, Mr. Chair.

It seems as though we're all trying to grapple with some fairly complicated issues here. I'm attempting to obtain information about the specific issue of the tax treatment of employer-provided transit passes and I have a few questions related to that.

First I have a general question, and I'll throw it open for anyone to respond to. Does the Department of Finance believe that the federal government has any role whatsoever in encouraging public transit usage as a means of dealing with the whole climate change issue?

Mr. Don Drummond: It's a bit of a loaded question. Does the federal government have a role and a mandate in public transit? No, obviously that's a local and provincial jurisdiction. But does the federal government have a role in environmental issues? Under the guise of environmental issues we do have a role. But respecting the federal constitutional jurisdictions there are certain things we can do and certain things we wouldn't want to do.

We certainly don't want to dictate to the local transit authorities how to set their prices and do their business. But the Income Tax Act is the federal government's responsibility. So whether this is a good proposal or a bad proposal, I don't view it as something outside the realm of the federal government's responsibilities. On the objective of reducing the emissions, it's certainly within the mandate of the federal government to be occupied with that sort of matter.

Mr. David Pratt: I'm having difficulty getting information on really reliable estimates on how many commuters use employer-subsidized parking and the lost revenue that results from that to the federal government. Do you have any up-to-date figures, any estimates whatsoever?

I've had an opportunity to very briefly read over the analysis dated November 27 in connection with the department's response on the issue, but it seems to be pretty thin gruel as far as an explanation of the government's position. There doesn't seem to be anything really specific, and that's admitted within the text of the response.

For instance, it says it's difficult to estimate the precise cost for such a measure without making some explicit behavioural assumptions, and then it goes through a series of assumptions.

First of all, are there any up-to-date figures on that whole business? It seems to me that although the policy exists in terms of the taxation of parking, we don't really have any reliable figures on the subject.

The Chairman: Your question is very straightforward. Are there any figures?

Mr. Don Drummond: I don't know, but I will endeavour to find out.

You mentioned the revenue losses. Of course, there aren't revenue losses because parking is taxed as an employee benefit. But I can endeavour to find out what the total value of that employer-provided benefit is because it would be reported. I know in Revenue Canada's taxation statistics book it isn't identified specifically. I'm not sure if it can go into its program and pull that out, but I'll certainly find out for you.

The Chairman: Your last question, Mr. Pratt.

Mr. David Pratt: The most recent study on this was done by the Victoria Transport Policy Institute. Has the department gone over this study with a fine-tooth comb to attempt to determine if the numbers are reliable and consistent with the numbers provided by the General Accounting Office in the U.S. with respect to its experience with this?

Quite frankly, I'm getting very different projections for the actual increase in transit usage that could flow out of a proposal like this. The assumption is that transit benefits would be available to 50% of all employees as a result of this measure. That strikes me as incredibly high. The Victoria Transport Policy Institute cites a figure that's much lower, something in the order of 10% of all employees.

Just in terms of the discrepancy of some of the information as well, apparently the department was taking a position....

The Chairman: What is your question, Mr. Pratt? It is 11 a.m.

• 1100

Mr. David Pratt: Maybe we could address that one first.

Mr. Don Drummond: To the best of my knowledge, they have looked at all available studies, and certainly they have looked at the two you have mentioned. If there are any others, I would be delighted to look at them.

One of the reasons why some of the numbers differ is that the General Accounting Office is looking at a very mature system, many years down the road. It's not envisioned that the half would be offered in the first couple of years. They are looking at a system that has been well in place, and looking perhaps five or ten years down the road I would anticipate that number would be very much lower than that. In fact, some of this wouldn't happen until the group went through a collective bargaining round, because I suspect that's when that type of benefit would be provided to the people. So there may be some convergence over time.

It's similar to my answer previously. It's very hard to estimate this stuff when people haven't done it. We have had a limited program in the United States for the federal employees, so you get some of the numbers from that, but without having done it it's a bit hard to know what the right number is.

Mr. David Pratt: Just one other quick one, Mr. Chair.

An estimate has come from the federal government of a $140 million cost to implement this type of program. That's from a letter that goes back to 1975. Yet the figure mentioned in this document is approximately $75 million. Maybe you can't respond to that right away, but I would like to get some indication why the discrepancy between $75 million and $150 million.

Mr. Don Drummond: The $75 million is from a very recent analysis we have done. I certainly think that is the more reliable figure. I think the higher number used previously was based on unrealistic assumptions. If you give me a pass and I didn't really want it, am I going to give it to my child? There are so many assumptions in there.

Mr. David Pratt: These things typically aren't transferable, though.

Mr. Don Drummond: I think that was in part the recognition when we were updating this number and came up with a lower number. I am much more confident about the $75 million number.

Let's come back to the model of how we approach this stuff. The government will make a decision whether to do something or not, but I like to present the most accurate figures. If there are other figures that can't be reconciled with this I would be delighted to have them. There's no percentage whatsoever in our business to bias it in any way. So we would be pleased to look at anything anybody has in terms of background numbers.

The Chairman: One final question, Mr. Drummond. You are probably familiar with this chart produced by Natural Resources Canada. It's entitled “Value of Tax Deductions Employed by the Oil and Gas Industry, 1993”. According to this chart the total tax deductions to this industry would amount to $6.2 billion. Do you have any comment to make on this chart and the figures?

Mr. Don Drummond: As I was saying at the outset, it's not really relevant to what we have been discussing, because what we're trying to get is a value of the tax preference. Any corporation in Canada that does a capital investment is going to get a certain amount of depreciation associated with that. We wouldn't have any businesses in Canada if that weren't the way we were operating. So if you see a number such as a capital cost allowance of $3 billion plus a bit higher, that doesn't really mean anything. That just means the industry is fairly capital intensive and that's fairly similar to the amount of book or financial depreciation they will be calculating.

What we were trying to get at in our discussion on the Canadian exploration and development expenses is the difference between the tax value of the depreciation and the book value. That was quite small. If we went through each one of these and lined them up, here is the total value and here is what the value would be on their own financial statements, it would be the difference we would be trying to analyse. That would bring that total number down to something that is fairly small.

The Chairman: What would it be?

Mr. Don Drummond: That's what we were trying to add up in the difference between the resource allowances and the non-deductability of the royalties, with depletion added in there. We had a number of about $71 million in 1993. It's a very small fraction of this total shown here. Similarly, if they presented that table for the manufacturing sector or any other sector of the economy you would be coming out with huge numbers, just as you are for this industry, but it doesn't indicate they are receiving a tax preference.

The Chairman: It's 11:05 a.m., and I apologize to our colleagues who are waiting.

Mr. Drummond and your colleagues, on behalf of the committee I thank you very much.

This meeting is adjourned.