FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, February 10, 1998

• 0904

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Order, please.

• 0905

I would like to welcome everyone back from the break. This morning we are here to begin the study of Bill C-28, which is described in the orders of the day.

We're to ask Mr. MacIntosh, Mr. Farber, and Mr. Gusen to open up with some introductory remarks, and thereafter we will engage in a question and answer session.

Just take the time that is required, gentlemen. Usually you have between five and ten minutes for the introductory remarks, and then we'll proceed to the question and answer session.

Welcome. Who's going to start?

Mr. Leonard L. Farber (Director General, Tax Legislation Division, Department of Finance): Mr. Chairman, Mr. Gusen is here with regard to the Canada health and social transfer provisions. This bill that's before you today is an omnibus bill dealing primarily with income tax measures, but it also includes a particular measure with regard to the CHST, so with your indulgence I would like to ask Mr. Gusen if he could give his opening remarks and possibly address any potential questions that you might have before we get into the various provisions of Bill C-28.

The Chairman: Mr. Gusen.

Mr. Peter Gusen (Director, Federal-Provincial Relations Division, Department of Finance): Thank you, Mr. Chairman.

This omnibus bill that Mr. Farber mentioned is a long bill. At clause 285 of the bill there's a measure to amend the Federal-Provincial Fiscal Arrangements Act. This amendment raises the Canada health and social transfer cash floor from the current level of $11 billion to a higher level of $12.5 billion.

In order to describe how this amendment would work, let me first describe the current arrangements, how the CHST would work without the amendment that's included in Bill C-28. Then I'll describe how the CHST would work with the amendment. That way you can see what the significance of this amendment would be.

Some material is being handed out to you that is useful in following along with my remarks.

The Canada health and social transfer—or the CHST—is made up of two components, a cash transfer component and a tax point transfer component. The CHST is paid in a three-step procedure, which is described in the existing legislation. First, the total transfer or the entitlement is established. Next, provinces collect a portion of their transfer entitlement as a tax point transfer. Finally, the remainder of the entitlement is paid by the federal government to each province as a cash transfer. You start off with a total entitlement, a portion of that is paid as a tax transfer, and the remainder is paid as a cash transfer.

In this diagram on the first page of the handout I've given you, you can see that under current legislation, the title is “CHST before the $12.5 billion cash floor”, so that reflects how the CHST works under current legislation.

You can see that the total CHST, the total transfer, in 1997-98 is worth $25.1 billion. That's the figure at the top of the first bar in the chart. This $25.1 billion will be paid to provinces in 1997-98, and $12.7 billion will be paid in the form of tax point transfers. That's the white portion at the top of the column, that $12.7 billion that's a tax point transfer. The remainder, $12.4 billion, will be paid as a cash transfer under the current arrangements.

For the first few years, the total CHST entitlement is established in the existing legislation at $25.1 billion. After that, the value of the entitlement starts to grow according to a formula that's related to the growth in the economy, to the growth in gross domestic product. So you can see that in 1999, 2000, 2001, and so on, the total entitlement...the height of the columns begins to increase, and that's according to that formula related to the growth in gross domestic product. Total entitlements before this amendment we're talking about today were projected to reach $27.3 billion by the year 2002-03, which is where the legislation covering the CHST ends.

• 0910

The current legislation states that the cash transfer component cannot go below $11 billion. No matter how large the tax transfer gets to be, the cash portion of the CHST, according to the current legislation before the amendment, could never fall below $11 billion. That's the $11 billion cash floor that currently exists.

I'd like to turn to what the amendment in clause 285 of Bill C-28 will do to this transfer. If you turn to the next chart in the handout that I just presented to you, the title indicates that it's the CHST after the $12.5 billion cash floor has been introduced.

Bill C-28 proposes amending the Federal-Provincial Fiscal Arrangements Act to increase the CHST cash floor from $11 billion to $12.5 billion. In other words, the cash component of the transfer could never fall below $12.5 billion. The provinces are guaranteed to receive at least $12.5 billion of their CHST entitlement in the form of a cash transfer.

Incidentally—and this is important to note—the tax point component of the transfer is not affected by this amendment in any way. Whatever the tax points were worth before this amendment, they'll be worth exactly the same amount after the amendment.

So you can see that even in the current fiscal year 1997-98, the amendment will have some impact on the pay-out of the CHST. The total value of the CHST will be $25.2 billion in 1997-98 rather than $25.1 billion, as indicated on the first sheet of the handout. So there's an extra amount being paid out right away. And over time you can see that this cash floor, the guarantee that the cash component will always be $12.5 billion at least—or it could be more than that—will increase the value of the CHST in each and every year of the period covered by this legislation. In 1998-99, subject to the passage of this amendment, it's projected that the CHST pay-out will be $26 billion instead of $25.1 billion, as indicated on the first diagram, which would be the case without this amendment being passed, without the $12.5 billion cash floor.

So the CHST will not only be higher every year, but it will be growing faster. The average growth of the CHST over the period covered by the legislation will be 2.5% per year. In the absence of this amendment the average growth rate would only be 1.7% per year.

So I hope it's clear from these diagrams that there will be a higher valued Canada Health and Social Transfer with this amendment being passed. How much higher? How much will passing this amendment cost the federal government? The third page of the diagram—

The Chairman: Sorry. There are some questions they'd like to ask.

Mr. Peter Gusen: As we go along?

The Chairman: I think they'd like to get a clarification right away. Is that okay with you?

Mr. Peter Gusen: Certainly. That's fine.

The Chairman: Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): I'm sorry to interrupt you.

I'm looking at the tax transfer portions between the two diagrams. On what are you basing the tax transfer portions between the two? What numbers of economic growth are you using to arrive at the tax transfer portions?

• 0915

Mr. Peter Gusen: Maybe I can give you the numbers, you can fill them in on the diagram, and then I can tell you how we came up with those projections.

Mr. Dick Harris: Okay.

Mr. Peter Gusen: For 1997-98 the tax transfer—you could put this number in the white portion on the top of the first bar in either diagram, because it's the same in both diagrams—$12.7 billion. The following year, it's $13.5 billion. The year after that it's $14.3 billion. The following year it's $14.9 billion.

Mr. Dick Harris: I want to know where—

Mr. Peter Gusen: Where they come from?

Mr. Dick Harris: Yes.

Mr. Peter Gusen: Okay, I'll give you two more years and then I'll tell you where they came from, if I may.

Mr. Dick Harris: Okay.

Mr. Peter Gusen: It's $15.5 billion and $16.1 billion.

The projections are based on a forecast of growth in the economy and how federal tax collections will proceed over this time period based on growth in income and population and so on.

Mr. Dick Harris: What percentage of the GDP are you using here?

Mr. Peter Gusen: I don't have that number right here, but I can supply that to you. It's the forecast the Department of Finance uses for all of its budgetary projections. These are consistent with those forecasts.

The Chairman: So they would be very prudent projections.

Mr. Peter Gusen: Yes, very prudent projections.

The Chairman: I guess Mr. Harris got his answer.

Go ahead, Mr. Gusen.

Mr. Peter Gusen: The next area I would like to go into is the cost of this measure. If this amendment is passed, what are the projected costs to the federal government?

On the third page of the handout there's a table entitled “Impacts of Raising the CHST Cash Floor”. It indicates what the total entitlements would be on a province-by-province basis, as well as the Canada total, over the entire span of years covered by the CHST legislation—that is, from 1997-98 through to 2002-03. In the very last column in this table you can see that with an $11 billion cash floor the total value of the CHST was to be just over $155 billion. Subject to this amendment being passed, the projected value of the CHST will rise to almost $162 billion. The difference, the extra pay-out of the CHST as a result of this amendment, would be just under $7 billion—$6.759 billion is our current projection.

The panel below this table is interesting because it reinforces the idea I mentioned before, which is that the tax transfer portion of the CHST is not affected by this amendment. All of this increase in the value of the CHST is an increase in the cash portion of the CHST. So you can see that in terms of changes from an $11 billion floor to a $12.5 billion floor, the increased value of the cash pay-out is also $6.759 billion. It's all cash.

What does this mean for provinces? Because the federal government is paying out an extra $6.759 billion in CHST cash, provinces will receive an extra $6.8 billion in cash between now and the year 2002-03. You can see from this diagram that every province receives more. It's not a selective increase. It goes across the board to all provinces. Newfoundland, for example, receives $127 million more, P.E.I. receives $30 million more, and so on. Reading across the third row in this table, you can tell for each province how much more we project they'll get up to 2002.

• 0920

The growth in CHST transfers is how much extra they're going to get as a result of the amendment. You may also be interested in looking year-over-year at what path CHST transfers are going to follow province by province. The last table in the handout illustrates that. The table entitled “Canada Health and Social Transfer” shows for each province and for each year how much they're going to receive in total transfers under the CHST with the $12.5 billion floor in place, and how that is decomposed into a tax transfer and a cash transfer. You will need some time to study all of the numbers in this table, but I can tell you that for every province the total entitlement is increasing every year as a result of this amendment.

The year-over-year growth in CHST transfers, if you calculated the growth rates, is faster in some provinces than in other provinces. The main reason for that difference in growth rates has to do with our projections for population growth rates in different provinces. Provinces with rapidly growing population projections like Ontario and B.C. see the fastest growth in their CHST transfer payments.

If you look at the table a little more closely and look at the cash line for each province, you'll see that the cash for some provinces is increasing year by year over this span of seven years, while for other provinces it's decreasing in certain years. You should bear in mind that when you compare the cash that any province is getting with this amendment being passed to how much they would receive in the absence of it, each and every province is getting substantially more cash than they would under the old regime. That's illustrated on the third page of the handout I gave you—how much extra cash each province is getting.

So that's a brief of summary of what changes with respect to the CHST as a result of this amendment. I thought I would close, Mr. Chairman, by indicating a few of the things that are left the same in the CHST.

The amendment that's before you now is only going to change the cash floor from $11 billion to $12.5 billion. It doesn't do anything about the span of years covered by the legislation. The legislation still covers the years up to 2002-03. It doesn't change anything with regard to the principles of the Canada Health Act. The Canada Health Act principles must still be respected. The amendment doesn't change that at all.

Similarly, the requirement that provinces not have any minimum residency requirement for giving social assistance payments to people recently arrived in the province—that's a requirement of the CHST. It was before this amendment and it will be after this amendment.

The distribution of the CHST among provinces, the percentage of the total CHST that each province gets, is not being changed by this amendment. The pot of CHST money will get larger as a result of this amendment, but every province will continue to get the same share it would get in the absence of the passage of this amendment.

The tendency over time for allocation of the CHST to become more equal on a provincial basis also remains in place over this seven-year period. The provinces that are getting a below-average CHST amount per capita will be coming up toward the average. That hasn't been changed. That was in place before the amendment.

That's all I have for introductory remarks, Mr. Chairman. I hope there's enough there to generate some questions.

Thank you.

The Chairman: I'm sure it will. Thank you, Mr. Gusen.

Mr. Harris.

• 0925

Mr. Dick Harris: Mr. Gusen, thank you for the presentation. I'm just wondering if I'm missing something here. That's an awfully big, involved presentation to tell us that starting in 1998-99, we're going to have a $0.9 billion increase in the cash floor, rising to $1.5 billion in the next two years, going to $1.4 billion and $1.3 billion.

As I understand it, the provinces' tax transfer portions are basically going to remain constant. The bottom line is that the feds are going to put more money into the CHST. It seemed like a long presentation to tell us there's simply going to be more money put into the cash floor. I'm wondering if I'm missing something.

Mr. Peter Gusen: Mr. Chairman, I've usually been accused of presenting things in too concise or too brief a form and not providing enough detail. Maybe I've overreacted to those criticisms I've had in the past.

I think the essential message is the one you've drawn away. The federal government will be putting more money into the Canada health and social transfer and each province will benefit from that.

Mr. Dick Harris: I appreciate your thoroughness. I was just wondering whether I had missed something in the presentation. The arithmetic is fairly simple. Thank you.

The Chairman: We're going to continue with Mr. Farber and Mr. MacIntosh. We'll hear everybody and then we'll engage in the question and answer session.

Mr. Leonard Farber: Thank you, Mr. Chairman.

Before I begin discussing the provisions of Bill C-28, I just want to mention that I have some colleagues with me who are prepared to deal with any particular issue. Mr. Marc Cuerrier is from our tax council unit and Mr. Robert Dubrule is the senior officer dealing with a lot of the personal income tax areas.

Mr. Chairman, Bill C-28 is a very large bill that picks up a lot of legislation that has been outstanding since April 1995. For ease of reference and ease of dealing with the massive number of amendments, the bill itself is divided into two sections.

The first section deals entirely with the 1997 budget amendments. Those amendments were first released as draft legislation in July 1997 and related to changes in registered education savings plans and enhancement of tuition and education tax credits to assist Canadians in saving for education. They also introduced the pension adjustment reversal to improve the operation of registered retirement savings plans and improvements in the tax treatment of Canadians with disabilities. They expanded the tax treatment accorded to mining reclamation trusts to all qualifying environmental trusts. In addition, the proposals include measures pertaining to tax assistance for charitable donations.

As I've indicated, Mr. Chairman, these measures have been out in the public domain since July 1997 and have benefited from public input and submissions generally. The measures found in the bill today have been changed somewhat to reflect that consultative period.

In addition, this bill contains all those amendments that were first released as what the department calls a technical bill in April 1995. Historically, the department has attempted on an annual basis to put out a technical amendments bill, which is a bill that picks up various changes that are required in order to make the provisions of the Income Tax Act work as they were intended. Technical bills by and large do not have any policy implications whatever, but merely try to make the various provisions of the act work in the manner in which they were intended to work from the very beginning.

Since the release of that technical bill in April 1995, comments have been taken into account. It was rereleased as a notice of ways and means motion in June 1996 and again as a notice of ways and means motion in November 1996, just before the tabling of Bill C-69 in December 1996, which picked up all those measures from the original release. That bill unfortunately died on the order paper.

• 0930

Bill C-28 picks up a number of additional technical changes that are referred to in the binders that we have distributed, along with a number of press releases relating to a number of issues like the film and video production tax credit and the transfer pricing rules, which, although they were referred to in the 1997 budget presentation, had draft amendments first released only in September 1997 and are now included in part B of this bill.

So, Mr. Chairman, this bill picks up quite a large number of changes that have been in the public domain since April 1995, as well as press releases, as I've indicated, that have also been the subject of consultation since that point in time. It's fair to say, Mr. Chairman, that to a significant degree the vast majority of the amendments found in Bill C-28—with the exception of a handful of minor technical changes that had been put in in order to clean up certain outstanding technical issues—have been in the public domain and have been commented on by the tax professionals' community and have benefited from consultation for quite some time. So there's nothing in this bill that's new in that context or that hasn't been the subject of debate over time.

In addition, Mr. Chairman, when the committee begins its clause-by-clause debate of this bill, we are recommending to the committee a number of amendments we would like to make at that point in time to reflect certain announcements that had been made in the context of changes resulting from input from the tax professionals' community. These improve the operation of the bill. As well, the amendments reflect changes with regard to certain inconsistencies in the operation of some of the provisions which were brought to our attention. As we go through the bill on clause-by-clause, I will highlight to you which amendments we'll want to bring forward and I'll discuss them at that point in time.

All those amendments, Mr. Chairman, are included in the briefing books that we have put before you and the committee members. We'll be pleased to address every one of them at that point in time.

That, Mr. Chairman, is a very brief overview of what the content of the bill is. It's a very large bill. It has a lot of provisions that date back to April 1995. Clearly it's important to move on with the bill and get it acclaimed in the earliest possible fashion.

Thank you very much.

The Chairman: Thank you very much, Mr. Farber. Mr. MacIntosh.

Mr. Dan MacIntosh (Legislation Coordinator, Tax Legislation Division, Department of Finance): I have no comments, sir. Thank you.

The Chairman: Now we'll move to the question and answer session. We'll begin with Mr. Harris or Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): I have no questions now, Mr. Chairman.

Mr. Dick Harris: Actually I have none either.

The Chairman: Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Chairman, you can't imagine how many questions I have to ask.

I'd like a quick answer to this question from Mr. Farber. I have other questions for him and I know he tends to drag out his answers.

He said that he will be tabling amendments when we come to the clause-by-clause study of the bill. I'd like him to table the amendments with committee members before our clause-by-clause study because it's too easy to ask parliamentarians to conduct a clause- by-clause analysis of the bill when the Department of Finance comes up with an amendment to the bill.

I'd like to ask him whether it would be possible for us to have these amendments a few days before our study.

[English]

The Chairman: They're in the briefing book.

[Translation]

Mr. Yvan Loubier: Where?

[English]

The Chairman: Do you have the briefing book?

[Translation]

Mr. Yvan Loubier: I don't have it. I don't have any document answering to that description.

[English]

The Chairman: They were distributed to your offices. Perhaps—

[Translation]

Mr. Yvan Loubier: I'd be quite happy to have a copy because I don't have one.

[English]

The Chairman: We will get you a copy, Mr. Loubier.

• 0935

[Translation]

Mr. Yvan Loubier: Good enough, then I have the answer. I have another question for you, Mr. Farber.

[English]

Mr. Leonard Farber: Mr. Chairman, I wanted to give as quick an answer as I possibly could, after the accusation that I gave long-winded answers. We did provide the amendments; they're here. We'll give you another copy.

[Translation]

Mr. Yvan Loubier: I did not accuse you, Mr. Farber. You are very touchy today. I did not accuse you. I merely said that I did not have these amendments, so we rectified things.

I have a real question for you now. The Minister of Finance said that Bill C-28, in clause 241, is attempting to attract foreign shipowners to Canada. He said that on February 5, at the same time you were making public a press release from the Department of Finance, I believe. How do we go about attracting foreign shipowners to Canada? Is it through a formal and a legal guarantee as provided in Bill C-28 to the effect that henceforth they will never be taxed in Canada for the revenue generated by their subsidiaries abroad?

[English]

Mr. Leonard Farber: Mr. Chairman, the provisions to which the member is referring, as he and I have discussed and as has been evident in the provisions that have been in the public domain since April 1995, were introduced in 1991 as part of an effort to induce international shipping companies to move to Canada.

To a significant degree these measures have been in place in an administrative capacity since at least the 1920s. Where a corporation is incorporated, provided that the measure is reciprocated by the other country in dealing with the taxation of Canadians, the place of incorporation is where the particular company is taxed. There were administrative provisions dealing with that for the longest time. In the late 1980s some federal and provincial officials became convinced that a large number of foreign, particularly Hong Kong-based, shippers were eager to move their headquarter operations to Canada. These were operations—

[Translation]

Mr. Yvan Loubier: So Bill C-28 does provide a formal guarantee to the foreign shipowners we are trying to attract here. It guarantees that their revenue from maritime transport, either directly generated or from inactive companies that manage shares of maritime transport companies abroad, will never be taxed in Canada. The bill provides them with a formal guarantee. Henceforth, under section 241 of the Act, there will no longer be any tax on this kind of activity, Mr. Farber. That amounts to sanctioning under the law an already existing practice, doesn't it?

[English]

Mr. Leonard Farber: The short answer, Mr. Chairman, is it does, in a statute since 1927. It does not give them any more benefits, it does not give them fewer benefits. It formalizes it, and the only way one can attract foreign shippers to Canada is to have something in a formal capacity and not in an administrative capacity. It doesn't grant them any additional benefits they didn't enjoy before.

[Translation]

Mr. Yvan Loubier: So for a number of years now, you have acted in the absence of legislation for inactive foreign corporations involved solely in managing the shares of companies active in maritime transport, and today Bill C-28 presents us with an amendment that would legally sanction the exemptions being offered to these maritime transport companies we wish to attract to Canada. The situation is quite clear now.

Similarly, there is a Canadian shipowner who has an affiliated business structure...

[English]

Mr. Leonard Farber: Mr. Chairman, that's not clear. They were not operating illegally in any manner whatsoever. I don't know how Mr. Loubier got that statement from what I said. They were operating fully within the law. There just wasn't a particular provision. There were rules of general application. There were common law tests on residency. The common law test on residency—

• 0940

[Translation]

Mr. Yvan Loubier: No, no, no. I'm sorry, but according to what we read about...

[English]

The Chairman: Mr. Loubier, let him answer the question.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, what he's saying has no foundation. We've got to stop that. I have specific questions for him and I intend to put them. I'm entitled to have an answer.

[English]

The Chairman: Mr. Loubier, we're going to—

[Translation]

Mr. Yvan Loubier: Mr. Farber, I did not say that it was illegal. I said...

[English]

The Chairman: Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Yes, Mr. Chairman.

[English]

The Chairman: This is the way we're going to operate. There is a question and there's an answer. You will be given time to ask your questions, and the witnesses will be given time to answer their questions. That's the way it's going to operate.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, I'm asking questions and I want to have answers. I don't want to hear a whole saga. I asked specific questions.

[English]

The Chairman: If you're not satisfied with the answer, you can ask another question—

[Translation]

Mr. Yvan Loubier: Yes indeed.

[English]

The Chairman: —within your time limit. The more time you waste like this, the—

[Translation]

Mr. Yvan Loubier: Yes, it's time to ask my question.

[English]

The Chairman: Go ahead.

[Translation]

Mr. Yvan Loubier: Let me word my question differently. Let's say I'm a Canadian shipowner with a foreign-affiliated business structure, something similar to a foreign shipper; there must be something in Bill C-28 that will encourage me to stay in Canada since you say that Bill C-28 does sanction in law a practice aimed at attracting foreign shipowners to Canada.

For Canadian shipowners who are already present here but who have foreign-affiliated business structures, either active or not in international maritime transport, there must be something in the Act that will encourage them to stay here, so that they will not be tempted to go abroad and no longer have any decision-making centre in Canada.

Are there provisions that could apply to Canadian businesses to encourage them to stay here since we have provisions to attract the foreign companies that are their competitors? That is my second question.

[English]

Mr. Leonard Farber: Mr. Chairman, nothing in this bill operates in a manner that is disadvantageous to Canadian shipowners who have historically been operating out of Canada. The rules we're talking about with respect to foreign incorporated companies operate only with regard to those foreign incorporated companies that are operating in the international shipping area.

The criteria applicable to these particular provisions are that these are international shippers for whom 90% of the income—the gross revenues they derive—is from international shipping and who are in the business of international shipping. The criteria relate only to foreign incorporated companies. Therefore, for Canadian companies that are resident in Canada and operating in Canada they have no relevancy whatsoever to the extent that these Canadian companies have foreign incorporated subsidiaries. Again, depending on how they are being managed, it also may or may not have any relevancy to them.

[Translation]

Mr. Yvan Loubier: No, I am talking about a Canadian company with foreign incorporated subsidiaries but headquarters in Canada.

For these Canadian companies with a foreign business structure and carrying out 90% of their activities in international shipping, is there not something in Bill C-28 that ensures they will be treated in the same way as the foreign companies we are attempting to attract to Canada? If not, it would be unfair competition. We would be putting at a disadvantage our Canadian businesses operating mainly abroad through foreign incorporated companies, either active or not in international shipping. That's the question I'm asking you. Otherwise, there is a lack of logic in your bill.

[English]

Mr. Leonard Farber: Mr. Chairman, I'm not sure how to answer the question in any better way than I have been answering the question. The provisions were designed to attract foreign shippers to Canada—shippers who did not have their headquarters or their management in Canada, shippers who were primarily located in Hong Kong and other areas of the world and were looking for a place to relocate.

The provisions we're talking about on an administrative basis at common law were always available to them. Those provisions at common law were also available to Canadians. We're only trying to attract foreign shippers to Canada so we can benefit from the spin-off that might accrue as a result.

I'm talking about spin-off benefits with regard to the management of other ships, with regard to potential shipbuilding, and with regard to other types of ventures that could stimulate Canadian jobs. To the extent that Canadian corporations headquartered in Canada that were also operating through foreign-incorporated companies outside of Canada...their business structure and their method of operation would have been entered into for business reasons, because the tax aspect of it would not have been relevant.

• 0945

I'm not sure what more I can say in the context of the original intent of these provisions, but that's what it was.

[Translation]

Mr. Yvan Loubier: There are many thing you can add, Mr. Farber. In your press release, the second paragraph says with reference to the provisions of C-28:

They are not relevant for companies incorporated in Canada or for affiliated foreign companies directed from abroad.

Let me return to my previous example. Let's assume I have a Canadian company with subsidiaries in the field of transport, either active or inactive in international shipping. That is what they refer to in their jargon as

[English]

mind and management

[Translation]

of the entire business structure, including the foreign elements, is located in Canada. I'd like to know whether according to what you yourself wrote in the press release, the new provisions of C-28 would apply to this business? If the

[English]

mind and management

[Translation]

is in Canada and this Canadian business has foreign subsidiaries, either active or inactive in transport, exactly like those foreign businesses you wish to attract to Canada, in such a case according to what you say yourself, C-28 would apply.

[English]

Mr. Leonard Farber: I think that's a very difficult question to answer, Mr. Chairman, because of all the caveats the member's put on the table. I mean, this does not apply to inactive companies, so when he suggests that you have companies that are active, that are inactive....

I've already indicated to you what are the criteria for application. It's for foreign incorporated companies that locate their management to Canada and that have two conditions: one, that they're primarily in the business of international shipping; and two, that 90% of the gross revenue is derived from international shipping. How that can apply to an inactive company is well beyond me, so I have a hard time dealing with that question.

If the question relates to the possibility of a structure that has a Canadian parent company incorporated and resident in Canada, and has a host of subsidiaries, or a subsidiary, incorporated in a foreign country, and that subsidiary is carrying on the business under the conditions I indicated to you, and that subsidiary, or the parent of that company, chooses to repatriate the management of that company to Canada and operate that subsidiary out of Canada, then yes, these provisions could be available to that company.

[Translation]

Mr. Yvan Loubier: To the three questions I put I've received an answer that means the same thing. I am delighted. It's the first time that it's been so clear.

I have another question to ask, if I may, Mr. Chairman. I don't know how much time we have but since the Reformers do not seem to have any questions, I might as well take advantage of it.

I'd like to know whether the provisions of C-28 or the preferential tax treatment of capital gains and other revenue from international shipping businesses could apply or already apply to other sectors of economic activity. I am thinking for example of large companies like Alcan, Bell and SNC Lavalin that could decide to have an international structure and carry out the major part of their activities abroad. Could this apply to sectors other than international shipping?

[English]

Mr. Leonard Farber: With regard to the provision the member is referring to in terms of international shipping, if the income from the operation of the ships is exempt under the conditions and the provisions I refer to, it would only seem logical that the capital used to generate that income would also be exempt under the same provision. It would not make any sense to have any kind of differentiation, because the particular capital assets our ships use in international waters under those particular conditions are fundamental to the operation and the income nature of that ship. So it's peculiar to this particular area.

• 0950

[Translation]

Mr. Yvan Loubier: Let us take foreign businessmen involved in a sector other than international shipping. Does the Income Tax Act contain similar provisions that could attract them to Canada, or perhaps Bill C-28 could apply to them?

The purpose of Bill C-28 is to attract international shipping companies, but could this apply to other businesses in other economic sectors that one may wish to attract to Canada? Are there any provisions other than in Bill C-28 granting preferential tax treatment to businesses in sectors other than international shipping, or is this limited to international shipping with no chance for businesses in other sectors of economic activity to enjoy such treatment?

[English]

Mr. Leonard Farber: These provisions, Mr. Chairman, are specific to international shipping. They are no different from provisions available in almost every other industrialized country with which Canada has treaties or conducts any business. Shipping on international waterways has historically been treated in this manner in basically all countries I am aware of.

Are there measures in the Income Tax Act designed to attract other kinds of business? I would like to think, Mr. Chairman, that the quality of life and the circumstances in Canada are such that we attract businesses here by our very nature. We have very generous provisions with regard to research and development and very generous provisions with regard to manufacturing and processing. We have a very stable economic environment, and in that context I would suggest to the member that there's a very healthy environment here, which does attract business to Canada.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, are you comfortable with the fact that there is a tax provision sanctioning a practice, because it is a practice, that has been applied for years now to allow the tax exemption of capital gains and other revenue derived from international shipping, and that could apply even to Canadian companies with foreign subsidiaries and 90% of their activities in shipping, or corporations that manage the shares of shipping companies? And do you think it is proper that such a provision applicable strictly to international shipping is being presented by a legislator who is also a shipowner? I am very uncomfortable with this kind of provision.

I hope you will consider it your duty to delve more deeply into this matter. I don't think it's acceptable to come up with that kind of proposal. It's specific to the field of international shipping. It could affect a business belonging to the Minister of Finance and here we are acting as if nothing were amiss. We're acting as if there are no questions to be asked. There's something wrong.

There's another problem I'd like to raise, if I may, Mr. Chairman, and another question, if my colleagues do not mind. If the main objective of this bill is to attract foreign shipowners, how do you explain the fact that it is retroactive to 1995? Why was it felt necessary to make this measure retroactive to 1995? Is the purpose to provide total security as of 1995 for appeals to Revenue Canada relating to tax claims? What exactly is behind this retroactivity to 1995?

[English]

Mr. Leonard Farber: Mr. Chairman, as I indicated in my opening comments, the particular measures the member is referring to are amendments to the original provisions that were introduced and received royal assent in 1991. Particular amendments that find themselves in Bill C-28 have been in the public domain since April 1995. These are not new measures; they were in Bill C-69 that died on the order paper. And up until last week, there's never even been a question raised about them.

The context of the retroactivity is that these are minor technical amendments to improve the operation of a policy put into the act in 1991. In that context, when the issue was brought to our attention...and there are two issues here, one dealing with the capital gains treatment that we have just discussed and another dealing with the underlying income of a subsidiary where there is more than one subsidiary and they pass the shipping income through as a dividend to a holding company, which operates these subsidiaries somewhere offshore.

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Again, these amendments were brought to our attention as something that ought to be put into the Income Tax Act to clarify the operation of the act and to be in keeping with normal business practices. In that context, when we were made aware of them and we saw no policy implications, we indicated at that time that we would be recommending those amendments. Those amendments found themselves in the technical bill released as a draft in April 1995 and they have been out in the public domain since that time. So that element of retroactivity is not an element of retroactivity in the context of making something good that would not have been good had it been introduced today. It was relevant to the point that it was released in the public domain.

The Chairman: Thank you, Mr. Loubier. Mr. Solberg.

Mr. Monte Solbe: Perhaps we've already been over this ground, but just so I understand, I have a question on clause 241, subsection 250(6). If we don't have a reciprocal shipping agreement with, for instance, Bermuda, does this amendment allow dividends paid by a foreign subsidiary to an international shipping corporation...does it allow them to avoid Canadian tax by its Canadian holding company? Is that the affect of this?

Mr. Leonard Farber: No, Mr. Chairman. It would depend on what the circumstances are to a significant degree. Particularly in international shipping corporations operating offshore, historically no matter what flag they were flying or what country they were incorporated in, they would always find the jurisdiction where their income being earned, which is on the high seas, would not be taxable. In that context, what we were trying to do was to attract the management of those companies to Canada. They would not have come to Canada; they would not be in a jurisdiction that would render them taxable.

I believe there's no jurisdiction in the world that renders them taxable unless they are operating to any degree within the waters of that particular country. Even within this provision, to the extent that a shipper who is benefiting from this operates in the Great Lakes or in the St. Lawrence Seaway, the income from shipping in that area would be taxable in Canada. So it's merely to attract them here.

Mr. Monte Solberg: Thank you.

The Chairman: Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): To begin with, one thing we have to recognize in the global context is that it's increasingly difficult for any country or any nation-state to tax global enterprise. It's becoming increasingly difficult due to information technology, partially. And certainly the shipping industry is a prime example of an industry that has been treated differently from many other global industries. But it is not simply going to be difficult for a domestic economy or an individual nation-state to tax shipping; it's going to be difficult for us to tax virtually any global enterprise. And knowledge-based industry is going to be added into this group. In effect, it seems like we're spending a lot of time discussing something that's fairly tautological. We should all recognize that this is just a basic fact of life.

My question is relative to the CHST portion of Bill C-28, and it may have been covered prior to my arrival. On the national floor on CHST and the raising of it to $12.5 billion, I understand one of the impacts of not having a floor established on a provincial or province-by-province level is that some provinces—and I've been told seven provinces, including Nova Scotia—will lose a further $384 million per year by the year 2002 due to these changes, as opposed to if we had a national floor established. A province-by-province floor would in fact protect seven of the ten provinces that are going to suffer under a national floor. Could you explain that to me more fully and clarify that?

Mr. Peter Gusen: There was a table in the handout material. The last page of the handout indicates for each province what amount of CHST they'll receive in total. The tax portion of the transfer and the cash portion of the transfer is on the fourth page of that.

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If you look at Nova Scotia there, you can see that the total transfer under the CHST, both the cash and the tax part of it, is $805 million this year, and by the year 2002-2003 it's increased to $871 million. The tax part of the transfer is increasing along with the growth in the economy and population, so we project that the tax part of the transfer will grow from $378 million this year to $460 million by 2002. The cash portion of the transfer, which is the remaining amount, decreases from $427 million, in Nova Scotia's case, down to $411 million. So if there had been a floor that was applied province by province, and the floor was set at $427 million for Nova Scotia, then that would have prevented the decline in the cash portion of the transfer by about $16 million.

Just to make it clear that it wasn't that measure that resulted in the cash portion of the CHST declining for Nova Scotia, if you turn to the table that you were looking at before, that indicates for each province how much extra cash will be delivered over the whole seven-year period that has been looked at for each province. You can see in Nova Scotia's case—I'm looking at the bottom panel of that table now that just deals with the cash portion of the transfer—with an $11-billion floor, with the legislation as it stands now, Nova Scotia would receive $2,309,000,000 in cash. With the $12.5 billion floor, Nova Scotia, like all provinces, gets more cash than they would receive if this amendment were not passed. In Nova Scotia's case, they get $2,518,000,000 worth of cash, representing an increase of $210 million.

To summarize, on a year-over-year basis, there is a decline in the cash in Nova Scotia's case, but each and every one of those years is at a higher level with this amendment passed than it would have been without the amendment.

Mr. Scott Brison: What is the rationale for not establishing cash floors or levels based on a province-by-province level?

Mr. Peter Gusen: There are two rationales that come immediately to mind. One is that the cash for any province is calculated as a residual amount. First, the total entitlement is established by the legislation. The portion that's delivered in the form of a tax transfer is computed based on the actual tax returns filed in that province during a particular year, and the residual amount, the amount to bring it up to the full amount, is paid in cash.

So if there was a province that had very minimal tax growth, for example, their cash would increase normally to fill in a larger gap. Another province that had very rapid growth in the value of its tax points would see its cash being pushed down by the rapid growth in the tax portion of the transfer. If a cash floor was established that was universal and applied equally to all provinces, then there would be no recognition of the differences in the growth of the tax transfers province by province. That's one thing that this transfer has always attempted to do, to look at both the cash portion and the tax portion of the transfer. That's the first rationale.

The second rationale is that provinces that have very rapid population growth will be getting a larger CHST entitlement over time. A portion of the CHST is computed on a per capita basis, so a rapid population growth will result in an increase in the total entitlement. If the total entitlement for that province is growing rapidly, then that indicates that, everything else being equal, the cash will be growing rapidly as well.

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So based on the projections we have for population growth—we used Statistics Canada's forecast of population growth—the provinces projected to have the most rapid population growth over this period are British Columbia and Ontario. Nova Scotia has a projection of more modest population growth.

Mr. Scott Brison: If the tax pointer or the value of the tax points does not grow, barring these projections, am I to understand that the value of the cash transfer would in fact increase beyond what is stated here?

Mr. Peter Gusen: That's correct.

In Nova Scotia's case, for example, if the tax portion of the transfer did not grow as indicated here, from $378 million this year up to $460 million next year, if it grew more slowly than that, then the cash portion of Nova Scotia's transfer would fill in the gap.

For the top line shown, the line that's in bold, the total amount will be filled by tax points, or if they don't fill it, the cash will fill the gap.

Mr. Scott Brison: Thank you.

The Chairman: Thank you, Mr. Gusen.

Mr. Valeri, followed by Mr. Pillitteri.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman. My questions are for Mr. Farber.

Dealing specifically with clause 241, Mr. Farber, was the Minister of Finance involved in any way with these particular amendments?

Mr. Leonard Farber: No, sir. At no time was the Minister of Finance involved with those amendments.

Mr. Tony Valeri: In fact, wasn't the entire process handled by the Secretary of State at the time?

Mr. Leonard Farber: That's right.

Even at the time, dating back to 1991—originally those provisions were put in under the previous regime—all discussions involving these particular amendments were handled through the Secretary of State's office.

Mr. Tony Valeri: Thank you.

Mr. Farber, I'd like you to take a look at a chart. I apologize for the quality of the copy, Mr. Farber. This is a chart that first appeared in Le Soleil, the Montreal paper. It's an organization chart. Mr. Farber, would a company organized in this way in fact be able to take advantage of this particular tax provision in Bill C-28?

Mr. Leonard Farber: Mr. Chairman, I believe this is the same chart that Mr. Loubier showed me the other day. Hypothetical questions of this nature were put to me at that time. As I said to him at that time, and as I say to you and to the members of this committee, given the complex organization of this company, which I'm only given to understand is owned by the finance minister, it would be inconceivable to me that the complexity of this structure...that a parent company resident in Canada would avail itself of these particular provisions.

Mr. Tony Valeri: Thank you, Mr. Chairman.

Mr. Yvan Loubier: Bullshit.

[Translation]

I'd like to put a supplementary.

The Chairman: No.

Mr. Yvan Loubier: Could I get a word in edgewise? Mr. Farber is talking nonsense, just as he was talking nonsense in the case of the $2 billion trust funds transferred to the U.S. two years ago.

[English]

The Chairman: Mr. Loubier, the government side has the floor. I also ask you to refrain from using language that I find unparliamentary. I would like you to drop it.

[Translation]

Mr. Yvan Loubier: If it is unparliamentary, Mr. Chairman, I apologize. Maybe I let myself get carried away but I hope that I'll be able to come back for a supplementary question to Mr. Farber, because I'm starting to get fed up with hearing this kind of nonsense.

[English]

The Chairman: We're going to move to the next question. Mr. Pillitteri.

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Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you, Mr. Chairman.

Let's look at this chart, this handout, and examine it. There was a question asked by Mr. Harris in terms of how without the tax portion, nothing has changed. I think we should look at it closely. We should be thinking that whoever came up with the formula in transfer payments to the provinces I think should be commended, because in Canada, as we find that the economy has changed, and we have discoveries, we find that all Canadians benefit.

There's something here that's tucked away in one little corner. Take a look at the very last page—and I want to do service to my friend George Baker, from Newfoundland—where it says cash transfers to the provinces actually increase, but the only province that decreases by 2001-02 is the province of Newfoundland.

The reason it decreases, as I see it, although it doesn't say so in here, must be because of the offshore oil industry coming in. Since there's so much revenue coming into it, in the agreement, their portion of the transfer decreases. Is this one?

There's Voisey's Bay coming in as well, so later on the province of Newfoundland will possibly have less transfer payments because of the income.

That's one part of the question. Then I'd like to ask the second part of the question to Mr. Farber.

Mr. Peter Gusen: If Newfoundland is as fortunate economically as people are suggesting—and it may be now with the developments in the mineral and oil industries—then the tax portion of this transfer would probably increase even more rapidly than what's projected here.

We've based our projections on prudent projections of where the economy may go, and not factored in good news that may happen. So in terms of the observation you've made, it will be true that the tax portion of this transfer will grow even faster if the good news does come to light.

Mr. Gary Pillitteri: Thank you.

Mr. Farber, my question to you concerns shipbuilding. We in Canada sometimes become a little parochial in terms of saying what part of the country we live in, and have a tendency a lot of times to ask ministers how they can best benefit the area.

Here's a prime example. We well know that the shipbuilding industry in the rest of the world is so heavily subsidized it's incredible. Then we try to pursue and push for having something built in Canada...

[Editor's Note: Technical difficulty]...to get the shipbuilding industry going. By these changes, I think, not only could we have a registration of shipping lines in other countries but there also could be subsidiaries in this country in shipbuilding. In some cases that might be.

This actually would benefit a lot of the shipbuilding industry we have in Canada, specifically on the east coast, or even inside the Great Lakes. That's partly where I come from.

Is this a benefit that's not been there? Do we have a shipbuilding policy within Canada that would benefit in some way a smaller...to building some vessels here in Canada?

Mr. Leonard Farber: Mr. Pillitteri, while it doesn't have a direct relationship in that context, the hope, as you find in many industries, is that when management locates in a particular area, oftentimes other aspects related to that industry also locate in that area. So what is hoped for is that there would be spin-off benefits at some point in the future. What is certain is that if they don't locate here, then there's nothing to draw them here whatsoever. But once they're here that is certainly the hope.

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[Translation]

Mr. Yvan Loubier: A point of order. I'd like to invoke now a right, that of tabling five motions for a vote here in the Standing Committee on Finance. I've given the clerk the five motions translated into English. I am in order in tabling these motions without advance notice, since for the past four years there have been no rules in the Standing Committee on Finance governing the tabling of motions. I'll have the motions distributed. Could the committee clerk please see that they are circulated? Let me explain the purpose of these motions. Could the clerk please distribute the motions?

There are five motions, but only the first two were translated into English since the following three have basically the same wording.

In view of the fact that last week we asked questions of the Minister of Finance, I would like to move that we question the government...

[English]

Mr. Tony Valeri: On a point of order, Madame Chair.

The Vice-Chair (Ms. Paddy Torsney): Mr. Valeri.

Mr. Tony Valeri: Madame Chair, we're certainly prepared to listen to and entertain the motions and debate them, but would it not make more sense from a procedural standpoint to deal with these motions once we dismiss the witnesses? There are a number of questions the government members would like to ask. In fact, other members might want to continue to ask questions. Once we dismiss the witnesses we certainly would be prepared to go through whatever Mr. Loubier would like to put forward.

The Vice-Chair (Ms. Paddy Torsney): I know there are lots of questions on the other side.

[Translation]

Mr. Yvan Loubier: Madam Chair, it's only a matter of minutes and I am in order.

The Vice-Chair (Ms. Paddy Torsney): Is there agreement?

Mr. Yvan Loubier: I have the right to table motions at a time I consider appropriate during the committee's proceedings. I have five motions to table and would ask you to call a vote on these motions. We can then proceed with the committee's business.

In view of what we have heard this morning, the questions asked and answers given, I think it's important for committee members to support me in my request to invite special witnesses to the Standing Committee on Finance to shed full light on Bill C-28, particularly clause 241 amending section 250 of the Income Tax Act and granting certain advantages to shipping companies with important international activities.

Motion number 1, which you have before you, moves that Mr. Howard Wilson, the government ethics counsellor, be called to appear as a witness before the Finance Committee as part of its consideration of Bill C-28 in order to clarify section 241 of the bill sponsored by the Minister of Finance, specifically on the matter of the tax regime for international shipping companies.

That is the first motion.

Motion number 2 is very similar. I move that Mr. Raymond Johnston, President and CEO of Canada Steamship Lines Inc., Mr. Pierre Préfontaine, Vice-President, or other members of the board of directors be called to appear as witnesses before the Finance Committee during its consideration of Bill C-28 in order to clarify section 241 of the bill sponsored by the Minister of Finance, specifically on the matter of the tax regime for international shipping companies.

My third motion makes reference to all of them, Mr. Chairman, since the content is the same although the names are different, I move that members of the blind trust as it is called...

[English]

Mr. Tony Valeri: On a point of order, I was just looking at what was given to me, and I only have two motions that are translated. Are they all the same, or am I missing something?

[Translation]

Mr. Yvan Loubier: Yes. Mr. Chairman, as I mentioned at the beginning, the five motions are worded in exactly the same way, the only difference being the names. Motion 1 invites Mr. Wilson. Motion 2 refers to members of the Board of directors of CSL who are invited to the Standing Committee on Finance. In motion number 3, for which you do not have a translation, we are asking that members of the blind trust presently responsible for Canada Steamship Lines Inc. (Passage Holding, Canada Trust) be called to appear before the Finance Committee during its consideration of Bill C-28 in order to clarify section 241 of the bill sponsored by the Minister of Finance, specifically on the matter of the tax regime for international shipping companies.

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The wording of motion number 4 is the same. In this case, I am asking that the Minister of Finance, Mr. Paul Martin, appear as witness before the Standing Committee on Finance during its consideration of Bill C-28 in order to clarify section 241 of the bill sponsored by the Minister of Finance, specifically on the matter of the tax regime for international shipping companies.

Lastly, in the fifth motion, I move that as part of the study of Bill C-28 undertaken by the Standing Committee on Finance, any witness likely to be of assistance to the committee in shedding full light on clause 241 of the bill—among others officials from the Department of National Revenue—sponsored by the Minister of Finance, specifically on the matter of the tax regime for international shipping companies, be called to appear before the committee.

For reasons I've previously given, and in view of the fact that this can be helpful to everyone, including the Minister of Finance, members of the government and the population at large, we should obtain some clarification. The Minister of Finance is sponsoring a bill, namely Bill C-28; it applies to international shipping and he himself is both a legislator and a shipowner and thus involved in this kind of business both abroad and in Canada. Since last February 5, there has been a great deal of contradiction among the various versions provided by the government ethics counsellor, the vice-president of Canada Steamship Lines Inc., the Minister of Finance himself and senior officials of the Department of Finance. I believe the members of the Standing Committee on Finance will be serving everyone's interests by humbly requesting these people to appear before the Standing Committee on Finance to explain how they see C-28 and the way in which it might apply to them.

[English]

The Chairman: Thank you, Mr. Loubier.

The motions are indeed in order, so we'll be dealing with motion number one. Everything is fine with this, but we do have witnesses here who have come to provide us with their expertise on this particular bill. Would you like to let them finish their presentation first and deal with this later on, or do you want—

[Translation]

Mr. Yvan Loubier: No, Mr. Chairman, it will be a matter of minutes. I am asking for a recorded vote on each of the motions. They will be put to the committee. With the agreement of the opposition parties, it will take five minutes. So I am asking for a vote on motion 1.

[English]

Mr. Gary Pillitteri: I have a point of order.

The Chairman: I'll recognize Mr. Szabo first because he had his hand up first.

Mr. Paul Szabo (Mississauga South, Lib.): Mr. Chairman, these are in order but they're also subject to debate. Would it not be prudent to continue with these witnesses or get the agreement of members to finish off with these witnesses? The opposition have had their questions. There are two or three questions left, after which time we can dispense with these witnesses and everybody can focus on the points that have been raised by our colleague on these motions. We're close to finishing here. Because if we don't, it might be neater—

[Translation]

Mr. Yvan Loubier: Yes, I accept your proposal, Mr. Szabo. There'll be the two questions from the government party and then we can have our debate and adopt the motions.

[English]

The Chairman: Mr. Pillitteri.

Mr. Gary Pillitteri: I have the same point of order, Mr. Chairman. This point of order was made earlier by the parliamentary secretary on the floor. I think it should have been dealt with before. We took these motions and it was not dealt with—to dismiss the witnesses.

I think a point of order was raised by Mr. Valeri that we should continue with the witnesses first, or dismiss them before we accept these here. But this was not ruled on. This is almost the same point of order that Mr. Szabo had.

[Translation]

Mr. Yvan Loubier: I accept Mr. Szabo's proposal. The government members still had two questions to ask. We can then have the debate on the motions and adopt them.

[English]

The Chairman: Thank you.

Ms. Paddy Torsney (Burlington, Lib.): I have three process questions. One, with regard to this whole issue, why wasn't this brought up at the steering committee meeting the other day? Two, why is motion five different from the other four motions? It's not the same and it's not the substitute of a name, so can we have the translation? Third, as a point of clarification, I believe Mr. Szabo, Mrs. Redman, and I had questions, so it's not two members; it's in fact three members.

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The Chairman: Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Let's stop fooling around. Mr. Szabo made an excellent proposal and I have a good enough sense of diplomacy to allow the government party to finish it's questioning. There were two questions left, according to Mr. Szabo, and then I'd like to have the motions debated. We can adopt them or turn them down but I'd like a debate.

As for the fifth motion, Ms. Torsney, I beg your indulgence for not having time to have them all translated. I'd like to remind you that on the Standing Committee on Finance, you often presented motions solely in English and I made no protest. The first motion simply says that we should invite any other person likely to shed light on the matter, any other witness.

[English]

The Chairman: Mr. Loubier, thank you very much for allowing the government side to get the same amount of time you had for your questions.

Who has the first question? Mr. Szabo, please.

[Translation]

Mr. Paul Szabo: Thank you, Mr. Loubier.

[English]

I think this will help us to keep this in some neatness.

I think all members would agree that the issue of the CHST, particularly these transfers, is very, very important to Canadians. I think all the members know that when we did our pre-budget consultations we had substantial concern about the levels. I think there was also a lot of ambiguity in the concepts. To mention tax points, even in the House during debate, tends to conjure up a pot-pourri of concepts or definitions.

Mr. Gusen, you had a statement that I think would be helpful to clarify. You said the entitlements were proposed in the legislation, and I wanted to be absolutely sure for the clarification of the members that we're talking about the floor, the proposed...that the entitlements will be included in the legislation. That was not my understanding. Would you clarify it, please.

Mr. Peter Gusen: Thank you, Mr. Chairman.

The legislation deals only with the cash floor part of the transfer. It will raise the cash portion of the transfer in those years in which it would be below $12.5 billion. That will increase the total value of the transfer.

Mr. Paul Szabo: I think it is important for all of us to be clear on the concepts, because if we say different things in the House or when we're dealing with the public, it tends to add to the problem.

My understanding is that under the current situation the total entitlements are commitments by the government. They happen to be stated commitments, long-term, five-year. I understand the tax points, or the value of the tax revenue to a province, is calculable with reference to tax returns and other information. The cash transfer is therefore a calculated amount, being the difference between the commitment and the value of tax points.

Under the proposed changes of Bill C-28, the entitlements are a result rather than a starting point. We know the commitment of the cash floor of the $12.5 billion. We again have the value of the tax points being calculated. The total therefore comes up with the value of the entitlements.

When there is significant deflation in a provincial economy, technically the total entitlements could go down. I raise that because Mr. Pillitteri has raised the other side of it. For instance, if in Newfoundland you get revenues from offshore oil or from Voisey's Bay, it does also raise the question of where equalization payments come into play here, if at all. It is important, because the revenues from Voisey's Bay and from Hibernia are not going to accrue fully to the province. They are in fact going to reduce the equalization payments they are otherwise entitled to.

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Can you clarify for us the impact of changes in equalization payments on tax point value?

Mr. Peter Gusen: Yes. I mentioned it in my remarks on the Canada health and social transfer, but I appreciate the opportunity to elaborate a little on how the equalization program works. It's a very important transfer of payment program that runs alongside the Canada health and social transfer.

If a provincial economy does very well, and the case of Newfoundland was cited with the wealth they may be reaping from Hibernia and Voisey's Bay, and the provincial government gets a higher capacity to raise its own revenues as a result of that economic success, under the equalization program their payments from the federal government would be reduced according to a formula based on the fact that they're in a position to raise more money themselves.

In the opposite case the member just cited, of a province that hit rough times and the economy contracts for one reason or another, the equalization formula would automatically swing into action there as well.

The equalization program measures the fiscal capacity of those provinces. Presumably if the economy hit a bad stretch, the capacity of the provincial governments affected would decrease and their payments from Ottawa under the equalization program would increase to fill the gap.

Mr. Paul Szabo: Under the current system provinces can count on a guaranteed amount. Under the proposed changes in Bill C-28, the total entitlements are not guaranteed; they in fact will float depending on economic growth or deflation.

Mr. Peter Gusen: Yes.

Mr. Paul Szabo: That's very interesting.

I have one last question. Perhaps Mr. Farber can answer it.

The RSPs are probably more misunderstood than even RRSPs. Do we have any idea of what the value of the increased proposals are up to the $4,000 level, what the cost is estimated to be to the government in terms of foregone revenues?

Mr. Leonard Farber: Do you mean the RESP, the registered education savings plan?

Mr. Paul Szabo: That's correct.

Mr. Leonard Farber: As you know, the increased limits do not provide for deductibility. It's really the interest element on the savings that is deferred. It ultimately comes out taxable, but taxable in the hands of the student who is using the money to pay for education. I don't have a cost estimate of the foregone revenues. When one looks at the total amount that has been invested with some notional interest rate attached to it, I don't believe it's a largely significant number. I could try to find the number for you.

Mr. Paul Szabo: I think it's important for Canadians to understand the value of the tax expenditure that was tabled by the government in its budget. I think the provisions have increased twice now. I think initially it was around the $1,000 level; now it's at some $4,000.

I understand fully that we're not talking about deductibility as we are with the RRSP, but we're talking about the taxation of the accrued income within the program when it ultimately comes out, whether it's taxed in the hands of the student or in the hands of the parent when the funds get rolled back into their own tax situation.

It seems to me it would be very difficult at this point, considering the vintage of the RESP system and its small size, to estimate. We would basically be speculating on the usage of the thing and whether ultimately it was taxable in the hands of the student or a parent.

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Mr. Leonard Farber: You have that right. It is difficult to estimate, but for a lot of measures that are put forward you always have to make certain estimates about potential take-up and certain assumptions.

My colleague has just referred me to a table that was with the budget plan for that 1997 budget. In a table on the federal revenue impact of new tax measures, the increase of the registered education savings plan annual limit to $4,000 was estimated to have a revenue impact for 1997-98 of $10 million, for 1998-99 of $25 million and of $40 million from 1999 to 2000 and into future years.

I would only suggest that the basis of the estimate is that you know what the population of RESPs is. So increasing the limit and just taking what you have as a base level, assuming normal contribution rates at that point and taking some assumed interest rate, one can see what the foregone interest, the tax on that interest, would be. That table represents what the revenue foregone would be.

Mr. Paul Szabo: Finally, can you confirm again the basis for the allocation of the $12.5 billion to the provinces, the cash floor? How is it distributed to the provinces and on what basis?

Mr. Peter Gusen: For each province the existing legislation determines the allocation of the total CHST amount. It's based in part on the payments under the transfer programs that the CHST replaced, the established programs financing and the Canada Assistance Plan, and in part it's based on the population of the provinces. The per capita amount is determined on that basis. This allocation formula determines the provincial shares of the total amount of the CHST and that includes the incremental amount that will be delivered as a result of raising the cash floor from $11 billion to $12.5 billion.

Mr. Paul Szabo: Does that mean the guaranteed cash for them could change from year to year?

Mr. Peter Gusen: Yes, if their population changes.

Mr. Paul Szabo: Thank you.

The Chairman: Are there any further questions? Ms. Torsney.

Ms. Paddy Torsney: As you may or may not know, I come from the province of Ontario, where the CHST is certainly a hot issue. In fact, we are being blamed for all the cuts in health care and what have you.

In the last government we in fact did cut the cash transfer to the provinces. The province of Ontario lost about $1.2 billion, I think. Is that correct?

While you're looking for that, the other part of my point is that I want to clarify that their tax point opportunity in fact increased, should they have wanted to utilize that.

Mr. Peter Gusen: Mr. Chairman, I can give you figures on what happened in Ontario. Generally the starting point for comparison is 1993-94. That was the high water mark for transfer payments. In that year, Ontario received $6.3 billion in cash transfers under the predecessor programs, EPF and CAP.

The year we're in right now, 1997-98, is the low point for the transfer payments. This year it's predicted that Ontario will receive $4.1 billion in cash transfers, so the comparison should be between $6.3 billion and $4.1 billion.

The value of the tax transfers compensated for some of that reduction but not all of it. There were reductions. In 1993-94 the value of the tax transfer in Ontario was $4 billion. By 1997-98 it had gone up to $5.1 billion.

Ms. Paddy Torsney: So $1.1 billion was the difference in terms of their cut.

Mr. Peter Gusen: Yes.

• 1040

Ms. Paddy Torsney: Contrasted with the tax cut they implemented on themselves, which cost them about $4.8 billion, I believe.

When you were wrapping up your comments you said the allocation of the CHST among the provinces will be more equal over time, that it will average out. I want you to clarify what that means.

Mr. Peter Gusen: A member from Ontario asked this question, I think. The previous government made reductions in transfer payments as well, including to the Canada Assistance Plan. The Canada Assistance Plan had been a cost-sharing program whereby the provincial governments would spend money on social assistance and social services, and they would be reimbursed by the federal government for fifty cents of every dollar they spent.

In 1990 the government of the day introduced a measure that limited how quickly federal transfers under the Canada Assistance Plan could grow. They were limited to 5% growth a year, but not for all provinces. Three provinces were chosen for application of this cap on CAP, as it was called, this limit on the growth of CAP programs, and Ontario was one of them.

As a result of the application of that cap for several years, Ontario ended up getting a proportionally smaller transfer payment than did other provinces. B.C. and Alberta were also affected by that. The allocation of the Canada health and social transfer, in its initial year, was based on the allocation across provinces of these old transfers. So the sins of the past were visited on the CHST in its initial year, and Ontario, B.C., and Alberta received a below-average share of the CHST.

What was built into the CHST, however, was that this situation would be corrected over time. During the years when the CHST was first introduced—1996-97—until the end of the period covered by the CHST legislation—2002-03—half of the gap between what Ontario, for example, is getting now on a per capita basis and what it would be getting if there was complete equality across the country in the per capita amounts of CHST will be eliminated over that seven-year period.

Ms. Paddy Torsney: The other bonus for the provinces is they do have that five-year predictibility, which they didn't have under an old system. Is that correct?

Mr. Peter Gusen: That's right. The legislation outlining the CHST covers the period up to 2002. It gives a degree of predictibility and security that wasn't there before.

Ms. Paddy Torsney: Thank you, Mr. Gusen.

My second question is with regard to charitable donations of shares. A lot of people have asked me why we cannot give.... They're happy with the opportunity to give shares to charity, but why can't they give them in privately held companies? If I owned a company making window frames that was shared with my children or something—imagining I had them—could we not transfer shares to a charity?

Mr. Dan MacIntosh: The provisions you're referring to in the bill deal with what are called loan-back transactions. The 1997 budget proposed to deny the charitable donations tax credit and the charitable donations deduction for gifts made in the course of a loan-back transaction. The type of transaction the government was concerned about would be where an individual donated an amount to a charity, either in cash or in kind, and then the charity immediately loaned that amount back to the donor. So the donor would continue to have the use of their funds, but they're able to claim a charitable donations tax credit.

The Minister of Finance quite rightly decided that this isn't the sort of thing the tax system should be subsidizing. This isn't the sort of donation that deserves a charitable donations tax credit.

• 1045

There are more elaborate variations of what I just described that require the loan-back transaction to be extended to gifts of shares. For example, rather than giving a gift to a charity, which then loans it back to the individual, perhaps the individual would give a gift to the charity, which would then loan it back to the individual's corporation.

In that case the individual would still have indirect control over the funds but would be able to claim a charitable donations tax credit. So if that were prohibited, the next step would be that the individual, instead of doing those former transactions, would simply loan the funds to his corporation as the first step, take back a promissory note and then donate the promissory note to the charity and claim a charitable donations tax credit. The funds are still in the individual's company, so you would end up in the same place you would if the amount had been donated and then loaned back to the company.

But if we prohibited that, the next step would be for the individual to put the funds into the individual's company and take back shares—the funds would represent a subscription of shares—and then donate the shares to the company.

I guess it's a familiar story in the tax system that every time you plug a loophole, tax practitioners go a bit further and make a more elaborate plan to take advantage of this. In designing the rules, we could see this coming. Revenue Canada had made us aware of certain loan-back transactions and it was becoming a problem, so we knew we had to stop it all of the way.

The result was a proposal that would have denied the charitable donations deduction for gifts of shares of privately controlled companies. This became a concern to the charitable sector, with whom we had many meetings and considered many of their submissions. Their argument was that while there may be some abuses, the great majority of gifts of shares did not involve an abuse of the tax system. No one was trying to rip off the system, they felt; they were just trying to make genuine gifts.

These submissions were considered by officials and by the Minister of Finance, and because of the importance of the charitable sector an exception was made in the rules so that under Bill C-28 shares of privately held companies can be given where the gift is made to a public foundation—that is, to a public charity and the individual is dealing at arm's length with the charity. This is because the cases of abuse that were brought to our attention involved individuals essentially making gifts to charities they effectively controlled, or at least did not deal with at arm's length.

Our understanding is that while the charitable sector would prefer there to be no restrictions whatsoever, this goes a long way in satisfying their concerns.

The Chairman: Ms. Torsney, very briefly.

Ms. Paddy Torsney: So a winery or a window company or whatever can donate shares to the Red Cross and get a tax receipt for them. An individual can donate his or her shares in their own family company.

Mr. Dan MacIntosh: Yes.

Ms. Paddy Torsney: Okay. Thank you.

The Chairman: A very brief question from Mr. Valeri.

Mr. Tony Valeri: I would like a brief clarification of a comment that was made earlier.

Mr. Farber, you said earlier it was inconceivable that under the diagram I distributed to you such a company would make use of the provisions. Why did you say that, and what benefits, if any, could a Canadian company make of those provisions?

Mr. Leonard Farber: I said that, Mr. Valeri, because in my opening comments I tried to address the foreign ownership question and the fact that these provisions were designed to attract foreign-incorporated shippers to Canada. There is a broad-based assumption that Canadian companies could or could not avail themselves of this particular tax measure. In fact, under the organization chart you showed me they're availing themselves of a tax exemption already, because the presumption is they're all foreign-incorporated companies that are being managed abroad. What possible benefit could there be for a Canadian resident parent company in accessing this particular measure? So I said it was inconceivable to me.

It's inconceivable in tax terms. Not everything, Mr. Valeri, is driven by tax reasons. Often things are normal business and administrative kinds of concerns.

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If a Canadian company ever wanted to avail itself of the provision, it would have nothing to do with tax reasons. It's already benefiting from the tax regime. But it could save itself some cost of management, some administrative costs and other issues of that nature totally unrelated to tax.

So I just want to clarify the point that in that particular set of circumstance it's not a tax-driven kind of mechanism that could ever be of benefit to a Canadian company.

The Chairman: Thank you, Mr. Farber and Mr. Valeri. And thank you, Ms. Redman, for forgoing your question in the spirit of cooperation. It is duly noted by the chair.

Thank you very much, Mr. MacIntosh, Mr. Farber, Mr. Gusen, and the entire team. Thank you for insightful answers to some penetrating questions. We will come back to you in case we need further information or clarification. Thank you very much.

First, let's establish the fact that all the motions in fact are in order. We will first deal with the first motion. I think everybody has a copy. We will have to go one by one.

The first one is pretty straightforward. It's been read. Can this be tabled for the record? First motion tabled by Mr. Loubier. Explanation?

[Translation]

Mr. Yvan Loubier: In my motion I am asking that the Standing Committee on Finance invite Mr. Howard Wilson, government ethics counsellor, to answer our questions on his interpretation of Bill C-28 and clause 241 and on the statements he made about the companies of the Minister of Finance.

[English]

The Chairman: Okay. There are no further questions or comments, so we'll move right to the vote.

Mr. Tony Valeri: I just have a comment.

The Chairman: Oh, do you?

Mr. Tony Valeri: It's a very quick comment.

[Translation]

Mr. Yvan Loubier: A recorded vote, please.

[English]

Mr. Tony Valeri: My comment is that certainly Mr. Wilson has the responsibility to liaise with the trust, with CSL. It essentially is responsible for being the liaison between government and private holdings.

So I would certainly be very supportive of having Mr. Wilson come before this committee to answer those questions that perhaps Mr. Loubier or other members of this committee may have.

I would encourage that we go directly to the vote.

The Chairman: Do you still want to record a vote?

[Translation]

Mr. Yvan Loubier: Yes.

[English]

(Motion agreed to)

Mr. Yvan Loubier: Oh, magnifique, wonderful.

An hon. member: Oh, oh.

Mr. Yvan Loubier: Okay—

An hon. member: Fire it up.

Mr. Yvan Loubier: —number two. Could you continue like that?

Some hon. members: Oh, oh!

Mr. Yvan Loubier: Put the hands up, please.

The Chairman: Okay, let's move on to the second motion.

Mr. Yvan Loubier: The second motion, okay.

[Translation]

Mr. Chairman, I move that Mr. Raymond Johnston, President and CEO of Canada Steamship Lines Inc. or Mr. Préfontaine or any other member of the board of directors appear to testify about the impact clause 241 of Bill C-28 might have on their business undertakings and the way in which they explain the contradictory comments made by the ethics counsellor and the Minister of Finance on February 5 in particular, with respect to the application of this new provision of the Income Tax Act to their business.

[English]

The Chairman: Thank you very much, Mr. Loubier. Just for the record, it looks like your motions are self-explanatory, so we can deal with the second motion.

Mr. Tony Valeri: I would just reiterate that I think it's certainly important to have Mr. Wilson come before the committee, since he is responsible for this type of liaison on behalf of the government. I suggest that Mr. Wilson come before the committee, and that this motion be voted on now and defeated.

The Chairman: Okay.

[Translation]

Mr. Yvan Loubier: Why? May I ask you a question? Why are you suggesting that it be defeated?

[English]

Mr. Tony Valeri: Well, essentially it is the responsibility of Mr. Wilson to come before the committee and answer those questions. He certainly has all the information available to him to do so. When we hear Mr. Wilson, if there is some challenge on his ability to answer those questions, we would certainly press him to get that information and answer whatever questions this committee would like to have answered.

The Chairman: Okay?

[Translation]

Mr. Yvan Loubier: But there is a difference between asking the ethics counsellor questions on ethics and questioning those who run a business about the operations of the business. It isn't the same kind of information that I would be trying to find out from directors of CSL in order to enlighten us.

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Today, we've heard theoretical explanations about the application of this kind of legislation. It would be good to know how a Canadian business with subsidiaries abroad is able to operate and to obtain additional information about the structure of the business.

[English]

The Chairman: Just so you're aware of this, the heritage committee is going to be here at 11 a.m., so we have five minutes left.

[Translation]

Mr. Yvan Loubier: Let them wait five minutes, Mr. Chairman.

[English]

The Chairman: Okay.

[Translation]

Mr. Yvan Loubier: A Reform colleague would like to say something.

[English]

The Chairman: Yes, sure.

Mr. Harris, and then Ms. Torsney.

Ms. Paddy Torsney: I just wanted to clarify that on Thursday we're hearing witnesses, anybody who wants to appear on this bill, and that message has gone out to the general public. That's what we agreed to at the steering committee. So if any individuals who are named in these choose to come, that will be their business.

The Chairman: Mr. Harris.

Mr. Dick Harris: Mr. Chairman, I think everyone is aware that Mr. Loubier has raised this question not only here, but also in the House and in the media.

I would think that in the spirit of openness and transparency, the government would want to have this question completely cleared up. This would be so that the media is not going to deal with it in their own way, and so that the question would not remain out there in the public eye that all the people who could contribute to answering the question Mr. Loubier has raised were not in fact heard from.

I'm surprised that the government would suggest that key witnesses to answer the question would not be permitted to come to the committee. I think the government has a responsibility to support these motions, as we will.

The Chairman: I think the points have been made.

Mr. Tony Valeri: I just want to reiterate that the reason this government is supporting the appearance of Mr. Wilson is in fact to be open and transparent, and to answer any of those questions. It is within Mr. Wilson's duties and responsibilities to be fully aware of what these companies are in fact doing, and to be able to answer those questions for this committee. That is why we're supporting the fact that Mr. Wilson come before this committee. So I would call for the question.

The Chairman: Okay. Second motion. All those in favour.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, one last thing. Mr. Wilson is employed by the Prime Minister. We have particular questions to ask him. Members of the board of directors of Canada Steamship Lines Inc. manage a business with tentacles everywhere from Bermuda to Liberia, Barbados etc. We would also like to ask them questions about the impact of this bill on their operations. The two things are completely different.

Mr. Wilson will appear before the committee. In spite of his willingness to answer our questions, he is not the person running these businesses, all the more so as an employee of the Prime Minister. So Mr. Wilson alone will not be able to shed full light the issue. Let's show some transparency.

If the Minister of Finance has nothing to reproach himself with, if the same is true of the government, it would be a good idea for the people, and for us to have all the witnesses I named appear.

[English]

The Chairman: Mr. Harris.

Mr. Dick Harris: Mr. Chairman, Mr. Loubier raises a good point. With all due respect to Mr. Wilson, he is an appointee of the Prime Minister; he's not accountable to the House of Commons, to parliamentarians.

Concerning his credentials, with all due respect to him again, I'm not exactly sure that he could provide the expertise regarding tax implications, the business...and all the pertinent items for consideration of Mr. Loubier's question.

I think that in this committee we would be well served to have key witnesses who are involved in the particular operation, key witnesses who are involved in the trust, in addition to the ethics counsellor. I think the government has a responsibility to call the most competent witnesses who can contribute to the hearing of the question.

• 1100

The Chairman: Okay, so let's take a vote on motion two now.

(Motion negatived)

The Chairman: We'll now move to motion three. I gather you have the same points, Mr. Loubier. Is it self-explanatory?

[Translation]

Mr. Yvan Loubier: I move that members of the blind trust presently responsible for Canada Steamship Lines Inc., Passage Holding of Canada Trust, be called to appear as witnesses before the Standing Committee on Finance.

[English]

(Motion negatived)

The Chairman: We'll move to motion four.

[Translation]

Mr. Loubier.

Mr. Yvan Loubier: That Mr. Paul Martin, legislator-shipowner and Minister of Finance, be invited to appear as witness before the Standing Committee on Finance as part of its examination of Bill C- 28.

[English]

(Motion negatived)

The Chairman: Motion five.

[Translation]

Mr. Yvan Loubier: I move that as part of the study of Bill C- 28 undertaken by the Standing Committee on Finance any witness likely to be of assistance to the committee in casting light on clause 241 of the bill sponsored by the Minister of Finance, specifically on the matter of the tax regime for international shipping companies, be called to appear before the committee.

[English]

(Motion negatived)

[Translation]

Mr. Yvan Loubier: You don't want us to invite any witnesses?

[English]

Thank you very much for your support.

The Chairman: Give me just one second before you leave. Hold on, just pipe down a bit here.

We're going to have to have a special meeting with Wilson, right? It's not going to be part of the Thursday meeting, so it will probably be the following Tuesday. We will therefore have to push clause-by-clause to the following Thursday.

The meeting is adjourned.