FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 2, 2001

• 1531

[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this afternoon.

As you know, the order of the day is Bill C-22, an act to amend the Income Tax Act, the income tax application rules, certain acts related to the Income Tax Act, the Canada Pension Plan, the Customs Act, the Excise Tax Act, the Modernization of Benefits and Obligations Act, and another act related to the Excise Tax Act.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Chairman, before we begin...

[English]

An hon. member: Clause-by-clause?

[Translation]

Mr. Yvan Loubier: Mr. Chairman, before we begin, I would like to raise an issue with you. Perhaps I'll start again.

Mr. Epp, is it okay now?

Tomorrow morning, we are to begin third reading of Bill C-18. At the same time, we are expected to proceed with clause by clause consideration of Bill C-22 in committee.

This is obviously a problem. We cannot be in two places at the same time. We are not yet ubiquitous, as far as I know. Would it therefore be possible to postpone the Committee meeting planned for tomorrow morning, so that we can be in the House of Commons for third reading?

[English]

The Chair: Yes, absolutely. Consider it done. From time to time these conflicts occur, but you're correct in saying you can't be in two places at the same time. So your suggestion is to postpone the finance committee. I think that's a wise suggestion.

Mr. Ken Epp (Elk Island, Canadian Alliance): I didn't hear the first part of it.

The Chair: There is a finance bill in the House at the same time that—

Mr. Ken Epp: Which one is it?

Mr. Roy Cullen (Parliamentary Secretary to the Minister of Finance): Bill C-17.

The Chair: Mr. Cullen.

Mr. Roy Cullen: Mr. Chairman, as I understand it, there are some discussions going on right now to try to eliminate the overlap, so that we do Bill C-17, and then the House leader would introduce another bill and get to Bill C-22 after the hearings on Bill C-17 here.

The Chair: So I guess by the end of the day we should know what happened.

Mr. Roy Cullen: Absolutely.

The Chair: But Mr. Loubier has a point, because you can't be in two places at the same time. If in fact you're proceeding with the debate of the bill in the House, then we're going to postpone the finance committee meeting. I think that's fair. Is there agreement with that?

Mr. Roy Cullen: That's understood, yes. We all have the same problem. I have the same problem as well, because I was supposed to be doing third reading debate.

The Chair: It's on until further notice.

Mr. Ken Epp: I wonder then whether we could take it one step further, because—and this is very personal, I know it's my own problem—I have one of my staff members away because he is in surgery. My other staff member is filling in. It's my economics help who's not around. So we're actually having some trouble getting to this bill between now and tomorrow. So if we could postpone it until next week, I would just be delighted.

The Chair: Yes. We just approved the schedule actually yesterday.

Mr. Ken Epp: Yes, I know.

The Chair: You probably remember. But Mr. Loubier's point is indeed a valid one and we'll have to look at that. Mr. Epp, I'll also take into consideration your staffing situation. But we have people who must appear and we have to get on with it.

Is that okay, Mr. Gallaway?

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Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Reference was made to Bill C-17. What is Bill C-17? These numbers confuse me.

The Chair: Mr. Cullen.

Mr. Roy Cullen: Bill C-17 is the bill implementing the Canada Foundation for Innovation funding and also some changes to the Financial Administration Act.

Mr. Roger Gallaway: Okay.

The Chair: Mr. Cullen, you know how this committee operates. Take the time you need, and then we'll go into a question and answer session.

Mr. Cullen, welcome.

Mr. Roy Cullen: Thank you very much, Mr. Chairman. Given that the act is 505 pages long, if you'll allow me, I'll just spend a moment to take the committee through the—

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): One minute per page.

Mr. Roy Cullen: Really? I'm not sure you want that. I'll keep my comments brief, so we can have some questions.

[Translation]

Mr. Chairman, this Bill implements key elements of the government's five-year tax reduction plan, which was introduced in the 2000 Budget and expanded in the Economic Statement and Budget Update last fall.

[English]

I'd also include other income tax measures, such as the technical amendments that were contained in Bill C-43, which died on the order paper in the last Parliament.

First, I'd like to discuss the personal income tax measures that are part of the five-year tax reduction plan, and I begin with the measures that provide for tax rate reductions at all income levels as of January 1, 2001. Under Bill C-22 the low and middle income tax rates fall to 16% and 22% respectively. The top 29% rate is reduced to 26% on incomes between about $61,000 and $100,000, which means that the 29% rate applies only to income over $100,000. In addition to the reduction in tax rates, the 5% deficit reduction surtax is eliminated as of January 2001. Bill C-22 also affirms the 2000 budget commitments to increase the basic personal amount to $8,000 by the year 2004 and to increase the tax bracket thresholds to at least $35,000, $70,000, and $113,804 by the same year.

[Translation]

Mr. Chairman, the next measure I want to discuss must be in place by the end of June. I am referring to the increased support for families with children through the Canada Child Tax Benefit (CCTB).

[English]

Bill C-22 raises the maximum child tax benefit for the first child to $2,372 as of July 2001, well on the way to the government's five-year goal of $2,500 for the first child by 2004. It also implements the enrichments to the child tax benefit announced in the economic statement and budget update. Together with the changes announced in the 2000 budget, this measure will increase child tax benefits to families with children by $2.6 billion by the year 2004-2005.

These changes are due to come into force on July 1, which is the reason this bill must be passed by then, in order for the Canada Customs and Revenue Agency to have legislative authority to pay the increased benefits for Canadian children.

[Translation]

Some of the other components of the five-year tax reduction plan included in this Bill are specifically designed to help those who need it most. The maximum annual amounts for the disability tax credit, the child care expense deduction for children eligible for the disability tax credit, and the caregiver and infirm dependent credits are all increasing in 2001.

[English]

In addition, eligibility for the disability tax credit is extended to individuals who must undergo extensive therapy to sustain their vital functions, and the list of relatives to whom the disability tax credit can be transferred is expanded.

Bill C-22 also doubles the education amount from $200 to $400, beginning this year, and it increases the exemption for certain scholarships, fellowships, and bursaries from $500 to $3,000.

Another measure allows self-employed individuals to deduct the portion of CPP and QPP contributions that represents the employer's share.

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Mr. Chairman, the additional personal tax measures in this bill are too extensive to discuss in the short time available today. The measures include, for example, a clarification of the rules under which clergy can claim a deduction for their residence, clarification of circumstances under which the Canada Customs and Revenue Agency may release information about former registered charities, and an extension of the travel allowance exemption for part-time teachers to teachers who don't have other jobs.

I and the officials here today with me will be pleased to discuss the additional technical amendments during the question and answer period at the end of my remarks.

[Translation]

Mr. Chairman, I would like now to turn to the business income tax changes in the Bill. Let me begin by pointing out that the five-year tax reduction plan goes a long way towards making this part of Canada's tax system more internationally competitive.

[English]

Bill C-22 includes significant corporate tax rate reductions. Corporate tax rates will drop to 21% from 28% for businesses in the highest tax sectors, such as the high technology services, to make them more internationally competitive. These reductions will begin with a one-point cut, effective January 1, 2001. By 2005, Mr. Chairman, the combined federal-provincial tax rate, including both income and capital taxes, will drop from the current average of 47% to 35%, a full five percentage points below the U.S. rate. This will put our businesses on a more competitive footing when compared to businesses in other G-7 countries.

Two measures in the plan are aimed at improving access to capital for Canadian businesses, Mr. Chairman. The first reduces the capital gains inclusion rate from three-quarters to one-half. This measure means that our top federal-provincial capital gains rate will be lower than the typical U.S. combined federal-state top rate.

The second measure provides a tax-deferred capital gains rollover for reinvestments in shares of certain small and medium-sized businesses. Consistent with the change in the capital gains inclusion rate is an increase in the deduction for employee stock options from one-quarter to one-half. As a result, employees in Canada will be taxed more favourably on their stock option benefits than employees in the United States.

[Translation]

In addition, Bill C-22 defers the taxation of certain stock option benefits and allows an additional deduction for certain stock option shares donated to charity.

Mr. Chairman, as with the personal tax measures, the business tax and other tax changes are too numerous for me to discuss individually at this time. However, let me provide a few examples.

[English]

Bill C-22 contains new rules for branches of foreign banks operating in Canada. The tax system for new foreign bank branches will be comparable to that for Canadian banks. Bill C-22 also strengthens the thin capitalization rules, amends the corporate divisive reorganization rules, introduces a temporary 15% investment credit for grassroots mineral exploration, and phases out the special tax regime for non-resident-owned investment corporations.

In addition, the bill clarifies the tax treatment of resource expenditures and gifts of ecologically sensitive land. It extends the additional capital tax on life insurance corporations until the end of 2000, and ensures that in a chain of corporations, a corporation is considered, for income tax purposes, to be controlled by its immediate parent.

Mr. Chairman, there are three additional measures that I wish to mention briefly before going on to questions. The first deals with trusts. Bill C-22 addresses the tax treatment of property distributed from a Canadian trust to a non-resident beneficiary. It also introduces measures dealing with the tax treatment of bare, protective, and similar trusts, as well as mutual fund trusts, health and welfare trusts, and trusts governed by RRSPs and RRIFs.

[Translation]

In addition, the Bill introduces several new anti-avoidance measures designed to ensure that transfers to trusts cannot be used to inappropriately reduce tax.

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The second measure concerns new taxpayer migration rules and ensures that Canada retains the right to tax emigrants on gains that accrue during their stay in Canada.

[English]

The bill clarifies the effect of the new rules on various kinds of rights to future income and allows returning former residents to reverse the tax effects of their departure, regardless of how long they were non-resident. In addition, former residents will be able to reduce the Canadian tax payable on their pre-departure gains by certain foreign taxes paid on the same gains.

This is part of Canada's commitment to avoiding international double taxation, a commitment that has been reflected in our tax treaty negotiations since December 1999.

The final measure relates to the June 3, 1999, agreement between Canada and the United States concerning foreign periodicals. As a result of this agreement, the existing Canadian ownership and Canadian content rules for advertising expense deductions no longer apply to advertisements in periodicals. Instead, advertising expenses in periodicals with at least 80% original editorial content are fully deductible, and advertising expenses in other periodicals are 50% deductible regardless of ownership.

[Translation]

The measures in this Bill provide tax relief to all Canadians, particularly to those who need it most. They also promote entrepreneurship, economic growth and job creation in ways that give Canadians an advantage in the new economy.

[English]

The five-year tax reduction plan will provide $100 billion in tax relief by 2004-2005, reducing the federal personal income tax paid by Canadians by about 21% on average. Families with children will receive an even larger tax cut, about 27% on average. In addition, the tax reduction plan makes Canada's business income tax system more internationally competitive.

[Translation]

While all Canadian taxpayers will benefit from these changes, in considering this legislation, I urge honourable members to particularly think about the Canadian children who need the Canada Child Tax Benefit increases by July 1.

[English]

Thank you, Mr. Chairman, for the time you've accorded me with the members here. Together with the officials present, I'll be happy to try to answer any questions. Merci.

The Chair: Thank you very much, Mr. Cullen.

As always, I'd like to thank all the officials present. We always seek your advice on key issues related to these bills.

Mr. Peschisolido, five minutes.

Mr. Joe Peschisolido (Richmond, Canadian Alliance): Mr. Chairman, thank you.

I would like to thank my colleague Mr. Cullen for his presentation. We were joking at the beginning about the number of pages we would have to go through if it were clause-by-clause. I believe that speaks to the complexity of the whole bill.

Mr. Cullen, given that this is a positive step but a housekeeping measure in order to implement the proposals put forth in October, do you believe there would have been a more efficient way, perhaps within a flatter, simpler, broader-based tax system, to bring in your proposals, or other proposals, than putting forth 500 pages of amendments?

Mr. Roy Cullen: Actually, Mr. Peschisolido, there are 511 pages to be exact.

Mr. Joe Peschisolido: Which further increases my argument.

Mr. Roy Cullen: I would have to argue with you that this is a housekeeping bill. In fact, this piece of legislation delivers the largest tax cut in Canadian history, $100 billion, and at the same time deals with other technical issues as a result of consultation with Canadians, with professional groups. There has been a lot of consultation with clergy, with foreign actors, with banks, etc., and a lot of these changes are actually quite important to these stakeholder groups and indeed to all Canadians.

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On the notion of tax complexity, I think probably all of us feel that income tax is becoming quite complex. Unfortunately, it's all of us who keep coming to the table with a little tweak here, a little tweak there, a little special measure here, a little special measure there, and incrementally, over time, it adds up to a lot.

You know, the Alliance Party's proposal for this flat tax or....

Mr. Ken Epp: Single rate tax.

Mr. Roy Cullen: A single rate tax, yes.

I put a question across the floor of the House. A lot of Canadians would think that you just take your income, multiply by 17%, and get your tax payable. I think your own party understands that there are in fact many measures in the Income Tax Act—deductibility of pension contributions, RRSPs, medical expenses over a certain amount, charitable donations in certain instances, etc.—that would probably be part of your own proposal.

No matter what Income Tax Act we have, we should always be striving for simplicity when we can, but it is a complex world, and we need to try to deal with those issues the best way we can.

Mr. Joe Peschisolido: In terms of your overall number, you claim, Mr. Cullen, that your tax package will mean a tax decrease of over $100 billion. Would that include or exclude the $20.7-billion increase in CPP premiums? Would that include or exclude the elimination of the indexation? Would that $40 billion be part of your $100-billion decrease?

Mr. Roy Cullen: The CPP is not, of course, a tax. The Canada Pension Plan is a contribution-based pension scheme where employers and employees pay into a pension plan. The funds go into a jointly trusteed or trusteed pension plan. The premiums don't go anywhere near consolidated revenue, as you're probably aware. So it's not a tax item at all. I would concede that it does affect take-home pay, but—

Mr. Joe Peschisolido: In effect, what you've just put forth is that the tax cuts, or the reduction of moneys that would be coming from Canadians as a whole, is not, as you've advocated, $100 billion, but closer to $50 billion when you throw in the CPP increases—

Mr. Roy Cullen: No.

Mr. Joe Peschisolido: —as well as what you haven't taken, based on indexation.

Mr. Roy Cullen: Mr. Peschisolido, perhaps you'll just let me finish my answer. You had talked about a couple of things there, including re-indexation of the tax system. That is part of the number of $100 billion that we do talk about, and quite appropriately so.

Now, I do find—without being partisan in a discussion like this—that many times in the House of Commons, before we re-indexed the tax system, we would hear from the other side that the finance minister had increased taxes. He hadn't, of course, but it was implied that, because the tax system wasn't indexed, he had. The moment the tax system is re-indexed, the opposition party members say “Well, that's not really a tax cut”. I think the $100 billion, if you look at it this way, is a reduction in the taxes that Canadians otherwise would have paid if the measures had not been introduced.

With regard to CPP, again, we've had this debate many times with the Alliance Party. The Canada Pension Plan is an investment in the future. The government took the measures that were needed to put it on sound footing. It has nothing to do with taxes. It is an investment in the future.

If you're going to talk about CPP, what about EI? Employment insurance premiums have consistently come down. In fact, we're now saving Canadian employers and employees approximately $6.9 billion a year.

When you talk about take-home pay, fair enough. You can talk about CPP perhaps, but then you have to talk about EI, and you have to talk about tax cuts all in one package.

The reality is that, to most analysts, the $100-billion tax cut is a huge stimulus. The Canadian Chamber of Commerce has said that the timing couldn't have been better. In fact, with regard to the Canada Pension Plan, as you probably know, taxpayers generally max out around June, and the same with EI, so that additional stimulus, together with the tax cuts, is just starting to work its way through the system. It's the biggest stimulus to the Canadian economy in recent times.

Mr. Joe Peschisolido: I have one final question, Mr. Chairman, if I may.

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Yesterday we had the honour of having the Governor of the Bank of Canada, David Dodge, here. He admitted he was using the only tool he had, which was money supply, and it would be incumbent upon a government—he was speaking theoretically, but it applies to the government in Canada—to be making some structural changes in order to lift the Canadian dollar and deal with productivity.

Based on the comments of the Governor of the Bank of Canada, do you believe it would have been more prudent to have bigger taxation reductions as well as a greater bite into the debt the government carries in order to allow greater flexibility for the Governor of the Bank of Canada, so we'd have a dollar perhaps closer to 80¢ rather than 66¢?

Mr. Roy Cullen: Well, Mr. Peschisolido, I think you were at a different meeting than I.

Mr. Joe Peschisolido: It was the same one, right here.

Mr. Roy Cullen: I think the Governor of the Bank of Canada acknowledged that structurally, in terms of fiscal policy and fiscal adjustment, Canada—it's well known—is an international success story. We've eliminated the deficit. We're paying down debt, which, by the end of this fiscal year, will be a minimum of $30 billion plus. We have low inflation, relatively low unemployment—I could go on and on. So in terms of fiscal policy and structurally, Canada is very well positioned.

I think you may have been confusing his remarks when he talked about it in Europe. What I heard was that the governors of the European Central Bank were basically saying they're not so convinced that interest rates have to come down, for a number of reasons. Also, I think they were suggesting there's some structural, fiscal work to do in Europe. But with respect to Canada, we're never done and we have debt that we're continuing to pay down. We'll continue to cut taxes. But I think the monetary and fiscal policies in this country have, to this point, meshed fairly well together. We have more work to do, and I'm confident we'll be able to do it.

The Chair: Okay.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, I was not planning to make any comment but Mr. Cullen's remarks gave me such a start, as they often do, that I felt I had to speak up.

When he refers to the tax burden, he has a tendency to mix apples, oranges, nuts, bananas and just about everything else. He is a little confused.

Certain things—such as direct and indirect taxation—are part of the tax burden borne by Canadian taxpayers. The Child Tax Benefit is not an item that contributes to tax—for example, negative tax. It is a government expenditure.

And in terms of employment insurance, Mr. Chairman, he is really going too far. He is so proud to announce that reductions in employment insurance premiums are linked to tax cuts. I find those comments more than a little outrageous, since employers and employees are paying into the Program. The federal government hasn't invested a dime in the Program for years now. The one thing it does do is control the cash.

Every year, it takes the liberty of skimming off billions of dollars away from employers and employees, in addition to excluding the majority of jobless who should normally be able to avail themselves of unemployment insurance. Yet we know that only 43 per cent of unemployed workers actually benefit from the EI Program. On top of that, the federal government is building a substantial nest egg: a surplus of an additional $5 billion a year, despite lower contribution rates for employers and employees.

I find his comments a bit much, Mr. Chairman. When people start making outrageous statements like that during a presentation on a bill, I must say it really gives me pause. I think it's misleading to talk about these measures being linked to tax cuts, when that is not the case at all. Yet not a word is spoken about the scandalous theft of Employment Insurance funds. Canadians are not fools. If he wishes to respond, then he should give us an accurate answer as to the true tax burden.

There are other arguments to be made with respect to the flat tax. That is a policy that should be reviewed. At first glance, it would seem to be a regressive measure, one that would run counter to the principles we have fought for for a very long time, namely that the higher your income, the more taxes you should pay. So, we can do without these kinds of arguments. It's ridiculous to make comments like that. They are not helpful and certainly do not contribute anything to the debate.

• 1600

That was a comment, rather than a question, Mr. Chairman.

[English]

The Chair: Thank you, Mr. Loubier.

Mr. Gallaway, followed by Mr. Pillitteri.

Mr. Roger Gallaway: I have really one question to address—there's more than one question. In the introduction, the summary refers to bullet nine, which is an unusual one. It's a clergy residence deduction.

About a year ago there were reports in The Globe and Mail that this was going to occur. In fact, the Department of Finance was floating a trial balloon. I wonder if you could tell me, first, in what section can one find it? Second, the summary says it provides clear rules for determining the amount deductible in respect of a clergy's residence, and I know there were a number of associations that expressed real concerns about changes.

Mr. Roy Cullen: Thank you, Mr. Gallaway. While the officials are looking, I'll just perhaps comment on Mr. Loubier's remarks.

With respect, Mr. Loubier, I don't think it's me who's confused, as much as you and Mr. Peschisolido. When you start to talk about the Canada Pension Plan premiums as being a tax, there's clearly a lack of understanding. Anything that does not go to the consolidated revenue fund is not a tax. I wanted to clarify that.

In fact, with respect to EI, it was the work of this committee that suggested, among other things, that the government review the rate-setting process for EI, and that process is underway now.

Mr. Lalonde, have you...?

Mr. Gérard Lalonde (Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance): Yes, the applicable rule is in paragraph 8(1)(c) of the act, which you'll find fairly close to the front of the bill. It's subclause 3(2).

Mr. Roger Gallaway: Mr. Lalonde, I wonder if you could tell me how this changes the previous regime, or how it clarifies it.

Mr. Gérard Lalonde: The previously existing regime allowed the clergy to do two things. One was to take a deduction from their income equal to the value of the benefit that had been included in their income when the religious denomination provided the housing. So if you had a benefit from employment of x dollars, you could take an offsetting deduction.

If the clergy person provided their own home, the rent paid to provide their own home could be deducted, or if they purchased their own home, they could deduct the fair rental equivalent for the home.

The difficulty in that situation was not so much in the circumstance where the religious denomination provided the residence, but rather where the clergy person provided their own residence, because there was no constraint on the type of residence that could be provided. You could have a clergy person buying a half-million dollar home and deducting the fair rental value of it, which seemed a bit excessive. As a result, the proposal is to change the law such that in the case where the clergy person provides their own residence, the amount they can deduct is constrained to a formula based on their earnings from the—

Mr. Roger Gallaway: For those who do not provide a residence but are provided a residence, does it change their situation?

Mr. Gérard Lalonde: Not at all.

Mr. Roger Gallaway: Okay. That's all I.... It's unusual for me to be asking questions. Mr. Lalonde would know that, but thank you.

The Chair: That's very kind of you, Mr. Gallaway.

Mr. Pillitteri.

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

Some remarks have been made from across the table that if tax cuts were real or if contributions were real.... You see, I'm a businessman and I can understand what it means. Maybe to some people they're just numbers, but to me, being a businessman, when I see the contributions to EI going from $3.05 per $100 down to $2.55 per $100, it might only mean approximately 50 cents per $100 for the employee, but it means a 70-cent reduction for me, because for every dollar the employee puts in, the employer puts in $1.40 per $100. So at the end of the year, it makes quite a difference. If you have several employees, 20 or 30 employees, at the end of the year, for a small businessman, it's quite a reduction. And I welcome reductions like that.

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Mind you, for someone who does not make a weekly payroll, it doesn't make any difference. But to be competitive, I think I find that very, very stimulating.

Going back to the corporate tax, Mr. Cullen, why wasn't it...? It's over a five-year period.... Was there any thought of bringing it down much faster—5% down to 21%?

Mr. Roy Cullen: Yes. In budget 2000 it was scheduled to come in a bit more slowly. In the economic statement, those cuts were accelerated and of course legislated now.

Mr. Lalonde, could you talk about the progression of the cuts? Part of it is an affordability issue and getting there as quickly as we can.

Mr. Gérard Lalonde: Sure.

In the budget it was planned that the corporate income tax rates would come down 1% this year and then come down by 7% in total within the next five years, but with no schedule attached. In the economic statement, the schedule was advanced to come into effect 1% the first year, then 2% in each of the following three years to bring it in that much faster.

Mr. Roy Cullen: To Mr. Pillitteri, if I could comment, when we look at corporate taxes, if you get corporate taxes to a rate, for example, where we're going to be 4% to 5% lower than most of the bordering U.S. states, it will have a tremendous incentive for investment and jobs.

We know that our personal income taxes are out of line, and we're dealing with them as rapidly as we can. But the government felt it was also useful to marry that with some corporate tax cuts, because ultimately they will attract jobs and investment in Canada.

Mr. Gary Pillitteri: I don't know if it's appropriate to ask this question here, Mr. Chairman, but there's always a tendency to believe there are always lower taxes in the United States. Would you want to comment, for the opposition, how much the contributions are for any employer for unemployment insurance and those kinds of deductions? Are they higher in the United States than they are in Canada? Would you, for their information, like to elaborate?

I do know they're quite a bit higher in the United States. I just....

Mr. Roy Cullen: You're absolutely right. If you look at Canada, we have our public health system and certain safety nets that Canadians demand, and they're part of our culture. Is there a cost to that? There probably is.

Will we ever get to, let's say, the personal income tax rates of the United States? We can strive to do that, but if you look at the whole suite of taxes, this is what is often forgotten. Canada is outside the range in terms of personal income taxes, but in terms of so-called payroll taxes—and you'd have to look at social security, EI, etc.—Canada is actually in the low quartile.

If you look also at what we call commodity taxes—GST, value-added-type taxes—Canada is also in the low quartile. We are out of line a bit on personal income taxes, and we're aggressively dealing with that. But you really have to look at the whole tax burden, and in areas of social security and payroll-type taxes, Canada is actually in the low end of the pack.

The Chair: Thank you.

Ms. Barnes.

Mrs. Sue Barnes (London West, Lib.): Thank you.

The students and the parents of students in my area are going to be very happy with some of the clauses here, especially on the scholarships, fellowships, and bursaries, where the value for exclusion goes from $500 to $3,000. Also, the monthly amount for full-time and part-time students goes to $400 from $120. In a town like London, Ontario, where we have college and university and some private institutions, I think this will be very helpful and long awaited.

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Part of this bill has some minor, technical amendments for clarification. One of them has to do with the definition of “principal residence” in clause 37. I couldn't find it in here, and I was just wondering what exactly is being changed there.

Mr. Roy Cullen: Yes. Mr. Lalonde will look at that.

While he's doing that, I can tell you that just in terms of students, yes, I think you're absolutely right. With respect to the additional expense allowance and the non-taxing of scholarships and bursaries, we had the somewhat unusual anomaly where we had the Millennium scholarships but students were going to be taxed on those scholarships. It was partly to respond to that, but it was more of a general response as well.

Some would ask, why not higher? There's a difficult bit of calculation once you get higher than that because suddenly at the university or college level you have a lot of incentive to look at compensation in terms of bursaries, fellowships, and scholarships. We think that with $3,000 we certainly improved the situation considerably. Whether one could go higher is something that won't have to be examined very carefully.

Mr. Lalonde.

Mrs. Sue Barnes: What page are you on there, please?

Mr. Gérard Lalonde: I'm actually on page 160 of the explanatory notes.

Mr. Roy Cullen: You might be in the bill, Sue. Do you have the explanatory notes?

Mrs. Sue Barnes: Yes.

Mr. Roy Cullen: Okay.

Mr. Gérard Lalonde: What this issue concerns is the fact that back before 1982—and this is old history—there was an interpretation of the then-existing law where each of the two spouses in a household could designate a separate principal residence for capital gains purposes. The law was changed in 1982 to one per family, one principal residence designation per year per couple, but for years prior to 1982 the separate designation could be maintained.

Now, in the intervening time there were some amendments to the definition of “principal residence”, and when those intervening amendments came into force, they didn't pick up that grandfathering of the old designations. What this does is fix it, so for the years before 1982 you can still have one designation for each spouse as was indicated in the 1982 budget.

Mrs. Sue Barnes: It's no longer possible, then, for each spouse to have a principal residence in a different location.

Mr. Gérard Lalonde: It hasn't been since 1982.

Mrs. Sue Barnes: Okay, that's what I wanted to clarify. That's all. Thank you very much.

Mr. Gérard Lalonde: Okay.

The Chair: Thank you, Mrs. Barnes.

Mr. Nystrom, are you ready for us?

Mr. Lorne Nystrom: I'm just being briefed by my adviser from the Senate here.

Anyway, thank you very much.

I have a couple of questions for Mr. Cullen. First of all, I want to say that one thing I like and support in the bill is making the individual income tax system more progressive. There are more tax categories, going from three marginal tax rates to four, which will be 29%, 26%, 22%, and 16%, I believe. A number of years ago we used to have seven or eight different marginal tax rates in the country, and in the Mulroney years that was reduced from seven or eight to about three, which made our taxation system less progressive. Of course the Alliance even wants to make it a lot less progressive—

Mr. Ken Epp: We want to make it more progressive.

Mr. Lorne Nystrom: —and have a single tax rate, where an elementary school teacher would be paying the same tax rate as a very wealthy wine producer, for example—

Mr. Ken Epp: No.

Mr. Lorne Nystrom: —who might make several million a year.

Mr. Ken Epp: Don't lie.

Mr. Lorne Nystrom: That's not a very progressive thing for our country to do.

Mr. Ken Epp: Don't lie. It's not true.

Mr. Lorne Nystrom: That's one aspect of the bill I support. The Americans of course have a still more progressive tax system. Ironically, the bastion of capitalism has a more progressive tax system than we do in this country.

I have a very quick question: why did they stop at four different rates instead of five or six? When I say I support this, I'm obviously going in that direction.

Mr. Roy Cullen: Thank you, Mr. Nystrom. I'll start it off, and then maybe Mr. Lalonde or Ms. Potvin could add something.

• 1615

You are absolutely right in terms of the flat tax or single-rate tax. It really doesn't offer any progressivity at all.

Mr. Ken Epp: That's not so, Roy Cullen.

Mr. Roy Cullen: If you call it a single-rate tax, I think we can assume there might be exempt income up to a certain amount, but beyond that it's clearly not progressive. In fact, we know for sure that it moves the tax burden from higher-income Canadians to middle-income Canadians, and the evidence on that is pretty clear.

When you look at the different brackets, it's to some extent a trade-off between complexity and equity, although you're right in a sense that because the charts are there and you multiply by such-and-such, it's not a huge deal.

Mr. Lorne Nystrom: It doesn't make it much more complex.

Mr. Roy Cullen: No, not really. It's always a matter of judgment as to how many rates you have there. Being Canadians, maybe we want to be stuck right in the middle with respect to either having a tax like a flat tax with no progressivity and having something with many different ranges as in the U.S.A.

Mr. Lalonde, maybe you could comment on some of the technical and other policy considerations in those four ranges.

Mr. Gérard Lalonde: This is more of an economic issue than a legal or drafting issue. I would point out, however, that one can in fact look at it as there being five brackets because of the effect of the basic personal credit. You have a rate of zero on the first tranche, and then the other four rates kick in.

In terms of the tax mix and the various rates...Lise, did you want to comment at all on the selection of the various tax rates as to why we only have four or five, depending on how you look at it, rather than a greater number?

Ms. Lise Potvin (Senior Chief, Employment and Investment, Department of Finance): What we wanted to do in the statement, really, was to reduce the tax rate on middle-income people who were facing the 29% tax rate, so we reduced that rate very substantially—

Mr. Lorne Nystrom: To 26%.

Ms. Lise Potvin: —to 26%. Of course we already have a very progressive tax system. I didn't bring the numbers with me, but a large proportion of the tax burden is borne by higher-income taxpayers. How many brackets should we have? I don't think there's any magic formula. You decide how you want the tax burdens to be distributed and when you want your rates to kick in.

Mr. Lorne Nystrom: The other question, Mr. Chair, is a tough one for the Liberal Party in view of the promise made back in 1993 on the GST. Why has there not been any movement on that? We now have some fiscal flexibility. There's a $100-billion tax cut. Why wasn't there some movement on the GST in terms of bringing it down a couple of points? That is certainly within the realm of fiscal capability. It's a matter of priorities as to what the government did.

As they say in French, an engagement was made with the Canadian people. Sheila Copps actually resigned over it and went back to face her people in a by-election. Mr. Pillitteri probably went house to house and said, “Elect me, I'll get rid of the GST eventually.” Why is that not being done? I notice you're doing a little thing with the GST here; you're not going to provide the tax credit to criminals for a couple of years. I think that's about the only change that's in there.

Again, my main question goes back to why you broke this promise. Why haven't you done something on it?

Mr. Roy Cullen: Well, Mr. Nystrom—

Mr. Lorne Nystrom: It's a matter of priority. There's a choice. One time you say we don't have the money because we're running a deficit in the country. That might be a reason not to do it, but it's still not an excuse for making a promise you didn't keep. You had a good reason not to keep it. Now they have the fiscal flexibility there, and you still haven't kept the promise. People like Mr. Pillitteri are getting pretty embarrassed by this.

Mr. Gary Pillitteri: No, no.

Mr. Roy Cullen: Actually, Mr. Chairman, every time this issue comes up I feel obliged to try to straighten out the record. If you go back to 1993, the government said in the red book that we would “replace” the GST. People who look at it in any sort of detail would understand that there was no way the government could just abandon that kind of revenue stream.

We tried to replace it. In fact, in Atlantic Canada we were able to harmonize the GST to come up with the harmonized sales tax. The other provinces didn't really want to harmonize the taxes. In fact, it's sad. With a harmonized GST and provincial sales tax in Ontario, for example, the administrative savings alone would have let us lower the combined rate by 1% without even blinking. Unfortunately, businesses in Ontario and other provinces still have the burden of these two taxes.

• 1620

If you look at the analysis I alluded to before, if you look at Canada's taxation, where we are compared with other countries, and how competitive we are or aren't, you can see we have some work to do on personal income taxes. We believe with these measures on our corporate income taxes we're getting very competitive. We know that in international comparisons with the OECD countries that have commodity-type taxes, which would include the GST, compared with, let's say, VAT taxes and other sales-type taxes, we're in the lower quartile. The same would apply to the so-called payroll taxes—I use that term advisedly, but people know what I mean—we're again in the lower quartile.

We did try to replace the GST; we did so in Atlantic Canada. I would like to see a time when we can harmonize the GST with provincial sales taxes across Canada—I think it makes a lot of good sense for Canadians.

Mr. Lorne Nystrom: My last question on that would be, what about the idea of reducing it from seven to five? As a little piece of trivia, a footnote, this is the very room where there was a filibuster back in 1990-91, or whenever it was, when your party was sitting on this side of the table with myself and somebody else from the NDP. I remember an all-night session here—people brought in sleeping bags. It was a horrible tax, a terrible tax. It's all in the record—Albina was around in those days too. The Liberal Party was very much opposed to it, and it's a promise he made to the Canadian people. So what about the possibility of at least reducing it, now that there's some flexibility there fiscally? It's really a political decision, not so much a decision of the bureaucracy.

Mr. Roy Cullen: Yes, well, thank you, Mr. Nystrom. As I say, we tried to replace the GST, and we did in Atlantic Canada. We'd all like to see it harmonized across Canada. A two percentage point reduction in the GST would be in the order of $7 billion, so if you do that, clearly it eats into your room to do anything on personal income taxes.

If you talk to Canadians, notwithstanding the election campaign in 1993, and you ask whether they'd rather have a reduction in personal income taxes or a reduction in the GST, they would opt for a reduction in personal income taxes. If you look at it strictly from a technical or policy level review, many economists would tell the Department of Finance and the Minister of Finance that what we should be doing is increasing the GST, and taking those additional revenues and using that to reduce personal income taxes. I'm not sure that's the way the government would go, but I take your point. There was maybe some confusion at the time, but if you read the red book, it said we'd replace the GST, and if you think about it realistically, there'd be no way the government could just abandon about $12 billion or more a year, I think it was at that time.

I think in the short to medium run, the government will be focusing its attention on personal income taxes, because that's where we're more out of line vis-à-vis our competitors and that's what Canadians want us to do.

The Chair: Mr. Cullen, I have a question, and then I'll go to Mr. Epp and Mr. Loubier. I think the greatest challenge our country faces is the issue of productivity, and Professor Porter yesterday released another paper with Professor Martin. I want to know from you how you think Bill C-22 helps with the productivity challenge.

Mr. Roy Cullen: When I was in the private sector, I was loaned by the Noranda forest group to work with the federal government and the Forest Sector Advisory Council to try to come up with ways the forest industry in Canada could be more competitive. In fact, it was called the famous prosperity initiative under our previous government, but it was ways of looking at making Canada more competitive. As a result of the Porter study, Canada at the Crossroads, these consultations were held. Unfortunately, the government encouraged a lot of reports and at the time—this was in the early 1990s—didn't do much with those reports. Porter has done a ten-year review of that report, and I've read it, because I was quite involved with the report at the time. He says Canada, at the macroeconomic level, has actually made some tremendous progress. If you look at our deficit, the taxes, inflation, etc., there is a very good story there. He says where we're still lacking is at the micro level—the micro level meaning at the provincial and local government level—but also at the business level. In other words, he's saying you can lower taxes—and in fact this is what he said more recently, in the last few days—taxes are part of the equation.

• 1625

So I think reducing these taxes will be very important. But what Porter also says is that businesses have to pick up, I think he said, 50% of the slack. We have to get smarter, our businesses in Canada, and have more adaptable business strategies. We can't continually be an adapter and adopter. We have to be pushing the envelope. We have to be state of the art. We have to be more innovative. We have to be more entrepreneurial.

In fact, in this budget, Mr. Chairman, and the economic update there are number of measures that I touched on briefly, the tax-free rollover, because we have to get more risk capital into the economy, the capital gains tax, the inclusion rates, corporate taxes. There are a number of measures there that will help Canada be more competitive, more productive. But I think we need to challenge businesses to push the envelope in their business strategies and the means to be competitive in this new millennium and beyond.

The Chair: So at the end of the day, what the federal government can do is set the macro framework, but essentially it's people and firms that have to.... There has to be, I should say, a shift in attitude. I agree with you. I think when you look at the macro level, we're doing fine, but somehow it's not filtering down to firms, which are not as “innovative” as, let's say, our American counterparts.

Mr. Roy Cullen: Yes. It's interesting because I think what Porter says—as he was quoted in any case, along with a couple of other of the panellists—is that Canadian businesses have been hiding behind the low dollar. Frankly, I think that's a bit unfair, because a lot of businesses wouldn't go out there and say, what I really want is a low Canadian dollar. Some of them who are exporting take advantage of that, clearly, but I know some of them are concerned that they might be missing productivity gains and lifts because of an artificiality that might be there, in the short term anyway. So I think it's unfair to say that businesses are hiding behind a low dollar. Most of them haven't asked for it—it's there, so they're going to take advantage of it. But I think you'll find many businesses trying to push the envelope on productivity, again, because they're smart enough to realize that eventually the dollar will come back and they'd better be competitive then, because they won't have any other options.

The Chair: What makes you think that? In the 1980s Canada was very slow to adjust to the changing dynamics of the global marketplace. Are you very optimistic that through the nineties and the year 2000 and beyond Canadian business will in fact start making those investments in capital machinery and productivity enhancement measures?

Mr. Roy Cullen: I think there are a lot of really encouraging signals. The federal government, for example—you know the notion, lead by example—is getting very active in e-commerce. Some of the data I've seen show that we've hardly scratched the surface on e-commerce, especially business-to-business e-commerce. If Canada can really push and be a leader and innovative there, the opportunity for productivity gain is enormous. I think being the most wired country in the world and the fact that.... This would just be a personal opinion, but I think the U.S. dollar is one day going to adjust downwards in relation to the Canadian dollar. So Canadian businesses are starting now to think of how they're going to be more innovative, more competitive.

The Chair: Thank you, Mr. Cullen.

Just a reminder that we do have another witness after Mr. Cullen.

Mr. Epp.

Mr. Ken Epp: Thank you.

Before I begin, Mr. Chairman, I would like to have it noted that it would be very useful, when we have these huge bills, for the section actually to appear at the top of each page, because once you get into a clause of the bill, it can refer to different sections of different bills, and there you land up in the middle of something and you don't know what clause you're in.

The Chair: Okay.

Mr. Ken Epp: So just make a little note of that.

• 1630

Mr. Roy Cullen: We're taking notes, Mr. Chair.

Mr. Ken Epp: It would just be easier to reference it.

I have a couple of questions. I'm not going to get into the political argument; I'm going to do that in the House with respect to the single rate tax.

Actually I think I might as well say here that I sure commend the Liberals, because by putting 16% instead of 17%, they can sell to taxpayers to vote for them, even though that results in a greater tax than the 17% with a greater proportion of it not being taxed at all, which results in a lower tax altogether. But you sold your program, so you get full marks for your messaging. We lost that one.

But I have a question with respect to these thresholds and the different rates. That is, it's indicated that after the end of five years, the thresholds will not be less than $35,000, $70,000, and $113,804. Is that because it's actually in the act? I've been looking for it, and I can't find it. What section is that, or what page? Tell me what page; that would be the best.

Mr. Gérard Lalonde: Yes, it is actually in the act. You'll find it in the coming into force section.

Mr. Ken Epp: It says it's in clause 92, but I can't find clause 92 in this thing.

Mr. Gérard Lalonde: If you'll bear with me for a second, we'll find it. It would be helpful if the clause numbers were on the top of the pages.

Mr. Ken Epp: No, they aren't. Where do you see that?

Mr. Gérard Lalonde: No, I'm saying it would be helpful. I agree with you.

Mr. Ken Epp: Oh, okay, I thought you said they were there and I missed them.

Mr. Gérard Lalonde: No. It would be very helpful if they were there.

Mr. Ken Epp: Anyway, while you're looking for that, let me ask another question, because I think we can make better use of the time here.

The next question I had—

The Chair: It's on page 290, Mr. Epp.

Mr. Ken Epp: So those numbers are specifically given, notwithstanding the rate of growth due to indexation?

Mr. Gérard Lalonde: You'll see, as was pointed out, that the provisions start on page 290 and continue on through to the top of page 292, where you'll see in subclause 93(4) that “subsection 118” of the act is amended by adding new subsection 118(3.1).

Mr. Ken Epp: Are these numbers the ones that are going to be there automatically, whether indexation takes it higher or whether it's lower?

Mr. Gérard Lalonde: No. If indexation takes it higher, the higher number will prevail.

Mr. Ken Epp: Then the higher number will prevail?

Mr. Gérard Lalonde: Right. If indexation doesn't take it up to these amounts, these guaranteed amounts will be in place.

Mr. Ken Epp: Then, in the year 2004, it's going to make this leap.

Mr. Gérard Lalonde: That's right.

Mr. Ken Epp: So it will go beyond indexation.

Mr. Gérard Lalonde: That's correct.

Mr. Ken Epp: Which of course is nothing compared to the ten years of indexation we lost, because while we were going like this with indexation, we would have been up here. Now we would have been way up there in our deductions and basic patterns.

I have one more question with respect to the clergy residency. I know Mr. Gallaway asked the question. The way I understand it, there is no change except for the individual who provides or has his own house and is charging. There's now a ceiling on it. Is that what it is?

Mr. Gérard Lalonde: That's correct. There's a ceiling based on the remuneration from the—

Mr. Ken Epp: On that $10,000 or one-third of the remuneration, which one prevails? Is $10,000 the maximum?

Mr. Gérard Lalonde: No, $10,000 is the minimum.

Mr. Ken Epp: Okay.

Mr. Gérard Lalonde: That would kick in at any level where your salary was under $30,000. After that, it can go up to one-third of your salary.

Mr. Ken Epp: I just wonder whether there's a flaw here. You mentioned the charlatan religious guy who gives himself a salary of $1 million and has a house that's worth $500,000 or something. In Canadian tax law, can that person then actually claim...?

Let's say, for round numbers, his salary is $300,000 that he's claiming out of the organization. Can he claim $100,000 for his deduction?

Mr. Gérard Lalonde: Yes, that's possible in that circumstance, but before this proposal came into place, he could have claimed even more.

• 1635

To start off, I'd like to say I didn't use the term “charlatan religious person”—

Mr. Ken Epp: I did.

Mr. Gérard Lalonde: —but to the extent that you had a clergy person who had.... In the past they could effectively wipe out the whole of their income using a clergy residence deduction. Now it's constrained to at least be proportional to the income they're receiving from the particular denomination they're clergy for.

Mr. Ken Epp: I'm sorry for using the word “charlatan”, but I always think of a person in a religious order being one who is sacrificing for the benefit of mankind.

I have some big problems with some of these people who live in these huge places at the expense of those who are donating to them. I think we perhaps ought to revisit that again. We'll do it when we form the government, but meanwhile, Mr. Parliamentary Secretary, you might as well think of doing it while you're in there.

Mr. Roy Cullen: We'll take that message back, Mr. Chairman.

Mr. Ken Epp: Yes.

I have a question with respect to CPP contributions on self-employed earnings. This is clause 41—and clause 100, it says.

The briefing we got from the Library of Parliament indicates that this introduces the deduction from business income, if one is self-employed, for one-half of that contribution, and then the other half is, of course, income to the individual and would be eligible for the tax credit.

What is the difference? Hasn't it always been thus?

The Chair: Ms. Potvin.

Ms. Lise Potvin: For employees, EI and CPP contributions are a tax credit.

The measure in the statements tries to correct inequity between self-employed who are incorporated, who were able to deduct contributions for their own coverage, and those who are not, who had only a credit. So the measure puts them on an even footing.

Mr. Ken Epp: So this was brought in to accommodate those who aren't incorporated.

Ms. Lise Potvin: That's right.

Mr. Ken Epp: Okay, that makes sense.

The Chair: Thank you, Mr. Epp.

Mr. Ken Epp: What? I have a few more questions.

The Chair: Oh, okay. Then go ahead.

Mr. Ken Epp: Okay.

What is this temporary 15% investment tax credit in clause 118 for grassroots mineral exploration? Is that an increase or a decrease from the investment tax credit that exploring companies are eligible for now?

Mr. Gérard Lalonde: It would be an increase, given that there is no existing investment tax credit for those particular kinds of expenditures. This is a new measure that was announced in the economic statement, I believe, or it might have been in the budget. But I understand it's brand new.

Mr. Ken Epp: So it's just a new clause, a new item.

Mr. Gérard Lalonde: It's a new item. It's in an existing provision in the Income Tax Act that deals with various types of investment tax credits that still exist—the SR and ED credit, for example.

Mr. Ken Epp: Okay, that's the answer I was looking for.

Foreign currency deposits will now be permitted for investments for RRSPs. You're not indicating that the 20% foreign investment limit has changed. Do I misunderstand that?

Mr. Gérard Lalonde: The 20% foreign investment limit was changed to go up to 25% for 2000, and 30% for this year, but that has already been put in place by the budget implementation bill for the 2000 budget.

But in terms of the particular kinds of investments that are eligible for RRSP placements, that's a different question. That's a question of, even if it is foreign property, what kind of foreign property you can invest in, and it's making foreign currency deposits eligible.

Mr. Ken Epp: Okay.

I have a few others, but I'm going to cut it short, Mr. Chairman, if I may.

The Chair: Okay, go ahead.

Mr. Ken Epp: I want to jump ahead to clause 182. It speaks of compliance. Again, our briefing notes from the Library of Parliament say this clause expands the prohibition on hindering, molesting, or interfering with an official who is enforcing the Income Tax Act.

How much freedom does this give somebody to come to my house when I'm not home and say to my wife, I want to go up into Ken Epp's office and look at his records. Can they do that right now?

This says it expands their capabilities. What are the rights of citizens in this kind of a case, and what does this clause specifically do?

• 1640

Mr. Gérard Lalonde: This clause is addressing situations where people actively harass Revenue Canada or CCRA officials in the course of their duties. An example of this would be where someone gets together a group of people to physically threaten a CCRA person, without actually touching them, in the course of their duties. I mean, it can be very intimidating to try to do your work when you have four football players surrounding you.

So this amendment bolsters an existing provision. The existing provision says you're not allowed to, for example, hinder a CCRA person in the performance of their duties.

Now, the situation can arise that the CCRA person nevertheless perseveres and succeeds in doing whatever it is they were trying to do. Technically the rule doesn't apply, because they didn't prevent the person from actually doing their duties. So this goes on and says that attempting to hinder a CCRA person also brings you within the ambit of the rule.

This measure is designed to counter some inappropriate or undue resistance that CCRA people find in the field. As you can appreciate, it's very difficult for CCRA people. They're not always the most welcome person at the door. This is trying to strike a balance between the rights of the citizen and the rights of the CCRA individual to pursue the course of their duties without harassment.

In terms of somebody arriving at your door and demanding documents from your house, well, you would need a court order for that. That's not what this is aimed at. This is aimed at somebody who has the court order and who shows up at a business and says “I would like to make photocopies of these documents, please”, and is prevented from doing so by the taxpayer.

Mr. Ken Epp: Is there any protection for the taxpayer when they're harassed by the CCRA people? Because those are the ones I hear about.

Mr. Gérard Lalonde: I'm not aware of any of those situations. I haven't heard them. But that doesn't mean it doesn't happen. It's a large organization of which I am not a member. I'm from the Department of Finance.

Is there any protection? First off, I guess, to the extent that people complain to the CCRA about that, it's like any other business. If you have an employee harassing their clients—and the CCRA does refer to taxpayers as their clients—it's not good business. Somebody like that can find themselves without a job, or being reprimanded within the employment context.

The Chair: Mr. Cullen.

Mr. Roy Cullen: Perhaps I can add to that, Mr. Chairman.

This is really under the purview of the minister responsible for national revenue, but as I recall, there is a statement or declaration of taxpayer rights, and I think the revenue agency respects that. If there are complaints, if people are being harassed within that context, then they do have rights.

As Monsieur Lalonde mentioned, this provision allows someone from the revenue agency to go in and have access to the records they need without being harassed to the point where they can't really do their job effectively. Someone might be able to do the job just because they have the tenacity, perhaps, or because they're foolish enough to put up with it or whatever. But this gives the officer the opportunity to do the job that he or she is there to do.

Mr. Ken Epp: Thank you.

The Chair: Mr. Loubier, final comments or a question.

[Translation]

Mr. Yvan Loubier: Thank you, Mr. Chairman.

I just wanted to mention that I have been a member of Parliament for almost eight years and have had a couple of issues with the federal Department of Revenue. Each time, the situation was resolved to everyone's satisfaction. In other words, the experiences I've had with Revenue Canada officials have always been very positive in terms of their outcome for my constituents.

• 1645

I believe this provision may be very useful when you consider the number of prosecutions involving criminal groups, as well as the kind of process that might make it possible to investigate the source of their property. They aren't all little angels, as you well know. As you were saying earlier, you get these football players lying in wait for officials at the homes of criminals. As far as I'm concerned, there is even more need for a provision such as this now.

Mr. Chairman, a little earlier, you initiated a very fundamental debate. I recall that two and a half or three years ago, the Finance Committee released a report that raised the alarm bell with respect to business productivity.

I, too, am concerned to note that there no incentives in here with respect to productivity. It was said—and you mentioned this yourself earlier—that the macroeconomic context was extremely important and that the federal government should ensure that the macroeconomic environment in which Canadian businesses are evolving fosters improved productivity. And yet, if you're talking about macroeconomics, that means primarily the monetary environment. It would be worthwhile pursuing the debate you opened up earlier with people who are knowledgeable in that area, so that we are all on the same wavelength.

There are two important points to be made with respect to the value of the Canadian dollar, and these are not trivial matters. For the last 30 years, the value of the Canadian dollar has been dropping every year. This structural variation, this drop in value, is linked to that. It's as though it were a reflection of Canadian business' lack of productivity. The fluctuations we have experienced are cyclical. They are related to daily supply and demand for Canadian currency.

But what we are seeing nowadays is extremely serious. Some people believe that the lower Canadian dollar boosts our exports. There is no doubt about that, to a certain point. The problem is that right now, many companies buy capital equipment abroad, and specifically in the United States. With a 63 cent or 64 cent Canadian dollar, their productivity is seriously threatened.

There have been incredible fluctuations in the value of the dollar. Some businesses are increasingly signing long-term contracts, where the price is set in Canadian dollars for American businesses or consumers, for example. We find ourselves in a situation where the following year, the terms of trade are completed turned upside down.

So, we have to take a serious look at the matter of productivity. You raised it two and a half years ago in your report. We also have to take a look at the issue of currency fluctuations and the fact that business people subject to such fluctuations are unable to plan productivity improvements.

My question for officials does not deal with this framework. I would like to know how far we have advanced in this legislation with respect to the zero tax threshold—in other words, the threshold above which a family—say, a family with two adults and two children—starts paying federal income tax. This has been an ongoing concern of mine. Where are we in that regard, excluding the Child Tax Credit, which is a direct transfer, as opposed to an actual tax? What is the income threshold above which a family of two adults and two children starts paying federal income tax?

Mr. Roy Cullen: Mr. Chairman, I will start off and ask officials to add their own comments.

I really have the feeling at times that when I am speaking, Mr. Loubier is fast asleep.

[English]

I would just like to repeat that in this budget—

[Translation]

Mr. Yvan Loubier: I'd say that's not a very positive reflection on you. It means that you put people to sleep.

[English]

Mr. Roy Cullen: —and the economic statement, there are many items that will assist Canadians and Canadian companies to be more productive. What I did say was that the government can introduce a number of measures, can set the economic environment, but businesses and other orders of government need to step in as well.

Just for the record, I would like to rattle off a few of the items in this budget and economic statement that actually will help Canada to be more productive.

I mentioned the capital gains tax rollover, where individuals investing in small and medium-sized enterprises can defer the capital gain. The income tax reduction presented in these initiatives is the largest Canadian tax cut, $100 billion, and according to most analysts, the timing couldn't have been better.

• 1650

As well, we have deferral options for stock options that now make us very competitive and that in fact give us a competitive edge as compared with the treatment in the United States. We have the reduction in the inclusion rate in capital gains. We have corporate tax cuts that are going to put us four to five percentage points lower than most of the bordering states in the United States.

So at the macroeconomic level, I think, the government is doing a lot and will do more in the future.

Since you directed the questions on some of the items to the officials, I'd ask them to respond.

Ms. Potvin.

[Translation]

Ms. Lise Potvin: We include the Child Tax Credit as a tax cut. This measure is delivered through the tax system by the Canada Customs and Revenue Agency. Also, it is covered in the Income Tax Act and replaces certain exemptions and tax credits granted previously. It is actually a negative tax, and therefore, we do include it in our figures.

In 2001, a family with four children and a family income of approximately $35,000 or two incomes resulting in a family income of approximately $40,000, will pay no income tax. I don't have the exact figures, but those are the approximate amounts.

Mr. Yvan Loubier: If you take away the Child Tax Credit, which I see as being a transfer, since it is not part of the tax system per se, what kind of zero tax threshold are we talking about? Have you made that calculation?

Ms. Lise Potvin: No. We do not make such a calculation. We always include the Child Tax Credit, because it is an item that reduces the tax burden of families.

Mr. Yvan Loubier: Would it be possible to ask you, as we do on a regular basis, to provide us with a written answer in that regard?

Ms. Lise Potvin: Yes, that would be a fairly simple calculation.

Mr. Yvan Loubier: Would it be a simple calculation for a two- income family of two adults and two children?

Ms. Lise Potvin: Yes, that would be possible.

Mr. Yvan Loubier: I would really appreciate that. Then I could make comparisons with what is done elsewhere.

Mr. Roy Cullen: We will pass that on to the Chairman for your consideration.

[English]

The Chair: Send a copy directly to Mr. Loubier as well.

I want to thank you very much, Mr. Cullen, Ms. Potvin, Mr. Lalonde, and all the other officials who are working back there. I'll make sure that all your names are included in the record, by the way, just for historical purposes. We like to know who does the work in the background, because we certainly appreciate it as a committee.

I'm going to suspend very briefly before we hear from our next witnesses.

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The Chair: I'd like to call the meeting to order. We welcome the following witnesses: Mr. Dan MacIntosh, partner, and Mr. Norman Loveland, partner, Osler, Hoskin & Harcourt; and Louis Chapdelaine, Peter Kiewit Sons' Inc.

You probably know how this committee operates. You have about ten minutes to make your presentation and thereafter we'll engage in a question and answer session.

I understand you have filed a letter with us, and we all have it in front of us. We will of course listen to your comments, review them, and if thereafter we feel we need to make some amendments as result of your presentation, we will of course entertain that idea as well.

Who's going to speak? Mr. Loveland.

Mr. Norman Loveland (Partner, Osler, Hoskin & Harcourt): Yes. Thank you, Mr. Chairman.

The Chair: Thank you for coming.

Mr. Norman Loveland: Members of the committee, thank you very much for giving us the opportunity to appear today.

I am a partner of Osler, Hoskin & Harcourt, newly based in our Montreal office. With me is Louis Chapdelaine, who's the director of the eastern Canadian operations for our client, Peter Kiewit Sons' Inc. Also here is Dan MacIntosh, a partner in our Toronto office. Dan is a former director of the tax legislation division of the Department of Finance.

Mr. Chairman, we welcome the opportunity to be here today because we understand the important role this committee plays in sound legislative policy, tax policy, and the legislation itself. We are representing Peter Kiewit Sons', a large construction company, and in particular its over 100 employee shareholders.

We are here to talk about the proposed amendment to section 86.1 of the Income Tax Act, the foreign spinoff rule. This is a provision that is often referred to as the Ford amendment. It will for the first time allow tax-deferred rollover treatment for Canadians who hold shares of a foreign corporation that spins off a subsidiary to the parent shareholders.

This type of treatment has been available for some time in a purely domestic context in Canada in spinoffs that have become known as butterfly transactions; however, this is a new development where a foreign corporation is involved. In fact there is a wide array of circumstances where the Income Tax Act gives a tax-deferred rollover treatment, especially in situations where you have shareholders who are involved in a cashless transaction, where there's just an exchange or a rearrangement of the securities, and in particular there's no cash involved, which is the case of the proposed rollovers.

We view these proposals as a rounding out of this important package of existing rollover provisions. We are very supportive of the thrust of this change. The effect of the new rule is that where there's a distribution of the shares of a subsidiary by a foreign corporation, Canadian shareholders would hold shares of both the parent corporation and the shares of the subsidiary that was distributed. Effectively, after this kind of spinoff, the shareholder, instead of holding shares of only one corporation, the parent, and indirectly owning shares of the subsidiary, the shareholder would hold shares of both the parent corporation and of the former subsidiary. One can think of it as owning directly shares of two sister companies as opposed to owning shares of a parent that in turn has a child.

As I mentioned, we totally support this amendment and we regard it as sound tax policy. It's consistent with the general thrust of the Income Tax Act in many respects. We think it is an important development because it removes the extremely adverse treatment that Canadian shareholders would otherwise receive in this type of situation.

The existing tax treatment is all the more adverse because U.S. shareholders of these corporations that do a spinoff get tax-deferred rollover treatment, whereas Canadians do not; in fact, they're taxed on an immediate basis at full income rates. I think you can safely assume that were this not the case, in other words if U.S. shareholders were to be taxed in the way Canadians are taxed on these kinds of transactions, those transactions would rarely ever be done by a U.S. corporation.

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So we see it as a healthy and positive development.

We like the proposal, but we find that it falls short in an important respect that unfortunately leads our client, Peter Kiewit, and specifically its over 100 Canadian employee shareholders, left out of the proposal. That is specifically what we want to talk about today.

The particular reason why a company like Peter Kiewit does not qualify is that the particular provision requires that the distributing corporation have its shares listed and actively traded on a stock exchange. We understand from the officials at the Department of Finance with whom we've been speaking on this matter that the purpose of this requirement is to ensure that the Canadian revenue authorities will have access through publicly available information to the information that the CCRA needs to be satisfied that a Canadian shareholder meets the detailed requirements for Canadian rollover treatment.

We understand and support this objective of the CCRA. However, despite the fact that Peter Kiewit has the same level of public disclosure as any other U.S. public company, whether listed or unlisted, and because Peter Kiewit is not listed and its shares are not treated on an exchange, its Canadian shareholders do not qualify under the new proposals.

In order to give you a better background to this we would like to just briefly talk about Peter Kiewit. It is one of the largest construction contractors in North America, heavily engaged in infrastructure projects: power, transportation, highways, bridges, airports, railroads, telecommunications, dams, oil and gas. Kiewit is currently involved in major construction contracts across Canada representing almost $1 billion in total contract amounts. So you can see it's a big factor in the Canadian market. Over 2,000 Canadian workers are currently employed on these projects.

Construction is an extremely competitive and high-risk business. The only way Kiewit can thrive in this environment is to attract and retain top-quality people who are totally committed to the business. The way the company has chosen in its business policies to do this is to have a system of employee ownership where the employees have a direct stake in the well-being of the company and vice versa. Moreover, Kiewit's compensation package for its key employees is heavily weighted in favour of this employee ownership participation, as opposed to a pension plan, for example.

Kiewit has over 1,400 shareholders, over 100 of whom are Canadians. In fact its corporate charter restricts ownership, so effectively only employees can own shares of the company.

The Securities and Exchange Commission in the United States has rules that require a company that has over 500 shareholders and over $10 million in assets to be registered under the SEC rules and as such become a public reporting company and make its information available to the public. This information is disclosed by a company such as Kiewit on the same level as a listed public company.

At the moment, Kiewit has no employee shareholder who owns more than 10% of the stock, and more than 60% of its common stock is held by employees with less than a 1% interest.

I'll now turn it over to my partner Dan MacIntosh, who will mention briefly a particular transaction that Kiewit has undertaken that's relevant to the proposed amendment.

The Chair: Thank you, Mr. Loveland.

Mr. MacIntosh.

Mr. Dan MacIntosh (Partner, Osler, Hoskin & Harcourt): Thank you, Mr. Chairman. The particular transaction that has precipitated our representations to the committee was a spinoff that was affected by Kiewit in September 2000. The rules we're concerned with are in proposed section 86.1 in Bill C-22. Those amendments are scheduled to come into effect retroactive to January 1, 1998. So the transaction we're talking about, which occurred in September 2000, is well within the timeframe of those amendments. We're not asking for any special treatment; we're merely asking for equal treatment.

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What this spinoff affected was a reorganization that allowed key employees of an operating subsidiary of Kiewit—the Kiewit Materials Company—to acquire an increased participation in the business of Materials, and that would allow Materials to better motivate its employees.

The U.S. Internal Revenue Service issued an advance tax ruling to Kiewit confirming that indeed the spinoff was tax free to its U.S. employee shareholders and was not tax motivated. In fact, the Materials spinoff does meet all the requirements of the proposed Canadian spinoff rules, as my colleague Mr. Loveland was mentioning. It's a distribution by a U.S. corporation of another U.S. corporation's shares. It's a distribution to holders of common shares of the common shares of an operating subsidiary. It has tax free treatment in the United States. These are all requirements in proposed section 86.1. Kiewit will provide to the CCRA all information required by it. The Kiewit employees will file an election, electing that the rollover apply to them.

The only criterion in the legislation that we do not meet is that the Kiewit shares are not listed on a U.S. stock exchange. The reason they're not listed on a U.S. stock exchange is because Kiewit believes in employee ownership.

Consequently, Kiewit's Canadian employee shareholders are not entitled to the rollover treatment under the proposed Canadian spinoff rules. Instead, under the current Canadian tax law, the Kiewit employee shareholders will be fully taxed on the value of their Materials shares. The value of these shares will be included as ordinary income in the shareholders' income. It's not treated as a capital gain.

This is a very substantial and severe consequence to Kiewit's Canadian employee shareholders. The value of the Materials stock was 36% of the consolidated value of Kiewit before the spinoff. The result is that the Kiewit Canadian shareholder employees must pay a tax of about 18% of the total value of their investment. This is a tax that's arising as a result of a transaction in which the shareholders did not receive any cash but they merely exchanged one share certificate for two.

I'd now like to turn it over to the other witness in our group, Louis Chapdelaine, who can explain the impact this has on Kiewit's Canadian employees.

Mr. Louis Chapdelaine (Peter Kiewit Sons' Inc.; Osler, Hoskin & Harcourt): Thank you, Dan.

[Translation]

Mr. Chairman, I would like to briefly discuss the effect of what has just occurred on our Canadian employees. We just paid our income tax two days ago. It was that time of the year.

Within our company, we consider our share purchase plan to be our pension plan. It is like our RRSP. We invest after tax dollars in it. Having to pay taxes at this particular time, because of the spin-off, has created an extremely negative work environment. Our employees are extremely angry because of the very harsh treatment they have received, compared to their American co-workers with whom they work on a regular basis. Our company is a North American company. Some of our Canadian employees have even asked to be permanently transferred to the United States.

[English]

There was some conversation a little earlier about productivity. I suggest to you that the first step in becoming more productive in the Canadian economy is to stop losing a lot of our best brains to other countries.

[Translation]

I am sure you can understand that because they work side by side with Americans on an ongoing basis, some of our Canadian employees feel somewhat betrayed.

We are only asking to be given the same treatment as employees of large multinational firms or ordinary investors in such firms. That is why we are respectfully submitting for your consideration the change we have been discussing.

Thank you.

[English]

Mr. Norman Loveland: In the October 18 statement, the minister stated that the policy goal for the U.S. spinoff rule was a removal of disparity between the tax treatment of U.S. shareholders as tax free and the full taxation of Canadian shareholders. However, for an employee-owned company like Kiewit, the result will be to expand the disparity in two important ways. First, the Canadian employee shareholders will continue to suffer tax treatment that's far worse than their U.S. counterparts. That's particularly unfair given that they are co-workers rather than just mere shareholders in the same company.

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Secondly, Canadian employee shareholders will now find themselves in situations where they're getting far worse tax treatment than Canadian portfolio investors in U.S. public companies, which seems inexplicable to the Canadian shareholders of companies like Kiewit.

I think Louis Chapdelaine has conveyed to you a good idea of how it makes them feel in the Canadian context. They certainly feel unsupported by their government when this happens.

This is particularly unfair when you consider that an employee shareholder doesn't really have much latitude to vote against the proposal, because as employees, they really have to go along with the employer in most cases.

I want to stress that the transaction that was done was not in any way tax motivated. It was done for purely business reasons, which we briefly describe for you. The other thing I would point out is that there was no way to do it on a better Canadian tax basis.

Even more importantly, if the transaction had been the other way around, a Canadian company had done this transaction and had U.S. shareholders, the U.S. shareholders, as well as the Canadian shareholders, would have had tax retreatment.

The other thing we've done is we've had a chance to study what potential expansion there might be in terms of how many more companies would qualify for the treatment if the amendment were made that we've asked for in the proposals. Our research indicates that the expansion would be very modest indeed. Most of the companies that can qualify for this are already swept in under the list of public company regime.

In conclusion, I would say that Kiewit has made a number of representations to the officials of the Department of Finance. In fact, these representations are ongoing. We've proposed a simple amendment—in fact, there's a copy of the revised version of it in your materials—that would fix this problem and would make the line we're trying to draw be a line that distinguishes between public companies in the U.S. and non-public companies in the U.S., rather than whether they're listed or not.

We have some cautious optimism that we may still yet persuade the officials of the Department of Finance that they should support our proposal, but as yet we haven't gotten there. When faced with the timing of these committee hearings, we thought it would be important for us to appear and in fact disrespectful if we did not take the opportunity to make this submission in this public forum.

Thank you very much for letting us do this. We hope that you will find—that you are persuaded—that our submissions will have earned your support.

Thank you.

The Chair: Thank you, Mr. Loveland, Mr. MacIntosh, Monsieur Chapdelaine.

You certainly make a very strong case for an amendment. We certainly welcome your input.

We'll now move to the question and answer session.

Mr. Epp. It's going to be a five-minute round for everybody.

Mr. Ken Epp: I'm probably not going to be that long.

I just have a few quick questions. One is, in your document on page three at the top, it says you offer key employees the opportunity to purchase Kiewit's stock each year. Is that actually a cash deal where your employees write you a cheque? Or is it a situation where you give them an end-of-year bonus, which they can take in stocks?

Mr. Louis Chapdelaine: It's a cash deal. We have to invest our own money, or borrow the money, of course, but it's our own money that we invest in our company.

Mr. Ken Epp: So they actually lay out the cash to buy the shares.

Mr. Louis Chapdelaine: The employees do, yes.

Mr. Ken Epp: Mr. Chairman, I think we're dealing here with tax experts. Are they not able, in investing this stock, to use that in their tax filing? Can they not deduct that? When you invest, in essence, that's an investment loss that year?

Mr. Louis Chapdelaine: The interest expense, of course, is deductible because it's allowed to.... I'm not sure I follow your question 100%.

Mr. Ken Epp: I'm not sure I know it either, because I'm not a big heavy duty investor.

Mr. Norman Loveland: No. The answer to your question is that this is a purchase of stock just like anybody else would purchase stock, and you may be able to deduct the interest if you borrow the money. But the cost of the stock does not give you any tax benefits at the front end. The only relevance of that is when you sell the stock in the future, the cost of the stock is a factor in calculating your capital gain.

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Mr. Ken Epp: What you're talking about specifically here are rollovers, which are different. So you're not asking that these employees be able to deduct from income what they use every year. Am I right there?

Mr. Norman Loveland: Oh no, not at all. What we're saying is—maybe we'll just deal with the specific—these Kiewit employees, shareholders, own shares of the top public company. It had a subsidiary and it took the shares of that subsidiary and paid them out as a dividend, in effect, to the shareholders. So the shareholders now, instead of holding just shares of Peter Kiewit, hold shares of Peter Kiewit, which they held all along, but the company was diminished, because they also now hold shares of the former subsidiary Materials. So they now had two pieces of paper rather than one.

The problem is that under existing Canadian law, which has been long standing, the value of the subsidiary in effect is treated as a dividend paid immediately to the shareholders. So not only do they not get capital gains treatment on it, but they're taxed immediately at full income rates on the value of the distribution. In Kiewit's case, let's say somebody had $1,000 of Kiewit's stock before the transaction; after the transaction they would have had $630 worth of Kiewit's stock and $370 of Material's stock. That's fine. That's not a problem, except that the $370 would be included in the employee's income, even though in large measure a lot of that is just getting your own money back.

Mr. Ken Epp: I think that's the only question I have, Mr. Chairman.

The Chair: Mr. Loubier.

[Translation]

Mr. Yvan Loubier: When you met with departmental officials on those different occasions, did you discuss the specific arguments that are blocking an agreement to bring forward amendments such as the ones you are suggesting today? Perhaps we could ask Mr. Lalonde, the Senior Chief of the Tax Legislation Division, to sit down at the table and make his own case. I would be interested in knowing what is blocking this and what the reasons are for not going ahead with it.

[English]

Mr. Norman Loveland: The main objection, as we understand it, is that they want to go slowly. This is a new provision. They'd like to test the waters. They are not unsympathetic. In fact, I'd say they're quite sympathetic to what we propose. But at the end of the day, they have not been prepared to expand it, because they've chosen to draw the line around listed public companies, because they're satisfied—and I don't disagree with them on that—that a listed public company will have a lot of information in the public domain. So when the CCRA sits down to look at the rollover claims that the employees will claim when they file their returns, the CCRA will be able to check by public information that in fact the employee really does qualify for the rollover that he is claiming—or I shouldn't say the employee, the shareholder.

But in Kiewit's case, this information is equally available, because it's a U.S. public company based on more than 500 shareholders registered with the SEC, so we think that we completely answer that point for them.

They also go on to say, well, this is a line drawing exercise and it doesn't matter, wherever you draw the line, there will always be somebody who is just on the other side of the line. We don't disagree with that either, but we think it's a very logical place to draw the line between public and non-public. We think it's a very logical and defensible line, and we don't think the expansion we're asking for is very significant. To the contrary, we think you'd have all public companies treated the same, instead of effectively employee-owned companies treated worse than listed public companies that investors go into, as opposed to employees. I hope I've been fair to them. I realize they're here, but that's my understanding.

Dan, would you like to expand on that?

Mr. Dan MacIntosh: No, that's fine, Norman, I agree with your synopsis.

[Translation]

Mr. Yvan Loubier: What is your estimate of the tax revenues that the federal government would be sacrificing if it were to create such a precedent and accept your amendment?

Mr. Louis Chapdelaine: What are you asking us to assess?

Mr. Yvan Loubier: I'm talking about tax revenues that would be sacrificed, because there would be some. What is the potential impact of the amendment you are suggesting? You said earlier that it would not affect many businesses.

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Mr. Louis Chapdelaine: I can't answer that question. Our company is quite unique because it is known or defined as a public company, but it is not traded on any stock exchange. Nor am I in a position to say how many other such companies may exist. I personally am not aware of any. There may be others, but I am not familiar with them.

[English]

The Chair: Thank you, Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, don't you think it would be a good idea to invite an official to come forward and address that question?

[English]

The Chair: Mr. Loubier suggested that if there are officials in the room who are actually dealing with this particular case, perhaps they could come forward, if they felt comfortable, to give us a sense of what is happening.

But, Mr. Cullen, do you—

Mr. Roy Cullen: I'd like to put a couple of questions. I have to go to private members' hour.

Thank you very much for appearing and—

The Chair: Mr. Cullen, I know you have to do that, but I had a question for the witnesses.

Mr. Roy Cullen: I'll leave then and you can carry on because I'm on deck for private members' hour.

The Chair: Go ahead. Ask your question.

Mr. Roy Cullen: I was going to say thank you for appearing here, and it is quite timely because I think the issue is being reviewed by the department.

First of all, I'd like to congratulate you for your commitment to employee share ownership in the company Kiewit. It's an issue that I have been a champion of within our government and our caucus, as many others have.

We touched briefly on how that is structured. Is it an employee share purchase plan, or is it an employee share ownership plan that is structured so that all employees can buy shares? How is that structured? Does it reach right to every employee, or is it structured at the middle management and upper management levels?

Mr. Louis Chapdelaine: No, it reaches all categories. It could be administrative, it could be production, it could be engineering—all aspects of our company. Of course, the number of shares that are offered to each are according to performance, so it's a plan based on merit basically.

But it's pretty widely...as we discussed earlier, I believe, there are 1,400 shareholders in North America, and the latest number of Canadians I believe is 127.

Mr. Roy Cullen: So is it a share purchase plan or is it a share bonus scheme?

Mr. Louis Chapdelaine: It's a share purchase plan.

Mr. Roy Cullen: A share purchase plan.

Mr. Louis Chapdelaine: Yes, we have to purchase the shares.

Mr. Roy Cullen: I have another question. You talked about how the U.S. tax authorities came out and reached some conclusion that the spinoff was not tax motivated. You don't know their business, but do you know how they came to that? In your case it sounds fairly straightforward, but I'm wondering how Canadian tax authorities, given, let's say, a private company.... Would the Canadian tax authority simply rely on a view that has come through the United States that the structuring was not tax motivated, or would the Canadian authorities, through the revenue agency, have means at their disposal to satisfy themselves, given the fact that, let's say, with a private company the measure was not tax motivated?

Are you suggesting they should rely simply on the U.S. determination?

Mr. Louis Chapdelaine: Because we're a public company by their definition, everything is available to the public.

Mr. Norman Loveland: We're not trying to develop a regime that's any different from what's on the table already for the U.S. listed public companies. We have done some research, and our research indicates that what has been swept in already is substantially all of what's out there, as far as public companies are concerned. The public companies that are not listed tend to be smaller, less well known. A lot of them in fact are on their way down in terms of their value as companies, so when you put in listed public companies you bring in a huge proportion of the total value of U.S. public companies.

Mr. Roy Cullen: When you define a public company, we have private companies, public companies, publicly listed companies—which definition are you using? A Canadian definition? A U.S. definition?

Mr. Norman Loveland: A U.S. definition.

Mr. Roy Cullen: How do they define a public company?

Mr. Norman Loveland: It's a company that is registered with the Securities and Exchange Commission as a public reporting company. They have extensive reporting requirements. In theory, you can do it voluntarily. As a practical matter, very few companies do it unless they're required to do it, and there are fundamentally two ways you'd be required to do it. One is if you're listed. The other is if you have more than 500 shareholders and more than $10 million of assets. Clearly Kiewit is in the second category.

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Mr. Dan MacIntosh: I wonder if I could add something to your earlier question concerning the potential for tax abuse. First of all, the rule requires that the transaction be a rollover transaction under the U.S. internal revenue code. The U.S. internal revenue code provides rollover transactions only for transactions that are business motivated.

There are a number of legislated and judicially developed anti-avoidance provisions in U.S. tax law that would help to protect the Canadian fisc, but in addition, Canadian tax law, including the general anti-avoidance rule, would apply as well. So you'd really have the benefit of tax avoidance rules in both regimes.

Mr. Roy Cullen: I recognize that tax avoidance rules are a blunt instrument, but I hear what you're saying. Thank you.

I have to go, Mr. Chairman. Thank you.

The Chair: Mrs. Barnes.

Mrs. Sue Barnes: For how long have you been pursuing this with the Department of Finance?

Mr. Norman Loveland: I think we first talked to them about two and a half months ago. I don't remember exactly.

Mrs. Sue Barnes: So it's a very rapid time period here.

In regard to the public policy reasoning, I'd ask the Department of Finance official, is it a line drawing exercise at this point? Has that been fairly stated?

Mr. Gérard Lalonde: I think what I would like to do is reiterate what Dan, Mr. Loveland, and Mr. Chapdelaine said earlier, which is that, like the persistent CCRA individual we talked about earlier, they are continuing to lobby the Department of Finance. We have a number of officials here, but we don't have the deputy minister or the minister, and as a result I can't give a definitive answer right now. I wouldn't want to preclude these gentlemen from continuing to make their case with us.

So I'd prefer to dodge that question at this particular time.

Mrs. Sue Barnes: I understand. I think that's actually very fair on your part. Perhaps at some later stage if we—-

The Chair: I agree, Mrs. Barnes. I think obviously there's always room for negotiations. As a matter of fact, as a committee we're going to review this particular amendment and see how we feel about it, because at the end of the day we have to make the amendments to the legislation as well. We're actually going to be the people who are going to be proposing it.

I would even go as far as saying that we should perhaps postpone the clause-by-clause of this bill, because the clause-by-clause is coming up pretty soon, to give ourselves more time to actually reflect on this before we report to the House. So that's where I'm at, and hopefully we'll get the support of the members as well.

Mr. Loubier, final question.

[Translation]

Mr. Yvan Loubier: I agree. I am satisfied with Mr. Lalonde's answer. I see this as a very important matter calling for a quick resolution.

[English]

The Chair: Thank you.

Panellists, obviously continue working on what you're working on. We'll continue working on what we're doing. Hopefully we can accommodate this particular issue.

Thanks very much. The meeting is adjourned.