[Recorded by Electronic Apparatus]
Wednesday, October 25, 1995
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[English]
The Chair: We're continuing our review of Bill C-103. With us today we have a distinguished commodity tax lawyer, Mr. Jack Millar, from Thorsteinssons, who has some concerns about the tax measures in Bill C-103.
Mr. Millar, we look forward to your remarks to us.
Mr. Jack Millar (Individual Presentation): Thank you, Mr. Chairman, committee members. I was just thinking today is the tenth anniversary of my first appearance before this committee. I've been coming before this committee since 1985 to offer comment on commodity tax legislation from a tax policy point of view. I've come here in my own personal capacity, I've come here on behalf of clients, and I've come here on behalf of my professional association.
Today I'm here on my personal behalf. I'm happy to tell you I'm here in an attempt to assist this committee constructively in its deliberations on Bill C-103. I have no particular brief for any of the people in the industry who might or might not be affected by this bill. Notwithstanding some telephone calls I've received in the last few days, I am not here as a fifth columnist on behalf of U.S. publishing interests. I'm here to try to ensure whatever legislation is taken forward is appropriate in the circumstances.
I want to emphasize that I am in support of the policy objectives I understand are behind this proposed legislation. I accept that it's important to us as Canadians to protect our cultural industries. I have concerns, however, Mr. Chairman, that the proposed policy instrument that has been chosen is quite inappropriate for that purpose. What I would like to do is to offer a few comments on why I believe that is so and to offer what I consider might be some constructive alternatives the committee might wish to consider in attempting to achieve those objectives.
The first point I'd like to raise, Mr. Chairman, is what I would call the ``tax design'' in Bill C-103. It is my view that the bill as proposed fails basic tax policy tests in terms of being an acceptable tax measure.
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In the early part of my brief, I've indicated under the title ``Lack of Certainty'' why I have those concerns. Those are briefly stated, Mr. Chair - the fact that the responsible person in the chain has no basis upon which they may or may not be able to determine if in fact they are the person liable to pay that tax.
Indeed, when you go down that chain there are a number of people in it who are not in contractual privity. So to the extent we would have a publisher who was publishing a publication that would be viewed as a split-run publication. There's no way that people down that chain of liability, such as the distributor or the wholesaler, would be in contractual privity with that publisher.
There's no way, even under the laws of contract, that person could try to ensure that they could get some contractual protection if it turned out later that somebody up that chain turned out to have been a non-resident.
The other major area of uncertainty in the proposal, Mr. Chair, is the fact that the value for tax - the gross fee - is a matter that is not knowable by the people who are defined within the ``responsible person'' definition to be liable to pay that tax.
The 80% tax is based on the value of the editorial content in the particular publication. It's based on either the published rates or, if they're not published, the actual amounts that were paid.
I ask you, Mr. Chair, how is a distributor or a wholesaler going to be able to ascertain what that gross fee amount is? It's an impossibility, I submit, Mr. Chair, and therefore again I think these proposals fail the basic tax policy criteria of certainty.
Mr. Chair, I have with me a treatise on the law of taxation, published by a Thomas Cooley. I don't propose to read it, but it contains a few things that I think could be quite instructive to this committee in terms of its deliberations.
I'll read you a few quick passages if I may:
- Writers on political economy lay down certain principles which should govern the imposition
of taxes. But these are guides rather to the legislature.
- I submit, Mr. Chair, they are guides to you rather than to the courts. The second maxim, Mr.
Chair, in terms of tax legislation is:
- The tax which each is to pay ought, as respects the time, the manner of payment, the sum to be
paid, to be certain and not arbitrary.
I submit to you, Mr. Chair, that we have a very significant departure from that requirement of certainty.
Mr. Chair, Professor Cooley's work has been referred to by the Federal Court with approval. I've cited the case in my submission - a 1978 case called The Queen v. B.C. Railway.
Indeed, this issue has been recently before us in the case in British Columbia on the legal services tax, where the court held that that particular tax was so uncertain in its application that it was void for uncertainty, and the legal services tax in British Columbia was struck down.
Mr. Chair, I have suggested in my brief an alternative tax design that would overcome these failures of certainty. I have suggested that the tax be imposed on the people who are in a position to know - the publisher and, failing the publisher, the advertiser. The advertiser, as you know, Mr. Chair, is currently obligated, because of the disallowance in section 19 of the Income Tax Act, to determine, when they make advertising expenditures, whether or not those expenditures are or are not entitled to deduction for computing their income tax liability.
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So, Mr. Chair, my submission to you is that if it's the will of the committee that the Excise Tax Act is an appropriate vehicle to meet the policy objectives, the tax design therein be altered to meet the basic requirements of certainty.
My submissions in this area, however, go further. I am concerned, Mr. Chair, that the use of the Excise Tax Act as a vehicle to meet the policy objectives is not well founded.
My colleague Ms Malone, when she was before you last week, indicated that in her view Bill C-103 was a valid exercise of the federal taxation power. Mr. Chair, I do not share that view. Our Constitution provides a head of power to the federal government under subsection 91(3) as follows: ``The raising of Money by any Mode or System of Taxation.'' I suggest to you, Mr. Chair, that Bill C-103 cannot be sustained under that head of power for the simple reason that it has not been designed for the raising of money.
I think one need look no further than to an article in The Globe and Mail published by John Gray on December 24, 1994. Mr. Gray was speaking with an official from the heritage department, and he says that Bill C-103 and the 80% tax is expected never to be used, and that:
- Unlike just about every other tax levied by the government, the proposed new tax to protect the
Canadian magazine industry will probably never be collected.
- The point of the tax is not to be a revenue-generating measure.
The Chair: Are you saying this comes under property and civil rights under section 92 and therefore is strictly provincial jurisdiction?
Mr. Millar: I am not saying that, Mr. Chair. I think what the committee should seriously consider is attempting to meet its policy objectives in a more direct and appropriate manner than trying to utilize the tax head of power when it seems to me, according to government officials, that it's not for the purposes of ``raising of Money by any Mode or System of Taxation'', and that one should consider what might be a better approach.
The Chair: Given your point that it may not be a tax measure, do you say it falls outside the jurisdiction of the federal government?
Mr. Millar: Mr. Chair, I do not say that.
The Chair: So it would still be intra vires?
Mr. Millar: It would be intra vires. As it's based right now it is, mind you, completely impossible to comply with. So I would be very chary of taking such a provision forward. It seems to me that by purporting to utilize the taxation head of power, the federal government opens itself to challenges of the nature I have indicated in my submission. It raises questions of colourability, Mr. Chair; it raises questions of improper purpose. I think what would be more appropriate would be for the policy objectives to be dealt with more directly.
The Chair: But you are saying in your brief that it is ultra vires, or may be.
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Mr. Millar: It may be, Mr. Chair. My view is that if the federal government goes forward, supposedly under the taxation head of power, it needlessly exposes itself to charter concerns and division of power concerns. It seems to me the better way to go about this is to look at either customs tariff code item 9958 or extending the dumping legislation.
It's my submission to you that both of those matters could be done. It's my submission to you, Mr. Chair, that it would be done in a much more direct and understandable and defensible fashion in terms of regulation of trade and commerce, in terms of controlling the ingress and egress of goods and property across our borders.
The Chair: Mr. Millar, we have invited Ms Patricia Malone from the Department of Finance to be at the table with you, and perhaps to respond initially to some of your concerns before we go to questions from members.
Ms Malone, please.
Ms Patricia Malone (Chief, Excise Section, Department of Finance): I'll begin with your suggestion.
Something like that was considered. However, proceeding with the suggestion would leave a very large loophole in the ability of publishers to publish a split-run edition in Canada where the advertisers would be non-residents. You could have a non-resident publisher and non-resident advertisers, because a lot of the goods advertised in magazines are international goods. A lot are Canadian specific, but a lot are sold throughout the North American continent.
Basically, the publisher could avoid the tax altogether. Tariff code 9958 would not be applicable, because it would be a publication printed in Canada, not brought over the border. It just wouldn't be a feasible alternative in terms of making the tax effective and discouraging split-run editions from being distributed in Canada.
I would add that the task force recommended that the tax be payable by distributors or printers of split-run publications. In drafting the legislation we made the publisher the first person responsible for paying the tax because ultimately the publisher is the person responsible for the distribution of these split-run magazines. However, the publisher is not always resident in Canada. That's why we had this list of responsible people depending on residence.
Mr. Millar raised the issue of uncertainty in determining who would be liable for the tax. There are already provisions in the Income Tax Act and the GST that required people to determine whether the person you're dealing with is a resident or a non-resident. For instance, sometimes Canadians have to withhold tax to non-residents. So this is not necessarily a precedent. This has happened before.
About the list, the first person responsible is the publisher, if the publisher's resident in Canada. The second one would be a person connected with the publisher. That person would know the residency status of the publisher. The third person on the list would be the distributor.
There is a very limited number of distributors of periodicals in Canada, and they distribute a very wide range of periodicals. So they would certainly be in a position to determine the residency status of the publisher and persons connected with the publisher.
It would go down the list. The other people would be in the measure to determine the status of the people with whom they deal.
So our position is that there is certainty in who would be liable for the tax.
About the value for tax, the value for tax is determined on the basis of the value of the advertisements in the split-run magazine. The legislation defines the value of advertisements. They would be determined on the basis of the publicly advertised single-insertion rates for advertisements. These are, for most public periodicals, readily available in publications. They are published, and the publication that has most of these is CARD, the Canadian Advertising Rates and Data. They basically list all the periodicals, their circulation, and their advertising rates for different advertisements.
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Therefore this information is readily available.
In instances where the information is not available in CARD, that information is still available to advertisers. One periodical did not publish its information in CARD, but we were able to obtain the information as to its publicly advertised rates quite easily. So this information is available, and therefore it would be feasible for the taxpayer to determine their tax liability.
In terms of the legal issues raised by Mr. Millar, these issues were carefully considered by the government. The government felt that it could defend the tax in terms of the charter, that the tax could be supported under the charter on the basis of freedom of expression.
I'll reiterate what I said the other day: the legal advice we have received is that the tax was a valid exercise of federal power.
The Chair: Do you wish to respond briefly to that, Mr. Millar?
Mr. Millar: Ms Malone, perhaps I was less than clear in my proposal about tariff code 9958.
It's very interesting to note that the terms of reference of the task force were as follows:
- how the government's stated objectives can continue to be met through the application of
section 19 of the Income Tax Act and Tariff Code 9558 in the face of evolving technologies.
In terms of Ms Malone's points about the tax design, she mentioned the Income Tax Act and the requirement to determine residency or non-residency under sections 115 and 116 when taxable Canadian property is being sold.
Mr. Chair, I submit to you that the department got it right there, because they brought in a due diligence defence. So when a Canadian is selling taxable Canadian property, if they act with due diligence and get a certificate from a non-resident as to his or her residency status, the Canadian vendor has immunized himself or herself from any liability.
This legislation is deficient in that it does not even have that type of minimal due diligence defence. Again, the problem is that the tax is imposed on people who have no way of knowing whether or not they have liability.
So to deal with residency or non-residency, the tax act has developed and put in the due diligence certification protection. However, even if we were to do that in trying to improve the tax design here, that would in no way deal with the tax base concern.
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My friend mentioned CARD, Canadian Advertising Rates and Data. Well, the test here is only what is published, but it says if it's not published, what is used? I ask you, Mr. Chair, how Benjamin News or Quebecor Printing would know, if it was not published, what it is. Remember, we're talking about 100% of the advertisements in this particular split-run edition.
Then further it goes on to say that it's the greater of that or the amount actually paid. Again, Quebecor Printers or Benjamin News are not going to know what the advertiser paid to the publisher to publish these particular ads.
Therefore, in terms of the tax design I'm suggesting, you're dealing with the people who have that knowledge. The publisher knows what his or her rates are, and the advertiser knows what he or she paid. It would seem to me that would be a much more direct way if, again, the Excise Tax Act were viewed as the appropriate vehicle to meet the government's objectives in this matter.
The Chair: Do you have any anything to add, Ms Malone?
Ms Malone: In terms of the customs tariff, I was not involved with this measure at the time the task force was set up, but my understanding was that before the task force was set up, a review of the customs tariff was undertaken, and it was determined that it just was not the appropriate vehicle. There was consideration of expanding the tariff to include the transmission of electronic data, and it was not considered a viable option. That might explain the terms of reference of the task force.
Going back to Mr. Millar's suggestion as to the certainty of the value for tax, it just would not be an enforceable measure if the advertiser were the person liable for tax, particularly if it were a non-resident advertiser, because they would be able to avoid the tax. Also, in terms of establishing the value for tax, generally, the value taken would be the publicly advertised single insertion rate, which is readily available. The rates, if not published, are readily available, because the publisher wants people to know what their advertising rates are. That's what they're in the business to do, to sell advertising.
Mr. Millar: I guess, Mr. Chair, when I think of Benjamin News...and when Mr. Perry was before you, he indicated that they carry over 4,000 international titles. I wonder, when the tax man knocks on his door and says he's going to charge him an 80% tax on this particular edition, whether he's going to agree with Ms Malone's characterization that he knew he had liability here and he knew how much he paid.
I suggest to you, Mr. Chair, that Benjamin News is going to feel extremely put upon to be found to be what I call a double indirect tax design.
The Chair: May I ask you a question? How many split-run editions are there in Canada today?
Mr. Millar: As I understand the testimony before this committee, qualifying under that would be Time, Reader's Digest, and Sports Illustrated, and there was some suggestion before the committee that there might be others, although in terms of the hearings that I was able to watch, I don't remember any other names.
The Chair: My understanding is the same as yours - only three - and if this legislation goes through, there'd be only two. The testimony before us is that it's highly unlikely that any further split-run editions would come into Canada.
Are we talking about a very theoretical issue, or are we talking about a practical issue that will affect tax practitioners and make them rich on a daily basis?
Mr. Millar: Well, I would certainly encourage anything that would do the latter, but I'm not sure this will accomplish what I would consider to be quite a worthy objective.
But you said it yourself, Mr. Chair; it's not going to be operative. So I ask you again, why under the supposed head of power for taxation are you proceeding? It's like saying we don't want people under 18 to drink, so we're going to put a 5,000% tax on the liquor vendor if he sells liquor to somebody under 18 years old.
The Chair: It sounds good to me.
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Mr. Millar: Yes, and that to me is not the use of the taxation power; that is the use of other heads of criminal power. How do we do it? We do it much more directly. We prohibit it under the Criminal Code. We deal with it under regulation of trade and commerce.
The Chair: Thanks, Mr. Millar.
Mr. Grubel.
Mr. Grubel (Capilano - Howe Sound): I would like to mention that in economic theory you have the theory of the second best. In extension to what you were saying with respect to law, if there is a market failure, either because there is a public good that society wants but the private market is not supplying, or private transactions provide costs on others, which is called an externality, then the theory of the second best says go and fix whatever is wrong directly; don't introduce another distortion that poses an extra cost in order to achieve something that is obviously wrong.
So I want to say that this is very consistent with the way I view the world. Not being a lawyer, however, I'd like to ask you, or maybe Ms Malone, why we don't just pass a law if we think it is so valuable to have these cultural protections, and prohibit just like we prohibit the imports of marijuana and dangerous drugs. Why don't we just prohibit the importation of split runs?
Mr. Millar: That was already done under tariff code 9958. As I understand, with advances in technology it's possible now to beam content across borders. But I would take your point and say yes, we are fully entitled and capable of doing that directly through the Customs Act and the Customs Tariff Act as opposed to coming up with this rather peculiar facade of taxation.
I would say, Mr. Chair, if we're going to use a taxation power and it's so difficult that nobody can figure it out and nobody is going to pay it anyway, at least put it directly on the people who would have knowledge about what is happening, which is not the case in Bill C-103 as it currently stands.
Mr. Grubel: May I say that in the case of the need for the protection of a public good called cultural publication, economic theory suggests that you pay for it. Pay a subsidy. Whatever magazines the market would not produce, subsidize them. That would be the most efficient and direct way of doing it.
What I don't understand would be -
The Chair: Would that be an externality, Mr. Grubel?
Mr. Grubel: No, that would be a provision of a public good.
The Chair: Okay.
Mr. Grubel: But I want to ask you why do we even need the tariff law on this? Wouldn't it be possible to say that it is not legal to publish magazines that are based on the transmission of editorial content from abroad by whatever mechanism, including electronic transmission? Am I naive on this? Why is this not possible?
Mr. Millar: I would suggest, Mr. Grubel, that you're asking good questions. It seems to me that if one in fact were to utilize the criminal power to do this, one would directly raise charter issues. Indeed, that was precisely the tension that was before the Supreme Court in the Tobacco Products Control Act. They struck it down, suggesting that the prohibition was not demonstrably justifiable in overturning the freedom of expression guarantee.
I'm here to say let's look at other policy instruments to achieve the objective. I don't think the Criminal Code is the right way to go. I think that trade and commerce is the right way to go, to move forward with tariff code 9958, which is fully defensible and supportable under the trade and commerce power. Or indeed I think one, in terms of trying to determine what the true objectives are here, is to seriously consider extending the anti-dumping legislation.
When I heard the witnesses before you dealing from the publishers associations, they were using all the code words that one uses in the context of dumping. They were talking about the dumping at unfair prices of editorial comment, unfair because those prices into Canada were less than the prices they were charging in their home jurisdiction. That is classic dumping analysis.
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Again, it seems to me that if the true objective is to have a level playing field - and that was the term used before you by the publishers - I think extension of the anti-dumping legislation is appropriate. If the true objective is to prohibit, to preclude, this kind of activity, it would seem to me that the more appropriate way to go would be to expand tariff code 9958.
The Chair: If that's all, I thank you, Mr. Grubel.
Mr. Campbell, please.
Mr. Campbell (St. Paul's): Thank you, Mr. Chairman.
I don't even need a segue into my question about anti-dumping. That's where I wanted to bring the conversation at this point. I'd like you to further elaborate on considerations about proceeding by way of dumping rather than on these particular changes. Maybe Mr. Millar could go first, and then Ms Malone. Why was that route not taken? Was that the road less travelled, so to speak?
The Chair: It's a ``Frost-y'' question.
Mr. Millar: Mr. Campbell, on page 45 of the task force report, the task force noted as follows: ``Some suggested to the Task Force that this constituted a form of ``dumping'' of editorial content on the Canadian market.'' And that is indeed quite consistent with the way it was presented before you last week by the Canadian publishers. Unfortunately, the task force did not move forward with that idea in its recommendations.
I happen to do a lot of anti-dumping litigation. It would seem to me that what would be needed is a defining of what it is we are concerned about. Right now the anti-dumping legislation does not do that because it is focused on the goods that are imported. So you look at what the goods are as they it cross the border, and ``goods'' traditionally has meant tangible property. What crosses the border here is not tangible property.
If we did indeed have split-run editions, we might decide that there might be some dumping there. The true focus here, however, is the value that editorial content that comes across the border finds itself in a magazine published for distribution in the Canadian market. It seems to me that one could look at defining what is - the wonderful code word in anti-dumping legislation is ``fair value'' - the fair value of that editorial content. Once you've done this front-end kind of conceptual work, the rest of the procedures that are in place right now would apply.
What you could consider doing is to say that proportionate share of that circulation in the Canadian market should bear its proportional share of the cost. That way, and on a proportional basis, you're not selling at distressed prices the editorial content or advertising space to Canadian advertisers.
Mr. Campbell: Mr. Millar, you are suggesting that the definition of goods - the Special Import Measures Act, if that is the appropriate legislation - is inappropriate to catch intangibles, and perhaps that is where we should look to amending legislation to deal with electronic transfer like this, because it may come up in other situations.
Before we turn to Ms Malone, let me just ask you one other quick question that I meant to ask concerning predatory pricing, another remedy that exists in the Competition Act. Would that be appropriate in this case, in your view?
Mr. Millar: As you know, Mr. Campbell, there have been a number of statements made, particularly in the course of negotiating the free trade agreement and subsequently NAFTA, that it would be nice and appropriate and economically rational if we could get rid of the anti-dumping rules between our free-trade partners. Indeed, the proposal in the anti-dumping area is to try to determine whether it can be replaced by competition law.
The difficulty I see there is that the provision that one would look at is the prohibition on predatory pricing. I believe the numbers that were put before you said an advertising page in the U.S. edition of Sports Illustrated would go for something like $10,000 to $12,000, yet for the Canadian publication it was going for $7,000. The issue that would have to be addressed under that would be whether or not you are being predatory in the sense that you are attempting to put your competition out of business by pricing at such a differential.
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The idea is that you are allowed to have free competition. The question is whether or not I am putting you out of business if I'm pricing at $7,000. Or the test comes when I look at the competitors and ask if they are still making money and whether it is more money or less money. You would be looking directly at the health of the Canadian industry. You would be looking to see whether or not they are succeeding or are making an appropriate return on their investment. So you could do that but you would have to have an answer that meets the policy objectives. I'm not sure whether it does or not.
The next one back is anti-dumping, which says, we don't care if you're making money or not; you're not allowed to sell into this market below the price that you're selling at in your own market. So that doesn't look at whether or not it is fair pricing in a predatory pricing way.
The other option is to say, we want to prohibit this type of editorial content from coming across our borders, from finding its way into publications that are printed in Canada, and from taking away advertising dollars from the Canadian publishers. Again, that takes us to tariff code 9958 and an extension.
I'd say one thing further, Mr. Chair. I believe we have to start dealing with intangible property. Perhaps one of the problems facing the Department of Finance is that the legislation and the policy instruments that we've been talking about have been, until now, focused on tangible property. We are now dealing with intangible property.
The Chair: I'm sure Ms Malone wants to comment on those two issues as well.
Ms Malone: The option of proceeding by using anti-dumping measures was considered as one of the possible options for addressing the issue. However, as Mr. Millar indicated, the Special Import Measures Act only deals with goods and not with intangible property. It therefore doesn't cover the transmission of data. My understanding is that international agreements do not permit Canada to apply anti-dumping duties to intangible property such as the transmission of electronic data. So that was not an option that was pursued.
Mr. Campbell: And on the complex issue of predatory pricing, do you have anything to add?
Ms Malone: It was considered as well, but it was not at all clear that the advertising weights of split-run periodicals would be considered predatory pricing. So again it was not pursued.
The Chair: Thank you, Mr. Campbell.
Mr. Walker, you had a word you wanted to get in.
Mr. Walker (Winnipeg North Centre): I just have a couple of points.
I'm sorry I came in a little bit late after you started, Mr. Millar. At one time, we were expecting to hear from the Canadian Bar Association. Were you working with them at one time on the presentation?
Mr. Millar: Yes, I was. I'm the chair of the commodity tax section of the Canadian Bar Association. Mr. Walker, as you're aware, there have been - and I shall use a euphemism here - scheduling difficulties with this committee. But we have an important thing happening on October 30, and I would suggest to you, given my ten years of doing this, that the flexibility of appearances and the scheduling of bills to be heard has perhaps been quite a bit different this time around.
All of that is to say that the approval processes of the bar do not move quickly enough for this to have been put through the processes in time for the bar to appear today. Indeed, that's why the submission was put in as a personal brief, because at the time we were told the debate was being cut off. I felt this was the only we could get anything in to assist the committee.
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Mr. Walker: Well, the debate isn't being cut off. The list of witnesses was at an end. There is an opportunity for the Bar Association to come forward in front of the Senate, of course. They'll have an opportunity to present it then.
I want to clear up a misperception. I don't know whether you've had a chance to read The Financial Post, but a regular columnist, Sam Slutsky, came to the conclusion that we were prohibiting American magazines. He said it is up to the finance committee to get to the bottom of this and to preserve the right of Canadians to buy and read foreign periodicals. I just wanted to say I think there would be an unanimous motion from this committee to support that Canadians should be able to read and have access to foreign periodicals. I just wanted to ensure the committee understood this. I am sure the witness would agree this legislation does not in any way, shape, or form impede people's access to foreign periodicals or their ability to read them.
Mr. Millar: I certainly agree with you.
I am familiar with the article. I'm not sure how Mr. Slutsky formed that conclusion. I for one would support the motion, because I want to continue to get Golf Digest.
Mr. Walker: A good start.
Mr. Grubel: Mr. Millar, I would like to ask you whether there is any difference between the two methods of achieving protection for the Canadian magazine industry, the excise tax method and the anti-dumping method. Would it be fair to say the anti-dumping method is uncertain both in timing and in whether or not it succeeds, especially if it goes to some international tribunal under the free trade agreement? Thirdly, there is a possibility that the pricing strategies of the magazines would be adjusted such that they do get a foothold and meet the conditions of the anti-dumping rules at the same time. So I wouldn't be surprised that if I were a magazine publisher I would much prefer the much more certain, if I'm correct in my presupposition, almost prohibitive, excise tax approach.
Can you comment on that? Can you assure the magazine publishers that in fact the approach you're suggesting would be certain in getting them their protection?
Mr. Millar: Mr. Grubel, again it's a question of what the objective is. If the objective is to have a level playing field, then the traditional way of doing that is to do it through anti-dumping legislation.
The policy underlying the Special Import Measures Act is that Canada encourages competition - with a very significant caveat, which is that it be done at fair prices. So if the anti-dumping legislation were to be utilized - and I believe pursuant to NAFTA, for example, we would be fully entitled to do that - the protection the Canadian publishers would get is they would not have to compete against dumped product. But they would still have to compete. To the extent that one were to enact legislation that effectively prohibits the activity, either directly through the tariff code or indirectly through the Excise Tax Act, the pool of advertising dollars effectively remains for the Canadian publishing industry.
So I think the results are quite different. Again, it depends on what precise policy objectives one is trying to reach.
Mr. Grubel: From your explanation one could logically reach the conclusion that the fact that the excise tax route was chosen is indicative of the fact that the magazine publishers' interests are not to obtain a level playing field but to be sure they are protected from foreign competition.
Mr. Millar: I'll answer by saying, again, I was fortunate enough to watch on the parliamentary channel, or whatever...to see the debates with the industry. I think they were somewhat confused about what these various alternatives may or may not achieve. I'm not so sure that if you were to ask them directly they would say, oh, yes, the Excise Tax act was the way we always thought was the best way to go forward. I'm not sure, at least from my hearing what they had to say, they were saying, yes, this is the way to go; forget that other stuff.
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I think they want to have some kind of continued protection, and perhaps at this time, whatever can be done, they're going to accept, whether or not they necessarily would think it's the most appropriate way to achieve it.
Mr. Grubel: [Inaudible - Editor] probably was right when he predicted that whenever businessmen get together they are thinking about how to restrain trade. That would be the preferred way to go. That would be consistent.
Thank you, Mr. Chairman.
The Chair: It's certainly been the history of all of our efforts in office over the last two years to try to restrain trade rather than open up Canada to the world markets.
Mr. St. Denis (Algoma): Thank you both for being here.
I have to admit that I was a little ambivalent on the issue until I read the most recent issue of Sports Illustrated. I was convinced that the policy objectives were indeed appropriate. So really the question comes down to the best way to get from A to B.
Even though the method proposed in Bill C-103 might seem awkward and a little back-doorish, if I can use that word, when compared to other methods, such as some grand cultural policy or legislative manoeuvre like anti-dumping measures or tariff code steps, I wonder if this in fact is the cheapest and easiest way to go, considering that we're only talking about two or three magazines. Even though it seems like an awkward way to go, when you step back and look at the whole thing objectively, maybe it's just the simplest way to do it.
Mr. Millar: I'll answer by saying that if this is the committee's decision, then I would request that at least the provisions utilized to do that should be more certain. Place what is potentially a very onerous obligation on the people who are in a position to know.
So I'm saying that to the extent it's decided, yes, this is the easiest path to follow to get to the policy objective. I'm saying to at least do it in a way that's consistent with the standards that are being met in other tax legislation.
I would say you should at least fix it up if you're going to proceed with this tax approach. Second, I would say, in terms of the least intrusive and easiest ways to do it, expand the tariff code, which has been there since 1965, to cover what's been occurring. That, to me, seems to be an easier way to go than to erect this elaborate tax design that's effectively attempting to prohibit this type of activity.
The Chair: Thank you, Mr. St. Denis.
Mr. Millar, I take a certain amount of exception to one thing you said. You said you didn't have time to consider this bill and the bar has been cramped in its opportunity to deliberate.
This bill was tabled in the House of Commons on June 22, 1995. The Canadian Bar Association's commodity tax division has had four months and three days to consider what its position would be and to bring it forward, so I don't think it's fair to say your opportunity to consider this has been abridged by this committee and that we are ramming it through.
So I take exception to that. I do, however, on behalf of all members, thank you for some very constructively directed comments to us, coming to us unsolicited from an expert in the area. We appreciate it. Thank you.
Perhaps, Ms Malone, you'd be good enough to stay, because perhaps this next witness will deal with some of the things you're dealing with.
Welcome, Mr. Ron Hamson of the Periodical Marketers of Canada.
Mr. Ron Hamson (Public Affairs Committee, Periodical Marketers of Canada): I'm not sure if I can add that much more to what's just been said by Mr. Millar, but I will go through what the Periodical Marketers of Canada feels.
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I'm the general manager of National News here in Ottawa. We are, like Benjamin News out of Montreal, a distributor of magazines, books, sundry products, etc. We distribute these products in the Ottawa-Hull region.
However, I'm here representing the public affairs committee of the Periodical Marketers of Canada. Unfortunately, the chairman of the committee, Mr. Michael O'Brien, was unable to attend this meeting, so I will be reading his brief for him.
Thank you, Mr. Chairman, for this opportunity to appear before the Standing Committee on Finance in regard to your consideration of Bill C-103, an act respecting split-run editions of magazines.
The Periodical Marketers of Canada is the association of Canadian wholesalers engaged in the distribution of magazines to some 35,000 retail outlets from coast to coast. I'm not here today to take any position on the principle of Bill C-103; rather, my comments will be directed towards the procedures provided in the bill, which assign responsibility for the tax obligation to persons other than the publisher.
This method, our association believes - and I think as Mr. Millar said - would involve a miscarriage of natural justice in that it imposes a tax obligation on parties described in the bill as responsible persons, but who in fact would have no responsibility whatsoever for the decision to publish in violation of the act. Nor would they be the direct beneficiary of any advertising income of any publication issued in violation of the act.
I'm sure all members of the committee will agree that just as there should be no taxation without representation, neither should there be taxation without responsibility.
In the case of magazine wholesalers, I should explain to the committee that our members are shipped supplies of periodicals directly from the printing plants of the publishers. However, we have no specific knowledge of the particulars of any title, and we would not in fact know whether a publisher was providing us with the title in violation of the act unless that publisher chose to so notify us in advance.
As Mr. Millar indicated, we handle 4,000 titles over the year. In each particular week we put out in the neighbourhood of 400 titles, on a weekly basis.
The decision-making in this matter is entirely out of our hands. There's no practical or reasonable way in which we, as magazine wholesalers, can take steps to avoid the possibility of unknowingly becoming responsible for a very considerable tax obligation. Nor, Mr. Chairman, is there any reasonable way whereby, in the normal course of business, a wholesaler could obtain relief via the courts of another country against a wilful violation of the act by a foreign publisher.
I might point out that a tax penalty imposed on the basis of 80% of the advertising revenue of a publication could amount to several hundred thousand dollars. The imposition of such an unwarranted tax would not only be extremely painful to our members financially, but could actually lead to the bankruptcy of our smaller members.
In addition to expressing our extreme concern about the unfairness of the proposed collection method, I wish to advise the committee that the responsible officials involved in this tax have been neglectful of what we believe is their responsibility to consult with affected parties.
A representative of our association - in fact, the chairman of the public affairs committee, Mr. Michael O'Brien - met with officials of Revenue Canada and other departments late last year. In a subsequent letter from Mr. Pierre Gravelle, Deputy Minister, Customs, Excise and Taxation, Mr. O'Brien was advised:
- It seems unlikely that distributors will be responsible for a tax liability. If the decision is made to
involve your members directly in the tax, departmental officials will contact them.
Further, Mr. Gravelle has so far chosen not to reply to a follow-up inquiry sent to him on June 27 of this year.
While we appreciate the intent of the bill, we find the methodology proposed by the government for its application to be totally at variance with any sensible or fair approach to the subject.
The Periodical Marketers of Canada request that the committee deal directly with this issue and respectfully suggest that there should be no yielding to any temptation to take refuge in assurances respecting the theoretical unlikeliness of there being actual violations of the act.
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An act that is unfair in its application, Mr. Chairman, should not be enacted into legislation in Canada without first undergoing changes to overcome this unfairness. On behalf of our members, Mr. Chairman, I appeal to your committee to recommend changes that will ensure that only directly responsible parties are held accountable under this act.
Thank you very much.
The Chair: Mr. Hamson, I have just one comment based on what you've said. I don't believe it is fair to single out Mr. Gravelle, the Deputy Minister of National Revenue. That is not the group in our government that undertakes consultations on tax policy measures; they're the ones who enforce the laws after they're made. I just point that out to you, and I want to get it on the record, that it would not have been his responsibility to get back to you and to consult with your group on any tax measures.
Mr. Grubel.
Mr. Grubel: I have no questions, thank you.
The Chair: Are there any questions?
Mr. Walker: Could I just ask Patricia to clarify a couple of points?
The Chair: Sure.
Ms Malone: We did meet with industry representatives, including Mr. O'Brien, in February of this year. Mr. O'Brien did make us aware of his concerns and we, to the extent possible, have addressed them in the bill.
Wholesalers are fifth on the list of responsible people. There are publishers, people connected with the publishers, distributors, printers, and then wholesalers. In the case of publications printed in Canada, the wholesalers would never be responsible for the tax since the tax liability would stop at the printer. In the case of imported publications, customs tariff 9958 still remains and would kick in to prevent the importation of the vast majority of split-run editions, should there be any split-run editions imported.
So in fact we have tried to the extent possible to recognize your concerns. It was not possible, however, to leave out wholesalers. We had to close the loop. We had to ensure that the measure was effective. Without imposing liability on the wholesalers, it would have been possible for publishers just to distribute their publications via wholesalers. So it was to ensure that the measure was effective.
The Chair: Is there any possibility that an unsuspecting distributor who has no means of finding out whether it's a split-run edition or not could suffer a huge fine under this legislation?
Ms Malone: There is a possibility, but I would add two things. Generally, the publication of a split-run edition is known. The publisher will be seeking advertising directed at the Canadian market, so there would be some knowledge in advance. Furthermore, we've added some provisions in the legislation to assist wholesalers, should they be liable for the tax, to recover the tax from the publisher.
The Chair: We certainly don't want members of the organization represented by Mr. Hamson to be subjected to this type of fine.
Could we put something on the record that would say that any innocent distributor would not lose his business or be subjected to this fine, even though they may be the primary means of getting at a foreign publisher who has committed a violation? You're saying we have to include them to close the loop so that we can get at the foreign publishers who are really the culpable people and know that they're doing it. But for an innocent importer who has no knowledge whatsoever, is there any way of getting around that?
Ms Malone: We've certainly considered this, but we can say that if we didn't impose a liability there would be a loophole. The addition of the provisions to assist the wholesaler to recover from the publisher the amount of tax paid by the wholesaler should assist in the wholesaler not losing their business.
The Chair: Thank you very much.
Are there any further questions of Mr. Hamson?
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Colleagues, we have heard a number of witnesses. We've heard all the witnesses who have asked to appear before us on this bill. All except one have supported the thrust of this policy.
We have had two witnesses today who have brought forward potential problems that may be real but may be highly theoretical. I'm not sure. I am of the view that these have been valuable contributions made to us today and that we have expressed for the record the fact that we don't want innocent members of Mr. Hamson's organization to be unjustly liable under this law. But we also understand that we have to stop every loophole if there are unscrupulous foreigners who wish to do split runs.
Maybe some of the issues raised by the previous witness will come up, and maybe they won't, but we are assured by our finance department that they have considered these alternatives and are prepared to recommend and have recommended that we proceed on the basis of their opinion as opposed to the others that have come forward.
My own feeling on this is that I would like to proceed with this bill as it is. I understand there's an amendment to be made by the parliamentary secretary.
Mr. Walker: Yes, there is, Mr. Chairman.
The Chair: Just before you do that, Mr. Walker, I think we should proceed with it and I think we've received valuable insights from the last two witnesses. If any of the potential harms they've adumbrated before us do come about, then I believe we, as a committee, would want to be seized of this issue again so that we can immediately respond to the difficulties. That's my particular view.
Mr. Walker: On the amendment, Mr. Chairman, I just wanted to know if you wanted to thank the witness.
The Chair: They'd probably like to stay here and hear your little amendment, Mr. Walker.
Mr. Walker: Thank you very much.
The Chair: But if you wish to leave, Mr. Hamson and Ms Malone, Mr. Walker's quite right. We thank you both very much for working with us.
Mr. Walker: Patricia will stay for the amendment.
On clause 1
Mr. Walker: Mr. Chairman, I'd like to propose an amendment to clause 1 of the bill. I will read the amendment and perhaps you will allow me about 30 seconds to read the explanation of it.
I move that clause 1 of Bill C-103 be amended by striking out lines 20 to 28 on page 6 and substituting the following:
- issues of a periodical, each of which had split-run editions, were published and distributed in
Canada, section 36 does not apply to impose a tax on a number of issues of that periodical that
has split-run editions published in any particular year that is equal to or less than that particular
number, if those issues published in the particular year are similar, in editorial content and
direction, to those issues published in
- And then it continues on with the existing language.
Thus, where a particular periodical is eligible for grandfathering treatment, it will not be subject to the excise tax if its numbers of split-run issues in future years does not exceed the number of split-run issues that were distributed during the 12-month period ending on March 26, 1993. If the number of split-run issues per year is increased, the tax will apply to the additional split-run issues.
The amendment corrects an oversight in proposed section 39. The purpose of the amendment is to clarify that periodicals will be grandfathered under proposed section 39, based on the number of split-run issues that were distributed in the 12-month period ending on March 26, 1993, rather than on the number of split-run editions. So it's a clarification of the use of the language, as between ``issues'' and ``editions''.
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Thank you, Mr. Chairman. If there's further clarification, Patricia will take over.
The Chair: Thank you, Mr. Walker.
Any questions?
Mr. Grubel: So that means essentially that Sports Illustrated will be able to publish split runs up to the number of months they used to publish them per year before.
Ms Malone: It's just a clarification of the grandfathering provision. It's not changing the intent of the grandfathering provision.
The Chair: I must say I do have a certain amount of concern about the issue raised byMr. Hamson. I propose now to proceed to clause-by-clause on this bill. If, having left our committee and gone to the House, this issue can be dealt with in such a way as to ensure there'll not be unfair treatment of innocent distributors, Canadian distributors who don't know they're dealing with split-run editions.... In other words, they'd be liable only if there were a conspiracy, or if they knew, or something like this. I'm not sure what the precise way to do it is. I know we have to close the loophole. I would probably sleep a little more soundly. If, having passed it out of here...some amendments were considered.... They might even be introduced at the Senate stage.
I'm not sure they're possible.
Mr. Walker: I must say, Mr. Chairman, this is a concern for us too, and maybe we can give it some thought before it passes to the Senate. The concern is that not to include them leaves a huge hole in the system, which would be open for abuse. On the other hand, you hope there aren't such cases. For example, there is some suggestion that we encourage the distributors to seek a contractual indemnity in this process. Maybe these are the sorts of things we should ask the department to work on and promote.
The Chair: I think we should keep an open mind. I don't look on the fact that we pass it through here as being necessarily the end of the issue. I think a lot of these issues will be found to be very theoretical in nature in the future.
Mr. Walker: Yes.
The Chair: But I'm not so sure that if I were the lawyer to one of the distributors I could advise him that he could sleep soundly at night, because he would never have a way of knowing whether he's dealing with a split-run edition. Therefore I consider that to be introducing into their businesses - small businesses, in many cases - an uncertainty that might be very unjustified. So for the sake of....
I don't think we can gainsay anything here. I would urge the department to consider ways we might protect the innocent and still achieve what all witnesses except one have said is a very important policy objective for Canada.
Amendment agreed to [See Minutes of Proceedings]
Clause 1 as amended agreed to on division
Clauses 2 to 5 inclusive agreed to on division
The Chair: Shall the title carry?
Some hon. members: Agreed.
The Chair: On division.
Shall the bill carry?
Some hon. members: Agreed.
The Chair: On division.
Shall I report the bill to the House?
Some hon. members: Agreed.
The Chair: On division.
Members and witnesses, again, thank you very much for your diligence and cooperation.
We're adjourned.