[Recorded by Electronic Apparatus]
Tuesday, January 21, 1997
.1300 
[English]
The Chairman: Order, please. The finance committee of the House of Commons is pleased to continue its hearings into Bill C-70.
We are also very grateful to those witnesses who've come to be with us this afternoon. We have with us, from the Food and Consumer Products Manufacturers of Canada, Gail Robinson-Gow and Bev Hutner; from the Canadian Professional Sales Association, Terry Ruffell; from the Canadian Society of Customs Brokers, Carol West and Tom Fisher; from the Alliance of Manufacturers and Exporters Canada, Brian Collinson and Glen Pye; from the Canadian Institute of Chartered Accountants, Catherine McCutcheon; and from the Nova Scotia Home Builders' Association, Richard Lind and John Kenward.
We look forward to your opening comments of about three minutes maximum and then to discussion with you. Thank you again for being with us.
We start with you, Gail Robinson-Gow.
Ms Gail Robinson-Gow (Co-Chair, Tax Committee, Food and Consumer Products Manufacturers of Canada): Mr. Chairman, honourable members, other attendees, thank you very much. Merci pour votre attention.
We are with Food and Consumer Products Manufacturers of Canada, an association of companies who manufacture a broad range of consumer products, including food, beverages, paper products, cleaners and health and beauty aids. Our products are sold through retail establishments, hardware stores, grocery and drug stores, mass merchandisers and restaurants. Overall we support harmonizing provincial sales taxes, but we came to explain a particular problem in our industry relating to the proposed place of supply rules.
The problem relates to the fact that we have to allocate services to provincial jurisdictions, but the rules are impossible to apply with regard to promotional allowances that are common in our industry. Simplification is possible and would help a lot.
Briefly, distributors' or customers' promotional activities are treated as services, and encompass the promotion of manufacturers' branded goods using a wide variety of merchandising of programs. For example, chain stores often feature brand name products in their stores and put out flyers and other advertising materials, or they simply ``feature-price'' products.
Manufacturers pay the distributors many kinds of allowances or rebates, including volume rebates as well as cooperative merchandising allowances. These more or less defray some of the costs of these promotional programs. The problem is, it is rarely clear where the promotional activities take place, as they often cross borders seamlessly. Often it is unclear whether a payment is being made for performing merchandising or merely as a reduction of the price of the goods bought. We call it ``cooperative merchandising'' because it's good for both parties. The distributors attract customers and benefit directly, and the manufacturers benefit indirectly when the distributors increase their purchases.
Currently, when a straight volume discount is deducted off the invoice, it lowers the GST, but most merchandising allowances are treated differently, because they are deemed to have a service component. We call these ``reverse supplies''. What happens is that the distributor is deemed to be providing a service to the manufacturer as a consequence of providing the promotional activities. So we have two parties involved here.
It's hard to administer the taxation of the reverse supplies. First of all, you have to decide whether an allowance is performance-related or not, and no effective means exists to classify them. Systems themselves track the shipment locales for the sales of the underlying goods but not the locales of any of other promotional activities.
As well, distributors lump together the moneys they receive from competing manufacturers. They can't identify how much they're spending on promotion by locale. They can't really even determine it by manufacturer.
The manufacturers who have to collect the tax on these allowances are in even less of a position to understand when, where or what amounts their customers are spending on these promotional activities. So they don't have a way of identifying them by province either.
The other important thing to remember is that no government revenue benefit arises with strict compliance, nor does a shortfall arise with a lack of compliance, because everyone is a registrant in the picture.
We've run a little short of time here to explain this issue, but we can elaborate on it in the question and answer period. What I want to stress is that our industry is a key player. Hundreds of millions of dollars are being spent here. But we're not looking for an industry solution. What we're seeking would simplify things for anyone paying these kinds of allowances.
Most of our customers belong to two associations, the Retail Council of Canada and the Canadian Council of Grocery Distributors. They fully support our request to have a simplification here. We've been working together with the Department of Finance, who've been very helpful, I must say. We've given them a detailed discussion paper on the problem, which I think was circulated to the members this morning. We all have agreed that the place of supply rules don't work for promotional allowances and they need to be simplified.
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Basically, we want the new model to work well so other provinces will buy in because it's good for our businesses, and we're confident the suggestions for promotional allowances will facilitate that. We would like this committee to help us support the efforts of the Department of Finance in achieving this simplification.
Thank you.
The Chairman: We'll hear on that from either the parliamentary secretary or the officials, but we certainly encourage you in your activities and encourage the department to continue discussions with you to come to a solution.
You're not asking for lower tax revenues.
Ms Robinson-Gow: No.
The Chairman: It's revenue neutral. You're just asking for something that will work in practice. It must not be beyond our collective expertise to find that, and I'm sure members from all sides will support you. Thank you very much.
From the Canadian Professional Sales Association, Terry Ruffell.
Mr. Terry Ruffell (President, Canadian Professional Sales Association): Thank you,Mr. Chairman. On behalf of the 30,000 members of the Canadian Professional Sales Association, we're grateful for the opportunity to appear before the committee on the subject of a harmonized sales tax.
The association has supported the government's initiative to harmonize the federal and provincial sales taxes for two important reasons. The first is the need for simplification, and we stress that many times. The second is the need to remove the effects of tax cascading.
Unfortunately, the proposals before us fall short of achieving these worthy objectives. In many ways the partial harmonization proposals in Bill C-70 increase the overall complexity of the tax system, not reduce it. Let me elaborate on the complexity issue created by partial harmonization proposals from the perspectives of our members, many of whom are small business owners or sales agents working independently for manufacturers or distributers.
Two aspects of the HST proposal significantly increase the complexity for our members. They are the requirement for tax-included pricing and - we'll touch on what Gail just said - the complexity of the place-of-supply rules.
First, on tax-included pricing, because of our limited time on this issue this afternoon we simply would like for the record -
The Chairman: We'll give you as much time as you want later on, but we'll give you enough time, Terry, to do it now.
Mr. Ruffell: Okay. For the sake of the record, the association is opposed to this proposal. We support the Chamber of Commerce view that tax-in pricing would mean increased costs of administration and higher distribution costs for retailers and their customers. I urge you to listen closely to the concerns of the chamber, the Retail Council, and other groups.
Second is really the issue I want to get at, the place-of-supply rules. For goods, the place-of-supply rules are relatively well understood. However, the rules for services and intangible property we believe are mind-numbing in complexity.
The technical paper issued by the Department of Finance devoted the better part of five chapters on the various permutations on this subject, and those dosn't include the transitional rules. For example, if a management consultant is providing services and he has to visit one province for discussions and write a report from an office in another, how do you measure where the service was performed? Is it the place where the discussion occurs or the place where the report was written?
If a sales agent is providing services selling goods in several provinces, how do you measure the percentage where the service is performed? Do you use the value of the goods sold, or the time or the effort in selling, or the commission earned on the sale of those goods?
Further, how does one factor in the timing of these measurements? If the contract is for a year, do you measure the service rendered on a monthly basis, or on when specific parts of the contract are completed, or is it prorated over the time of the contract?
I've given you a table, Mr. Chairman. It's a very simple example. We can maybe address it later. I direct your attention to the table, which illustrates some of the difficulties in interpreting these rules and the anomalous results that could follow.
Our scenario assumes the sales agent who contracts with an Ontario manufacturer to provide selling services in Canada and in the United States. Under the proposed rules it seems if you sell over 90% of the goods and services to the HST provinces, two different tax results occur for the HST on the services of a manufacturer's agent, depending on the selling method used. It seems you could have a 7% result if you phone from Ontario, but you could have a possible 15% result if you visit the client in Halifax. A different result seems to follow if your sales are below 90%. If you sell less than 90% to the HST provinces, then it seems you may have only a 7% maximum rate, regardless of the selling method. Finally, if you perform some of the services in the United States and some in Canada, you get another type of result.
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As you can see, Mr. Chairman, the rules require us to measure precisely the amount of services rendered. The basis for measuring, or even whether these services can be measured accurately, does not seem to be clearly addressed in the legislation.
In conclusion, I'd like to reiterate our support for the concept of tax harmonization but would implore the committee to recognize that harmonization without simplification doesn't make sense. I would submit that the supply concepts that this legislation introduces are alien to the current tax system. To our accountant's knowledge, no other country in the world has adopted them.
It is the association's recommendation that the Government of Canada hold off on harmonization, particularly the tax-inclusive pricing requirements, until the time when you get a majority of provinces to agree and that the place of supply rules are of such a nature as to not further complicate an already complicated tax system.
Thank you.
The Chairman: I'll bet you the Canadian Institute of Chartered Accountants will disagree with you totally. They will have a field day with these new rules.
Mr. Ruffell: That could very well be.
The Chairman: Can we now hear from the Alliance of Manufacturers and Exporters of Canada, Brian Collinson and Glen Pye.
Mr. Brian Collinson (Director, Commercial Policy, Alliance of Manufacturers and Exporters Canada): Thank you very much, Mr. Chairman and honourable members of the committee. The Alliance of Manufacturers and Exporters Canada wishes to thank the standing committee for providing this opportunity to comment on the provisions of Bill C-70.
The alliance was created by the amalgamation of the Canadian Manufacturers' Association and the Canadian Exporters' Association. It has 3,500 member companies, representing all types and sizes of manufacturing, processing and exporting enterprise. Our members together produce over 75% of the nation's manufactured output.
The alliance has at least one regional office in each province. Our regional vice-presidents have communicated frequently with our members on the subject of harmonized sales tax. Across Canada, the membership of the alliance has been highly supportive of the GST and is equally supportive of the proposed HST in the Atlantic provinces. As a whole, our membership strongly advocates that the federal and provincial governments redouble their efforts to expand the HST, beyond the provinces encompassed, to the remainder of Canada.
The alliance strongly supports the agreements for sales tax harmonization that the federal government has signed with the participating Atlantic provinces. However, our membership does have some initial concern with the complexity of the proposed HST, as the following comments will reflect.
With respect to the April 1, 1997, implementation date, we believe the government should honour its intention to implement the new HST on the proposed date. Many businesses have taken the announced implementation date with great seriousness, investing substantial resources to fully prepare for April 1 implementation. Nonetheless, for many businesses, despite their best efforts, the April 1 date will come too early to allow full compliance with the HST requirements. The alliance therefore recommends that the government exercise a large measure of leniency toward those businesses that demonstrate reasonable efforts at compliance but that are not able to fully comply by April 1. Such leniency should be extended until December 31, 1997, and beyond that time where circumstances warrant.
In particular, the alliance believes administrative leniency must certainly be extended in the following circumstances where there is no revenue loss to the government: one, transactions between registrants where the place of supply is unclear; two, purchasing systems that cannot be modified by April 1, 1997; and three, pre-printed and standard documentation where the time and resources needed to make the necessary changes are not available.
Other concerns of the alliance are as follows. The alliance believes the determination of whether or not a service is supplied in a participating province can be difficult and complex. The alliance recommends that the HST application be based on the location of the recipient of the services rather than the location of the supplier.
Second, an issue raised frequently by our exporting members located in the HST provinces concerns an anticipated increase in cashflow difficulties. Revenue Canada must recognize that businesses will now carry an additional 8% tax on many of their inputs. As a result, it is essential that Revenue Canada be fully prepared for HST implementation, including ensuring that refunds are expeditiously processed.
Mr. Chairman, the alliance thanks you for the opportunity to comment on Bill C-70. Mr. Pye and I would be pleased to answer your questions.
The Chairman: On behalf of all members I would like to thank your organization as well for the incredible efforts you have made and the leadership you have shown in pushing for harmonization throughout this country.
We next will hear from the Canadian Society of Customs Brokers, Carol West and Tom Fisher.
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Ms Carol West (President, Canadian Society of Customs Brokers): Thank you,Mr. Chairman, and good afternoon, honourable members.
Canadian customs brokers act as duly authorized agents of importers and we're licensed by the Government of Canada. We become involved in some 80% of import transactions.
We last appeared before this committee with some comments about the review of GST. The application of the HST for us is somewhat different, because we're looking at the application of the tax to non-commercial goods. In this respect our comments are somewhat more focused.
We too have concerns about the rules of supply, and those concerns have been discussed with the Department of Finance, primarily the application of the HST to customs brokerage fees. The normal rules of supply, it was agreed, did not work, just because of the structure of our business and the opportunities provided by electronic processing for us to do business nationally across Canada and to provide services to people in Atlantic Canada from places outside Atlantic Canada and participating provinces.
A special rule has been proposed for customs brokerage services. That rule focuses on where the port of release of goods is located. But that rule is not without its difficulties, and we would like to comment on those difficulties today.
That rule of supply may result in the movement of clearance away from ports in Atlantic Canada, with serious economic impacts, and it may also have concerns and negative impacts for efforts by both the private sector and the Government of Canada to clear goods at first port of arrival in Canada and to take advantage of pre-arrival processing from Revenue Canada's and Customs' point of view and from the point of view of the private sector.
Because the harmonized tax doesn't apply to commercial goods, we have put forward a recommendation to the committee that HST be applied only to customs brokerage services provided for non-commercial shipments, in line with the application of the tax to casual goods, but when customs brokerage services are provided to a commercial importer the responsibility should lie with the importer to self-assess. That's the recommendation we have on the application of the HST to customs brokerage fees.
We also share concerns about the lead time available before implementation of the tax. We're well beyond what we consider to be the minimum six months of lead time for implementation of any change of this magnitude. We think it's going to be extremely difficult for our members to implement the systems and programming changes they'll need to do before April 1.
The rule of supply, although it has been proposed, is not yet clear. We need to program to accommodate that. We also need to do systems programming to reflect the application of the tax to casual goods. Although the bulk of our business is with commercial goods, we do become involved with the clearance of non-commercial goods as well.
The third issue about which we are concerned is the need for consistency with rules and processes for the QST, or Quebec sales tax. We have heard and we understand the Government of Quebec has agreed in some ways to streamline rules and processes of the QST to bring them into line with the HST provinces. We certainly need clarification and confirmation about what we've heard as quickly as we can, once again in the interests of our communicating clearly to the thousands of Canadian importers who will be affected by the application of the HST to imported goods and those importers across Canada who do business using the services of Canadian customs brokers.
We appreciate the opportunity to put these views forward. We'll be pleased to answer questions later.
The Chairman: Thank you very much, Ms West.
Ms McCutcheon.
Ms Catherine McCutcheon (Chair, Commodity Taxation Committee, Canadian Institute of Chartered Accountants): Thank you, Mr. Chairman and members of the committee. As chairman of the CICA commodity taxation committee, I'm pleased to take part in these round table discussions.
As you know, in the past the CICA has called on the government to implement sales tax harmonization. We were pleased to see the Atlantic harmonization agreement incorporates some of the key principles the CICA has called for: one rate, one base, one administration. We appreciate the need for the government to move ahead with this proposed legislation, which is just a first step towards achieving national harmonization.
However, we do have some concerns about the proposed legislation. It is very complex. It contains what we feel are excessive penalties. The very short time lines involved dictate the need for administrative tolerance on the part of the government in administering the proposed legislation.
Some general areas we would like to comment on are as follows. The first is tax-inclusive pricing. The CICA originally called for tax-inclusive pricing within the context of a national system of sales tax harmonization. It's the consumers' choice. However, in a partially harmonized setting we are skeptical tax-inclusive pricing can work. Without national harmonization, tax-inclusive pricing creates confusion for the consumer, increases cost to business, and results in competitive inequities. In any event, we believe the penalties regarding tax-inclusive pricing are too harsh.
The Chairman: By ``penalties'' you are referring to jail terms?
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Ms McCutcheon: Yes.
The Chairman: We found out about those yesterday and have abolished them.
Ms McCutcheon: We read that in the news this morning.
The Chairman: They're gone.
Ms McCutcheon: We still find the $5,000-a-day fine excessive as well.
The Chairman: Okay, we'll get rid of that, too.
Some hon. members: Oh, oh.
Ms McCutcheon: To continue, the second major theme is that we are concerned about provisions in the proposed legislation that will allow the government to pass temporary regulations within the first two years of implementation. We recognize that this provision provides flexibility to address anomalies. This is desirable because of the short timeframes involved in drafting and implementing this legislation. However, changes by regulation are not subject to normal public scrutiny. Therefore, we believe the provision should be narrowed to ensure that it cannot be used to bring in retroactive changes that impose an additional tax.
Three, there's a real need for the government to show administrative tolerance. This cannot be said enough. There's been very little lead time for people to grapple with the implications of this complex legislation. As such, we urge the government to make every effort to exercise tolerance in administration.
We also have more specific concerns, such as the place of supply rules, as was enunciated by a number of the other witnesses today. The rules are extremely complex. Yes, it might be a field day for accountants, but candidly, it gives me a headache. I think a theme CICA has always supported is that of a very simple, cost-effective tax.
These rules are very complex, and the government should take a second look at simplification. Wherever possible, there should be a reference to information that is currently captured in suppliers' systems. We would be pleased to continue to work with the Department of Finance in this regard.
We would also like to comment on the formula provisions in the proposed legislation regarding financial institutions. The formula for paying taxes in the participating region is different from what was originally proposed in the October 23 technical paper, and should be reconsidered.
The change in the formula denies relief for the provincial component of tax on transactions between related financial institutions. We think this is inappropriate.
As well, the formula approach will result in double-tax scenarios. There should be some relief mechanisms put in place.
Finally, we do not agree with the principle brought in last spring, the four-year and two-year rule. We presume that the provisions will be enacted, and there have been proposed changes, but the proposed changes to the provisions do not go far enough. For example, the two-year rule will still apply to all registrants, regardless of size, for certain rebates such as tax paid in error, or bad debts. As well, we feel there should be a threshold to distinguish between large and small financial institutions, just as there are for other registrants.
We thank you for your attention and look forward to your questions.
The Chairman: Didn't we announce that we're getting rid of the four-year and two-year rule? The two-year rule is already going to become a real two-year rule as opposed to a nominal two-year rule.
We made incredible progress yesterday. This is the first time I've ever been ahead of an accountant.
We next will hear from the Nova Scotia Home Builders' Association, Richard Lind.
Mr. Richard Lind (President, Nova Scotia Home Builders' Association): Thank you,Mr. Chair, members, other witnesses. I'm president of the Nova Scotia Home Builders' Association and a new home builder and renovator for 25 years in Nova Scotia. With me is John Kenward, chief operating officer for the Canadian Home Builders' Association.
As you know, we are the national and provincial voices of the residential construction industry. We are here to make our voices as clear as we can that the impact of the harmonized sales tax will mean a new tax. It will be a new tax on land where previously there had been no PST. There'll be a new tax on labour where there'd previously been no provincial tax. There'll be a new tax on financial services, legal services, surveyors' fees and other services that previously did not have a PST.
We've tabled here some independent research and consultation with the provincial government, which confirms that the costs overall for new home construction will increase by 4.5%. As well, residential renovation project costs will increase by 4.5%.
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It is the intent of the Province of Nova Scotia, as it was the intent of the federal government when introducing the GST, that these taxes should have a neutral effect. The Province of Nova Scotia is providing us with a rebate in an attempt to establish this neutral effect, a rebate of about 1.5%. That's obviously inadequate when compared with the 4.5% increase in cost. There's still no renovation rebate, nor is there a workable definition on the federal part of what constitutes a substantial renovation.
We're sorry to report that the cost of new homes and renovations will indeed go up. Even the provincial government has admitted this. They hope, with their figures and the federal government's figures, for a mitigating effect on three areas. We would like to challenge the assumptions of the various levels of government on the basis for the mitigating effects.
The first one is that the rebate assumes there will be an industry-wide pass-through of the tax credits on the order of 90% to 100%. Based on the past experience of the GST, a more realistic figure for pass-through would be 60% to 70%.
The second assumption is that the change of rate from the combined tax of 8.8% down to 15% will produce an offsetting savings. We find the small savings may indeed offset day-to-day expenditures, but there's no way those savings can offset the increased cost of major purchases such as a new home or renovation project.
It's also assumed, and we would love to be able to support you on the assumption, the new tax system will produce a stronger economy - stronger economic activity and a broader tax base. It may be very well to hope for that, but good financial planning indicates that you have to prepare for other eventualities, should they occur. We don't see that planning in place. Particularly as federal support declines over the four-year span, the tax burden is going to fall more heavily on our local economies.
The federal government indeed has a role in this. The federal government has put the plan on the table. It has formulated the structure for it. Indeed, it's even financing the changeover for the provinces. Therefore through this committee we call on the federal government to look at three areas: one, to ensure a meaningful provincial renovation tax rebate as well as the expansion of the new home tax rebate; second, to redefine the existing but unworkable ``substantial renovation'', or its application as a rebate; and third, to eliminate the $30,000 GST registration threshold - and we feel that in particular provides an obvious loophole to unethical operators and generates tax avoidance and a very large underground economy.
We look forward to your questions and discussion.
The Chairman: Thank you very much, Mr. Lind.
[Translation]
I suggest we should continue with our witnesses until 5 p.m. Then, we will hear from the parliamentary secretary. Is this agreeable?
Some hon. members: Agreed.
The Chairman: Thank you very much.
[English]
I would be pleased now to continue with discussions and questions from members. We've had a lot of very common issues raised, particularly about the supply rules. We could ask the parliamentary secretary to deal with those immediately, because they affect a lot of people, or else we could go to questions. It's up to you.
Mr. Campbell (St. Paul's): Mr. Chairman, I'm prepared to respond to some of the issues that have been raised, but as is always the case, we have an excellent dialogue at this committee, so I'm happy to allow members to raise other issues in response. I might be able to shed light also on those issues which arise from the conversation that will ensue, so I'm pleased to wait for later on.
[Translation]
The Chairman: What would you like better, Mr. Pomerleau?
Mr. Pomerleau (Anjou - Rivière-des-Prairies): We could start with questions.
The Chairman: Okay.
Mr. Pomerleau: For the first turn, I would like to ask Mr. Ruffell of the Canadian Professional Sales Association to explain a bit more the table he has presented a moment ago because I did not quite understand. It seems extremely difficult to allocate taxes in this table.
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[English]
Mr. Ruffell: I think the problem - and it will come back to one of my comments - is that where you have the new rules there are lots of questions that depend on the method used in selling. So if you listen to Catherine McCutcheon from the CICA, she says - at least I hope this is what she said - the new tax rules should come from existing corporate records.
What is happening in the HST legislation is that there are new requirements, new questions. There are questions about where the service was provided, where the report may have been provided, whether or not the sale was generated from telephone marketing, etc. So what you're now asking sales agents and consultants is to say not only what the sale was but what the method of the sale was. Were you in a trade show in Halifax, for example? Well, if it was a trade show in Halifax it could very well be that a 15% rate would be applied. If you were sitting in Ontario or Quebec and you made a telephone call, it very well may be a 7% tax.
So you're now asking corporations to start analysing their method of selling, where the sale took place, where the discussions took place. So you've really entered a whole new game. As far as any company I know is concerned, this information is not readily available. So you're adding another complexity to an already complex system.
So just to answer that question, we've done 7% scenarios, and it could very well be a 15% scenario, and it's just too confusing. I think almost everybody around the room talked about those place-of-supply rules, which are very complicated and confusing.
[Translation]
Mr. Pomerleau: These are new rules that will apply and that did not exist before, am I right?
[English]
Mr. Ruffell: That's exactly right. As far as we know in talking to our own auditors, these new rules are not found anywhere else in the world. We're trying to develop something new, a totally new concept.
There was a reference earlier in another presentation that said let's look at much simpler rules, and I know our own auditors said we should look at Europe. The rules already exist, they work, they're well understood. I think there certainly should be a reflection in there regarding how this stuff works, because it is very complicated.
Mr. Pomerleau: Maybe we should harmonize with the rest of the world at the same time.
Mr. Ruffell: That sounds like a good idea to me.
[Translation]
The Chairman: Thank you very much, Mr. Pomerleau.
[English]
Mr. Solberg.
Mr. Solberg (Medicine Hat): Thank you very much, Mr. Chairman.
I've been listening to what people have had to say about the problems with supply. The chart we've been given that explains how difficult it would be for sales agents to determine what level of tax they would have to pay leads me to believe that this is truly a giant step towards tax complication, not tax simplification. If I remember right, one of the big points of harmonization was to simplify the system, but by bringing it in one step at a time, I'm afraid we're making it hopelessly complicated.
I think it's important to point out that a number of people here have spoken in favour of harmonization, but again, bringing it in one region at a time just makes it hopelessly complicated and I think it doesn't do much for the government's case when they want to sell this across the country.
I'll let the parliamentary secretary deal with the issue of supply, but I do want to follow up on something that was raised by the home builders, Mr. Lind.
Mr. Lind, I trust that new home construction would be a big part of the Nova Scotia economy. I would suggest that it probably employs a lot of people and constitutes a big part of the overall economy. Is that right?
Mr. Lind: Yes, indeed, Mr. Chair. It's about 8% to 10% of the economy.
Mr. Solberg: And probably people have concerns about unemployment in Nova Scotia, as they do across Atlantic Canada and indeed across the country.
Mr. Lind: Indeed.
Mr. Solberg: And I suppose this won't do a lot for concerns about unemployment.
Mr. Lind: No, but the structure is there so that it could do something positive about it, I think, if it were followed through in that fashion.
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Mr. Solberg: You mean if there were rebates that came through?
Mr. Lind: If we were to look at the structural role and implement a system of improved rebates and of closing loopholes it actually might improve the economy.
Mr. Solberg: What would be the impact, in your judgment - or maybe you've done a study, because KPMG has done a study for just about everybody so far - on your industry if you don't get these rebates and indeed people are stuck bearing, if not 4.5%, 3% of the increase on new homes? What will be the impact on your industry?
Mr. Lind: Indications from KPMG are that there will be about 200 housing starts fewer than what might normally be expected, and perhaps as many as 2,000 jobs fewer.
Mr. Solberg: Really.
Mr. Lind: That's spread throughout the renovation as well as the new home construction industry.
Mr. Solberg: I'm curious to know, when you talk to people in the finance department and lay these things out for them, what kind of response are you getting?
Mr. Lind: As we indicated, that was the KPMG report. The provincial government and the federal government have used their own set of assumptions and figures. They feel that what has been put in place will help to mitigate a possible effect of the increased tax and they're looking for a neutral result to these taxes with their rebate system. We feel the assumptions were perhaps false, or at least not based on past experience.
Mr. Solberg: I want to turn to the subject of tax-in pricing for a moment. We've had a few people suggest that perhaps now is not the time to proceed with tax-in pricing. I think Mr. Ruffell mentioned that, and I believe Ms McCutcheon mentioned it as well, and there may have been others. I guess this really makes the point, and we've heard this I don't know how many times already in these hearings, that people have said that they can live with harmonization, and indeed there are aspects of it they embrace, but they're very curious to know - or maybe I'm putting words into people's mouths - why we are pursuing tax-in pricing at this point when obviously it's not going to be to anyone's benefit and it's only going to complicate things. So I want to make that observation. If people want to comment further on tax-in pricing, so be it, but I do want to mention again that it seems to be proceeding despite everybody who's being affected by it speaking out very loudly against it. I'll just leave it at that, Mr. Chairman.
The Chairman: Mrs. Brushett.
Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman.
I'll direct my first question to Mr. Lind, in terms of the construction industry in Nova Scotia. Since the PST will come off all construction materials, will that not be a positive message to the construction industry, or very helpful?
Mr. Lind: As we indicated in our remarks, the PST coming off certain aspects does not balance out what the expanded base is going to be covering. So the net effect is not a neutral effect on the cost of a house.
Mrs. Brushett: However, with the rebates to first-time home buyers and the federal program that's in place as well, which is an incentive for new construction, collectively and cumulatively, is there not a positive gain here, so that we should see the construction industry in Nova Scotia actually doing very well under this?
Mr. Lind: It's certainly in the right direction, but we feel it doesn't go far enough to even make a neutral effect on the taxes. We feel it's a step in the right direction, but the legislation and so forth need to be amended and regulations put in place so as to make that rebate applicable to renovation as well new home construction. Right now, it's only for new home construction or what is called substantial renovation, and the definition of that is so tightly defined that we're having trouble finding anyone who's qualified for a substantial renovation rebate.
So we feel that the structure is there, but it certainly can be improved so as to make it indeed a neutral effect. And if it went even further it could actually stimulate the economy and indeed provide a stronger economic base for the entire province and all the good effects from that.
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Mrs. Brushett: I'm glad you brought in those words, ``stimulate the economy'', because I think KPMG has done so many reports for so many people, and I think that was one of their fundamental reports to the Province of Nova Scotia - that it would indeed create thousands of new jobs through general and broad economic stimulus. This is in terms of manufacturing and construction and the various sectors of the economy. That was a fundamental premise as to why this was a good tax.
Mr. Lind: I think they've factored that into our figures, but the effect on our particular aspect of the industry is not positive. I think John may have some figures he'd like to add to that.
Mr. John Kenward (Chief Operating Officer, Nova Scotia Home Builders' Association): Mr. Chairman, if I may speak to this very briefly, the 1.5% rebate that is being provided for in the province of Nova Scotia will not offset the additional costs that are involved here. When KPMG did its calculations, they took into account some of that offset. We're still below where we should be in relation to the rebate.
I would like to say that it is my position here today, in the context of the Nova Scotia representation, that in fact we have a triple problem. What has been said here today in relation to Nova Scotia also applies to New Brunswick, where there are no rebates at all at the moment, and in Newfoundland as well, where there are no rebates at all for either new home construction or renovation.
I would just mention one another thing, which we're not going into in detail today, and that is that the rental sector is also harmed by the form harmonization is taking in all three provinces.
Mrs. Brushett: I have one further question, if I may, to the Alliance of Manufacturers and Exporters, Brian Collinson. You've brought up some excellent points, and I want to explore them a little further. You talk about an extended and more lenient time period of the phase-in. We've heard this from other people. Is this realistic? Do you think we could achieve our end results here by giving that extension?
Mr. Collinson: I think Mr. Pye will answer that question for us.
Mr. Glen Pye (Chairman, Subcommittee on Commodity Tax, Alliance of Manufacturers and Exporters of Canada): Our discussions with our members have indicated that regardless of whether tolerance is provided or not, the timeframe's not available to fully comply.
The key thing should be to ensure the government doesn't have a revenue loss. Get the numbers right, make sure the tax is collected, remit it, so at least the dollars are flowing the right way. If there are some compliance aspects that maybe relate to documentation or other aspects, you can look after those after the fact, but on April 1 let's get the numbers and the tax dollars right. That's really the key issue. If we can provide some tolerance on the issues that aren't monetarily related, maybe we can work on those after the fact to get them in place as well and make sure there's full compliance down the road.
It's virtually impossible. There's been next to nothing coming from Revenue Canada to date. Obviously there have been extensive dealings with the Department of Finance, but that tends to be only the more high-profile organizations. There are many businesses out there that are going to be obliged to collect HST that aren't even aware of it. There's really very little out in the public domain that would give them good guidance on what they should be doing.
I think we should focus on getting the tax dollars correct and perhaps letting some details slide. It's unfortunate, but the timeframe we're dealing with is just too tight to accomplish everything in a couple of months' time.
Mrs. Brushett: There are a couple of other concerns of the alliance. On page 2 of your report you're recommending that the HST application be similar to the current GST, where it's based on the location of the recipient of the service rather than the location of the supplier. Would that take care of some other problems as well that have been enunciated here today?
Mr. Pye: That's one option. I'm sure there's no one solution that will solve everyone's problem. But typically, if we go back to current supplier's records, you usually know where the recipient is located. It's something that's easier to determine than the default provisions that exist under the current recommendations. I think you would find the vast majority of companies would find it a much simpler process if it were based on location of the recipient who's enjoying the service.
Mrs. Brushett: Okay. If it can be simpler, we're all for that - aren't we, Mr. Chairman?
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The second point you make is the issue regarding exporting members located in the harmonized zone and the cashflow problems. This comes up repeatedly. Would it work if we used the 30-day compliance, so that GST-HST is rebated within the 30-day period? Revenue Canada must have that cash back to the business within the next 30 days so that there is a constant turnaround and the cashflow is maintained for both parties. Would it work if we were able to do something like that?
Mr. Pye: I think the programs within the current GST could take care of it, including the one you've talked about. There are also some offset provisions with other taxes. But we're somewhat concerned that Revenue Canada might not be totally up to speed on April 1. There are start-up businesses and businesses that are in a constant refund position, and this cashflow is crucial to them. It's mandatory that Revenue Canada be up to speed and that it make sure the current mechanisms within the GST work to ensure they're getting their refunds back, as required by law, or within the timeframes that are current under the GST.
Mrs. Brushett: Are most of your members happy with the turnaround time now with Revenue Canada?
Mr. Pye: I think most of the members who have good compliance generally can accommodate the GST and have found ways to use it to their best advantage, so that they're not out of pocket for too long a period. So I think it's working, but when you bring in something new such as the HST, things seem to fall apart on occasion, and that's what we're concerned about, particularly that there has been so little discussion to date with Revenue Canada, and really they're just getting some of the rules now. I'm certainly sympathetic to them. It's not going to be an easy task to accommodate these changes in such a short timeframe, but it's crucial for the success of some businesses.
Mrs. Brushett: So what you're really concerned with is the efficiency of Revenue Canada and not the fact that businesses are now tying up 15% as opposed to 7.5% and maybe borrowing more and having more charges, and so on.
Mr. Pye: We are somewhat concerned about the 15%, but we haven't been able to identify a fix that might solve that problem generally. So at least if the current mechanisms are working, I think we'll accommodate or solve most of the problems. There still will be the odd business that obviously has a bit of a cashflow hit as a result of the HST implementation, but without causing many other complexities within the GST we haven't been able to come up with an easy solution.
Mrs. Brushett: Thank you, Mr. Chairman. I'll pass for now.
The Chairman: Thanks, Mrs. Brushett.
Ms Whelan, did you want to add anything? Mr. St. Denis?
Ms Whelan (Essex - Windsor): I have just a brief question, Mr. Chairman. I just want to pick up on something Mr. Pye said, and I'll direct this to Ms West.
You raised the fact that brokers would be disadvantaged based on those that have clearance places in the provinces. If it was deemed that regardless of where the broker is or where the clearance is, it was based on where the good was going, wouldn't that solve that problem and take away those disadvantages competitively?
Ms West: I'll let Mr. Fisher answer that one.
Mr. Tom Fisher (Second Vice-President, Canadian Society of Customs Brokers): If we target it based on where the goods are going, that presents difficulties because of the fact that a lot of drop shipping takes place, so the vendor of the goods in Canada can have those redelivered to any other province in Canada after they cross the border. So the goods may be purchased or imported by a vendor in one of the HST provinces, but those goods could end up in Alberta as well as in Nova Scotia.
So where the importer is located presents some difficulty. That's why we have advocated that since commercial goods, the department has said, cannot be tracked at time of arrival at the border and therefore it's up to the importer to self-assess, if the importer is self-assessing on the goods - because only the importer really knows at the time those goods cross the border where they're going - then it makes it consistent and simple for the importer to self-assess on the fee at the same time.
Ms Whelan: So it's not a problem, then, when the importers self-assess? I'm not following this.
Mr. Fisher: If the importers self-assess it's not a problem, because then it's very simple and very consistent, and it's very easy for us to program our systems to handle that. If we have to determine whether taxes apply based on either point of release or where an importer is located, then that poses difficulties, because then we're dealing with the goods in one fashion and the fee in another.
The Chairman: I understand that. Do you?
Ms Whelan: I'm fine with that. I'm just not sure I'm following your concerns here regarding where you want to end up.
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Mr. Fisher: We would like to end up with this. On non-commercial goods, if the broker is applying HST on the import of the merchandise, he should also assess HST on the fee. Because it's a commercial importation and we don't know where the goods are going, if HST is not going to be attached to the goods at time of importation and the importer is going to assess whether those goods end up in an HST province, then similarly the importer should be assessing on the fee. So he treats the single invoice that he receives for us, for our services plus our disbursement, in exactly the same way.
Ms Whelan: Okay, I understand. Thank you.
The Chairman: Thanks very much, Ms Whelan, for clarifying that matter.
Mr. St. Denis.
Mr. St. Denis (Algoma): Thank you, Mr. Chairman.
Thank you for being here to help us through a very tricky subject.
I'd like to ask Ms Robinson-Gow or Ms Hutner about the issue of the goings-on between manufacturers and distributors, which provide distributors with certain incentives on behalf of manufacturers and maybe even vice-versa; I don't know. This can take many forms. Does it even include coupons, the coupons that customers -
Ms Bev Hutner (Senior Manager, Taxation and Insurance, Kraft Canada Inc.; Food and Consumer Products Manufacturers of Canada): No.
Mr. St. Denis: Okay, but there are many different types of incentives. You refer to them as reverse supplies. Many different kinds of arrangements can take place between distributors and manufacturers.
You mention in your brief on page 3, ``No government revenue benefit arises with strict compliance and no shortfall from lack thereof''. You suggest that Revenue Canada isn't seeing it from the revenue-neutral perspective but rather from an administrative or bureaucratic perspective.
I wonder if you could help us to understand better why there would be that kind of insistence on the administration of GST in a reverse supply situation and why it could be that we could ignore those, because the net result at the end of the day is zero net cashflow anyway in terms of the sales taxes?
Ms Robinson-Gow: I'll start and then maybe Bev can fill in.
One of the problems is there are different kinds of allowances and our marketing people create them. Their names and their impacts are fairly creative, so it's pretty hard to put a label and say this is a certain kind of allowance and this is another kind of allowance.
The second problem relates to that. That taxation requires you to treat a price reduction allowance in one fashion and an allowance that has a so-called performance element in another, completely opposite fashion.
Mr. St. Denis: Which might be a cheque in the mail?
Ms Robinson-Gow: A price reduction allowance is typically a volume rebate. In other words, you pay it to the distributor who orders a certain quantity. The other kind of allowance might be paid to a distributor who not only orders goods from you but agrees to feature them in a flyer, along with other goods. Because he's agreed to do that activity, it's considered a service he's performing for you, and therefore it goes into this other realm of taxation, which requires you to do something totally different.
The problem runs into complexity because you can't always draw the line. For example, if a distributor agrees to buy a certain quantity of goods from you and simply feature-price them, he's only reducing the price the same as you've done, but just that simple agreement to feature-price them might take it out of the price reduction treatment and into a so-called service treatment.
The parties to the transactions are GST registrants, and all of us who pay tax get it back, but when Revenue Canada comes in, they don't really have much revenue to get from us, because it's all in and out, so they start asking, ``Have you considered these allowances exactly right under the law, and if you've paid an allowance, is it really a volume discount or does it have this peripheral service component?'' They try to -
Mr. St. Denis: Tax the service.
Ms Robinson-Gow: - find that you've done it wrong.
What happens is they might raise an assessment against you, and then, because you're a registrant, you go to your customer and get it back from him. It all washes out in the end, but in the meantime the auditors have spent a lot of time on it, both parties to the transaction have spent a lot of time on it, and nobody wins anything, because there's no extra revenue gain.
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So our problem could be resolved on these cooperative merchandizing allowances if they could simply be treated as price discounts. We'd treat them all in the same way. We wouldn't have to involve our customers when paying them; we'd simply deduct them from the price of taxable goods. It's a simple solution and it doesn't result in any revenue loss.
Mr. St. Denis: Thank you, Mr. Chairman. I thought that was important, and they made a good point.
The Chairman: That's very important.
Would the department find that acceptable, Mr. Campbell?
Mr. Campbell: It's certainly something we'll have to look at, Mr. Chairman.
The Chairman: Mr. Solberg.
Mr. Solberg: I think I have a solution to the cashflow problem. What should happen is if they're late getting that money back, they should be put in jail for 30 days.
The Chairman: Or pay a fine of $5,000.
Mr. Solberg: Absolutely.
Some hon. members: Oh, oh!
Mr. Solberg: Actually I wanted to ask a question of Ms McCutcheon. She touched on something we've heard and talked about before, but I want her to expand on it.
It has to do with two issues. One is the issue of retroactivity, and I think you also touched on the issue of the department having these broad, sweeping powers under this legislation to go ahead and make some changes. I wonder if you could expand on that a little bit, just so we understand what is the ambit of change that they might be able to engage in.
Ms McCutcheon: There's a specific provision in the bill that will allow the department to bring in changes by means of regulation, and that is any time up until two years after implementation. Then the regs can be in effect I think until May 1, 2000.
But in effect it's a double-edged sword. Because this legislation is going through so fast and there are a lot of problems - place of supply being a prime one that we've all talked about - it allows the department and taxpayers and their advisers to work with the legislation to change it and simplify it without having to go through a technical amendment in a bill.
From that perspective it can be very positive, but the concern is it will be used as a taxing provision, what Department of Finance has on occasion called ``clarification'', as opposed to what other people have viewed as a very significant new taxing provision. That's where the double-edged sword comes in.
We think it should be narrowed so it can't be a ``clarification'' that is in fact a new tax, just because the rule as originally written wasn't quite working. We think those should go through the normal process and be subject to a bill and a review before they can be implemented.
Mr. Solberg: Absolutely. I agree with you.
Could you expand on retroactivity as well? What were your concerns? You mentioned that, I believe. Or did you? Maybe I'm having a dream. Maybe it was somebody else. It's been a common theme.
The Chairman: It was definitely Ms McCutcheon who mentioned retroactivity.
Ms McCutcheon: The only context in which I referred to retroactivity was the one we just mentioned, the provision on the regulation. In a sense we're trying to have our cake and eat it too by saying we want it retroactive if it's a clarification - fixing a rule that doesn't work - but don't use it as a way to tax people without having to go through due process.
Mr. Solberg: I will say it one more time. This issue of retroactivity has been raised here numerous times. I know people from the department are here and Mr. Campbell is here, but we should mention again just for emphasis that it's not a very good way to proceed.
The Chairman: And Mr. Campbell will change it for us, I know.
Mr. Solberg: Good.
The Chairman: Mr. Pomerleau.
[Translation]
Mr. Pomerleau: My question is for Mr. Lind or Mr. Kenward. The report you have tabled today is based on a KPMG investigation that shows we will experience price increases in new homes and renovation. Can we assume these findings of a study in Nova Scotia apply similarly in all the Maritime provinces?
[English]
Mr. Lind: In response to your question as to whether the KPMG study about the increased costs of home construction might apply to the other maritime provinces, we asked KPMG to look specifically at Nova Scotia. I think the overall situation in the other provinces is similar enough that the general trend could be applied to the other provinces, but I would hesitate to apply the specific figure to each of the other provinces.
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In particular, the recognized increase in cost for a new home, according to the provincial government, would be only about 1.5%. KPMG indicates that in Nova Scotia it would be 4.5%. I think that could be applied to the other provinces. That's why the provincial government is offering only a 1.5% rebate and that is why we are asking for a 4.5% rebate.
I think the other provinces have also been struggling to get a recognition of the increased cost of new homes as well as renovations, and seeking action in the legislation to assure the neutrality of the effect of the tax and to keep a zero increase.
Did you have something to add, John?
Mr. Kenward: Mr. Chairman, KPMG did studies in the other provinces as well. The numbers are slightly different, but it's really the same story.
Mr. Pomerleau: But they're not neutral.
Mr. Kenward: That's correct. In the case of Newfoundland, the provincial government refuses to even contemplate discussion about rebates. In New Brunswick the same situation exists. The provincial government has allocated the sum of $5 million for the purpose of discussing some type of one-year relief for either the new home construction side or the renovation side. But $5 million is an amount that would not mitigate the effect for either sector. The concern we have here is that it's not a rebate; it's in the form of a one-year program. So a year from now we're stuck with the same problem again.
The impact is very large on new home construction, renovation and the rental housing sector in each of those provinces. The situation is that there's not a satisfactory rebate system in any of them to offset the increased costs that are going to occur in each of those sectors in each of the three provinces.
[Translation]
Mr. Pomerleau: Before I became a member of Parliament, I worked quite a few years in the construction industry, which is an extremely complex area. It is very difficult to compare and estimate construction costs of different types of houses depending on their use and the construction techniques. It is being suggested here to have harmonization, which is in itself quite complex, to construction. Thus, two complexities are being compounded.
I just spent five minutes going through this report, but can you tell me, after studying it, that you are satisfied it gives an accurate picture of the real facts.
[English]
Mr. Lind: Mr. Chairman, the complexity of both the accounting and the construction that the hon. member has been involved with is one of the reasons we have to hire people such as those around the table. That's why our costs are going up. There was only 7% tax on your fees before and now it's going to be 15%.
The Chairman: But you do have confidence that the study prepared by KPMG is basically correct.
Mr. Lind: Yes, we do, Mr. Chairman. We opened our books to their auditors so that they could get real-life figures. We have confidence in that.
[Translation]
The Chairman: Thank you, Mr. Pomerleau.
[English]
Mrs. Brushett.
Mrs. Brushett: I have one brief question to the Canadian brokers' association. I want to understand a bit more about the concerns you have with your brokerage fees. I'm wondering about two points and also about your concerns with what you refer to as casual or non-commercial goods.
What percentage of your business is non-commercial or casual, which you are raising these concerns about? Is it a small percentage or is it very significant? Second, what is the range of your fees that you are now concerned with?
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Mr. Fisher: As far as the percentage of casual importation is concerned, for the majority of our members casual imports probably represent less than 2% or 3% of our business.
That really isn't the issue we're trying to address. What we're trying to address are the commercial importations and the fact that an importer will have to treat a transaction from two points of view: one, whether he self-assesses on the goods based on where the goods are eventually being delivered, and the fact that he has to self-assess or we have to charge him on the fee. Therefore, he has to take the necessary steps to capture that charge on the fee even though he might not have any dealings whatsoever in one of the harmonized provinces.
If point of release is the determination of whether the HST applies on our fee, that means a broker in Alberta with a customer in Alberta who is releasing goods in Halifax because commercially it is quicker to get those goods released at point of arrival and then delivered to the manufacturing facility, that broker would have to charge his Alberta client HST. Neither of them is going to be involved in any transactions in the HST province. That's one of our concerns: that there becomes a consistency with the treatment of the fee and the commercial goods being imported.
The other thing is that we've always worked closely with Revenue Canada over the years. Revenue Canada is reallocating its resources. First point of arrival makes sense from Revenue Canada's point of view and it makes sense from the importer's point of view, but to avoid having to deal with the HST issue and the programming that entails and the capturing of the ITC that entails, the inland broker will probably elect to have those goods move in bond to the destination as opposed to being released in Halifax.
The majority of the goods coming over the port of Halifax or St. John's are not destined for the Atlantic provinces. They're destined for inland points. We feel there can be a disruption there of what we think is the ideal way to deal with imports and of what I think the department feels is the ideal way to deal with imports.
Mrs. Brushett: But I believe Revenue Canada will still insist that the first point of entry is the point of transaction. Isn't that the rule at the present time?
Mr. Fisher: For the present time that's what they're stating. I think that complicates the matter as opposed to simplifying it.
The Chairman: Mr. Lind, Mr. Kenward, I take it that the problem we're facing is that it's not the GST component that's changing, but the fact that we have additional provincial taxes.
Mr. Lind: Mr. Chairman, also the base is expanding because of that system and the recognition of everyone that we can accept harmonization as long as it's neutral, simple, fair and effective. With each of those areas we need to look at how to improve the implementation system so it does achieve those things.
The Chairman: But it's not the present GST component that is the difficulty.
Mr. Lind: We've had difficulties with that. John can -
The Chairman: But I know it has been discussed in the past with the home builders that the 4.5% tax we charge is not really equivalent to the old FST.
Mr. Lind: That's true. We feel a little short-changed on that one.
Mr. Kenward: The situation, Mr. Chair, is that we still have our concerns about the GST. That's the homebuyer rebate and the definition of substantial renovation.
The Chairman: I wanted to deal with the issue of substantial renovation. Have you been working with Revenue authorities to see if we could come up with a definition that would be satisfactory? This has been an ongoing problem throughout the life of this tax.
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Mr. Kenward: We certainly have discussed it with Revenue Canada. They have listened to us and reminded us that this topic of discussion deals with tax policy and therefore they have nothing to say about it.
The Chairman: Have you had discussions with Department of Finance officials about that?
Mr. Kenward: Yes, and the response has always been the same: to draw the line in legislation between what is a substantial renovation and what is not involves complexities they would rather not have to deal with.
The Chairman: So there are no ongoing discussions on this particular issue?
Mr. Kenward: We never take no for an answer, as you know, Mr. Chair, so we keep consulting and keep raising the same issues in the hope that one day we can get beyond no.
The Chairman: Good for you.
Mr. Collinson, in spite of the uncertainties that exist regarding the new law, you are very much of the opinion we should not postpone implementation beyond April 1, that we should proceed and then try to catch up as quickly as we can, applying leniency principles throughout.
Mr. Collinson: That's absolutely correct, Mr. Chairman. We believe that the HST should be implemented on April 1. We believe that it is a positive step in the right direction. We would of course like to see harmonization rolled out across the entire country, but we certainly believe that moving forward with the implementation on April 1, 1997, is the right thing to do and that leniency should be extended in a reasonable manner.
The Chairman: We have the customs brokers here, who were quite adamant that April 1 is too soon. Could you go along with April 1, providing we have intensive ongoing discussions with officials and leniency principles are applied?
Ms West: That certainly sounds preferable to going on with April 1 period. I think that what we're asking for is clarification immediately with respect to some of the issues we've raised. The idea of leniency and continuing discussions sounds good to us.
The Chairman: Good. I'm sure Revenue Canada can have all the rules in place by April 1. They don't have anything else to do at that time of year.
I was going to suggest that because so many of your submissions related to the difficulties and complexities surrounding the supply rules, maybe Mr. Campbell could respond to them in terms of the promotional allowances, the taxation of services, which someone pointed out is very complex, five chapters, the brokers' issues, and anything else Mr. Campbell might want to comment on.
Mr. Campbell: The chairman is being a little devilish, ladies and gentlemen. He's throwing down the gauntlet that I should turn to him as a former tax practitioner to explain all of the above.
The shock, Mr. Chairman, is I will try to respond, on behalf of the government, to what has been an excellent exchange of views among the panelists and members of all the parties. A number of issues have been raised, and I would like to respond in the hopes of shedding some light on some of them.
Mr. Chairman, your summary was excellent a moment ago in suggesting that moving forward while continuing to be mindful of the complexities and how one reacts to getting used to new rules and new changes should guide us.
I'm going to respond. I'll try to lump some of these things together. I've asked Ms Whelan to respond to some of the issues that have been raised by the customs brokers. Anything that comes anywhere near a border goes to my friend, Ms Whelan, who is from a border community, a border riding. I wouldn't go anywhere near the border.
Let's talk, though, about place-of-supply rules, Mr. Chairman, in response to the concerns that have been raised by our witnesses today. As members will understand, as I know you do,Mr. Chairman, the place-of-supply rules are necessary in a partially harmonized system. When you have different rates applying, then you have to have some opportunity to deal with that. And in response to Mr. Solberg, even in a national system, given that the province of Alberta has no sales tax, you would still need place-of-supply rules. A national system would not eliminate the need for place-of-supply rules. As long as you have two different rates, you're going to have that issue to deal with.
Now, without getting into it in too much detail, seeing that I only have 45 minutes,Mr. Chairman, until the panel -
The Chairman: Take your time, Mr. Campbell.
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Mr. Campbell: It's fairly straightforward in most cases, as witnesses will understand, but it's complex in others. The complexities arise where services are performed in more than one province. The choice then is whether to place the supply where the service provider is located or, as some of you have suggested, where the recipient is located. Now, reasonable people can disagree, but it is felt by the government that going with where the recipient or the customer is located is more complex and more complicated, because that requires an understanding of where your customer is resident, which is often difficult to determine. In most cases, as I said, most service providers don't have a problem, but where you're dealing with certain kinds of services there are these problems.
I want to focus on two particular issues, one that Ms Robinson-Gow raised on promotional allowances. And while the chairman was trying to catch me a little bit, he has forgotten that my background is as a competition lawyer, among other things. So I know more than I ever wanted to know about promotional allowances and rebates and all of that, but I never realized I'd get into it from this perspective.
There are some issues there, and you've raised them very clearly and coherently. I understand that consultations are ongoing with the department, as you said in your opening remarks, which I think will resolve the outstanding issues - and you've raised some very good ones.
The problem, I think, in your last discussion with Mr. St. Denis with respect to zero tax revenue at the end of the day.... Hearkening back to my days as a lawyer, part of the problem is you never know if your customer is going to reach the volume or what's going to happen. So sometimes it's not clear whether at the end of the day you have no revenue. But without getting into this, those consultations are ongoing, and I'm sure that will result in a satisfactory arrangement.
Mr. Ruffell also talked about some particular concerns. I know the department - I've spoken to officials who are here - would be pleased to sit down and talk to you. They were not aware of the particular concerns you raised. There may well be alternatives for specific industries that we should be taking a look at. As Mr. Pye said, it isn't one size fits all. There may not be one set of rules that would satisfy everyone. So if you've not already been speaking with finance department officials I'll be pleased to introduce you after this panel, because they should be made more directly aware of the issues you raised today.
Mr. Chairman, of course witnesses can respond to any of this, but let me move on to a couple of other areas.
On implementation and complexity, yes, we hear you loud and clear. We're making some changes here. There are some complexities readily acknowledged. I think you can expect a great degree of administrative tolerance or administrative leniency. I wouldn't hesitate at seeing the committee recommend to Revenue Canada that they exercise that leniency, mindful of some of the complexities here.
As witnesses will know and members know, I made it clear that with respect to tax-inclusive pricing there's going to be a further period beyond April 1 at which point there will be monitoring but no enforcement - more education taking place. I think it's not too much to expect that with respect to place of supply and some of the other complexities we will see similar tolerance and leniency.
I also want to reiterate what you alluded to earlier, Mr. Chairman, which is that after the issue was raised in one of our panels yesterday with respect to the possibility that one might be labelled as engaging in criminal activity due to inadvertence, we responded immediately yesterday to say that will be changed. There will be no danger of somebody stumbling into a criminal record because they've inadvertently done something or have misunderstood what may be a complex rule.
The Chairman: Except for accountants.
Mr. Campbell: Except for accountants, who should know better. But we look forward to an ongoing dialogue, and you've contributed enormously to it.
Let me come then to the third item, which is tax-inclusive pricing. CICA recognized this as the consumers' choice but clearly said that there are some concerns, some problems.
No one addressed the guidelines that were issued on Friday, which people are just digesting now, allowing for bin pricing, shelf pricing, dual pricing. These have gone a very long distance towards addressing many of the greatest concerns. Yesterday we heard from the Canadian Federation of Independent Business, which said as much and recognized that the guidelines have answered outright many concerns and have gone a long way towards meeting others.
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Let me come to the next item, Mr. Chairman, which is proposed section 277.1, the regulation-making authority, the delegation of authority to cabinet and the concerns that have been expressed.
Yesterday I clarified for the record how limited that provision is. It does not permit a change in the rate or the base without coming back to Parliament, without legislation. It is designed to ensure, as I think Ms McCutcheon pointed out, that we can go back and clean up things that haven't been done quite properly in light of this move to harmonization. And it is quite limited to the system of harmonization and not beyond it.
I want to reiterate, Mr. Chairman, that the retroactivity Ms McCutcheon expressed concerns with will be addressed in amendments to be presented to this committee. There will be no retroactive regulations resulting in an enhancement of tax. That was responded to yesterday.
Before I turn to Ms Whelan, one of the problems as I sat here and listened to the discussion on housing was that when we're focused on a piece of legislation and on a particular provision that affects one's industry sector, there's a tendency to look at the sector in a vacuum and to look at the changes before you and be overly focused sometimes on what those changes mean. It's inevitable. It happens to all of us.
But of course these changes are not taking place in a vacuum. If one really wanted to know what was going to happen to the housing industry, one would have to look at the effect of lower interest rates: actual housing starts up, resales up. What's having that impact? Now add to that what drag, if any, might occur from the changes you see being made.
I know the Canadian Home Builders' Association is working very closely with Revenue Canada on the whole area of the underground economy, fraud and the home-building industry, because that's also a factor you've spoken to.
On your concern primarily about the level of the rebate, this is a provincial rebate that the provincial government is offering. You're essentially saying to us that it's not enough. It may not be, but I hope you are discussing the matter with the province, as it's not a federal rebate. It is a provincial rebate.
Those are my comments, Mr. Chairman. I would say in closing - and I would be happy to hear any reaction - that this has been an extremely useful panel this afternoon. I look forward to working with all of you in the months ahead as we move forward.
Ms Whelan is going to speak to the customs broker issues you have raised.
Ms Whelan: This is an issue near and dear to my heart, coming from Windsor. I just want to clarify a couple of things that were brought up today and the questions I asked.
As we all know, for the harmonized sales tax to work well it needs to have a wide similar base for efficiency and effectiveness. It's one of the original problems with the GST. As we come to common ground on that, the no HST already on the imported goods, as you know, is a major concession. To go further with no HST on services would be out of line, in my opinion, with similar services in the Atlantic region and would go further to distort the base.
That said, however, I think there are other options available. Port of release doesn't necessarily have to mean point of entry or port of entry. You can carry the goods under bond to the closest port of release, which you do now. I don't agree that goods coming into Halifax would necessarily have to be released in Halifax to arrive in Alberta. Customs brokers in my area would tell me that's the whole reason they have offices all over the country. They don't do that, bring them in one place and then ship them all over the place.
So there are different things and different ways to work around it. The department is obviously still willing to sit down and discuss things with you, but we do know that self-assessment is not always an effective way to collect tax. We have to work together.
The Chairman: Mr. Lind, you had words of praise for Mr. Campbell's comments.
Mr. Lind: There was a question indirectly addressed to us, Mr. Chair, and I'd like to respond to it.
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We appreciate the detail of following along on our request for rebate, but we also want to make sure people understand there are specific federal jurisdictions that we think can be addressed: the definition of ``substantial rebate'' and also the definition of the threshold for GST registration. If we continue with the $30,000, we have a very large loophole, big enough to drive a pickup truck through.
The Chairman: Do you see a lot of individuals who come under that, or claim they come under it, and therefore don't have to charge the GST on renovations?
Mr. Lind: We suspect there is a very large number, because there's an awful lot of work being done that we can't see the taxes being collected on. That's why the federal tax collectors are so busy trying to chase them down as well.
The Chairman: Thank you.
Mr. Solberg: I have a very brief comment in response to something Mr. Campbell said.
He made reference to the CFIB being in support of some of the measures that were brought in on Friday. I think there was a very mild approval of what went on, and I think other members of the CFIB who were at the table at the time that comment was made probably were less warm to that idea. Other people will be coming forward who I think will also indicate they don't have as warm a feeling for those changes as has been suggested.
Mr. Campbell: With all due respect, let's not engage in anticipatory testimony. Let's wait to see what the witnesses have to say.
Can I ask something, Monte?
Mr. Solberg: Go ahead, Barry.
Mr. Campbell: I want to ask Mr. Lind a question so I make sure I understand.
Your reference to the threshold means you'd like to see a lower threshold?
Mr. Lind: We think there should perhaps be a zero threshold for registration. What level you insist upon collection can still be discussed.
Mr. Campbell: I don't know if I want to open up that discussion here.
The Chairman: But I think we should be prepared to consider it, not with respect to all enterprise, but maybe it's one approach to dealing with the underground economy in the construction industry itself, which maybe can be given unique treatment.
Mr. Kenward.
Mr. Kenward: Mr. Chairman, I'd like to respond to one or two things referenced byMr. Campbell, if I may.
Number one, I'd like to take this occasion to say we have extraordinarily good working relationships with Revenue Canada. We're extremely pleased about that relationship with respect to the underground economy. Next week we will be starting consultations with the Department of Finance, and we hope this moves us beyond ``no'' on certain matters.
One of the things we are very concerned about here is this notion of looking at our particular sector within the context of a broader frame of reference; it's not in a vacuum. I'd like to assure this committee that is exactly what is being done.
The concern we have is that these consultations have not been detailed enough, in relation to the discussions between our provincial associations and the provincial authorities, to get the combination of the specific sector consideration - the housing industry - and the broader frame of reference.
There has been a tendency on the part of one side of the table, which is in fact the provincial side, to be concerned far more with the broader frame of reference to find the rationalizations and justifications for proceeding with matters that affect the particular sector. We're saying we would like to have seen a heck of a lot more work done on the relationship rather than a discussion on taking broader issues to justify specific matters.
It's very important for this committee to know that though this falls within the context of a provincial responsibility and authority vis-à-vis rebate, the outcome is going to have a profound, negative impact on the housing industry in those provinces. To the extent that the federal government was involved in the development of this proposal, at the end of the day they should be concerned about the outcome for a very important industry in that part of the world.
The Chairman: Of course we're concerned; there's no doubt about it.
Ms Brushett.
Mrs. Brushett: Thank you, Mr. Chairman.
I have just one follow-up, since you brought up the point about the underground economy and the possibility of every construction company having to register and what Revenue Canada then determines is the minimum level before the HST becomes applicable.
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Do you have figures? Other than the statement you made just a few moments ago that we know there's business going on and we don't see the tax benefit happening, do you have any broader facts or figures to assume this would correct the underground economy in the construction industry? It's very important that we look at this a little more broadly if this is a factor that might potentially resolve the issue.
Mr. Lind: It certainly is a substantial factor in both revenue collection and also equitability across the whole industry.
All we have are anecdotal references. I would hope the figures Revenue Canada has been collecting would give them some idea as to how much activity is out there and how much is not being collected in taxes. I would not venture to suggest a figure.
Mrs. Brushett: But you believe this would be a correction to that problem?
Mr. Lind: It would be a move in the right direction, I believe, to have across-the-board registration and then determining at what level taxes would be collected and remitted. It would help level the playing field, as we say.
The Chairman: Are there any comments from any of our panel in response to Mr. Campbell or others? Ms McCutcheon.
Ms McCutcheon: Yes, I have a couple of points to make in reference to Mr. Campbell's points.
One was the tax-inclusive pricing and the guidelines that were released on Friday. I shortened my introduction and took out references to that. I was pleased to see the bin and shelf-pricing concession, because that does help for pre-priced goods, but the one I just can't get by is the national advertising, be it print or media. I'm sure you'll hear more from groups that will be here tomorrow about the inordinate cost of having to run dual campaigns.
I have a lot of advertising clients who represent the companies that are having to decide to rerun campaigns for a 30-second airtime or double up on print costs and run the ads in more than one way if it has to go tax-inclusive. I just don't see a way around that until you get full harmonization at a single rate. I know that's one you're still going to be discussing with the Retail Council of Canada and others, but it's a real problem. That's a personal viewpoint.
The point I'll make wearing my CICA hat for the commodity tax committee is on the place of supply. I know you referred to the comments Mr. Ruffell made, and I think they were very valid points, but I would caution you about taking too much of an industry-by-industry approach. If you have too many industries where there are problems, then there's a general problem.
As I know the alliance has, we have had extensive discussions with the Department of Finance to try to find ways to simplify the rules. I know the theme from the Department of Finance has been equity - not disadvantaging suppliers in the region - and therefore the theme of national treatment, but we really struggled with the services rules.
We in fact had also suggested a recipient test. It isn't perfect, but nothing is, and a recipient test is what's in there right now. Anytime we deal with non-residents, we're used to a recipient tax. Now you're turning it on its head and making suppliers have to deal with two different sets of place of supply rules. It is creating the need to track information that previously wasn't tracked.
In the discussion the CICA had with the Department of Finance in that regard, the Department of Finance had a concern that a recipient test could create too much leakage, that too many services were portable. When you look at large areas where the tax revenues are coming from, I would suggest that should be re-looked at.
You have a special rule for financial institutions. The MUSH sector isn't that portable. Then you get into a lot of commercial activities where it's supposed to be in and out - it's not supposed to be a tax that sticks - and yet it's creating inordinate problems. It's virtually unworkable for non-residents, whom I've been trying to work through the rules with.
I don't disagree with what Mr. Ruffell said, but it's a much broader problem.
The Chairman: Ms Robinson-Gow.
Ms Robinson-Gow: I would like to add a couple of points to things that were alluded to briefly in some of the presentations.
One point was harmonization with Quebec. I know Quebec has made an announcement that they will harmonize a number of the place-of-supply rules, but they haven't provided any details whatsoever. It goes as basic as where title passes and where the jurisdiction of tax lands on goods, and when you get into services it's well beyond that. So it's very encouraging that Quebec has agreed to harmonize, but I think it's important for the rest of us.... Some of the tax impacts hit on February 1, and I think it's really important to get details out about just exactly what they're harmonizing on.
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Secondly, I'd like to pick up on the comment somebody made about Revenue Canada providing information soon. When the GST was implemented there were all kinds of hot lines and taxpayer information opportunities and questions could be submitted to Revenue Canada. I really think there should be some more public information to help the small guy.
The Chairman: Just on that latter point, I know that the CFIB, in conjunction with our officials, is working on a whole package for education suppliers.
If that's all, let me thank you on behalf of all members who were here. As Mr. Campbell said, I think this has been an extremely informative hearing for us. From listening to you we've learned things we probably didn't realize.
In terms of the home builders, it's a tough issue, because it's not just us alone. But you're quite right, we have to be concerned about the overall impact - and we are.
The rest of you - and maybe I'm being presumptuous in trying to summarize - have spoken very enthusiastically about the need to harmonize and to harmonize throughout all of Canada. Many of you have devoted many hours through your member groups to encouraging this process and to bringing it about.
All of you have come here today with some of the problems we face at the current time, some of which relate to partial harmonization. We realize that it is not the ideal solution. It's not as good as full harmonization, but it's a step on the road. And we realize, as you do, that it's going to be more difficult for our businesses and consumers until we achieve this overall goal.
You've come here today with some very concrete proposals to us as to how we might simplify these rules, make them easier to comply with. I am very impressed that the parliamentary secretary and the Department of Finance and all of us are prepared to work with you to learn more from you and to take advantage of your knowledge and your special circumstances to find ways to simplify these rules and make them more workable as we go along.
We're not approaching this as a finished tableau. We consider it to be a work in progress. This is why I accept what Mr. Collinson and Ms McCutcheon and others said about the need to begin the job, because it is beneficial for all Canadians - this is the reason for the implementation date - but for us to do so with an attitude of humility and of searching to continually improve it for your advantage and for the advantage of all Canadians. This means that we will have to work with you on a very comprehensive ongoing basis and accept what you've asked for in terms of leniency or tolerance in the administration and the further development of the rules that affect all of us.
This is not the usual way we do tax law. We usually announce them and they're effective as of the moment they're announced. The law comes down and there's usually very little debate about it. But I'm seeing a new type of approach in Canada, and it's certainly something I am proud to be a very small part of, as I think are all members of this committee. We don't have all the answers, but we are called upon to make very difficult decisions and we have to approach that responsibility with the humility that we are going to make mistakes. But that can't deter us from acting.
We must not penalize people because of those mistakes. We must continually try to improve on what we're doing. I think with your help in approaching it from that point of view we will go a long way to overcoming many of the problems you've talked to us about today.
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On behalf of all members, I thank you. And we welcome working with you in the future, as we have in the past, particularly as we have today. Thank you very much.
We will adjourn until three o'clock, or maybe a little bit sooner. Thank you.