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Briefing binder created for the Deputy Minister of Finance on the occasion of his appearance before the Standing Senate Committee on National Finance (NFFN)

Table of contents

Meeting Scenario and Background

Bill C-59, Fall Economic Statement Implementation Act, 2023

Background

Bill C-59, Fall Economic Statement Implementation Act, 2023, was passed by the House of Commons on May 28 and formally referred to the Senate (TBC).

On May 9, the Standing Senate Committee on National Finance (NFFN) began a subject matter study of the bill (i.e., "pre-study").  NFFN heard from various witnesses, including Finance and other departmental officials, as well as stakeholders.

Below is an overview of key stakeholder positions on Finance-led measures based on submissions provided to NFFN. Senators often take up the concerns expressed by stakeholders, and can therefore be expected to ask about them at the May 29 meeting.

Table 1
Stakeholder Views on C-59 Finance-Related Measures
Stakeholder Position Rebuttal
Clean Technology Investment Tax Credit
The Canadian Chamber of Commerce (CCC) recommends including intangible property and mine development investments in the Clean Technology Manufacturing Tax Credit, and extending the timeline for phasing out the Clean Technology Manufacturing Investment Tax Credit and Clean Electricity Investment Tax Credit.
  • Enabling legislation for the Clean Technology Manufacturing (CTM) and Clean Technology investment tax credits (ITCs) are not contained in Bill C-59; enabling legislation for the CTM ITC is in Bill C-69, and draft legislation for the Clean Electricity investment tax credit will be released later this year.
  • The CTM ITC was announced in Budget 2023 to support investment in tangible capital property (e.g., machinery and equipment) related to the manufacturing and processing of clean technologies, and extraction and processing of critical minerals key to clean technology supply chains. In general, across all eligible activities, the tax credit does not cover site development costs.  Finally, the tax credit was implemented as part of the government's response to the U.S. Inflation Reduction Act: Clean technology manufacturing tax incentives in the U.S. (Advanced Energy Project Credit and Advanced Manufacturing Production Credit) do not provide support for development expenses or intangibles.
  • In general, the clean economy investment tax credits announced by the government will be available to 2035, which is meant to help stimulate and accelerate investments in order to meet the government's emissions reduction targets, and with the phase-out of clean economy incentives in the U.S. introduced under the Inflation Reduction Act.
Pelican Lake First Nation and Northern Village of Pinehouse recommends that Bill C-59 be amended to include biomass in the definition of "clean technology property" for the purposes of the Clean Technology Investment Tax Credit. According to the organization, the effect of this amendment would be to make installations using waste wood as fuel to generate electricity immediately eligible for the proposed 30 percent refundable investment tax credit, just like solar, wind and water energy.
  • The 2023 Fall Economic Statement announced an expansion of eligibility for the proposed Clean Technology and Clean Electricity Investment Tax Credits.
    • The 30 per cent Clean Technology investment tax credit would include systems that produce electricity, heat, or both electricity and heat from waste biomass.
    • The 15 per cent Clean Electricity investment tax credit would include systems that produce electricity or both electricity and heat from waste biomass.
  • Draft legislation for the proposed expansion of these investment tax credits will be released for consultation in the coming months.
Digital Services Tax (DST)
The Canadian Chamber of Commerce (CCC) argued the DST would impact the affordability of a variety of digital-based services and increase the costs for businesses and Canadians. The CCC also noted that successive US administrations have signaled that enacting a DST could provoke damaging trade retaliation, potentially against key sectors of the Canadian economy.  As such, the CCC is calling for the "punitive and retroactive" application of the DST to be cancelled, and the introduction of a safe-harbour for low-margin businesses similar to OECD Pillar One, Amount A in which there is a safe harbour provision.  Affordability & costs
  • The DST will only be imposed on large businesses with total revenue of at least €750 million and digital services revenue, associated with Canadian users, of more than $20 million. i.e., businesses generally expected to be able to afford this tax.
  • Some companies have purported to increase fees in response to DSTs in other countries, but it's not possible to determine to what extent these price changes are actual consequences of the tax or increases that would have been made in any case.
Trade retaliation / "discriminatory"
  • The proposed DST does not discriminate – it would apply equally to revenue earned by domestic and foreign businesses, and Canada is committed to removing the DST once a multilateral solution comes into effect.
"Retroactive"
  • The Digital Services Tax was first announced in November 2020 and full details were provided in Budget 2021, with draft legislation released in December of 2021.
Safe harbour for low-margin businesses
  • The DST is designed as a simple tax on revenue from monetizing the data and content contributions of Canada users of online platforms, whereas a safe harbour for low-margin businesses would significantly increase the administrative complexity of the tax.
The Retail Council of Canada advocates for the government to stop moving forward with the DST and, to the extent that the DST does move forward, strongly urged the government to remove the retroactive nature of the tax. Instead, they urge the government to commit to working with international partners on a multilateral solution to international taxation.   Multilateral solution
  • Canada supports the multilateral "Pillar One" treaty being negotiated at the OECD; once it is finalized, signed and ratified, the multilateral system will come into effect and Canada's DST will be removed.  
"Retroactive"
  • The Digital Services Tax was first announced in November 2020 and full details were provided in Budget 2021, with draft legislation released in December of 2021.
The Travel Technology Association recommends removing the two-year retroactivity of the DST and have it applied only to revenues that occurred on or after the date fixed by order of the Governor in Council; increasing the DST global revenue threshold to align with OECD Pillar One, Amount A, and include a similar safe-harbor provision (i.e., EUR 20BN revenue and 10 per cent Profit Before Tax  margin); and, allowing credit for DST, or any similar tax, paid in another jurisdiction to avoid double taxation. "Retroactive"
  • The Digital Services Tax was first announced in November 2020 and full details were provided in Budget 2021, with draft legislation released in December of 2021.
Pillar One thresholds
  • The Pillar One Amount A proposal is not a digital services tax. It is a complex coordinated multilateral system to re-allocate taxing rights in respect of the largest and most profitable multinational enterprises. It is not limited to digital corporations.
  • Many design features of this complex multilateral system, including the thresholds, would not be appropriate for the DST which is a simple tax on certain revenue, and not a tax on profit.
Double taxation from DSTs of other countries
  • Canada's DST is designed to apply only to digital services revenue associated with Canadian users. Furthermore, there is no multilateral coordination on DST design. DSTs are simple interim measures – once the multilateral system comes into effect national DSTs will be removed.
Excessive Interest and Financing Expenses Limitation (EIFEL) Rules
Electricity Canada and FortisBC are requesting an exemption from the EIFEL rules for regulated utilities and their holding companies on the grounds that these changes would inadvertently increase costs for utility customers at a time of affordability challenges.
  • The EIFEL rules are part of Canada's efforts to address international tax planning arrangements used by multinational enterprises to reduce their taxes, through limiting excessive debt or interest expenses that can be placed in Canadian businesses in a way that erodes the Canadian tax base. 
  • The proposed EIFEL rules, currently included in Bill C-59, recognize that certain exceptions are necessary and provide for several forms of relief available to any industry to mitigate the impact of the rules, including for industries with higher overall debt levels such as regulated utilities.
Excise Stamps for Vaping Products and Cost Recovery Fee on the Tobacco Industry
Imperial Tobacco Canada welcomes proposed changes to the excise stamping regime, however, are concerned about the timeline for implementation, which they argue is extremely tight.  They have also expressed concerns that the cost recovery fee may have unintended consequences in light of Canada's challenges with illegal tobacco, which they argue may provide illegal operators with an additional competitive edge which could in turn benefit organized crime groups involved in the illegal tobacco trade.
  • Regulations that allowed for the issuance of new province- and territory-specific vaping product stamps were made on May 8, 2024.
  • There is a three-month implementation period to allow for the transition from the current federal-only stamped vaping products, to new province- and territory-specific stamps. As of October 1, 2024, only products bearing the stamps for Ontario, Quebec, Northwest Territories, and Nunavut will be available in those jurisdictions.
  • While the details of the proposed cost recovery framework will be finalized after consultation, it is expected that any price increase resulting directly from the proposed framework would be minimal.
GST on New Residential Rental Property Rebate
The Canadian Chamber of Commerce (CCC) recommends further amendments to the Excise Tax Act to ensure the GST New Residential Rental Property Rebate maximizes creation of housing supply.
  • The Enhanced (100 per cent) GST Rental Rebate is intended to incentivize the construction of new rental developments by making the math work for builders—to help ensure that projects, which may not otherwise have been viable, can move forward.
  • Projects for which construction started before September 14, 2023, were planned for and commenced without knowledge of the enhanced 100 per cent GST Rental Rebate. 
  • Extending the enhanced GST relief to these projects would not stimulate new supply, but rather result in windfall gains for builders of those projects.
  • Applying a transitional rule that is based on when "construction was commenced" is consistent with transitional rules used for the introduction of the original 36 per cent GST Rental Rebate in 2000. 
Intergenerational Business Transfers
The Conference for Advanced Life Underwriting (CALU) recommends prioritizing the passage of Bill C-59 to provide small business owners with certainty in planning for their business succession in 2024, however recommends removing provisions that would ensure that a business is effectively transferred "only once" from a taxpayer to their child, as they believe this restriction would "greatly" diminish the flexibility that appeared to be provided to business owners in structuring their succession plans when the new rules were first announced in Budget 2023.
  • The requirement that a business be transferred only once from an individual to their child is a safeguard to ensure that, after the business has been transferred, the individual cannot engage in successive "surplus stripping" transactions that convert corporate distributions of retained earnings from dividends into lower-taxed capital gains.
  • Under the proposed rules, individuals have the flexibility to transfer a business over up to a 10-year period and to spread their capital gains realized on the business transfer over up to 10 years.

Senators' Positions

Since the bill has not yet been debated in the Senate (i.e., at Second Reading), and proposed measures in the legislation have not been prominently discussed during Senate Question Period, senators' position on Finance-led measures are unclear at this time. 

That said, it is expected that most senators not affiliated with a political party, such as those belonging to the Independent Senators Group, will be supportive of measures in the bill and ask clarifying questions. 

Conservative senators, however, may adopt positions similar to those of their counterparts in the House who have opposed the bill at all stages arguing it would add $23 billion in inflationary spending and does little to address housing affordability. 

Bill C-69, Budget Implementation Act, 2024, No. 1

Background

Bill C-69, Budget Implementation Act, 2024, No. 1, was introduced in the House of Commons by the DPM/MoF on May 2, 2024.

While the bill is formally being debated in the House, the Senate authorized NFFN and other committees to undertake a subject matter study of the bill on May 9. Since then, NFFN and other Senate committees have heard from various departments, agencies and stakeholders on the bill, with a view to report their findings to the Senate by June 10 (note that stakeholder submissions to the committee have not been make public at this time). 

Senators' Positions

As with Bill C-59, Bill C-69 has not yet been debated in the Senate and, as such, senators' positions on the bill are unclear. 

While it is expected that most senators would be supportive of measures in the bill, some issues have been debated during Senate Question Period which senators may take the opportunity to raise during the DPM/MoF's appearance.  The most prominent of these issues is the Canada Disability Benefit (CDB) and concerns around its perceived inadequacy to help lift Canadians with disabilities out of poverty. 

Senator Kim Pate (Independent Senators Group and NFFN member) has been particularly critical of the government for breaking its promise to persons with disabilities that the CDB would be adequate, accessible and available by 2024. She argued the benefit of $200/month would reach, at best, less than half of those with disabilities who live in poverty––which amounts to less that half of what the PBO projected was needed––and would only take effect in 2025. In light of statements by government that this benefit was only a starting point, she questioned how long it would take to ensure persons with disabilities living in poverty receive an adequate amount. The issue of whether the policy would include persons with lifelong episodic disabilities like multiple sclerosis, has also been raised.

The issue of a capital gains tax increase has also received some attention, with Tony Loffreda (Independent Senators Group and NFFN member) questioning who will be affected by the proposed measures. Specifically, the senator noted that contrary to the DPM/MoF's statement that only 0.13 per cent of Canadians would be affected, he has heard that up to 20 per cent of Canadians may be impacted by the policy which he noted may capture many working professionals like doctors and real estate investors who have trusts or incorporated businesses.  In that regard, he may ask for clarification on exactly how many Canadians will be affected and what data was used to make this determination. Additionally, the senator may inquire about the consultation process around this policy stating he spoke with many individuals and entrepreneurs who were caught off guard by the announcement.

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