Bill C-48 (Historical)

An Act to amend the Income Tax Act (natural resources)

Income Tax Act

[Bryon Wilfert, Liberal, Parliamentary Secretary to the Minister of Finance]

Madam Speaker, I appreciate my colleague's intervention more than he knows.

I will go over the four provisions again: Canadian exploration expenses, Canadian development expenses, Canadian oil and gas property expenses and capital cost allowances determine the timing of reduction for capital expenditures. These provisions recognize the risks inherent to the large investments required for resource exploration and extraction and play an important role in ensuring a competitive business environment.

Also, there are two targeted income tax vehicles: the Atlantic investment tax credit that supports resources development and other investment in Atlantic Canada; and flow-through shares, which are designed to support junior exploration firms.

As well, the 15% mineral exploration tax credit was introduced in October 2000 as a temporary measure to moderate the impact of global downturn in exploration activity on mining communities across Canada.

The 25% resource allowance was introduced in 1976 to effectively put a ceiling on deductions in respect of rapidly increasing provincial and other crown royalties and mining taxes. This allowance functions as a proxy for actual royalties and mining taxes paid to provinces.

The government recognizes that the resource sector tax regime can generate greater investment and jobs for Canadians if it achieves these three goals. First, the sector must be internationally competitive, particularly within the North American context. Second, it must be transparent for firms and investors. Third, it must promote the efficient allocation of investment both within the resource sector and between sectors of the Canadian economy. I believe the measures in Bill C-48, which would be phased in over five years, meet these goals.

As we know, in a global economy with intense competition for capital, a tax system with a lower tax rate, applied uniformly across all sectors with a simpler and more efficient tax structure, is far more effective than one with a higher rate of tax applied on a less efficient tax base. Bill C-48 would address this issue by reducing the federal statutory corporate income tax rate on income earned from resource activities from 28% to 21% by 2007.

The federal statutory corporate income tax rate is important because it is often the first piece of information viewed by prospective investors. A uniform, low statutory rate sends a positive signal to investors in Canada and internationally about Canada's relative competitiveness. In addition, a single rate reduces compliance and tax administration costs. The resource tax package will result not only in more competitive tax rates but also in a more competitive tax structure.

I would like now to look at changes relating to crown royalties, mining taxes and the resource allowance. As hon. members may know, the existing tax structure disallows the deduction from income of crown royalties or mining taxes. The resource allowance can either exceed or be less than non-deductible royalties and mining taxes for a specific project annually or over its economic life.

The resource allowance also introduces complexities in the tax system, thus adding to the cost of compliance and administration. It operates in economic conditions that have changed significantly from those that gave rise to it in the 1970s and earlier 1980s. Oil and gas markets are now deregulated and international competition for exploration and development capital is more robust.

All these factors put pressure on producers to be more efficient and, on host jurisdictions, to levy royalties and mining taxes at competitive rates.

By providing through this bill a deduction for the actual amounts of provincial and other crown royalties in mining taxes paid and eliminating the resource allowance, projects will now be treated in a more comparable fashion. This means that investment decisions will be based more consistently on the underlying economics of a project.

When fully implemented, this measure will result in a tax structure that imposes the same corporate tax on resource income as on other corporate income, and one that also allows deductions for actual costs instead of an arbitrary allowance.

These changes with respect to the resource allowance and royalty deductibility present important structural improvements to the treatment of costs in the resource sector.

Another measure introduces a new 10% mineral exploration tax credit for corporations incurring qualifying mineral and pre-production exploration expenses before a mine reaches production in reasonable commercial quantities. The new tax credit will be available only to corporations and will not be refundable or transferable under a flowthrough share agreement or through a partnership or trust. It will apply to both Canadian grassroots exploration and pre-production development expenditures for diamonds, base or precious metals, and industrial minerals that become base or precious metals through refining.

I should point out that this new tax credit is not to be confused with the 15% temporary mineral exploration tax credit that Bill C-28 is extending to the end of 2004. That credit is only available to individual investors in flowthrough shares. It was introduced as a temporary measure, as I mentioned earlier, to moderate the impact of the global downturn in exploration activities on mining communities across Canada.

Bill C-48 also includes special transitional arrangements. I will provide a little background at this point.

Following the budget announcement that the government intended to improve the taxation of resource income, on March 3 the Minister of Finance released a technical paper on the proposed changes.

The government reviewed the changes with industry and the provinces. Further to these discussions the government made two changes to the transition provisions of the new tax structure.

The first change will achieve a better measure of taxable resource and non-resource income for the purposes of applying the general corporate rate reduction during the transitional period by utilizing resource pool deductions in the determination of resource income.

The second change targets the Alberta royalty tax credit, ARTC, transitional relief set out in the technical paper to get a greater number of small and medium size producers. The Alberta royalty tax credit, as many hon. members know, is one of the most significant refund programs for crown royalties. Under this program the province of Alberta refunds a minimum of 25% of the first $2 million in crown royalties paid by each corporation or group of corporations.

A special transitional measure will reduce, during a 10 year transitional phase-in period, a portion of the refund that must be included in income tax for tax purposes. It will be available to individuals who receive the ARTC and to taxable Canadian corporations that pay no more than $2 million in Alberta crown royalties. Taxable Canadian corporations that may pay more than $2 million but less than $5 million of Alberta crown royalties will be eligible for a reduced amount of special transitional fund.

This new measure will further assist smaller corporations in their transition to the new tax structure. Both the general five year transition and the 10 year ARTC transition will provide investors with the certainty they need when making investment decisions.

There will be several benefits to the changes implemented through the bill. These changes will increase Canada's international competitiveness in oil and gas and in mining. As I indicated earlier, they will result not only in more competitive tax rates but also in a more competitive overall tax structure.

Regardless of how a firm's tax base is affected by the removal of the resource allowance and deductibility of crown royalties, all resource firms will benefit from a lower rate of corporate income tax. The oil and gas sector will pay less federal corporate income tax as a whole as a result of this change. Similarly, it is anticipated that the new taxation regime for mining, which includes the new pre-production mining tax credit for corporations, will result in a lower tax burden for that sector. For the most part there has been strong positive feedback on these proposed changes from industry organizations.

When these measures are fully phased in, it is estimated that the annual revenue cost to the federal government will be about $260 million.

There is one more important element of this bill that I would like to discuss. Bill C-48 also includes a measure that will enhance the treatment of the Canadian renewable and conservation expenses, the CRCE. These expenses are associated with the development of certain renewable energy and energy efficiency projects. The measure will also allow corporations to renounce Canadian renewable and conservation expenses to flowthrough share investors in a year where the CRCE will be incurred in the subsequent year.

This change was proposed in a July 26, 2002 Department of Finance news release. It will apply to qualifying renewable energy and energy conservation projects and will provide greater flexibility in the timing of investments financed through flowthrough shares. The treatment of flowthrough share investments in such projects will now parallel that of investments in non-renewable energy projects.

This new tax structure will achieve what it is designed to do. It will improve the international competitiveness of the Canadian resource sector, in particular relative to the U.S. It will promote the efficient development of Canada's natural resource base by establishing a common corporate income tax rate for all sectors and by treating costs more consistently, both across resource projects and between the resource sector and other sectors of the economy. It will simplify the taxation of resource income, streamline compliance and administration, and send clearer signals to investors.

This is a very important new regime. It will build upon Canada's tax advantage to support investment, innovation, productivity, growth and jobs for Canadians. I would urge all members of the House to support this bill.

[Bryon Wilfert, Liberal, Parliamentary Secretary to the Minister of Finance]

Madam Speaker, I appreciate the opportunity to present Bill C-48 for second reading today.

The bill would implement federal income tax changes that were announced in the 2003 budget for Canada's resource sector, comprising the mining, oil and gas and fertilizer industries.

The 2003 budget takes concrete comprehensive action in several areas to build the society that Canadians value, the economy that Canadians need and the accountability that Canadians deserve. Included in the budget are measures to help Canadian business become even more competitive in the North American and global economies.

This new structure for federal income taxation of the resource sector reflects the government's ongoing commitment to an efficient and competitive corporate income tax system.

As hon. members know, a better economic performance for Canada tomorrow requires a more productive, innovative and sustainable economy today. Our tax system plays an important role in creating a stronger, more productive economy.

An efficient tax structure can enhance incentives to work, save and invest. It can also support entrepreneurships and the emergence and growth of small businesses. In addition, a competitive tax system is critical in encouraging investment in Canada, which leads to greater economic growth and job creation.

That is why the government launched a five year $100 billion tax reduction plan, the largest in our history, which has strengthened the foundation for economic growth and job creation in this country.

Among other things, it lowered the general federal corporate income tax rate from 28% in 2000 to 21% in 2004. With the tax cuts implemented to date, the average federal-provincial corporate tax rate in Canada is now below the average in the U.S.

The 2003 budget builds on the Canadian tax advantage for investment.

Several measures that will benefit the resource sector were included in Bill C-28, the Budget Implementation Act, 2003, which received royal assent last June.

These measures include: eliminating the federal capital tax over five years, a move that will strengthen Canada's tax advantage for investment in the capital-intensive resource sector; increasing the amount of annual qualifying income eligible for the reduced 12% federal small business tax rate from $200,000 to $300,000; and extending the existing temporary 15% mineral exploration tax credit until December 31, 2004, and providing an additional year for issuing corporations to make expenditures related to these arrangements.

When fully implemented, the measures in the legislation we are debating today, Bill C-48, will require that firms in the resource sector are subject to the same statutory rate of corporate income tax as firms in other sectors and that they will be able to deduct actual costs of production, including provincial and other Crown royalties and mining taxes.

Before discussing the measures in detail, I would first like to put them in context.

The resource sector is an important generator of investment, exports and jobs for Canadians, indeed, a significant component of the Canadian economy. In 2001, for example, the resource sector accounted for almost 4% of Canada's GDP, with over $64 billion in exports and more than $30 billion in capital expenditures. Over 170,000 Canadians work in resource businesses.

As well, the sector in general, and the mining industry in particular, is vital to rural and northern economies, while the oil and gas industry, long important to western provinces, is now also a significant economic presence in Atlantic Canada.

The potential for future resource development exists in virtually every region of the country. Moreover, Canadian resource industries are large investors in innovative technology and major participants in the provision of exploration and extraction services internationally.

Historically, income earned in Canada from the extraction and initial processing of non-renewable resources has been subject to special tax treatment. There are three main reasons for this.

The first is that resources are key economic assets. Since the development of non-renewable resources can create significant economic and social benefits, there is a strong initiative for governments to design a sound, economic and fiscal framework for large capital investment requirements.

The second reason underlying the tax treatment of the resource sector is that governments have come to accept that there is a specific set of risks and benefits inherent in the business of resource exploration and extraction. The tax treatment acknowledges that the resource sector is operating in a distinct environment.

The third reason underlying this special tax treatment is the direct competition for international investment dollars. Historically, international capital has been critical to the development of our resource industry. Competition for this capital, including Canadian capital, is increasingly intense.

I would like to review for members the current income tax provisions that are specific to the resource sector.

There are four provisions: Canadian exploration expenses, Canadian development expenses, Canadian oil and gas property expenses--

[Anne McLellan, Liberal, for the Deputy Prime Minister and Minister of Finance]

moved that Bill C-48, an act to amend the Income Tax Act (natural resources), be read the second time and referred to a committee.

Business of the House

[Don Boudria, Liberal, Minister of State and Leader of the Government in the House of Commons]

Mr. Speaker, I will be pleased over the following weeks to continue to elaborate on the program from now until December 12 for the benefit of the hon. member and for anyone else. More specifically, about the following week, I wish to express the following by way of the business statement.

This afternoon, we will continue with the debate on the opposition motion.

Tomorrow, the House will return to the motion to refer Bill C-49, the electoral boundaries bill, to committee before second reading. This will be followed by Bill C-45, the corporate liability bill, or Westray bill if you like, and Bill C-34, the ethics commissioner bill.

On Monday, we will begin with bills not completed this week, Friday in particular. We will then proceed to Bill C-46, respecting market fraud, Bill C-50 respecting veterans, Bill C-17, the public safety bill, and finally Bill C-36, the Library and Archives of Canada bill.

Tuesday will be an allotted day.

On Wednesday and Thursday, the House will begin consideration of Bill C-48, respecting resource taxation, and will then return to any of the business just listed that has not been completed.

Supply

[Paul MacKlin, Liberal, Parliamentary Secretary to the Minister of Justice and Attorney General of Canada]

Madam Speaker, I welcome the opportunity to speak to the motion put forth by the hon. member for Joliette. While I commend the hon. member for bringing this matter to the attention of the House, I am unable to support the motion.

Following my remarks I am confident that hon. members may well share my views. In the time allotted to me today I want to focus on two issues. First, I want to set the record straight about the government's commitment to tax fairness and tax equity. Second, I want to review with hon. members why Canada has a network of tax treaties or tax conventions, as they are often called, in place.

Let me begin with the tax fairness and tax equity. Since the beginning of our mandate back in 1993, two of the government's ongoing priority areas continue to be sound fiscal management and fairness in our tax system. The government is fully aware that better economic performance for Canada tomorrow requires a more productive, innovative and sustainable economy today.

Our tax system plays an important role in creating a stronger, more productive economy.

An efficient tax structure can enhance incentives to work, save and invest. It can also support entrepreneurship and emergence and growth of small businesses.

In addition, a competitive tax system is critical in encouraging investment in Canada, which leads to greater economic growth and job creation. That is why, in the budget in 2000, the government introduced its five year $100 billion tax reduction plan, which is the largest tax cut in history.

The tax reduction plan is putting in place a tax advantage for business in Canada as a basic part of the strategy for fostering a strong and productive economy. With the tax cuts implemented to date, the average federal-provincial corporate tax rate in Canada is now below the average U.S. rate.

The 2003 budget builds on that tax reduction plan to further improve the tax system and enhance incentives to work, save and invest.

Hon. members will recall that Bill C-28, the Budget Implementation Act of 2003, received royal assent in June. That bill contained several measures that improve the tax system. We will soon be debating Bill C-48 which introduces a new tax structure for the resource sector to make it more internationally competitive, again a measure that stems from that 2003 budget.

I can assure hon. members opposite that the government remains committed to a fair and equitable tax system, one that is reasonable and compassionate and that we will continue to introduce measures as appropriate to ensure that this commitment is met.

This brings me to the topic of today's motion, that is the tax treaties or conventions. Our tax treaties our tax treaties are there to assure us of how Canadians will be taxed abroad. At the same time, these treaties assure our treaty partners of how their residents will be treated in Canada.

Canada, as we have already heard today, has over 70 tax treaties in place. This speaks volumes to the work behind the scenes on behalf of the government to set up this extensive network.

Canada's tax treaties are all designed with two general aims in mind: first, to remove barriers to cross-border trade and investment; and second, to prevent unintended tax results by encouraging co-operation between Canada's tax authorities and those in other countries.

International trade and investment decisions can be influenced by the existence and terms of a tax treaty and their importance in this regard should not be overlooked. Tax treaties do not impose tax nor do they generally restrict countries from taxing their own residents as they see fit under their domestic tax laws. Among other things, however, tax treaties set out the rules under which one country can tax the income of a resident of another country. This is particularly important for traders, investors and others with international dealings who are interested in doing business in Canada. It is only natural that they would want certainty as to the tax implications associated with their activities here and reassurances that they will be treated fairly.

The importance of eliminating tax impediments to international trade and investment has grown even more important now that the world economy has become so intertwined. It should not, therefore, come as any surprise that it can be advantageous to have tax treaties in place with other countries.

One of the most disconcerting things to a taxpayer is unrelieved double taxation, in other words, to have income taxed twice when the taxpayer lives in one country and earns income in another. Without a tax treaty, both countries could claim tax on the income without providing the taxpayer with any measure of relief for the tax paid in the other country.

To alleviate the potential for double taxation, tax treaties resort to two general methods. In some cases, the exclusive right to tax particular income is granted to the country where the taxpayer resides. In other cases, the taxing right is shared but the state where the taxpayer resides is obliged to eliminate double taxation by providing relief for the tax paid in the other country.

Put another way, tax treaties reduce the frequency with which taxpayers of one country are burdened with the requirements to file returns and pay tax in another country when they are not meaningful participants in the economic life of that country or where it would be a nuisance for them to do so.

Withholding taxes are also a common and important feature in international taxation. In Canada's case they were applied on certain income, for example, interest dividends and royalty payments that Canadian residents make to non-residents. Withholding taxes are levied on the gross amounts paid to non-residents and generally represent their final obligations with respect to Canadian income tax. Without tax treaties, Canada usually taxes this income at the rate of 25%, which is the rate set out in our domestic law or, more precisely, under the Income Tax Act.

Our tax treaties specify the maximum amount of withholding tax that can be levied by Canada and its treaty partners on certain income. These rates are almost always lower than the 25% rate provided for in the Income Tax Act.

I now want to turn to the second objective of tax treaties, namely that of preventing the unintended tax results by encouraging co-operation between Canadian tax authorities and those in other countries.

The most obvious unintended result from a tax administrator's perspective is that of tax evasion or avoidance. Like their predecessors, tax treaties are also designed to encourage co-operation between tax authorities in Canada and in the treaty countries to prevent tax evasion or avoidance.

Treaties are an important tool in protecting Canada's tax base as they allow for consultations and the exchange of information between our revenue authorities and their counterparts in these eight countries.

Because of tax treaties, tax authorities are able to deal directly with each other to solve international transfer pricing issues, to reach satisfactory solutions to concerns raised by taxpayers, to complete audits and to engage in other discussions aimed at improving tax administration.

But there are benefits. Many positive benefits ensue for taxpayers and businesses alike from tax treaties. For example, taxpayers benefit from knowing that a treaty rate of tax cannot be increased without substantial advance notice.

Investors and traders benefit from the atmosphere of certainty and stability that the mere existence of tax treaties will foster.

Our tax system works more effectively with the introduction of mechanisms to settle disputes. Our expanded tax treaty network generates more international activity which impacts favourably on the economy. Of course, assurances against unrelieved double taxation are always applauded by taxpayers.

In concluding my remarks, Canada's network of tax treaties with other countries is one of the most extensive of any country in the world. Canada's exports now account for about 40% of our annual GDP. Further, our economic wealth also depends on direct foreign investment as well as inflows of information, capital and technology.

Clearly the impact of tax treaties on the Canadian economy is significant. Without these international agreements, double taxation can adversely affect economic relationships between countries, mainly because tax treaties are directly related to international trade in goods and services and therefore impact directly on our domestic economic performance.

Let me reiterate: The passage of tax treaties results in many meaningful benefits for taxpayers, benefits that include a more simplified tax treaty system, a more stable environment for investors and traders and most important, the elimination of double taxation that might otherwise result in harmful international transactions.

Given the success of the existing tax treaty system and its contribution to creating fairness and equity in the tax system, I feel that the premise of today's motion is not relevant and I am unable to support it.

Income Tax Act

[Don Boudria, Liberal, for the Minister of Finance]

moved for leave to introduce Bill C-48, an act to amend the Income Tax Act (natural resources).

(Motions deemed adopted, bill read the first time and printed)

Copyright Act

[The Speaker]

The Chair is satisfied that this bill is in the same form as Bill C-48 was at the time of the prorogation of the first session of the 37th Parliament. Accordingly, pursuant to order made on Monday, October 7, the bill is deemed adopted at all stages and passed by the House.

(Bill read the second time, considered in committee, reported, concurred in, read the third time and passed.)

[Sheila Copps, Liberal, Minister of Canadian Heritage]

moved for leave to introduce Bill C-11, an act to amend the Copyright Act.

Mr. Speaker, this bill is in the same form as Bill C-48 from the first session of this Parliament and, in accordance with the special order of the House of October 7, 2002, I request that it be reinstated at the same stage that it had reached at the time of prorogation.

(Motions deemed adopted, bill read the first time and printed)