Canadian Heritage Committee on Dec. 1st, 2016

[The Vice-Chair, Conservative, Larry Maguire]

Good morning, everyone. I'd like to welcome you to the 41st meeting of our House of Commons Standing Committee on Canadian Heritage.

I want to welcome our witnesses this morning: from the Department of Finance, we have Sean Keenan, director, sales tax division, tax policy branch; and from the Canada Revenue Agency, Danielle Laflèche, director general, excise and GST/HST rulings directorate, legislative policy and regulatory affairs branch.

Thank you very much for attending this morning. I'll turn it over to you in a moment for your opening remarks, and then I will allow seven-minute sessions back and forth. That's seven minutes for the questions and the answers. I look forward to your presentations and the information you can share with us so that we can work it into the report that we'll be making on rural and remote areas and communications.

With that, I will turn it over to Mr. Keenan, who is the first witness on our list.

[Sean Keenan, Director, Sales Tax Division, Tax Policy Branch, Department of Finance]

Thank you for inviting me to appear before the committee to discuss the application of Canada's national sales tax, the goods and services tax/harmonized sales tax, well known as the GST/HST, to supplies of digital products.

As the chairman said, I'm Sean Keenan. I'm the director of the sales tax division in the tax policy branch at the Department of Finance. Among my responsibilities, I oversee the policy and design elements for the GST/HST system.

The GST/HST is a broad-based tax intended to apply to most goods and services that are consumed in Canada. The broad tax base ensures that the GST/HST is fair, efficient, and simple.

Vendors who supply taxable goods and services are generally required to register and collect the GST/HST from their customers and then remit the tax collected to the Canada Revenue Agency. The tax is also generally levied on imported goods and services in the same manner as it is levied on domestic purchases. This helps to ensure that imported goods and services do not have a competitive advantage over goods and services sold in Canada.

The GST, or the federal component of the HST, is currently levied at a rate of 5% across Canada. The Provinces of Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador have elected to harmonize their provincial sales taxes with the federal GST. In these five provinces, the GST is levied as part of the HST at a joint federal-provincial rate of 13% or 15%, depending on the particular province.

E-commerce and Internet sales are an emerging and rapidly growing aspect of consumption in Canada. Under the GST/HST, Canadian businesses, as well as foreign companies that carry on business in Canada, are generally required to register and collect tax on their Internet sales of goods and services to Canadians where the items are to be used in Canada.

E-commerce sales by foreign-based companies can present a challenge for proper sales tax collection. Foreign-based Internet vendors' businesses with no physical presence in Canada are generally not required to collect GST/HST on their sales. Instead, in the case of physical goods that are purchased online and shipped to Canada by post or courier, the applicable customs duties and GST/HST would generally be collected by the Canada Border Services Agency at the time the goods are imported.

In cases other than the importation of physical goods, the GST/HST legislation imposes a general requirement to self-assess the tax. For businesses that would be entitled to recover any tax payable by claiming input tax credits, there is generally no requirement to self-assess tax on such imports.

The challenges related to the proper collection of sales tax on digital supplies by foreign-based vendors are not unique to Canada. It's a difficult issue for all jurisdictions with a sales tax. In this regard, the issue was examined as part of the recent initiative of the G20 and the Organisation for Economic Co-operation and Development to address what is known as “base erosion and profit shifting”, or BEPS.

In the context of that international initiative, budget 2014 invited input from stakeholders on what actions the government should take to ensure the effective collection of sales tax on e-commerce sales by foreign-based vendors. Specific feedback was solicited on whether foreign vendors should be required to register with the Canada Revenue Agency and charge the GST/HST on digital sales to residents of Canada. The feedback from these consultations helped shape Canada's input and participation in the G20 OECD BEPS project.

The final reports of the BEPS project were issued by the OECD on October 5, 2015, including “Addressing the Tax Challenges of the Digital Economy, Action 1”. The Action 1 report examined issues related to the effective collection of sales tax on cross-border digital supplies and services and recommended that where countries decide to institute a regime for taxing foreign suppliers of digital content, the regime should follow the principles of the OECD's international value-added tax/GST guidelines for these supplies. These guidelines indicate that, at the present time, the most effective and efficient approach to ensure the appropriate collection of VAT/GST on cross-border business-to-consumer supplies is to require the non-resident supplier to register and account for VAT/GST in the jurisdiction of the consumer—essentially, the usual residence of the customer.

Following up on the BEPS Action 1 report, the OECD's Working Party No. 9 on Consumption Taxes is developing a report on mechanisms for the collection of VAT/GST on digital supplies and services by foreign vendors. The report will examine and identify the best practices of jurisdictions that have required non-resident digital suppliers to register and collect tax on sales in their jurisdictions, in order to assist those that are considering doing so. Canadian officials are participating in the development of this OECD report.

Those are my opening remarks. I'd be happy to answer any questions that you have.

[The Vice-Chair, Conservative, Larry Maguire]

Thank you. We'll proceed with Ms. Laflèche and then open it up to questions.

Ms. Laflèche.

[Danielle Laflèche, Director General, Excise and GST/HST Rulings Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency]

Good morning, Mr. Chair. My name is Danielle Laflèche. I'm the director general of the excise and GST rulings directorate at the Canada Revenue Agency. I'd like to thank you for inviting me to attend your meeting.

To set a helpful context for today's discussion, I'd like to briefly describe the role of the Canada Revenue Agency in the administration of the GST/HST. As mentioned by my colleague, the Department of Finance is responsible for developing and evaluating federal tax policy and the legislation through which policy becomes law.

As administrator, the Canada Revenue Agency is responsible for the functions that implement these laws, including: providing information to the public and stakeholders; establishing processes through which individuals and businesses may meet their tax obligations and receive benefits; and, of course, carrying out compliance activities to help ensure that everyone respects the law as intended by Parliament.

The role of the excise and GST rulings directorate within the Canada Revenue Agency, for which I am responsible, is to interpret the GST/HST legislation—that is, the Excise Tax Act—as it is worded. We provide this service to clients over the phone, in person, and by responding to their written requests for rulings and interpretations. I can thus speak about the application of the legislation as it is worded.

Mr. Chair and members of the committee, this concludes my opening remarks. I'd be pleased to respond to your questions.

[The Vice-Chair, Conservative, Larry Maguire]

Thank you very much, Ms. Laflèche.

We'll start the questioning with Ms. Dabrusin, please.

[Julie Dabrusin, Liberal, Toronto—Danforth, ON]

Thank you for coming today.

My questions for the CRA and for Finance are actually a little broader than the GST/HST. I'm hoping that you might be able to help me with some of them.

Some of the witnesses who have come before us—and I'll speak specifically about The Tyee as one example, but there were others—talked about challenges with forming a not-for-profit or a charity to support media. We've been asked to try to consider what some of the different options are that might support media.

Apparently, for charities, there's no legal basis on which a media organization can be granted charitable status in Canada. Is that correct?

[Danielle Laflèche]

Thank you for your question.

The charitable environment is not my area of expertise. I do understand that there are criteria that need to be met to be granted charitable status, but I'm not really in a position to respond to you. I can go back and get the answers for you.

[Julie Dabrusin, Liberal, Toronto—Danforth, ON]

It would be wonderful if you could do that.

[Sean Keenan]

I could say, though, that the definition of a charity comes from the common law. It's not a defined term, but it comes from common law. It covers.... I'm not going to give out the waterfront of what it covers, but the relief of poverty, promotion of education, and religion are generally considered to be charitable purposes. To the extent, then, that you've heard some witnesses say that the promotion of media probably is not considered to be a charitable purpose, that is likely the case. Again, we would have to speak to the experts that...it's not covered by that definition.

[Julie Dabrusin, Liberal, Toronto—Danforth, ON]

If there is a policy direction on that, it would be helpful for us.

Additionally, then, for not-for-profits, I was looking at section 149 of the Income Tax Act, which deals with not-for-profits. My understanding, when we were given evidence by The Tyee, was that they do have a foundation that is tied to their operations. My question is, within the tax act, is there an opportunity to create foundations to support media organizations? If not, what would be the change we would need to make from a statute perspective in the Income Tax Act? That might be another “bring it back to me later” point.

[Sean Keenan]

I think that's going to have to be the case. Foundations generally.... Charitable foundations would need to have a charitable purpose. Again, it would swing back to what's the definition of the foundation's charitable purpose.

[Julie Dabrusin, Liberal, Toronto—Danforth, ON]

I was also looking at the not-for-profit sector as another opportunity, with section 149 being the section I was directing it to.

I'm going to share my time with Mr. Vandal, so I will pass it over to him.

Thank you.

[Dan Vandal, Liberal, Saint Boniface—Saint Vital, MB]

Merci beaucoup.

Are you aware of any provinces across Canada that use the tax credits successfully as a way to facilitate and encourage Canadian content in media production or television production?

[Sean Keenan]

I know that film and video tax credits exist in certain provinces. I couldn't comment on the efficacy of those credits. There is one at the federal level as well. It's not really my area of expertise, but I know that some provinces have film and video production tax credits.

[Dan Vandal, Liberal, Saint Boniface—Saint Vital, MB]

Could you tell us about the federal tax credit?

[Sean Keenan]

Unfortunately, no, not in any great detail.

[Dan Vandal, Liberal, Saint Boniface—Saint Vital, MB]

Several of our witnesses have suggested that we study ways to encourage innovation in digital media using a tax credit. Others have suggested that we use a tax credit to help the production of local news on television or, as something that's suffering, in newspapers. Do you have an opinion on those suggestions?

[Sean Keenan]

I don't personally. Again, generally those credits are something that would fall under the income tax side. There would be income tax credits that are offered. At this time, I would say that in the last budget the government announced a review of the tax expenditures that exist in the tax system to ensure they are properly targeted, well functioning, serving, as fair and efficient as possible, and as simple as possible. A number of tax credits that exist are under review as part of this tax expenditure review, but in terms of the efficacy of proposals for new credits, I wouldn't be able to comment on that.

[Dan Vandal, Liberal, Saint Boniface—Saint Vital, MB]

Thank you.

[The Vice-Chair, Conservative, Larry Maguire]

Our next questioner will be Mr. Waugh.

[Kevin Waugh, Conservative, Saskatoon—Grasswood, SK]

Thank you, Mr. Chair.

Thanks to both of you for coming today.

This is complex for us, as you can see, but I'm going to pick up on Mr. Vandal's point, because for the last several months we've heard, as you know, that media everywhere in this country seem to be in a bit of trouble, whether it's newspapers, radio or TV, digital, or whatever. Tax credits have been mentioned here for those forums. That would be intended, I guess, to support the communications industry in the process to shift to digital.

You've mentioned that probably you personally don't have many thoughts on this now, because it has just been floated here in the last little while, but what would be the recommendation to create this new tax credit for the purchase of advertising in traditional Canadian media? We haven't seen this before: tax credits for television, newspapers, radio, and so on, and now we have the new digital. What would that look like if it did get rolled out? Do you have any thoughts on that?

[Sean Keenan]

I would say generally that the work of the Department of Finance, certainly in the tax policy branch, is to examine proposals that the government asks us to examine and also other aspects of the system. When we look at proposals to introduce new tax credits or new aspects of the system, we're looking at it from the tax policy perspective to see how that is going to promote fairness and efficiency in the tax system. The perspective that we generally take is that a broad-based tax system that allows for low rates and doesn't distort economic decision-making is usually the best kind of system.

We also look at administrative issues. How would a tax credit be designed? How would it be best designed to serve the purpose? Is the design of a tax credit going to be the most effective way to lead to the desired outcome? Oftentimes, tax credits are.... The tax system has a broad application, so if you're targeting a single area and you use a broad instrument like the tax system, you may be supporting things that businesses might do anyway, in which case you're going to provide a windfall gain to economic actors who would have undertaken certain action anyway. You're not going to change their behaviour, because they would have acted that way. In that case, that might not be most targeted way to support the activity.

I think in the area of.... Newspapers are a thing that people know, and you could sort of say that here's something that people understand, how they're produced, and where they're bought. I think that when you go into the digital aspect, again, for the design aspects on how it would apply and how it would affect... Because it's such a cross-border thing and it's a different type of media, those aspects would become important elements of any proposal. How would it work? How would you target it? How would you ensure its effectiveness? Those are all the considerations that we certainly would look at from the view of the Department of Finance in assessing any policy proposals brought forward.

[Kevin Waugh, Conservative, Saskatoon—Grasswood, SK]

Yes. Do you have any thoughts on the amount this would cost the federal government if we went to the tax credit? I know that we don't have a structure, but obviously this would cost millions.

[Sean Keenan]

I think the cost would certainly depend on the scope of the credit and what it would apply to. Without the specific details, that would be something that I certainly couldn't comment on.

[Kevin Waugh, Conservative, Saskatoon—Grasswood, SK]

Okay.

Ms. Laflèche, I have a question for you. At our meeting on November 15 of this year, we had with us Mr. Jason Kee, counsel, public policy and government relations, from Google Canada. He said:

On the question of the GST, which Mr. Nantel flagged, I'll quickly explain that it's a function of the structure of the tax. GST, remember, is a tax [really] on consumers.

It's not a tax on the businesses. It's a tax on consumers.

He said: It's payable by consumers, not by Google, by a retailer, by whoever. CRA has rules. In the case where you're serving services from outside of the country, you're not required to register, collect, or [even] remit GST.

Is this true? Are consumers themselves required to submit the GST on the service?