Environment Committee on Nov. 6th, 2018

[The Chair, Mr. John Aldag (Cloverdale—Langley City, Lib.)]

Good afternoon, everyone.

I'd like to welcome our departmental officials here today.

We set aside the meeting today to look at items that were referred to us from the finance committee on Bill C-86. We've allocated the full meeting today to hearing from our departmental officials. We've been asked to discuss three sections of Bill C-86. We'll go through a standard piece with department officials. I think both Finance and Natural Resources are going to make opening comments, but not Environment Canada.

You have up to 10 minutes for your opening statements. If you need less, that's fine. Then we'll go into our standard rounds of questions, at six minutes each.

Mr. Jovanovic, go ahead.

[Miodrag Jovanovic, Associate Assistant Deputy Minister, Tax Policy Branch, Department of Finance]

Thank you, Mr. Chair.

Thank you, committee members.

I'll say a few words regarding the proposal in Bill C-86 on the climate action incentive payment. My colleague Pierre Mercille will then say a few words about the proposal with respect to GST on emission allowances.

Bill C-86 proposes to amend the Income Tax Act to introduce a climate action incentive. This measure creates a mechanism by which direct proceeds collected under the fuel charge component of pollution pricing under the Greenhouse Gas Pollution Pricing Act can be returned to individuals in provinces and territories subject to the federal pollution pricing system if those proceeds are not returned directly to the government of that jurisdiction.

The climate action incentive payments enabled by this measure will be received by individuals when they file their tax returns for the 2018 taxation year—that is, when they file their tax returns in early 2019.

Calculation of the amount of the climate action incentive payment for an eligible individual will be based on the individual's province of residence and family circumstances, with province-specific amounts to be specified annually by the Minister of Finance. Individuals living in rural areas, defined as areas outside census metropolitan areas as established by Statistics Canada, will receive a supplementary rebate equal to 10% of their baseline entitlement.

Distributions made through this mechanism will be deemed to have been paid as rebates in respect of fuel charges levied under part 1 of the Greenhouse Gas Pollution Pricing Act. This measure can be found in clauses 13, 18(1), 18(8), 18(9) and 19 in part 1 of Bill C-86.

Thank you.

[Pierre Mercille, Director General, Sales Tax Division, Tax Policy Branch, Department of Finance]

Good afternoon. My name is Pierre Mercille, and I am the Director General responsible for legislation in the Sales Tax Division of the Department of Finance. Part 2 of the bill amends part IX of the Excise Tax Act to implement amendments to the goods and services tax and the harmonized sales tax. The measure that I will describe is found in clauses 41, 44, 45, 48 and 53 of the bill.

The measure modifies the way the GST/HST that is payable on a sale of a carbon emission allowance in the secondary market is to be accounted for. These allowances or permits are created by government entities and issued to emitters of carbon and other greenhouse gases. At the end of a compliance period, emitters with surplus allowances may sell the surplus to other companies that have exceeded their emissions target. This is the case under a cap-and-trade system, for example.

The supply of these allowances between companies is taxable under the GST/HST. The amendment does not change the amount of GST/HST payable on such a sale, but it provides that the purchaser of the carbon emission allowance is responsible for self-assessing the tax amount. This replaces the previous requirement whereby the seller of the allowance collected the tax from the purchaser and remitted it to the Canada Revenue Agency.

This brings the Canadian rules in line with how these allowances are generally treated internationally, such as in most EU countries where value-added tax applies and where a cap-and-trade system exists. lt should be noted that the companies purchasing these allowances are generally involved in commercial activities and would be generally allowed to claim an offsetting input tax credit.

That concludes my description of the amendments proposed by part 2 of the bill.

[The Chair]

Thank you, and that was well within the time limit.

We'll now move to the Department of Natural Resources for their statement, please.

[Timothy Gardiner, Senior Director, Offshore Petroleum Management Division, Department of Natural Resources]

My name is Timothy Gardiner, and I'm the acting director general of the petroleum resources branch at Natural Resources Canada.

I am pleased to have this opportunity today to introduce the contribution of Natural Resources Canada to the second act to implement certain provisions of the 2018 budget, specifically with regard to the proposal to amend the Canada-Newfoundland and Labrador Atlantic Accord Implementation Act and the Offshore Health and Safety Act.

Some of these amendments also relate to the federal Greenhouse Gas Pollution Pricing Act, and my colleagues from Environment and Climate Change Canada are here to answer any questions relating to that piece of legislation.

There are two components to these amendments. Clauses 176 to 178 and 181 make it easier to apply the carbon tax in the Canada-Newfoundland and Labrador offshore area in accordance with the joint management framework for offshore hydrocarbons. Clauses 179 and 180 extend the temporary measures on workplace health and safety in the Offshore Health and Safety Act.

The first set of amendments allow for the incorporation by reference of Newfoundland and Labrador's provincial carbon pricing regime in the Canada-Newfoundland and Labrador Atlantic Accord Implementation Act and its application to the Canada-Newfoundland and Labrador offshore area. These amendments reflect approaches to offshore carbon pricing that have been agreed upon by the federal and provincial governments, including alignment with the federal Greenhouse Gas Pollution Pricing Act.

The amendments will also empower the Canada-Newfoundland and Labrador Offshore Petroleum Board to act as the regulatory authority responsible for the provincial carbon tax system in the Canada-Newfoundland and Labrador offshore area.

The other set of amendments extend the expiration date of the transitional regulations under the Offshore Health and Safety Act, the OHSA. This act was passed in 2014 to implement a comprehensive set of occupational health and safety regimes under the accord acts.

The act allowed temporary regulations to come into effect in support of a workplace health and safety scheme in the areas covered by the accords, in anticipation of permanent regulations being developed.

The transitional regulations are set to expire at the end of 2019. This five-year time frame was originally deemed sufficient to develop permanent regulations, but additional time is now required, given the need to coordinate these regulations with other offshore regulations under development and to undertake additional consultations with the provinces, indigenous groups, and stakeholders.

These amendments are generally not seen as controversial. The oil and gas industry accepts that carbon pricing will be a cost of doing business in Canada going forward and understands that the OHSA regulations protect the safety of offshore workers and reduce the potential for regulatory uncertainty in the offshore.

Environmental and non-governmental organizations and indigenous groups are generally supportive of carbon pollution pricing as a tool to reduce emissions and address climate change. Nevertheless, some could take the opportunity to argue that these measures are not enough.

Thank you.

[The Chair]

Thank you.

Before we get into the questions and answers, I'll invite the Environment Canada officials to briefly introduce themselves and their position so we have it on the record.

[Judy Meltzer, Director General, Carbon Pricing Bureau, Department of the Environment]

Thank you very much.

I'm Judy Meltzer, and I'm the Director General of the Carbon Pricing Bureau in the Environmental Protection Branch at Environment and Climate Change Canada.

[Philippe Giguère, Manager, Legislative Policy, Department of the Environment]

Good afternoon.

My name is Philippe Giguère. I am the Manager of Legislative Policy at Environment and Climate Change Canada.

[The Chair]

Welcome, everybody.

Now we'll go into our series of six-minute rounds.

First we have Mr. Amos.

[William Amos, Liberal, Pontiac, QC]

Thank you, Chair.

My thanks to all our witnesses. We are aware that this is a very complex subject that is sometimes very difficult to fully understand, not only for the general public but also for us as members of Parliament.

I find that it's actually very hard to understand. I think one of the biggest challenges that any government faces—and this goes for provincial governments as well, as they attempt to explain their own approaches to pollution pricing—is explaining the details to the public in a way that generates understanding and buy-in.

I think Canadians understand, and have understood for many years, that polluter pay is a principle of Canadian law. They appreciate that. Those are Canadian values, but they don't yet necessarily understand the system that is being put forward.

I have a couple of questions, and I'm hoping that this can be explained in terms that would be not just understood by experts, but also translated to the average constituent in Pontiac.

The 10% increase provided for in relation to a credit received by individuals living outside of a census metropolitan area is effectively a support for rural Canadians. In this, I think our government has done right by rural Canadians. However, it's not clear what the basis of that 10% determination was.

Could you please explain how we arrived at 10% and how that reflects the different realities of rural Canada?

[Miodrag Jovanovic]

Thank you for the question.

Before addressing your question directly, I think it's important to understand the general approach with respect to the climate action incentive payment. That payment will go to all qualifying or eligible individuals in relevant provinces—that is, in provinces where the federal backstop will apply and where it has been determined that the revenues will go back to individuals.

The base amount provided will be the same, and it's going to depend on family circumstances. It will be a base amount for the first individual, a lower amount for the spouse and then a lower amount for each child.

This 10% top-up is basically to recognize some unique circumstances of individuals not living close to large urban areas. The 10% is a level of top-up that has been determined by the government as being appropriate to reflect these special circumstances, which could include, for instance, the fact that these individuals may not have the same options with respect to public transit.

[William Amos, Liberal, Pontiac, QC]

I'm just going to push you a bit further, because I appreciate that there are differences in rural costs of transportation and access to public transit.

In Pontiac, we have many municipalities.... Let's take a hypothetical scenario. Quebec is a province that has its own pricing system, which falls within the ambit of the law and therefore no backstop is required, but let's say that a government like Doug Ford's arrived in Quebec and decided to do away with it. In the Pontiac, there are a number of municipalities that are quite rural but actually fall within the national capital region.

How is that determination made around 10% specifically? Why not 12%? Why not 8%? Was there a rationale that led to that determination?

[Miodrag Jovanovic]

I think you're raising two things here: the 10% as well as the boundaries.

Why CMA? CMA is a useful tool to the extent that there's a clear definition determined by Statistics Canada. That's the advantage of using that. As I said, the 10% has been determined as being an appropriate level to recognize these unique circumstances. It is not based on any scientific assessment. The government has decided that 10% is appropriate in this context.

[William Amos, Liberal, Pontiac, QC]

Okay.

In terms of the collection of a carbon tax, I think we're hearing that in the industrial context.... When we're talking about shifting the burden of collecting the sales tax over to the purchaser, which is a bit of a shift, what is the rationale behind that?

[Pierre Mercille]

The main rationale is essentially to align it with the way other countries that have a VAT and a cap-and-trade system in place.... Basically, it's aligning our GST rule with the VAT rule, with the way those other countries have done it in the past.

[William Amos, Liberal, Pontiac, QC]

Can it be expected to be more efficient and less complicated for businesses outside of Canada to come and invest because they will understand how the system works?

[Pierre Mercille]

Yes, it kind of aligns internationally.

However, there's also a benefit there, because usually when the purchaser pays the vendor, they have to disperse the money, and then they have to wait a month, generally, to claim back their ITC. Now, with this system, they will essentially self-assess and, in the same return, claim their related input tax credit.

[The Chair]

You're out of time.

Now we will move to Mr. Warawa.

[Mark Warawa, Langley—Aldergrove, CPC]

Thank you, Chair.

When Mr. Amos began his comments, he said this is confusing, and I think that's quite right.

The different entities that are mentioned in the brief are not the average Canadian who fills up their gas tank at a local gas station. They will be paying the price that's on the pump, and that price will include a price on carbon, and a GST on that.

Is that correct?

[Miodrag Jovanovic]

The GST applies on the final price at the pump. That's a fact. That doesn't mean that all of the fuel charge will bear GST. There are situations where some of that may be reflected in the price of groceries, for instance. Groceries are a zero-rated product for GST purposes.

It will also depend on the behaviour of individuals. They may pay more at the pump, including some additional GST, but if there's a substitution that is happening, and to pay for that they reduce somewhat other discretionary expenses on which they would have paid GST, from looking at the application of a fuel charge, then it's a wash.

For the federal government, that doesn't result in additional GST, per se.

[Mark Warawa]

That wasn't my question.

My question is, when an average, middle-class Canadian, or even a vulnerable Canadian who is struggling on a fixed income, goes and fills up their gas tank—to take their children to hockey practice, or a senior going to the doctor—and there's now a price on carbon, the price of the gasoline that they put in their car will go up. It will go up even more because there will be GST charged on that carbon tax.

I think that's a pretty easy question; it's a yes or no.

The price will go up. They will have to pay an increased price. Is that not correct?

[Miodrag Jovanovic]

The price will go up. However, through the climate action incentive payment, particularly if they are low-income, it's very likely that they may receive more from that payment than what the fuel charge will cost them, even including GST.

[Mark Warawa]

I don't want to be rude, but I hope I'm not hearing that the government is going to go in the hole, increasingly going into deficit spending, so they can pay Canadians more in a rebate than what they are paying in a price on carbon.

I don't think that's what you said, because it wouldn't make sense to pay people more than what the government is collecting in taxes. There has to be a balance. Canadians are willing to pay their fair share, but Canadians in general....

This Parliament dealt with a bill, Bill C-342, and they said we shouldn't be charging a tax on a tax. In principle, they saw that as being very unfair. They said to just make the carbon tax GST-exempt. Unfortunately, Parliament said no.

What we're coming up with appears to be very confusing and hard to explain. However, the average Canadian who fills up their car is going to be paying more, and you're hoping they are going to get rebated. I think $12.50 a month is not going to adequately cover the cost of heating their home and filling up their car.

In the limited time I have, I would like to ask about Volkswagen. Volkswagen has pleaded guilty on deceiving. They said they were fined $14.7 billion in the United States. They were fined in Europe—

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

I have a point of order.

Do we have an idea of what's going to be considered relevant for this very narrow aspect of Bill C-86?

[The Chair]

I was going to hear Mr. Warawa's question.