Finance Committee on Nov. 1st, 2012

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is the 87th meeting of the Standing Committee on Finance. The orders of the day are pursuant to the order of reference of Tuesday, October 30, 2012, our study of Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.

We're pleased to welcome back officials from the Department of Finance to be with us today on the second look at this budget implementation bill.

Colleagues, at our last meeting we finished discussions on the corporate mineral exploration and development tax credit. The next area is the Atlantic investment tax credit, oil and gas and mining.

I've had some discussions with you. I'm going to identify the section. I'm going to ask if there are questions, and if there are, we can move right to questions and then have the officials respond. There's a fair amount to get through in the next two days, and we hope to finish with officials in this meeting and the next meeting, so that's how I will proceed.

Are there any questions dealing with part 1(g), which is the Atlantic investment tax credit, oil and gas and mining?

Mr. Cuzner, please.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

Thanks very much, Mr. Chairman. It's great to be back with you today.

[The Chair, Conservative, James Rajotte]

We'll have five-minute rounds.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

I appreciate the officials being here today to respond to some of the concerns or questions we might have and to provide some clarification.

Could you provide us with some examples of what areas are going to be impacted by the immediate phase-out of this credit? What kind of jobs are we talking about? Are we putting any job development opportunities at risk with the phasing out of this particular tax credit?

[The Chair, Conservative, James Rajotte]

Mr. Trueman.

[Geoff Trueman, Director, Business Income Tax Division, Tax Policy Branch, Department of Finance]

It's fair to say that the phase-out will affect oil and gas and mining operations in the Atlantic provinces. What we've seen over recent years is that activity levels are very strong, very robust across Canada in these industries, including in the Atlantic region. You can look at a number of methods, but certainly capital expenditures, employment levels, and value of production, exploration, all these in the Atlantic region are at or near historic highs. The phase-out of the credit is being undertaken at a time when activity levels are very strong and significant transitional rules include grandfathering, which will help to mitigate the impact of the phase-out of the credit over time.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

No sunset was placed on the credit when it was initially developed, was there?

[Geoff Trueman]

The legislative history of the AITC is fairly long. I'm not sure of the conditions when it was originally put in place.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

How many tax filers is this going to impact?

[Geoff Trueman]

The measure will apply to those active in the Atlantic region. We generally don't provide the exact number of taxpayers affected by a particular measure.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

Could you give us some indication? Will it have an impact on those who are doing exploration?

[Geoff Trueman]

It would only affect the equipment that might be purchased to be used in exploration, so there would be some tangential impact on that. At the same time, other measures in place to support exploration would include the extension of the mineral exploration tax credit, for example.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

Okay, that's great.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Monsieur Mai, s'il vous plaÎt.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you, Mr. Chair.

I would like to know why the Atlantic Provinces are being directly affected here. Is this linked to the fact that the corporate tax credit for mining exploration and development is itself reduced? Can you explain the context to me a little?

[Geoff Trueman]

Sure. The Atlantic investment tax credit is available for activities in the Atlantic provinces. This particular measure, the phase-out as it applies to oil and gas and mining, represents further action by the government with respect to the G-20 commitment to phase out inefficient fossil fuel subsidies. The action is being taken to level the playing field for those industries and to remove inefficient fossil fuel subsidies, rather than focusing particularly on the Atlantic provinces.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Will the other provinces still have the investment tax break?

[Geoff Trueman]

The AITC has only been available in those Atlantic provinces, and it is being removed in those provinces.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

It was a temporary measure.

[Geoff Trueman]

It was a measure introduced for the benefit of the Atlantic provinces, yes.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Okay.

[The Chair, Conservative, James Rajotte]

The next item deals with the investment tax credit. Are there any questions on this section?

Okay, I will move to part 1(i), which is the scientific research and experimental development tax credit. Are there questions from members on this section?

Monsieur Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Would you mind if we actually have a presentation on this section?

[The Chair, Conservative, James Rajotte]

Okay, can we have a brief presentation on the scientific research and experimental development tax credit?

Mr. Cook, please.

[Ted Cook, Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance]

Certainly. To give a brief overview of the four elements of the changes to the scientific research and experimental development credit, it's an investment tax credit available in respect of scientific research and experimental development. It's currently available at a general rate of 25% and an enhanced rate of 35% for Canadian-controlled private corporations on expenditures up to $3 million. That general rate of 25% is being reduced to 15%. At the same time, that enhanced rate of 35% is being maintained at a rate of 35%.

The second element of the measure deals with the proxy amount. Taxpayers, if they wish and can itemize their overhead expenditures with respect to scientific research and experimental development, can actually itemize their expenditures and include them in the expenditure pool. Alternatively, the taxpayer can use a proxy amount, which is currently 65% of salaries and wages spent in engaging in scientific research and experimental development, and use that as a proxy for overhead. That proxy amount is being reduced, in a staged fashion, from 65% to 60% to 55%. That'll be the sort of the mature go-forward proxy amount with respect to overhead.

The third element is to remove, again by way of proxy, the profit element in third party contracts. Taxpayers can undertake SR and ED themselves, or they can have someone else undertake it on their behalf. Where a taxpayer has a non-arm's-length party, such as a parent corporation or a subsidiary corporation, undertake the SR and ED, there's a transfer system that allows either of the two companies to recognize the SR and ED expenditures, but the expenditures that are recognized are just the actual SR and ED expenditures undertaken. There's no profit element in the contract, if there is one.

To line up the treatment of non-arm's-length contracts with arm's-length contracts by way of a proxy amount, we're attempting to take out the profit element of arm's-length contracts. When a taxpayer pays an arm's-length party to undertake SR and ED on their behalf, the eligible expenditure will not be 100% of the contract payment, but rather 80% of the contract payment.

The final aspect of the measure is to remove capital from the expenditure base for SR and ED. I guess the one thing in particular to note is what we're talking about is purchased capital. If a taxpayer undertakes SR and ED in developing their own capital property, that will continue to be eligible for the credit.