Evidence of meeting #121 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was year.
A video is available from Parliament.
4:40 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
But what if it takes some time to figure out whether the well is going to produce oil?
4:45 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
There are two sides to that.
The first is that if they haven't produced anything within two years, then it's deemed to be unsuccessful. Let's say they end up eventually producing something from it; it's deemed to be—
4:45 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
If in the second year they realize they have a dud, is it the case that they then have to go back a year and write off an expense that they were not originally allowed to write off in an earlier tax year, which will now be closed out?
4:45 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
They could do that, or it could become something they can write off right there, for going forward.
4:45 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
It just seems as though again there's another rule that's going to add complexity, particularly to small businesses. This tax measure relates to small business. It's available only up to a million dollars, for smaller exploration companies, the juniors in the oil and gas sector, and you're now telling them they have to wait three years before they can write off an exploration cost for one year.
4:45 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
To clarify, there are two measures. When you said “exploration” in a general sense, I then went with the idea that you were talking about the discovery well measure.
There is another measure with regard to reclassification of Canadian development expenses for flow-through share investors. That's a different measure altogether, the one that's for smaller companies. In the normal context, that measure is for a development expense; therefore, it would normally be deductible at only 30% for that company, on a declining-balance basis. That company, on those particular measures, can essentially reclassify that. We would know it's a development expense, normally deductible at only 30%, but we would let them reclassify it as an exploration expense—which, in any other context, would not be considered an exploration expense—and allow it to be deducted at 100%, but it's not actually the company, in that case, that's deducting it at 100%.
4:45 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
Yes, and in particular a shareholder that buys a flow-through share. Basically, with that flow-through share they get a share, but they also get access to the deduction. Let's say it was a development expense of $100—
4:45 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
Right, but for a successful oil well exploration, with a flow-through arrangement, how much can they write off under the status quo?
4:45 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
With a successful flow-through share arrangement?
4:45 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
For successful exploration of an oil well with a flow-through share, how much can they write off of the expense in year one, today, under the status quo?
4:45 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
In that context, it doesn't matter whether it's successful or not.
4:45 p.m.
Conservative
4:45 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
For the actual investor, let's pretend it's $100 and it gets flowed out to them at $100. The investor would be able to write off $100.
4:45 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
Right.
What you're saying now is that if it's a successful exploration of an oil well, that shareholder will only be able to write off in the future, under this change, $30.
4:45 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
No, because.... That's where I'm saying the success....
What we're talking about when we're talking about that measure is that it was a development expense. It wasn't an exploration expense. It's only by sort of being designated as exploration.... It's basically put into the class. Let's put it that way. These development expenses that would normally be called Canadian development expenses at 30% are deemed essentially to be Canadian exploration expenses, which are deductible at 100%.
That's why they are able to deduct them at 100%: it's because we deem it. It's not whether it was successful or not; it was a development expense that we deemed to be an exploration expense deductible at 100%. That's what's being impacted. That's why I'm saying it's not really whether it's a success or not on that issue.
4:45 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
But under the proposal, they'll only be able to claim 30%.
4:45 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
Correct. That development expense that's normally 30% was deemed to be a Canadian exploration expense, and they'd be able to deduct it at 100%. You're right that they would only be able to claim a development expense at the 30% rate.
4:50 p.m.
Conservative
4:50 p.m.
Senior Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance
It's regardless. It's not a success thing.
4:50 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
For my final question, how much money is lost through the deferral of taxes because of the use by professionals of the billed-basis accounting?
4:50 p.m.
Senior Legislative Chief, Legislative Review, Tax Legislation Division, Tax Policy Branch, Department of Finance
The estimates that were included as part of the budget were $425 million over the horizon mentioned in the budget. That, as I said, was based upon a two-year deferral, so it would be extended beyond the cut-off date of 2021.
4:50 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
You're telling me that every two years, professionals are saving a total of roughly $450 million by paying tax on billings in the year that they are actually received?
4:50 p.m.
Senior Legislative Chief, Legislative Review, Tax Legislation Division, Tax Policy Branch, Department of Finance
No.
The elimination of the deferral, which would bring into income all the deferred income, would total $425 million, but that would be once there's a move to an accrual system. You'll see in the budget materials that there are no revenue projections beyond the 2019-20 year. Of course that would be later under the revised proposals. I don't have the revised numbers with me, but with the phase-in period going from two years to five years, the revenues in each year would of course be lower and the amount of time before it goes to nil would be longer, but—
4:50 p.m.
Conservative