Finance Committee on May 1st, 2018

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

I have to level it a little.

[John Moffet]

When the government developed its commitment to pan-Canadian carbon pollution pricing in late 2016, three jurisdictions already had carbon pricing and Ontario had already announced its intention to join the Quebec-California cap-and-trade system, so we had the four provinces with the bulk of Canadian population already implementing or committed to carbon pricing.

The government decided not to impose a single carbon pricing system on Canada that would have required replacing the four existing systems, and instead decided to move in a stepwise fashion, where the first step was to articulate a commitment to ensure that there was a reasonably consistent approach to carbon pricing across Canada that respected two things: first, the existing systems, and second, the flexibility and jurisdiction of the remaining provinces and territories to develop their own systems, provided those systems aligned with a core set of criteria. In that way, the government's goal was to ensure that carbon pricing applied throughout Canada so that a price signal was sent to a broad range of activities, to ensure coherence and as much efficiency as possible, and to send a signal to other countries and businesses planning to invest in Canada that Canada was committed to carbon pricing.

The final element was a commitment to the system that is codified in this bill, which is a federal system that could be used in jurisdictions that choose not to develop a system that aligns. The government has elected to implement carbon pricing throughout Canada but in a way that allows jurisdictions both the flexibility to design their own system and, even if they choose the federal system or have it imposed on them, the flexibility to use the carbon pricing revenue as they see fit.

Given all of those policy choices, then, we come to the difficult question of what the precise impact will be on a household in a given jurisdiction. The simple answer is “It depends”, and it depends on a number of factors, some of which are articulated in that broad framework document that we published in late 2016, and some of which are articulated in the details of the backstop legislation, but some of which have not yet been decided and will not be decided until the end of this year. Ministers McKenna and Morneau have asked provincial and territorial premiers to submit information about their systems and their plans by September 1 of this year, so it won't be until then that we have all the details in place.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, and that was part of my next point, the deadline or the ask for having those plans in place, because that's also in this document.

You started to talk about the example in Alberta and Mr. Poilievre cut you off a little bit before you'd finished, but could you talk about the example in Alberta or any jurisdiction that has already somewhat indicated what its plan might be and how they plan to return or use the revenues to offset any costs? Do you have any of those based on the jurisdictions' intentions so far, granted that I know they still have time to come up with these detailed plans?

[John Moffet]

The study that I mentioned has on pages 7 and 8 some examples of the ways that provinces with existing carbon pricing systems are investing some of their revenues. Each of those jurisdictions is pursuing what you might call a portfolio approach. They have not said that every cent will be dedicated to A or B; instead, they are generally using the revenue for a variety of things with the relative emphasis differing from province to province.

The major emphasis in British Columbia is on a revenue-neutral system, which means that the carbon pricing revenue is being used, in one way or another, to reduce various forms of taxation so that overall government revenues remain neutral. The example provided in the paper is that this year B.C. plans to invest its carbon pricing revenues in reducing the medical service plan premium by about half, and also cutting the personal income tax and small business corporate income tax.

Other provinces have done some fiscal balancing, but have also chosen to take the money and return it directly to households. For example, Alberta has a rebate system in place that is tailored to household income. As I said, the Government of Alberta estimates that about 60% of households will be made whole through this rebate. Ontario and Quebec are providing some rebates, but also make the money available to households and businesses to invest in energy efficiency schemes. They're also pooling the money in large technology funds that will be made available to businesses and innovators to develop and deploy clean technology.

There are a variety of ways in which revenues are being used, and indeed, that's consistent with the advice of most academic and policy reviews of carbon pricing in Canada and internationally. In Canada, most prominently, the Ecofiscal Commission published a fairly significant study of carbon pricing revenues and essentially recommended that revenues be used in a variety of ways to address whatever the most salient policy goals of the jurisdiction are.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Just to give everyone an idea of where we are on the list, next will be Mr. Dusseault, Ms. Lambropoulos, Mr. Fergus, and then Mr. Poilievre. That's what I have on my list at the moment.

Mr. Dusseault.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

My question is about the obligation to report to Parliament. In reference to the tabling of the report, clause 270 mentions “starting in the year in which the second anniversary of the day on which this section comes into force”. My question is very simple.

Generally, the year following the coming into force of the legislation is chosen. Why did you choose the second anniversary? Is there a reason behind it that you could share with the committee?

[John Moffet]

Thank you. That's a very good question.

I'll reply in English.

We did think about this carefully. The reason for deciding on the second anniversary is that the results of the system will not be clear for about a year and a half. The reason is that the system has two components, with a charge and the output-based pricing system. The charge will be paid on a regular basis, once it's imposed and comes into force. By contrast, the output-based pricing system is paid on an annual basis at the end of each year. The carbon pricing backstop system will come into force on January 1, 2019, about half a year from now, and then for the first year, the obligation of a large facility subject to that system will be to track emissions. At the end of that year—so in the winter of 2020—it will then report its emissions, calculate how much it owes, and then pay what it owes, if it owes anything. The payment it makes will not be made until the middle of 2020, so in other words, we will not know precisely who has paid what under the system until the middle of 2020. It's for that reason that we decided that the first report should be a complete report and talk about where the system was applied, in what jurisdictions it applied, how much charge was paid, by whom, and how much of the output-based pricing system charges were paid and by whom. Again, we won't have all of that information in place because all of those activities will not have occurred until about the middle of 2020. That's why we picked two years, but then the obligation is an annual report thereafter.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you.

My next question is a little more complex. It concerns the circumstances under which an exemption certificate may be issued, meaning that some taxpayers will be exempt. The best example, I believe, is farmers.

Could any of you explain to us how the exemption system will work?

In short, I would like more details on the mechanics of the exemption system.

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

In part 1 of the bill, there are situations where some people will have the right to use exemption certificates. If you want to talk mainly about farmers, I can talk about farmers.

As a general rule, as I explained in my presentation the other day, the people who pay the fuel levy are distributors or wholesalers who sell these products. It isn't the buyer who pays, generally. So, if it is in compliance, the exemption certificate allows the fuel supplier not to pay the fuel levy. Since the fuel supplier doesn't pay this fee, the value isn't included in the price charged by the fuel vendor.

As far as a farmers are concerned, they will have to provide a certificate of exemption. It isn't something that the Canada Revenue Agency gives to the farmer, but rather the farmer who produces the certificate in the manner specified by the agency.

There are a number of conditions that must be indicated in the exemption certificate, which is a document in which a person certifies certain facts. If these facts are certified, the seller may not pay the fuel levy. There are four things that farmers have to certify in the document. First, they must certify that they are farmers. Then they have to certify that the fuel is delivered to a place that is a farm. The third condition is that the fuel will be used exclusively in the operation of eligible farming machinery. The fourth condition is that all, or almost all, of the fuel will be used for eligible farming activities. If these four conditions are met, the distributor does not have to pay the fuel levy itself, and the farmer does not have to pay that cost either.

The concepts of farmer, eligible farming machinery and eligible farming activity are all defined in the bill. So, a farmer is defined as a person who operates a farming business in a reasonable expectation of profit. Eligible farming machinery generally consists of property that is primarily used for agricultural purposes: it must be a farm truck, a tractor, an industrial machine, a portable engine, or a vehicle that is not licensed to be operated on a public road. However, this eligible machinery doesn't include an automobile, as defined in the Income Tax Act, nor property used for providing heating or cooling to a building or similar structure.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

It's very interesting. It seems rather complex, however, for the average farmer who has to understand all this.

My question is who will apply these rules? You mentioned all the rules and the four conditions, but who will apply them? I imagine it's the Canada Revenue Agency. How will you successfully adapt to the new regulations and enforce them? Will you directly check on farms that the fuel is used for the operation of eligible farming machinery? How will it work, once the legislation is passed, to apply it on the spot?

[Pierre Mercille]

As with other legislation administered by the Canada Revenue Agency, this system includes a self-assessment principle, a self-declaration principle.

There is an advantage for farmers that I didn't mention. For others who are eligible to use the exemption certificate, the standard is to register with the Canada Revenue Agency and file returns that are generally monthly. In the case of farmers, we don't require them to meet this condition. They don't have to register for the purposes of this act.

In any case, the Canada Revenue Agency conducts audits of farmers from time to time. So, we are only going to ask them for information. We will administer this in a similar way to other statutes administered by the Canada Revenue Agency. If a farmer ever produced exemption certificates and then resold the fuel to someone else, there are rules in place to ensure that there is no diversion of fuel. This helps to respect the general structure of the legislation.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

I'm going to look at another aspect of the operation. It will be much easier for a supplier who provides fuel exclusively to farmers to distinguish between the fuel that goes to farmers and the fuel that goes to other customers. In a perfect case, a supplier supplies fuel only to farmers. It is therefore exempt on all fuel. In the case where there are several customers who are not all farmers, how can the supplier make the difference exempted from the fees depending on the quantities of fuel? How will it work?

[Pierre Mercille]

The first criterion is whether or not an exemption certificate is presented to the distributor. If the distributor delivers fuel to a service station, the service station doesn't present an exemption certificate. Knowing this, the distributor will determine its selling price taking into account that the customer will have to pay the fee on the fuel that will be delivered to the service station. However, for a delivery of fuel to a farmer's farm, I presume that the farmer will call the distributor in advance and say that he will present a certificate of exemption. The price can be established this way.

[John Moffet]

Could I just add one point? Many provinces already have similar arrangements with their provincial sales taxes on fuels. Many farmers would already be familiar with the distinction and already have the arrangements put in place not to pay fuel tax on fuels. Indeed, in many jurisdictions those fuels are actually coloured so they can be easily distinguished.

I appreciate that there is some administrative complexity, but the point is that farmers are already used to that system, and we're trying to mirror as much as possible the existing arrangements that are in place.

[The Chair, Liberal, Wayne Easter]

I don't know of any farms that don't have bulk storage on them. In our province, as you said, John, they mark the gasoline. They put a colouring in it, and therefore that would show up if it were, say, used in your passenger car. That's the way it works in some provinces, but I don't think there's an indication to mark the fuel, as I understand it, in this case.

Do you have any further questions, Pierre?

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

No, thank you.

[The Chair, Liberal, Wayne Easter]

I have just one other one on this because I know that we'll get questions on this. I think, Mr. Mercille, you commented on trucks that don't have plates to operate on a public road.

What happens in the case of a potato farmer or a grain farmer who is hauling their harvested crop from their field to their farm bins in the yard? Are farmers allowed to use the exemption on those vehicles or not? I can understand it if it's hauling from a farm to the elevator system for shipment, but what happens about trucks on the road that are really just going from field to farm?

[Pierre Mercille]

If the transportation is between a location at a farm to another location at a farm—it doesn't have to be the same farm—the exemption certificate could be used to get the levy out on that fuel.

[The Chair, Liberal, Wayne Easter]

With trucks in many cases it depends on the province. Some provinces have farm plates on their trucks and some don't, but they are used for the operation of the farm. I think you said it doesn't have plates to operate on a public road.

[Pierre Mercille]

Well, I said both. It could be a farm truck or it could be a tractor or vehicle that is not licensed to operate on public roads.

[The Chair, Liberal, Wayne Easter]

Okay.

I have one other question before I go to the other side. Are fishermen entitled to an exemption as well in terms of their fishing boats, do you know?

[Pierre Mercille]

They are not.

[The Chair, Liberal, Wayne Easter]

They are not. So the exemption is there for farmers and not for fishermen.

[Pierre Mercille]

That's what the legislation provides.