Finance Committee on May 16th, 2022

[The Chair, Liberal, Peter Fonseca]

I call the meeting to order.

Welcome to meeting number 44 of the House of Commons Standing Committee on Finance. Pursuant to the order of reference of May 10, 2022, the committee is meeting on Bill C-19, an act to implement certain provisions of the budget tabled in Parliament on April 7, 2022 and other measures.

Today's meeting is taking place in a hybrid format pursuant to the House order of November 25, 2021. Members are attending in person in the room and remotely, using the Zoom application. Per the directive of the Board of Internal Economy on March 10, 2022, all those attending the meeting in person must wear a mask, except for members who are at their place during proceedings.

I'd like to make a few comments for the benefit of the witnesses and members. Please wait until I recognize you by name before speaking. For those participating by video conference, click on the microphone icon to activate your microphone and please mute it when you are not speaking.

For interpretation for those on Zoom, you have the choice at the bottom of your screen of the floor, English or French. For those in the room, you can use the earpiece and select the desired channel.

I would remind you that all comments should be addressed through the chair.

For members in the room, if you wish to speak, please raise your hand. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can, and we appreciate your patience and understanding in this regard.

I would now like to welcome today's witnesses. Please note that today's witnesses are here to speak about part 5 of the BIA.

I will welcome today's witnesses. As an individual, we have James Hinton, intellectual property and innovation expert from Own Innovation. From Canada's Building Trades Unions, we have Sean Strickland, executive director, and Rita Rahmati, government relations specialist. From Canadians for Tax Fairness, we have D.T. Cochrane, economist. From Cider Canada, we have Barry Rooke, executive director, and from Imagine Canada, we have Bruce MacDonald, president and chief executive officer.

We'll now begin with Mr. Hinton from Own Innovation for his opening remarks of up to five minutes, please.

[James Hinton, Intellectual Property and Innovation Expert, Own Innovation, As an Individual]

Good morning.

I am Jim Hinton, IP lawyer, patent agent and trademark agent with Own Innovation. I'm the co-founder of the Innovation Asset Collective, a senior fellow at the Centre for International Governance and Innovation, and an assistant professor at Western University. But I'm not speaking to you in my capacity in those roles. I'm speaking to you as an individual with experience helping Canadian companies navigate the often predatory global IP systems so that they can commercialize and scale their technologies globally.

I'm pleased to speak to budget 2022, which has been called an innovation budget. There are many great aspects to this budget, including IP strategy investments and other innovation funding programs, but unless we position these programs properly, they will be nothing but empty calories. They taste good going down but we will have nothing to show for them when it matters.

Two key things to consider in this budget are the importance of IP—intellectual property—and data assets and how those impact a company's freedom to operate.

Intangible assets including IP and data represent the most valuable corporate assets today, with 91% of the S&P 500 market value being in intangible assets. So IP and data aren't everything, but they are almost everything.

With this budget we have recognized that Canada will have a last place in innovation in the OECD with dismal business investment in R and D. This will continue despite our current trajectory of billions of new innovation funding unless we properly orient it.

Why do Canadian companies do so poorly and not invest in R and D? Quite simply it's because they do not have the freedom to operate, since global markets are already owned by existing players that control IP and data stocks.

So where does Canada stand? It's terrible. We own less than 1% of the world's intellectual property. For Canadian companies that means we do not have the freedom to operate, because you can't commercialize what you don't own. We have to manage the 99% of IP positions of global players, which limits Canadian companies' freedom to operate. Practically speaking, that means Canadians don't have the proprietary datasets or own the foundational patents that are needed to practise to commercialize globally, for example.

In the current budget, there is a buffet of funding innovation programs—a growth fund, new innovation agency, overhauling SR and ED, the critical minerals strategy, clean-tech programs, semiconductors, the strategic innovation fund, federal granting councils, superclusters, copyright extension, digital currency, council of economic advisers, patent box, competition reform, strategic procurement and even IP law clinics.

But to get innovation, you have to have a proper frame of success. What is innovation success? It's Canadian companies owning valuable IP and data [Technical difficulty—Editor] and commercializing their technology globally and at scale. The proper frame is one of freedom to operate. Will this program increase or decrease the freedom to operate of Canadian companies? What is the net economic benefit?

To do this, we need to recognize Canada's current IP position within the global IP landscape and ensure that these programs structurally improve the global IP and data positions of Canadian companies as against their global competitors. This must be the lens through which Canadian innovation policy views any innovation funding. Remember, nearly all economic activity, over 91%, is innovation activity.

In a particular example of how poorly we have been doing, of the over $10 billion in annual public funding that goes to Canadian universities, more than half of the resulting industry IP ends up being owned by foreign companies. This means that currently Canadian universities are actually working to reduce the freedom to operate of Canadian companies. We would be better off if Canadian universities did nothing at all in the name of innovation.

This situation permeates our misoriented innovation funding. There are consistently examples from artificial intelligence to mining, from critical minerals to electric vehicles.

These challenges are the reason I co-founded the Innovation Asset Collective to increase the freedom of Canadian companies to operate. In less than two years, the IAC has become a standout of successful innovation action by making a significant impact in meaningfully improving the freedom to operate and the IP positions of Canadian companies through IP education and generation and patent collectives. However, I was disappointed to see that IAC was not funded in this budget to keep Canada at pace with its global peers.

Full funding means funding at an order of magnitude of more than the $30 million pilot. Just as a comparison with our global peers, the French patent fund initially received 500 million euros and has since received another 500 million euros. We need to be doing this at scale to compete globally.

Finally, things will get worse for Canada, and we must act with tremendous urgency. The Americans and Chinese are internally well coordinated at controlling their domestic markets with those of the Japanese, Koreans and Europeans and aggressively work to maintain and expand their IP and data positions. Here in Canada our IP stocks are dwindling with two of Canada's major strategic IP holders—BlackBerry and WiLAN—selling off their IP portfolios. All the while, we continue to invest in growing the IP positions of foreign companies like Huawei and Google.

Despite progress, without proper orientation and an increased pace of action we will most certainly be last in the OECD countries. This will mean that Canada won’t be able to enjoy the fruits of a productive economy—great health care and other social programs—that form the bedrock of Canadian prosperity. If we’re last in the OECD, then it won’t be long until Canada quickly becomes a middle-income country.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Hinton.

We'll move to Canada's Building Trades Unions for five minutes of remarks, please.

[Sean Strickland, Executive Director, Canada's Building Trades Unions]

Good morning, Chair Fonseca and members of the committee. Thank you for the opportunity to take part in the pre-budget consultations earlier this year and for the invitation to appear today. Unfortunately, my colleague Ms. Rita Rahmati will not be able to join us today.

My name is Sean Strickland. I am the executive director of Canada’s Building Trades Unions, part of North America’s Building Trades Unions. We represent 14 international construction unions with a combined membership of over three million unionized construction workers in North America, with 600,000 here in Canada.

The women and men of the building trades are employed in constructing everything from small projects through to large multi-billion dollar projects right across Canada. The construction and maintenance sector combined represents approximately 6% of Canada’s annual GDP.

Budget 2022 included important wins for workers, including the historic win for Canada’s construction workers—something the building trades have been advocating for for a long time—namely, a labour mobility tax deduction for tradespeople. Under this proposal, they will now be able to deduct those expenses from their income, something they previously could not do under the Income Tax Act. This will make it easier for construction workers to go where [Technical difficulty—Editor]—

[The Chair, Liberal, Peter Fonseca]

Mr. Strickland, can you hear me?

[Sean Strickland]

I can hear you.

[The Chair, Liberal, Peter Fonseca]

Great.

Your Internet is a little bit choppy. You may have to turn off your video. This is a televised meeting, but you may have to turn off your video so that we can hear you clearly for your remarks. We'll see how that goes.

Are you still there?

[Sean Strickland]

Yes. I just turned the video off.

[The Chair, Liberal, Peter Fonseca]

If you could continue with your remarks, we would appreciate that. Let's see if it comes through clearly now.

[Sean Strickland]

Do you want me to take it from the top, or did you get most of it?

[The Chair, Liberal, Peter Fonseca]

You had about a minute and a half left. That's where I kind of stopped the time.

[Sean Strickland]

Perhaps I will start with budget 2022.

[The Chair, Liberal, Peter Fonseca]

Sure. That would be great.

[Sean Strickland]

I'd ask for some leeway with the time, Mr. Chairman.

[The Chair, Liberal, Peter Fonseca]

Yes.

[Sean Strickland]

Budget 2022 included some important wins for workers, one of which is something we've been working on for a long time. It's the labour mobility tax deduction for tradespeople.

With this proposal, tradespeople who have to travel far from home will now be able to deduct those expenses from their income, something they previously could not do under the Income Tax Act. This will make it easier for workers to go where the work is, and still support their families back home.

I want to thank the finance committee for including this in its pre-budget report and recommendations.

The budget included other wins for workers and Canadians, such as doubling the funding for the union training and innovation program, a program that has allowed training centres and organizations to expand, innovate, and improve training for skilled tradespeople. It included projects like the creation of the office to advance women apprentices. This focused on offering wraparound support services to increase the recruitment and retention of women in the skilled trades.

There were also investments in new home builds; funding for research investments in green technologies, like small modular reactors; an investment tax credit for carbon capture, utilization, and storage, which is really important in our move to a net-zero-based economy; investments in child care, health care, and a national pharmacare program; and a new union-led advisory table that brings together unions and trade association that will advise the government on priority investments to help workers navigate the changing labour market, with a particular focus on skilled mid-career workers in at-risk sectors and jobs. These are just a few of the highlights included in budget 2022 that benefit workers and Canadians.

As we look beyond budget 2022, CBTU urges the government to focus on reforms to the temporary foreign worker program as part of the short-term solution to labour availability.

Where unions are able, make them a designated employer for the temporary foreign worker program to ensure that workers are treated fairly. Unions can leverage our hiring hall systems to put temporary foreign workers to work with different employers, better addressing labour availability.

Building trades and local building trade councils can also be included, when you're making an assessment of the viability of the temporary foreign worker program in any particular area in Canada.

Regarding changes to employment insurance, make permanent the current temporary change to the allocation of separation monies; allow apprentices to apply for EI in advance of their training, which would provide better financial security to update their skills; and when re-establishing the board of appeals, ensure that there is designated labour representation on that tribunal.

One other issue that we could look at going forward to address labour shortages is to address and ease cross-border mobility for skilled trades workers between Canada and the U.S. There are 197 training halls across North America. We know that training qualifications for many of our trades are nearly identical on both sides of the border; therefore, it just makes sense to allow workers to travel back and forth to address labour shortages which is very difficult to do.

In conclusion, as parliamentarians you know that there is always more work to be done. On behalf of our 600,000 unionized construction workers, we thank you for your service, and encourage you to pass the budget to the benefit of not only our members but all construction workers in Canada.

Thank you, Mr. Chairman and committee members.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Strickland.

We were able to hear you clearly once the video was off. I'm not sure if you'll be able to turn it on afterwards so that we can see you when you make further remarks or answer questions.

We're now moving to Canadians for Tax Fairness and Dr. D.T. Cochrane, for up to five minutes, please.

[Dr. D.T. Cochrane, Economist, Canadians for Tax Fairness]

Thank you very much.

Thank you kindly for having Canadians for Tax Fairness comment on this budget implementation bill.

Let me begin by commending the government for acting with the appropriate urgency to create a publicly accessible beneficial ownership registry. The need for this registry is acknowledged by members of all parties.

Efforts must now be turned to getting the provinces on board so the registry is truly pan-Canadian. To that end, we recommend the government fully fund the endeavour. Further, implementation should move ahead with all willing partners. Any laggards can be later enrolled.

There are several other components of Bill C-19 that C4TF will happily address during the Qs and As, particularly the luxury goods tax, the measures on housing speculation, the home accessibility tax credit and the tax measures for climate action.

However, today I want to address things missing from the bill: the one-time and ongoing surtaxes on the profits of banks and insurance companies, plus an updated general anti-avoidance rule to crack down on tax avoidance. We understand that these measures might require more consultation. However, we are concerned that there is a lack of urgency. Too much time allows for too much influence by well-resourced elites and their agents, leading to weakened, if not ineffective, measures.

During the pandemic, the government provided unprecedented amounts of money to support Canadians and stabilize our financial system. Unfortunately, deficit Chicken Littles are now misleading Canadians by claiming that these supports are responsible for inflation.

The standard inflation story claims that it is from “ too much money chasing too few goods”, but there is a much simpler explanation: Corporations are using their price-making power. This is not to discount significant external forces disrupting global supply chains and causing many costs to rise. However, our research found that the 2021 profit margin of Canada's publicly listed corporations almost doubled to nearly 16% from a prepandemic average of less than 9%. This strongly suggests that corporations are doing more than just passing along higher costs.

We have a trickle-up economy. That means some of the public money added to the economy inevitably found its way into corporate coffers. With corporations also boosting their profit margins, an ever-larger flow of public money ended up under corporate control. This overwhelmingly benefits the elite owners.

C4TF welcomes the surtaxes on banks and insurance companies; however, they are too narrow in application, set too high a threshold and are too low. While finance companies have seen the largest jump in profit margins—going from 14% to 22%— extraordinary profits are seen across many sectors. There is no good reason to limit the one-time tax to incomes above one billion dollars or the ongoing rate increase to incomes above $100 million. Also, a one-time extra 15% and the ongoing additional 1.5% are timidly low.

Successive governments have been cutting the corporate income tax rates for decades. From almost 40% in the 1980s, the current rate is a meagre 15%. We were promised that the cuts would result in more productive investment. In fact, investment out of corporate profits is lower now than it was in the 1980s.

Of course, corporations don't actually pay taxes at the statutory rate. In 2021, even while they were making record high profits, corporations were pushing their effective tax rates to record lows. They create and exploit loopholes to lower their taxes. We were pleased to see that budget 2022 included plans to close some of these loopholes.

We also welcomed more concrete steps towards strengthening the general anti-avoidance rule, also known as GAAR, which will empower the Canada Revenue Agency to crack down more forcefully on creative corporate accounting, but this process needs to be given greater urgency. Currently, the deck is heavily stacked against the CRA and its efforts to deal with tax avoidance by the largest corporations and wealthiest individuals.

Recent decisions by the Supreme Court against the CRA highlight the fact that the agency is working with one hand tied behind its back. We need an updated GAAR ASAP.

When the pandemic struck, it was widely accepted that we needed our public institutions to support Canadians. Corporations and their owners have nonetheless profited handsomely.

The need for robust investment in public programs only grows. A stronger excess profits tax, a higher corporate income tax rate and stronger GAR can reduce the excessive benefit going to corporations and help to create a more just, equitable country.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Cochrane.

Now we'll hear from Cider Canada, Barry Rooke.

[Barry Rooke, Executive Director, Cider Canada]

Thank you for having me present to the committee today.

My name is Barry Rooke. I'm the executive director of the new national cider association, Cider Canada/Cidre Canada. We support 370 licensed cider makers across the country and just reached our first year as a non-profit last month. Although the association is new, cider has been produced in Canada for hundreds of years, making a resurgence over the last half-decade. We believe that the number of cider producers has doubled in the last five years across Canada.

The sector directly supports close to 9,000 jobs, and tens of thousands of others at orchards and in transportation and restaurants. Cider producers come in many different forms: small fruit-to-table producers that do everything, like Riverdale Orchard and Cidery in Bonshaw, P.E.I.; community-focused small businesses, like Coronation Hall Cider Mills in Bristol, Quebec; destination cideries like Taves Estate Cidery in Abbotsford, B.C.; and large, commercially driven products that service the entire country, like Growers, No Boats on Sunday, and Thornbury Craft cider company.

In Ontario, we believe that close to 8% of all apples are used for cider, with the numbers in Quebec, B.C. and Nova Scotia at similar or even higher levels. Many of them use apples that would not be used otherwise because of their appearance. It is also an important alternative to beer for those who are gluten intolerant and don't want the high alcohol levels of wine.

Our biggest concern is related to the incoming excise duty. This is expected to increase the costs of a can or a bottle by 20¢ to 50¢. This cost has to be borne by the producers or passed on to the consumers for at least six months before the proposed program for producers provides some relief.

With production costs rising, transportation costs further increasing and new cash-flow issues, cider producers are struggling to compete with international products, price points that are drastically inferior to Canadian beverages, and seeing money leave the country. This would be very bad for Canada's largest fruit-producing sector.

The proposed support program appears to be short by $25 million to $35 million a year and is only set to last until 2024. We need to have a fully funded program, as the sector's consumer base is really starting to grow. We have the resources to be one of the largest producers of this product in the world. Having the added cost will stifle growth, as it puts in doubt the producers and leaves the sector unsure of whether to invest in the Canadian economy. We could see close to half of cider producers in Canada close their doors within the next three years, with an estimated economic impact of $500 million annually.

Production of cider is slightly different from our counterparts in the wine industry, where cider is classified. Production costs for cider are typically higher than wine, but is consumed more like a beer. Apples can travel better but are stored for a longer time, which makes production able to happen year-round. This means that importing juice, which is not overly common, could be a solution to reducing costs, at an impact on the local economy.

Without a fully funded program, large commercial cideries will have no incentive to buy Canadian apples and may turn to imports. This also encourages medium companies, which use groups like BC Tree Fruits to co-pack or co-produce a product, to look for juice externally and further hurt the Canadian apple industry.

I'll finish my time with some great news about the sector. We are becoming known worldwide, as cider producers in Canada are winning awards at a disproportionate rate. We are really, really good makers of cider with Canadian apples.

Thank you again for the opportunity to share the information about what used to be one of the largest industries in Canada—pre-prohibition era—now seeing faster growth than the craft beer industry did from 20 years to 10 years ago. Now is the time to invest in the sector.

I'm happy to answer any questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Rooke.

We'll now move to Imagine Canada and Bruce MacDonald, for up to five minutes, please.

[Bruce MacDonald, President and Chief Executive Officer, Imagine Canada]

Thank you, Mr. Chair and committee members, for the opportunity to bring important considerations to your attention as you discuss the first budget implementation act.

As you are all aware, the charitable and non-profit sector is a vital part of the very fabric of our communities, improving the lives of everyday people here in Canada, and working with others around the world. In addition, this sector contributes to the nation's economic well-being. Charities and non-profit organizations employ one in 10 Canadians, and contribute 8.3% of Canada's GDP.

As a sector that is of significant importance to supporting Canadians, we were encouraged by two recent announcements in budget 2022. These are the changes to the disbursement quota and the stated intent to amend the Income Tax Act to allow a charity to provide its resources to organizations that are not qualified donees. It was stated that this would implement the spirit of Bill S-216. In combination, these measures would infuse the sector with additional financial resources and allow for more of those new resources to support vulnerable and marginalized communities, including working with organizations often serving and led by Black Canadians, indigenous people and persons of colour.

I'm here today to let you know that the proposed language in the budget implementation act has significantly missed the mark and would, in fact, make things worse for charities wanting to work with non-qualified donees. While the intent is clear, the specific language is hugely problematic.

The spirit of Bill S-216 includes a number of critical elements. It is a made-in-Canada policy solution that reflects our international commitments and integrates the latest evidence-based accountability and trust-based philanthropic principles. Unfortunately, the specific language of the BIA instead offers a rigid and ill-suited integration of U.S. tax measure into Canada's ITA.

We continue to encourage the government to support the spirit and substance of Bill S-216, and a wide collective of organizations, including Cooperation Canada, Philanthropic Foundations Canada, Imagine Canada and a group of the nation's leading charity lawyers, all of whom are offering concrete solutions to improve the legislation.

If not amended, Bill C-19 will have a number of harmful effects. Rather than removing the concept of direction and control, the BIA retains the current “own activities” regime, which requires direction and control. The language of the BIA would then codify direction and control through regulations and make it part of the fabric of the new qualifying disbursements regime.

In practice, casting existing CRA administrative guidance into legislation will result in a less flexible approach, and the CRA will require more direction and control-like conditions than before for qualifying disbursements. This will result in fewer types of collaborations, less flexibility in their design, and fewer partnerships with non-qualified donees overall.

The proposed language does not reflect the spirt of Bill S-216, which is trust-based philanthropy on equal footing, but instead perpetuates the current paternalistic regime by embedding a long and overly prescriptive code-like list of requirements that would govern the relationship between funder and grantee. By doing so, the BIA retains the colonial, parent-child nature of the relationship that we were trying to get away from.

The BIA reinforces and, in fact, enhances the administrative burden. Organizations will have to incur legal fees, hire lawyers and control actions to abide by these regulations.

In order to encompass the spirit of Bill S-216, we are pleased to offer three amendments to the language of the BIA for consideration.

In subsection 149.1(1) of the Income Tax Act, we propose to refine the definition of “qualifying disbursement”. Remove the reference to the disbursement meeting prescribed conditions, and replace it with a requirement that the charity instead take reasonable steps to ensure that the resources disbursed are used exclusively in furtherance of a charitable purpose. This would allow for more inclusive partnerships to better support non-qualified donees providing programs while retaining accountability and further charitable purpose.

In clause 21 of the bill, amend the proposed language in paragraph 168(1)(f) of the act related to directed giving. I won't read the full amendment, but will say that the amendment provides a solution to the directed giving issue in the BIA. The problem with the language isn't that charities can't grant to non-qualified donees, it's that they cannot receive gifts for the specific purpose of giving them to non-qualified donees, even if this aligns with their charitable activities.

Delete proposed regulation 3703 in its entirety. This would allow for the regulations to move back into CRA guidance documents, and not exist as codified rules in the Income Tax Act.

The language of the BIA has yet to be finalized. As members of the finance committee, as members of Parliament and as the voices of your communities, you can have an enormous on the final wording, and I urge you to use that influence and to support these amendments. By doing so, you will establish a system that is more respectful, less complex and less costly, and that can adapt to the needs of the future.

Thank you for your time. I'm happy to answer any questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. MacDonald.

Now we will have questions from members. In our first round, each of the parties have up to six minutes to ask questions of witnesses.

We are starting with the Conservatives. I believe MP Lewis is up for six minutes.

[Chris Lewis, Essex, CPC]

Thank you so much, Mr. Chair.

It's an honour to be here at the finance committee for the first time. I'm excited to be here.

Thank you to all of the witnesses for your testimony. I think it was fantastic.

Mr. Chair, through you, all of my questions will be for Mr. Strickland this morning.

Mr. Strickland, I would start off with a quick comment. Thank you for the work you do through Canada's Building Trades Unions. As you're very well aware, I've been working incredibly closely with a lot of the various unions, like the carpenters' unions, the construction labourers' unions, the IBEW and LiUNA. I believe you're aware, sir, of my private member's bill, Bill C-241.

Are you aware of that bill, sir?

[Sean Strickland]

Yes I am, MP Lewis.