Finance Committee on Feb. 16th, 2023

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you.

[The Chair, Liberal, Peter Fonseca]

We'll go over to Madam Chatel.

[Sophie Chatel, Liberal, Pontiac, QC]

First, Mr. Macklem, on behalf of all my colleagues on the committee, I'd like to thank you for being with us today. It's very reassuring to hear you speak to Canadians like this.

Earlier, you said the distribution of businesses' price changes, their price setting behaviour, is normalizing.

Could you send us the chart you spoke of? We'd really appreciate it.

[Tiff Macklem]

Of course. The chart is on our website, but I'll send it to the committee.

[Sophie Chatel, Liberal, Pontiac, QC]

All right, thank you.

Do other countries have different policies?

What policies could be adapted to incentivize businesses to bring their prices back to normal?

Are there any precedents elsewhere?

[Tiff Macklem]

As far as monetary policy is concerned, the key to normalizing price distribution is reducing excess demand.

When the economy is in an excess demand situation and consumers start to anticipate that inflation will be high, the price pattern changes and it's easier to raise prices.

However, the competitive system works much better when we have a better balance between supply and demand. It then becomes more difficult for businesses to raise prices because they stand to lose customers and consumers.

That's why we had to raise interest rates, to better balance supply and demand and also reduce anticipation of inflation. The competitive system will work better, and price setting will normalize.

The Bank of Canada's deputy governor Paul Beaudry is giving a speech today in Alberta, and he will further expand on that.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor Macklem and Senior Deputy Governor Rogers.

We thank you for your regular appearances here before the finance committee to update us on monetary policy and how things are going. Members had many questions. We look forward to seeing you here in a number of months.

On behalf of the members, we want to thank you.

Members, we're going to suspend now as we go into our second panel to look at the luxury tax.

[The Chair, Liberal, Peter Fonseca]

Welcome back, members.

This panel will be on the Select Luxury Items Tax Act and Bill C-19.

From the Department of Finance, we have Mr. Gervais Coulombe, senior director, excise taxation and legislation, sales tax division, tax policy branch; Mr. David Turner, senior adviser, sales tax division; and Mr. Darren D'Sa, tax policy officer, tax policy branch.

Welcome, and I understand the opening statement will be from Mr. Coulombe.

[Gervais Coulombe, Senior Director, Excise Taxation and Legislation, Sales Tax Division, Tax Policy Branch, Department of Finance]

Thank you, Mr. Chair.

I am pleased to be here with you today to discuss the progress report that was tabled by the Department of Finance on December 2, 2022, which describes efforts by the department to address issues with the implementation of the Select Luxury Items Tax Act—including a summary of discussions and issues raised by impacted sectors.

In budget 2021, the government announced the introduction of a luxury tax on the sale of aircraft and cars with a sales price over $100,000, as well as on boats with a sales price over $250,000. This tax is calculated at the lesser of 20% of the value above the threshold, or 10% of the full value of the luxury car, boat or aircraft. The luxury tax came into effect on September 1, 2022.

This report addresses the following steps leading to the implementation of the luxury tax: the release of a technical backgrounder for public consultations, as of August 2021; the release of draft legislation for public consultations, as of March 2022; feedback received from stakeholders; internal consultations with CRA, CBSA and other governmental departments; linguistic, bijural and legistic review conducted by the Department of Justice; changes made in response to those public consultations; governmental news releases announcing details on the implementation, which were released in July 2022; an order in council made by the Governor in Council to fix the coming-into-force date of the luxury tax, released in August 2022; the release of draft regulations by the Department of Finance; the administration of the luxury tax by CRA and CBSA since its coming into force; additional measures since that coming into force; and, finally, a list of examples of typical stakeholders who met with finance officials over the last two years.

As detailed in this report, the Department of Finance consulted and discussed with sectors, on many different occasions, in an effort to address issues with the implementation of the luxury tax. Now that the luxury tax is in effect, administration and enforcement are ensured by CRA and CBSA. The first reporting period for the luxury tax ended on December 31, 2022. Taxpayers had until January 31 of this year to file their first return with CRA.

The department will continue to closely monitor the implementation of the tax.

Finally, as officials of the Department of Finance, we make best efforts to remain open and available to stakeholders, so that we can hear and understand any technical concerns they have with respect to the tax system, all while still ensuring that the government's tax policy goals and objectives are met.

This completes my opening remarks. I'm here with my colleagues to answer any questions that committee members may have.

[The Chair, Liberal, Peter Fonseca]

Thank you, Monsieur Coulombe.

We're going to get into the first, and only, round we will have with you and your colleagues, at this time.

Members, I'm looking at the time. Each party will have about five to six minutes.

We're starting with the Conservatives.

Please go ahead, MP Chambers.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Just off topic, but since I have the floor, I just note the Deputy Prime Minister has not accepted the invitation to come to committee. The governor has been glad to appear every time he's been invited. The only time the Deputy Prime Minister appears is when there's legislation to pass. If the government would like the legislation with the BIA, which is going to come in a few months, to pass smoothly, I think we should probably work on a better working relationship.

Anyway, let's talk about the luxury tax.

Thank you for appearing.

One of the things we heard from stakeholders was the government had not completed an economic impact analysis of the luxury tax. The Parliamentary Budget Officer indicated, just using vessels as an example, about a $2-billion loss of sales over the next five years for vessels. The aerospace sector industry group, just for business jets alone, believe there will be about 750 job losses as a result of the imposition of the luxury tax.

Does the Department of Finance agree with some of these economic analyses? Will that be part of your final report? I understand this first interim report was a little bit more on the implementation, but are these some factors you will be opining on in the next update?

[Gervais Coulombe]

As you correctly pointed out, that report is the first of two. The motion adopted by this committee in October included the presentation of a detailed written economic impact study. That study is being completed by the department as we speak. I understand it will be tabled by March 1 of this year. That will include more details on the economic impacts of the introduction of the luxury tax, but I'm not in a position to speculate on its content at this very moment.

[Adam Chambers, Conservative, Simcoe North, ON]

Of course. Fair enough.

I want to note something that would be helpful for the committee, if I could offer some suggestions.

In other jurisdictions that have introduced a luxury tax, some have kept them, some have substantially amended them and some have removed them altogether for various reasons in Europe, and even in the U.S. If there's some discussion in the final report about why some jurisdictions decided to make changes or to abandon them, I think it would be helpful for the committee, and certainly for industry, which, because the government didn't complete its own analysis prior, has been trying to determine what the real impacts are to industry.

It sounds like you have a good open relationship with the various industries. Is that right? Are they sharing their information with you? Are you relying on some of the work they've done to inform the future report?

[Gervais Coulombe]

As stated in the report that we tabled in December to that committee, there have been ongoing consultations with the three economical streams, so basically the car, the boat and the aircraft industries. We have received on numerous occasions their feedback, including on some of the analysis you mentioned.

But, again, the economic impact study will be tabled before that committee later this month or by March 1.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

So you wouldn't be in a position to say whether you agree with some of the assumptions made by either the Parliamentary Budget Officer or, say, the aerospace sector yet. Is that fair?

[Gervais Coulombe]

Given that this economic study will be tabled, it would just not be appropriate for us to start navigating into those issues. The committee would probably appreciate reading the report on the impacts of this first.

[Adam Chambers, Conservative, Simcoe North, ON]

Absolutely. Certainly, we look very much forward to that as a way to give us some advice about how we might proceed in the future or how we could adjust perhaps some of the thresholds. I'll note the threshold for airplanes is $100,000. I'm not sure I want to fly in an airplane that costs less than $100,000, and so I would be open to some threshold discussions as well.

I wanted to thank the department for the work so far, which is helpful, but, of course, we're very interested in the economic impact statement. I know you worked with industry on some of the implementation issues, which you identified in the report. For us, the report that comes in March will be, I think, perhaps a richer discussion and have some feedback from the associations, but thank you for your work so far.

Thank you, Mr. Chair.

[The Chair, Liberal, Peter Fonseca]

Thank you.

We go over to the Liberals now.

MP Chatel, go ahead for five minutes, please.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Chair.

I'd like to thank the witnesses for being with us today.

I have to mention what a great job all of you in the Department of Finance are doing to help Canadians. You make sure that Canada's tax system is fair and balanced, and that it gives the government the revenue stream it needs to make Canadians' hopes and dreams come true. It also keeps them healthy, as we've seen recently. This would not be possible without your hard work. Thank you very much.

I know you held very broad consultations, and I would like to hear your comments about that.

What are the key comments you received?

What challenges did you face?

How did you respond to them?

[Gervais Coulombe]

I can start answering the question, and then I will turn to my colleagues.

At the bottom of page 1 and the top of page 2 in the report, you will find the main comments received at our consultations on the technical backgrounder. At that point, no detailed legislative proposals had been released yet.

We received a lot of feedback, particularly from people in the aeronautics industry, who pointed out the absence of a business use test. That was part of the feedback taken into consideration when drafting the legislative proposals released for public comments in March of last year.

We also received feedback on the test for improvements made to goods subject to the luxury tax. People in the industries asked us to make sure that subject vehicles, aircraft and vessels sold below the price threshold will never be subject to the technical improvement tax rule. That was part of the feedback we received during consultations.

Mr. Turner, would you like to add something?

[David Turner, Senior Advisor, Sales Tax Division, Department of Finance]

Certainly. One of the other themes during consultation and moving the technical paper into legislation was, not surprisingly, bringing additional detail and specificity to all of the concepts, terms and proposals that were included in the technical paper.

The technical paper, given its nature, was presented at a higher level and intended to solicit expert information from participants in the industry itself, and it was effective in doing that. We received information on just how sales of planes, for example, work and how those will work with the proposed definitions. You saw many refinements made to the definitions themselves.

When the legislation was released in draft form in March of last year, the feedback continued, and there was increased request for specificity. Also, additional circumstances were brought forward, which we could then respond to in a fairly technical manner. This is pretty far down in the weeds, but these were the sorts of refinements that were made.

One example of that was that we received feedback from stakeholders regarding sales, the agreements for which were completed before a certain date, and whether those were receiving the appropriate and fair treatment under the taxation framework, so some modifications were made to those rules, which were reflected in the final legislation that this committee considered and studied last summer.

[Sophie Chatel, Liberal, Pontiac, QC]

Would you say that the stakeholders were happy with the way you worked with them and your response to their concerns?

[Gervais Coulombe]

I'd say that the key stakeholders are always pleased when their comments are read and they participate in discussions. Generally speaking, people from industries were pleased to see that some of their concerns had been taken into account in the final legal provisions adopted by Parliament. Of course, not all of their recommendations were taken into account.

Our role is truly to implement government policy. However, the policy clearly stated that a tax would be applied to three types of luxury goods. Many expressed their opposition to a tax of this kind from the outset. It was introduced anyway, but with technical adjustments.

[The Chair, Liberal, Peter Fonseca]

Thank you.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much.