Finance Committee on May 18th, 2023

[Daniel Brock]

Thank you very much, Mr. Ste-Marie.

An interesting aspect of this proposal is that it seems to run entirely counter to the government's laudable efforts to combat climate change. Not to take anything away from the businesses that are operating in Alberta—they do great work as well—but in Quebec the opportunity is very rich for this high-performance computing industry to take hold, to create jobs, to attract investment and to bring revenue into Canada.

When this lobby was first being prepared for then minister Morneau back in 2015 and 2016, this industry didn't exist as it does today. It is a rapidly changing industry in which the technology is also rapidly changing, and Canada has found itself in a unique position to be able to supply this service globally, with clean power.

One of the criticisms of the crypto-asset or of the digital asset mining space is its high energy use. There are many industries that use a lot of energy, and this is one. When it uses energy from Canada, it's typically clean energy or low-carbon energy. When it uses its energy from Russia, from Kazakhstan or even from the United States, which are the three countries above Canada in supplying energy to this industry, it's fossil fuel-generated energy.

When this law was prepared, there was not that understanding of the industry. When the law was tabled in February 2022, the department.... We work with the department. We have respect for the officials who work in the department. They, like many people, are struggling to understand this industry. They had not consulted with anybody in this industry, which had just grown up since 2017. The $2 billion we talk about in revenue generated largely came in since 2018. They did not consult with the industry, so they couldn't really understand the impacts of this law on them.

The correction we're looking for is to take the law they created and create a very small clarification to the exception there. It would make it clear that Canadian companies that do high-performance computing and that sell high-performance computing as a commodity to the international marketplace should be treated like any other computing business. They would receive full input tax credits so that they can continue to grow their businesses.

David, did you want to add something?

[David Robertson, Partner, EY Law, Digital Asset Mining Coalition]

I can take you to the exact problem in the legislation.

If you have subclause 118(1) of the BIA available—that's proposed section 188.2—there's a definition of “mining activity”. Paragraph (c) says a mining activity includes “allowing computing resources to be used for the purpose of” crypto-asset mining. Think about that. I could be AWS. I'd have computers and computing servers, but their use by my customer—in this case, my customer outside Canada.... It's determining that I'm now being deemed to be engaged in their activity.

Then it has this provision: The definition of “mining group” means “a group of persons that...share mining payments”. Sharing is not something used anywhere in the legislation. If a landlord signs a triple-net lease and says, “I'll rent you this store, but one element is that you're going to pay me 2% of your revenue,” does that constitute sharing in the revenues of the store?

The officials from the Department of Finance suggested there is an exemption for this sector, but what I'm hearing from the Bankers Association about certainty.... We're looking for certainty. What we're asking for is a very simple amendment, added after, that says that with respect to a mining activity, if a Canadian is performing it for a non-resident mining pool, we're excluded from the legislation. It's as simple as that.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Mr. Ste-Marie.

Now, it's over to the NDP and Mr. Blaikie.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much, Mr. Chair. I have a question for Mr. Hannah.

I heard loud and clear that you don't have the number today, in terms of what the cost to banks would be if this legislation were to pass as is. Is that because your members aren't sure what their financial exposure is, as a result of these changes to law, or is it because they haven't shared that information with you?

[Darren Hannah]

I'll start by saying that, in some respects, it's both. You have retroactive legislation that applies, potentially, all the way back to the introduction of GST. When I have—

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Excuse me. I have a point of order.

We're not getting the interpretation.

[The Chair, Liberal, Peter Fonseca]

Okay.

We're good to go again. Thank you, Mr. Ste-Marie.

Mr. Blaikie, continue.

[Darren Hannah]

You have retroactive legislation that applies literally back to the inception of GST, if you take it back far enough.

When I get calls from clients—and I do, from institutions—their first question is, “I don't understand my exposure, because I have something here that has no end to it.” They are trying to figure that out for themselves.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

I hear that, and I've certainly heard you say that the application of tax in this regard has been contested for a long time now.

In the labour movement, we have an expression: “Work now; grieve later.” I'm interested to know whether they have been paying the tax while they've disputed it. If this weren't to pass, and given the 2021 decision, would they be entitled to a rebate on the taxes they've already paid, or have they not been paying this tax while it's been contested and would have to pay it, going back?

[Darren Hannah]

No. They have been paying it. That's exactly the issue. They've been paying it and contesting it for the better part of 20 years. It was only when they got, frankly, to the point where they took it to court, and ultimately the government lost, that all of a sudden this came about.

What happened was—just to be clear—the institutions paid it. They would file a request with CRA for, in effect, a tax paid in error. CRA would do nothing. Eventually, CRA denied a claim. That's what precipitated the court case. The facts of the matter were heard, and the government lost at the Federal Court of Appeal. The government could have appealed to the Supreme Court, had it wanted to. It chose not to do that, which speaks volumes about the strength of its case. It then sat on its hands for two years. Finance said nothing, then, all of a sudden, retroactive legislation comes out that effectively tries to erase 20 years' worth of history.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Based on the 2021 decision, if this bill weren't to pass with those provisions in it, would the effect be that the government would be required to rebate the taxes they've been paying over the time they've been contesting the decision?

[Darren Hannah]

Yes, where there have been—

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

If it passes as it is, they would no longer be entitled to that rebate. We can contest whether that's right or wrong, based on the principle of retroactive law, but, effectively, this has the impact of stopping a rebate to banks on money they've already paid to government.

Is that a fair assessment of the impact?

[Darren Hannah]

Yes, it would make it so that the request for overpayment they made or would make in response to the ruling would then simply no longer be allowed to be processed.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much.

Mr. Brock, I'm curious to know, with respect to the issues you've raised here today.... We heard from officials on this previously. What they were saying was that the current state of affairs they are trying to correct—we can argue the merits of that and obviously we will; you have to some extent already—is this: Because it's hard to identify the customer, given the makeup of mining pools and the anonymity that exists with respect to some of those pools and the way they're constructed, it's impossible to assess the GST. There's no way for government to raise revenue on the GST. I think their claim is that the input tax credits are designed to offset tax that would be paid. Here, structurally, we have a situation in which tax cannot be paid, so it doesn't make sense to extend the input tax credit. That's what I understood from officials.

Is that your understanding, as well, or do you think there's something else about it that the committee ought to know?

[Daniel Brock]

I'll let my colleague David go into the tax details.

What the officials came to speak to you about is the activity of these mining pool companies, their relationship to the bitcoin network, the transactions that happen on that network, and the bitcoin companies that verify and secure those transactions. That entire activity Finance is referencing happens outside of Canada. It doesn't happen in Canada. The Canadian businesses that provide the computing support for this industry and that make bitcoin money possible are in Canada. Their clients are outside of Canada. They are creating a service. They are creating a supply of clean, high-computing services that they are selling to a non-resident of Canada. They know exactly who their client is. Their client is the mining pool company. Their client pays them for the services they provide.

What this legislation does is confuse the whole thing. It tries to combine this Canadian activity—the discrete computing services—with broader questions about how, from a regulatory point of view, we should treat the bitcoin network and the people who transact on that network, and what the regulatory oversight should be. These are all perfectly legitimate questions the government should grapple with. There should be a framework of law and regulation that addresses these issues.

The issue of GST and these companies is very simple and clear. They're creating computing services. They're selling those computing services to a non-resident company. Those services should be rated zero for GST purposes, and they should be able to claim their input tax credits.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Mr. Blaikie. We're over time.

Members and witnesses, we're moving into our second round. We have Mr. Morantz, who is up for five minutes.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you, Mr. Chair.

Mr. Hannah, I want to talk to you about this issue of the credit network operating services. Since I've been here, since 2019, I've seen the government break a lot of promises. If I were to list them all, I would run out of time. What I've never seen, though, is a government make a promise in a budget and then break that promise in the same budget.

Let me read you something from budget 2023. I realize that interchange fees are different from the card network operating services tax, so I'm not conflating those. The government says,

The pandemic brought an increase in people using credit cards when they shop. Small businesses pay fees...with the largest component being the “interchange fee”.... [They promised] to lower these transaction fees.

In Budget 2023, the government is announcing that it has secured commitments from Visa and Mastercard to lower fees for small businesses, while also protecting reward points for Canadian consumers offered by Canada's large banks.

Now, your organization and the Canadian Bar Association have made submissions. Moneris has made a submission.

In Moneris's submission, they say:

We [want] to draw your attention to a proposed amendment to the Excise Tax Act respect to the Goods and Services Tax...Treatment of Payment Card Clearing Services and its impacts on not only the Canadian acquiring and payments industry, but on Canadian merchants and consumers. This proposed change may ultimately result in higher costs to merchants and therefore higher costs to Canadian families at a time when we are working towards making life more affordable....

On one hand, we have the government saying, “Hey, we're going to pat ourselves on the back. We made a deal with the credit card companies to lower these interchange fees,” and at the same time they're bringing in retroactive legislation to go back to 1991.

At the risk of being accused of what Mr. Baker was being accused of, I'm going to go on.

The Canadian Bar Association, in their correspondence, say:

Canadian democracy is founded on the rule of law, and the “law should be such that people will be able to be guided by it.” It is important for people to be able to “foresee the consequences of their conduct in order that persons be given fair notice of what to avoid.”

It is a “basic tenet of our legal system” that the legal consequences that flow from a person's conduct “should be judged on the basis of the law in force at the time.”

Given all of this, I recognize your frustration. It's more a comment than a question, but how are merchants supposed to deal with the situation in which the CRA can now go back 30 years and try to collect money from them that is based on this retroactive rule?

[Darren Hannah]

Your point is very well taken. Indeed, I mentioned it in the opening remarks.

It is ironic that the government is proposing this measure at the very same time it is claiming that it is trying to lower the cost of card acceptance fees for small businesses—

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Exactly.

[Darren Hannah]

—because you're increasing taxes on issuers. You're increasing taxes on acquirers. Ultimately, it's going to affect the cost of card acceptance by merchants.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you very much.

Now, Mr. Gray, your CEO, Mr. Beatty, has made a number of comments about this budget. They're mainly around productivity, and you alluded to productivity in your opening statement.

Budget 2022 acknowledges this problem, as you mentioned. In fact, the finance minister, in her opening statement, called this problem “Canada's Achilles heel”.

Now, we have a government that was brought to power in 2015. This is 2023. Canada is dead last in the OECD for productivity. This is a very serious problem, and unfortunately we don't have a government that's serious about solving it.

What do you think this government should do to solve it?

[Alex Gray]

I think, from our membership, we hear two key areas of concern that lead to lower productivity in the Canadian economy.

One is the difficulty of investing in a way that will yield a reasonable return. As we noted during our criticism of the stock buyback tax, companies don't buy back their stocks just because they want to. They do because they don't see anywhere else they can reasonably deploy their capital.

I think you could very well describe the same thing in terms of lagging productivity. Productivity is not an issue of Canadians not working hard. It's, in large part, a product of not having the tools necessary to do the job and to do it as well as it could possibly be done—for example, an employer not investing in the technology and software that would enable them to automate certain workflows or to streamline certain processes.

The other is a function of our just not having enough labour. There's a labour shortage. This is why we're coming out very strongly in terms of reducing seniors' disincentives to work and streamlining the express entry program to ensure that all Canadian businesses have the people they need to invest, thrive and grow.

I believe the best testament was offered here, by the Hotel Association of Canada. The amount of lost revenue at a time when they should be ramping up operations is absolutely stunning.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Mr. Morantz.

Now we'll go to Ms. Chatel, please, for five minutes.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Chair.

I can't resist the urge to jump into this debate.

I've worked in taxation for most of my career, and let me tell you, when it comes to retroactive legislation, there's a big difference between what we see in some countries and what goes on in Canada.

Since the GST was introduced in 1991, the Department of Finance's and the Canada Revenue Agency's position has always been that interchange fees were not related to financial services but rather to administrative services.

This was challenged before the Tax Court of Canada. In 2018, the court upheld the Department of Finance's and the Canada Revenue Agency's position, namely that these were not financial services, based the rule of law and the way it was enforced by the banks.

In 2021, the Federal Court of Appeal give the banks a huge gift by ruling that those services were now considered financial services. That gift would be paid retroactively to the banks by middle-class Canadian taxpayers. You'd expect a government to correct that to maintain what's always been its position up to 2021. I understand that there was a two-year period wthehen there may have been some legal uncertainty on this. With respect to the decision not to appeal to the Supreme Court, I would point out that the Supreme Court hears cases of national interest. I just wanted to set the record straight.

My questions will be for Mr. Gray. After the budget was tabled, the Canadian Chamber of CommerI have a couple of other ones for youce stated that it was pleased to see “a number of new measures introduced which will ensure our domestic clean technology players can remain competitive in the face of the U.S. Inflation Reduction Act”.

I would like you to explain two things.

First, why is it so important that the government invest in these measures to remain competitive with what the Americans are doing?

Second, in your view, what are the most important measures in that regard?