Mr. Speaker, the legislation before us, Bill C-48, implements a new federal income tax structure for Canada's resource sector, to be phased in over five years.
To begin, I want to give the House a sense of the overall importance of the resource sector, especially mining and oil and gas, to the Canadian economy as a generator of investment, exports and jobs for Canadians.
In 2001, for example, the sector accounted for almost 4% of Canada's GDP, with over $64 billion in exports and more than $30 billion in capital expenditures. As well, over 170,000 Canadians work in resource businesses.
The potential for future resource development exists right across the country. While the mining industry is vital to rural and northern economies, the oil and gas industry is important to both the western and Atlantic provinces and the territories.
Internationally, Canadian resource industries are large investors in innovative technology and they also play a significant role in the provision of exploration and extraction services.
Overall, the changes in Bill C-48 will be positive, both for mining and for the oil and gas industry, but before discussing them, I want to briefly review the existing sector specific tax measures.
As hon. members know, income earned in Canada from the extraction and initial processing of non-renewable resources has historically been subject to a range of targeted tax measures.
For example, certain provisions determine the timing of deductions for capital expenditures. They include Canadian exploration expenses, Canadian development expenses, Canadian oil and gas property expenses and capital cost allowances. These measures recognize the risks involved in investing in resource exploration and extraction and also play an important role in ensuring a competitive business environment.
In addition, the resource sector is able to use flowthrough shares to raise capital for resource exploration and development. Individuals investing in flowthrough shares for grassroots mineral exploration are also eligible for the 15% mineral exploration tax credit, introduced in October 2000 as a temporary measure to moderate the impact of the global downturn in exploration activity on mining communities across Canada.
Another resource specific provision is the 25% resource allowance. This provision was introduced in 1976 primarily to protect the federal income tax base from what were rapidly increasing provincial royalties and mining taxes, which had been deductible for federal tax purposes.
The resource allowance, however, is an arbitrary deduction that does not necessarily reflect the actual cost of royalties and mining taxes. Consequently, it can distort the returns from individual resource projects and the allocation of investment between projects within the resource sector and between the resource sector and other parts of the economy.
As well, the complexity of the resource allowance calculation has meant substantial compliance costs for the industry and administrative costs for government.
The economic conditions that led to the introduction of the resource allowance have changed significantly since the 1970s, leaving the original need for it less relevant. In today's economic environment, there is greater pressure on producers to be efficient and on host jurisdictions to levy royalties at competitive rates.
The government recognized that the resource sector tax regime is capable of generating even greater investment and jobs for Canadians. In designing a new tax regime for the sector, the government was guided by three main goals.
First, the tax regime must be internationally competitive, particularly in the North American market. Second, it must be transparent for firms and investors. Third, it must promote the efficient allocation of investment both within the resource sector and between sectors of the Canadian economy.
Following extensive consultations with the industry, and I underline extensive, the government announced in the 2003 budget that it intended to improve the taxation of resource income.
Subsequently, on March 3 the Minister of Finance released a technical paper on the budget proposals. These proposals were reviewed in the course of extensive consultation with the industry and with the provinces. In response to these consultations, some special transition measures were incorporated into the legislation before the House today.
I would now like to briefly review the measures in Bill C-48. The proposed new tax structure will ensure that the resource sector firms are subject to the same statutory rate of corporate income tax as firms in other sectors. It will also ensure that these firms can deduct their actual cost of production rather than an arbitrary allowance.
Let me explain a little further. The first measure in Bill C-48 would reduce the federal statutory corporate income tax rate on income earned from resource activities from 28% to 21% by 2007. This rate is often the first piece of information viewed by prospective investors. If Canada is to send a positive message to investors that it is competitive, then this uniform lower rate is indeed essential.
The second measure would eliminate the arbitrary 25% resource allowance and would provide a deduction for the actual amount of provincial and other crown royalties and mining taxes paid. This means that projects would now be treated in a more comparable fashion. This change would promote efficiency by ensuring that the investment decisions were based more consistently on the underlying economics of each project. It would also result in a simpler tax structure, streamlining tax administration and compliance.
The government has recognized the particular circumstances of the mining sector in Bill C-48 by proposing a new 10% mineral exploration tax credit and it will apply to both Canadian grassroots exploration and preproduction development exploration for diamonds, base or precious metals and industrial minerals that become base or precious metals through refining.
It is proposed that these new measures be phased in over a five year transition period. An exception is the new mineral exploration credit which will reach its full rate in only three years. The proposed implementation schedule provides a reasonable transition to an improved tax structure in a fiscally responsible manner.
In addition to the resource tax changes, Bill C-48 includes measures that promote renewable energy and energy conservation projects by improving the treatment of Canadian renewable and conservation expenses, the CRCE. These expenses are fully deductible in the year that they are incurred and can be transferred to investors under a flow-through share agreement.
As I clarified in the standing committee hearings, we are discussing federal tax changes only. To the extent that the provinces rely on the federal tax base though, if offsetting adjustments are not made, provincial income tax revenue from the resource sector may increase as a result of these changes.
The international competitiveness of Canadian firms will be maximized where provinces provide a mechanism to return to the industry any provincial revenue gain arising from the changes to the federal tax structure.
The new tax structure for the resource sector complements other measures in the 2003 budget. We discussed these measures during the debate last spring on Bill C-28, the Budget Implementation Act, 2003. That bill eliminated the federal capital tax over five years, which will strengthen the Canadian tax advantage for investment in the capital-intensive resource sector.
Together with the elimination of the federal capital tax, the new measures in the bill we are considering today will substantially reduce the effective tax rates, both for the mining and the oil and gas industries.
For oil and gas, this reverses a current disadvantage relative to the United States. For mining it will build on an existing advantage. In both cases the changes place the Canadian resource sector in a markedly improved position to attract capital for exploration and development.
Bill C-48 reflects the government's ongoing commitment to an efficient and competitive corporate income tax system which plays an important role in creating a stronger and more productive economy. The resource sector attaches considerable priority to the delivery of these proposed changes. I cannot emphasize that enough for the members.
During the finance committee hearings on Bill C-48, the industry representatives and many committee members indicated that they considered the timely delivery of the legislation to be of utmost importance to their constituents and, indeed, to many provinces such as Alberta, Saskatchewan, Nova Scotia, et cetera. Given the benefits of these changes for the resource industries and the communities on which they depend, I would encourage all hon. members to give quick and speedy passage to Bill C-48.