Madam Speaker, I appreciate my colleague's intervention more than he knows.
I will go over the four provisions again: Canadian exploration expenses, Canadian development expenses, Canadian oil and gas property expenses and capital cost allowances determine the timing of reduction for capital expenditures. These provisions recognize the risks inherent to the large investments required for resource exploration and extraction and play an important role in ensuring a competitive business environment.
Also, there are two targeted income tax vehicles: the Atlantic investment tax credit that supports resources development and other investment in Atlantic Canada; and flow-through shares, which are designed to support junior exploration firms.
As well, the 15% mineral exploration tax credit was introduced in October 2000 as a temporary measure to moderate the impact of global downturn in exploration activity on mining communities across Canada.
The 25% resource allowance was introduced in 1976 to effectively put a ceiling on deductions in respect of rapidly increasing provincial and other crown royalties and mining taxes. This allowance functions as a proxy for actual royalties and mining taxes paid to provinces.
The government recognizes that the resource sector tax regime can generate greater investment and jobs for Canadians if it achieves these three goals. First, the sector must be internationally competitive, particularly within the North American context. 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. I believe the measures in Bill C-48, which would be phased in over five years, meet these goals.
As we know, in a global economy with intense competition for capital, a tax system with a lower tax rate, applied uniformly across all sectors with a simpler and more efficient tax structure, is far more effective than one with a higher rate of tax applied on a less efficient tax base. Bill C-48 would address this issue by reducing the federal statutory corporate income tax rate on income earned from resource activities from 28% to 21% by 2007.
The federal statutory corporate income tax rate is important because it is often the first piece of information viewed by prospective investors. A uniform, low statutory rate sends a positive signal to investors in Canada and internationally about Canada's relative competitiveness. In addition, a single rate reduces compliance and tax administration costs. The resource tax package will result not only in more competitive tax rates but also in a more competitive tax structure.
I would like now to look at changes relating to crown royalties, mining taxes and the resource allowance. As hon. members may know, the existing tax structure disallows the deduction from income of crown royalties or mining taxes. The resource allowance can either exceed or be less than non-deductible royalties and mining taxes for a specific project annually or over its economic life.
The resource allowance also introduces complexities in the tax system, thus adding to the cost of compliance and administration. It operates in economic conditions that have changed significantly from those that gave rise to it in the 1970s and earlier 1980s. Oil and gas markets are now deregulated and international competition for exploration and development capital is more robust.
All these factors put pressure on producers to be more efficient and, on host jurisdictions, to levy royalties and mining taxes at competitive rates.
By providing through this bill a deduction for the actual amounts of provincial and other crown royalties in mining taxes paid and eliminating the resource allowance, projects will now be treated in a more comparable fashion. This means that investment decisions will be based more consistently on the underlying economics of a project.
When fully implemented, this measure will result in a tax structure that imposes the same corporate tax on resource income as on other corporate income, and one that also allows deductions for actual costs instead of an arbitrary allowance.
These changes with respect to the resource allowance and royalty deductibility present important structural improvements to the treatment of costs in the resource sector.
Another measure introduces a new 10% mineral exploration tax credit for corporations incurring qualifying mineral and pre-production exploration expenses before a mine reaches production in reasonable commercial quantities. The new tax credit will be available only to corporations and will not be refundable or transferable under a flowthrough share agreement or through a partnership or trust. It will apply to both Canadian grassroots exploration and pre-production development expenditures for diamonds, base or precious metals, and industrial minerals that become base or precious metals through refining.
I should point out that this new tax credit is not to be confused with the 15% temporary mineral exploration tax credit that Bill C-28 is extending to the end of 2004. That credit is only available to individual investors in flowthrough shares. It was introduced as a temporary measure, as I mentioned earlier, to moderate the impact of the global downturn in exploration activities on mining communities across Canada.
Bill C-48 also includes special transitional arrangements. I will provide a little background at this point.
Following the budget announcement that the government intended to improve the taxation of resource income, on March 3 the Minister of Finance released a technical paper on the proposed changes.
The government reviewed the changes with industry and the provinces. Further to these discussions the government made two changes to the transition provisions of the new tax structure.
The first change will achieve a better measure of taxable resource and non-resource income for the purposes of applying the general corporate rate reduction during the transitional period by utilizing resource pool deductions in the determination of resource income.
The second change targets the Alberta royalty tax credit, ARTC, transitional relief set out in the technical paper to get a greater number of small and medium size producers. The Alberta royalty tax credit, as many hon. members know, is one of the most significant refund programs for crown royalties. Under this program the province of Alberta refunds a minimum of 25% of the first $2 million in crown royalties paid by each corporation or group of corporations.
A special transitional measure will reduce, during a 10 year transitional phase-in period, a portion of the refund that must be included in income tax for tax purposes. It will be available to individuals who receive the ARTC and to taxable Canadian corporations that pay no more than $2 million in Alberta crown royalties. Taxable Canadian corporations that may pay more than $2 million but less than $5 million of Alberta crown royalties will be eligible for a reduced amount of special transitional fund.
This new measure will further assist smaller corporations in their transition to the new tax structure. Both the general five year transition and the 10 year ARTC transition will provide investors with the certainty they need when making investment decisions.
There will be several benefits to the changes implemented through the bill. These changes will increase Canada's international competitiveness in oil and gas and in mining. As I indicated earlier, they will result not only in more competitive tax rates but also in a more competitive overall tax structure.
Regardless of how a firm's tax base is affected by the removal of the resource allowance and deductibility of crown royalties, all resource firms will benefit from a lower rate of corporate income tax. The oil and gas sector will pay less federal corporate income tax as a whole as a result of this change. Similarly, it is anticipated that the new taxation regime for mining, which includes the new pre-production mining tax credit for corporations, will result in a lower tax burden for that sector. For the most part there has been strong positive feedback on these proposed changes from industry organizations.
When these measures are fully phased in, it is estimated that the annual revenue cost to the federal government will be about $260 million.
There is one more important element of this bill that I would like to discuss. Bill C-48 also includes a measure that will enhance the treatment of the Canadian renewable and conservation expenses, the CRCE. These expenses are associated with the development of certain renewable energy and energy efficiency projects. The measure will also allow corporations to renounce Canadian renewable and conservation expenses to flowthrough share investors in a year where the CRCE will be incurred in the subsequent year.
This change was proposed in a July 26, 2002 Department of Finance news release. It will apply to qualifying renewable energy and energy conservation projects and will provide greater flexibility in the timing of investments financed through flowthrough shares. The treatment of flowthrough share investments in such projects will now parallel that of investments in non-renewable energy projects.
This new tax structure will achieve what it is designed to do. It will improve the international competitiveness of the Canadian resource sector, in particular relative to the U.S. It will promote the efficient development of Canada's natural resource base by establishing a common corporate income tax rate for all sectors and by treating costs more consistently, both across resource projects and between the resource sector and other sectors of the economy. It will simplify the taxation of resource income, streamline compliance and administration, and send clearer signals to investors.
This is a very important new regime. It will build upon Canada's tax advantage to support investment, innovation, productivity, growth and jobs for Canadians. I would urge all members of the House to support this bill.
