Thank you, Mr. Speaker. The Standing Committee on Finance, in accordance with its terms of reference, is pleased to submit its report on the review of Bill 26, An Act to Amend the Income Tax Act, No. 2, and Bill 27, Payroll Tax Act, 1993.

Background

Mr. Speaker, the Standing committee on Finance met in Yellowknife on five occasions in February, 1993, to consider the first Tabled Document 21-12(3): Payroll Tax Act. At that time, the committee consulted with the Minister of Finance and reviewed written submissions from the public who were invited to provide input. The committee also employed the services of a taxation specialist, Mr. William P. Daye, CA, to undertake a detailed review of the draft legislation with the Department of Finance.

The Standing Committee completed its initial review and tabled its report on February 18, 1993. The committee supported the principle and the objective of the policy initiative. However, the review raised a number of concerns, many of which related to the means of implementing this tax. As a result, the Standing Committee on Finance concluded that it could not recommend passage of the Payroll Tax Act in its present form.

The Minister of Finance undertook public consultation, redrafted the proposed legislation and tabled the following documents:

- Tabled Document 101-12(3), tabled on March 17, 1993 - Proposed Bill, Payroll Tax Act, 1993

- Tabled Document 102-12(3), tabled on March 17, 1993 - Proposed Bill, An Act to Amend the Income Tax Act, No. 2

- Tabled Document 104-12(3), tabled on March 19, 1993 - Summary of Proposed Regulations for Payroll Tax Implementation.

The proposed Payroll Tax Act was revised and on March 31, 1993, two bills received first reading. These are as follows: - Bill 26, An Act to Amend the Income Tax Act, No. 2

- Bill 27, Payroll Tax Act, 1993

Implementation Process

The Standing Committee on Finance is distressed by the process used by the government in attempting to implement the Payroll Tax Act. In the first place, the Minister of Finance failed to respond to the standing committee's report of February 18, 1993 in a timely fashion. Secondly, the government did not take the committee's suggestions regarding legislative process seriously. These actions defeated the purpose of the committee process and result in a situation whereby Members of the Legislative Assembly have been essentially presented with a last minutes ultimatum.

The third factor which concerned the standing committee was the fact that the public consultation process undertaken by the government has been too rushed. The committee noted, for example, that the government did not advertise in the newspaper widely circulated in the Inuvik region, the South Slave and the eastern Arctic. Finally, the Standing Committee on Finance feels strongly that the government has not allowed enough time for this important legislation to be properly considered in the Legislative Assembly. The committee is distressed by the possibility that important considerations have been overlooked, in the government's haste to implement the Payroll Tax Act by the initially established target date of July 1, 1993.

Purpose Of The Review

The purpose of the Standing Committee on Finance review of the proposed Payroll Tax Act and associated legislation and regulations is as follows:

- To assess the policy objectives of the proposed legislation;

- To determine whether the proposed legislation meets the policy objectives; and,

- To determine whether, in the context of total revenue and expenditures, the proposal presented is realistic and allows the government to fulfil its mandate.

Public Consultation

The Standing Committee on Finance was informed that the following actions have now been undertaken by the Government of the Northwest Territories regarding the proposed Payroll Tax Act:

- Writing to individuals and organizations, who had responded to the initial call for public input, explaining the revisions undertaken and asking for further input; and,

- Publishing a notice to the public, in the March 19, 1993 issue of Yellowknife and in the March 22, 1993 issue of News/North, inviting written submissions.

Revisions To The Proposed Payroll Tax Act

The revisions made to the proposed Payroll Tax Act, after its tabling on March 17 and prior to first reading on March 31, 1993, were reviewed by the standing committee's consultant and discussed with the Minister of Finance and his officials on April 1, 1993. The revisions were not substantial, rather they were required for reasons of legal or technical clarity and many were made in response to suggestions from the standing committee or the public.

For example, one set of revisions resolves a previous deficiency in the definitions of "employee" and "person." Another series of changes will provide a better method of dealing with employees who do not reside, and are employed only temporarily, in the Northwest Territories. The change will enable the establishment of a fixed amount below which temporarily employed non-residents will not be subject to the Payroll Tax Act.

Further changes clarify the anti-avoidance rules imposed and prevent employers from using service contracts with non-resident companies to avoid collecting the payroll tax from employees. A final revision resolves a previous deficiency with respect to the enforcement and collection system.

Assessment Of The Payroll Tax Scheme

Legislative Rationale

The Payroll Tax Act was developed in response to a need on the part of the Government of the Northwest for additional revenues. This tax is proposed as a key element of the 1993-94 fiscal framework. The government is counting on the revenue emanating from this taxation scheme to balance the budget.

The proposed Payroll Tax Act will meet its objective to obtain tax revenues from individuals who work in the Northwest Territories but who do not pay income tax here. The tax addresses the problem of leakage of potential tax dollars and will capture revenue from southern-based activities like the diamond rush and possible major transportation projects.

The Payroll Tax Act has been drafted to minimize the administrative burden for small businesses. Businesses with a total payroll of less than $200,000 will be required to file only once a year.

Recent budgets in other Canadian jurisdictions, such as British Columbia, Saskatchewan, New Brunswick, Newfoundland and the Yukon clearly indicate the trend of increasing taxes to fight deficits. Taxes need to be increased in some form in the Northwest Territories in order to avoid falling behind. When other jurisdictions in Canada increase their tax rates, it affects the performance of the formal financing agreement with Canada. The committee recognizes the need to raise more revenue through taxation.

Some written submissions and public commentary have suggested that the implementation of one percent payroll tax could soon be followed by increases in this proportion. In this regard, the bill has been referred to by some as "the thin edge of the wedge." However, any increases to the payroll tax can only be done by passage of an amendment to the legislation by the Legislative Assembly.

The proposed Payroll Tax Act will not create an unnecessary burden for low income earners and those in receipt of social assistance and workers' compensation. The tax will be accompanied by a tax credit through which northern residents whose incomes are less than $55,000 per annum will receive a rebate that equals or exceeds the tax paid.

One of the little understood aspects of the proposed taxation scheme is the tax credit which would accompany the payroll tax. The tax credit will be administered by the federal government through the proposed amendment to the Income Tax Act. Attachment one, prepared by the Department of Finance, illustrates the total impact of the payroll tax and the tax credit.

Committee Concerns

The Standing Committee on Finance recognizes that there will be difficulties with any taxation proposal. No tax system will please everyone. The standing committee, in its review, has noted a number of difficulties associated with the current proposal. These problem areas are described briefly below.

The standing committee wishes to make it clear that although one of the stated purposes of the proposed tax was to obtain tax revenues from individuals who work in the Northwest Territories, but who do not pay income tax here. It is now estimated that 70 to 80 percent of the revenue generated will come from residents of the Northwest Territories. This fact has generated some negative reaction to the tax among northerners.

By the time the proposed tax changes are fully implemented in 1995-96, it is projected that annual net revenues of approximately $1.6 million will be generated. In addition, approximately one per cent of this revenue will be absorbed by administration costs. These administrative costs do not include the costs which will be borne by employers to collect, remit and comply with the proposed Payroll Tax Act. The employers' cost is a hidden cost but it has potential to be quite significant. The committee has concluded that as a means of raising revenue, the Payroll Tax Act is too complex in relation to its revenue potential.

Taxation schemes, once implemented, tend to remain in place for a very long time. With this in mind, taxation schemes need to be well thought out and very carefully constructed. The Standing Committee on Finance is of the opinion that the necessary care and consideration has not been given to the development of the proposed payroll tax scheme. In addition, the committee is fearful that the government, once having implemented the payroll tax, will succumb to the ever-present and all to easy temptation to generate additional revenue by means of increasing the rate of taxation.

The standing committee is troubled by the fact that, under the present proposal, there are some classes of taxpayers who will receive a rebate even though they do not pay the payroll tax initially. This class of taxpayer is comprised of self-employed individuals. The Minister of Finance informed the committee that he believed that this class of taxpayer was relatively small. He indicated that attempts were made to alleviate this difficulty but that these attempts have been so far unsuccessful. He undertook to continue to search for ways to ensure that self-employed individuals, who are exempt from paying the payroll tax, will not receive a rebate.

Conclusion

The Standing Committee on Finance has met, initially on March 15, and again on four separate occasions on April 1 and 2, 1993, to fulfil its responsibility to carefully review the proposed legislation put before it. Several very real concerns emerged from these deliberations and these concerns are duly reported in this document.

The Standing Committee on Finance has worked very hard to ensure that this proposed legislation is as effective as it can be in achieving the fiscal policy objectives of the Government of the Northwest Territories. The committee feels that the proposed legislation has been improved immeasurably as a direct result of these efforts. However, the committee feels that these efforts have been hampered by the haste in which the government has attempted to implement the Payroll Tax Act.

The Standing Committee on Finance has completed its review and assessment of the proposed Payroll Tax Act and the Act to Amend the Income Tax Act, No. 2, within the confines of the limited time allocated.

Recommendations

The Standing Committee on Finance agrees that there is a need for the government to raise more tax revenues. The alternative to the payroll tax is either a further increase in personal taxes or an increase in the business tax. Given the alternatives, the committee believes that the implementation of a new tax, the payroll tax, may be the best alternative. On the basis of agreement with this rationale, some Members feels that Bills 26 and 27 are now ready to proceed.

However, other Members of the committee were outraged with the very flawed process of consultation with the Standing Committee on Finance and Members of the Legislative Assembly. The Minister did not act in a timely manner to deal with the initial Standing Committee on Finance recommendations so that Members would have a reasonable amount of time to consider the revised bill before today, nor has he communicated how the payroll tax and the tax credit will work to those Members who are not Members of the Standing Committee on Finance. For these reasons, some Members felt strongly that Bills 26 and 27 are not ready for passage at this time.

Therefore, this committee recommends:

Recommendation 1

That the following bills be moved into committee of the whole for further consideration. Bill 26, An Act to Amend the Income Tax Act, No. 2, and Bill 27, Payroll Tax Act, 1993. Recommendation 2

The committee recommends that the government continue to investigate ways and means to ensure that self-employed individuals, who are exempt from paying the payroll tax, will not receive a rebate.

Motion To Accept And Move Committee Report 20-12(3) To Committee Of The Whole

Mr. Speaker, that concludes the report of the Standing Committee on Finance, therefore I move, seconded by the honourable Member for North Slave, that the report of the Standing Committee on Finance on Bill 27, Payroll Tax Act, 1993, be received by the Assembly and moved into committee of the whole as the first item of business for today.