2015 Legislative Session: Fourth Session, 40th Parliament

HANSARD

The following electronic version is for informational purposes only.

The printed version remains the official version.

official report of

Debates of the Legislative Assembly

(hansard)

Thursday, April 30, 2015

Afternoon Sitting

Volume 25, Number

ISSN 0709-1281 (Print)

ISSN 1499-2175 (Online)

CONTENTS

Page

Orders of the Day

Committee of the Whole House

Bill 26 — Liquefied Natural Gas Income Tax Amendment Act, 2015

Hon. M. de Jong

B. Ralston

A. Weaver

Report and

Third Reading of Bills

Bill 26 — Liquefied Natural Gas Income Tax Amendment Act, 2015

Proceedings in the Douglas Fir Room

Committee of Supply

Estimates: Ministry of Children and Family Development (continued)

Hon. S. Cadieux

D. Donaldson

B. Routley

[ Page 7895 ]

THURSDAY, APRIL 30, 2015

The House met at 1:31 p.m.

[Madame Speaker in the chair.]

Orders of the Day

Hon. M. de Jong: In Committee A, Committee of Supply, estimates of the Ministry of Children and Family Development, and in this chamber committee stage of Bill 26.

Committee of the Whole House

BILL 26 — LIQUEFIED NATURAL GAS

INCOME TAX AMENDMENT ACT, 2015

The House in Committee of the Whole (Section

B) on Bill 26; D. Horne in the chair.

The committee met at 1:33 p.m.

section 1.

Hon. M. de Jong: To the members of the committee, I thought maybe the first thing I would do is alert the committee to who will be assisting not just me but, I believe, the committee through the discussion on these provisions: Paul Flanagan, Pat Parkinson, Suzanne Anderson and Christina Dawkins.

I am aware, from the conversation we had in second reading, of particular areas of concern and/or disagreement, but I think all members will join me in acknowledging the efforts of the staff that are here in compiling this document.

B. Ralston: I do welcome the staff as well. I have, thanks to the intervention of the minister, received a briefing.

[1335]

I’m aware to some degree, although probably not fully aware, of the tremendous intellectual effort that has gone into creating this bill. Nonetheless, it’s our solemn duty here to examine the basis for that, so there will be, predictably, a number of questions, all of which will be relatively technical, I think. Perhaps the minister can just confirm at the outset….

section 1 there are a number of

definitions that do not appear or are revisions of

definitions which appear in Bill 6. The minister could perhaps confirm that Bill 6, although it was passed last fall and received third reading, is not yet in force because it has not yet been proclaimed in force.

The government is assuming the passage of Bill 26 and all of the accompanying amendments, and it will be the intention of the government to proclaim by regulation the amended Bill 6, which is amended substantially by Bill 26, in force upon the completion of the legislative process related to this bill.

Hon. M. de Jong: That is the process we would intend to follow.

B. Ralston: Beginning, then, with the definition section,

section 1. There are a number of revised

definitions from Bill 6 and a number of additional

definitions. Beginning perhaps first with the definition of “commissioner.” This was not in the previous version of the act.

Can the minister explain who the commissioner is entitled to be in definition (b)? It refers to “another person designated under

section 124.70” — which is a reference to a later

section in the bill — “by the minister” — I’m assuming that the Minister of Finance, but perhaps the minister can clarify that — “to administer this Act.”

I know sometimes in other legislation the deputy minister is the person designated to administer the act. Or is it proposed that it would be a public official other than the deputy minister?

Hon. M. de Jong: Hopefully, I’ll get all of these. First, with respect to the minister, it would be the Minister of Finance. The commissioner referred to is the Commissioner of Income Tax under the Income Tax Act of British Columbia. I’m advised that that position is filled and has been filled and will continue to be filled by the executive director of the income tax branch within the department.

The Chair: Member, perhaps before we continue…. I’m just wondering if the member for Burnaby-Lougheed intends to participate in the debate and, if she does from that seat, if leave would be granted for that prior to it becoming an issue. Is that the intent?

B. Ralston: I’m not sure she intends to participate in the debate. Perhaps to assist occasionally in terms of my questions.

The Chair: Okay.

B. Ralston: Then subsection (b), which we’ve just referred to, is simply there for legislative caution. Should the commissioner that’s been referred to, the executive director, become incapacitated or unable to perform their duties, this provides a legislative alternative to designate someone else. Is that the purpose of that?

[1340]

Hon. M. de Jong: If I understood the member’s question correctly, I think that is partially the case, in the event where the commissioner were unable. But there’s

[ Page 7896 ]

another circumstance where a particular function…. We are not contemplating this, but were the government to want to create another position separate from the commissioner itself…. It’s not a provision designed to create a second commissioner per se, but if the government wished to assign certain responsibilities to another person separate and apart from the commissioner, this would create the authority to do so.

B. Ralston: Subsection 1(

a) begins by adding a number of

definitions. I understood in the briefing that these are more technical

definitions that were required to make the act fully operational. I do have a few questions about some of the

definitions that have been added. There is a separate section, as the minister will know, where there are revisions of the original

definitions in Bill 6, and I’ll have separate questions on those as well.

Perhaps the minister could begin by explaining the purpose of the first definition, “applicable percentage,” and what it is intended to do.

Hon. M. de Jong: I can advise the member and the committee as follows. This definition was contemplated and included within the previous legislation. It is now being used in more than one instance. As a result, the decision, largely relating to drafting, is that in those circumstances it should be moved from the body of the legislation. I believe it was applied specifically in the area dealing with transfer pricing and exists as a separate definition, given that it is applicable in more than one instance in the act.

B. Ralston: It’s certainly not in the

definitions

section of Bill 6. The next definition which is added — Bill 6 begins at “capital cost,” so these, alphabetically, occur before “capital cost” in Bill 6 — is the “assessable amount.” Can the minister explain the purpose of placing this in the

definitions section?

[1345]

Hon. M. de Jong: It’s a definition that derives from the inclusion now of the administrative provisions. The member has read this section, but the definition includes taxes, penalties and interest payable in the event of penalties being applied. It becomes necessary insofar as we now, via this legislation, are purporting to create the administrative provisions that were not included in the bill that we discussed and dealt with last fall — so a concept that emerges through the inclusion of the administrative provisions.

B. Ralston: The next definition I wish to ask a question about is “commercial debt obligation.” That was not included in

section 1 of the

definitions

section of Bill 6. It appears to be a really detailed definition. Can the minister explain why this definition is included in

section 1 at this point?

Hon. M. de Jong: I want to make sure I’m being accurate on some of these technical components. In circumstances around debt forgiveness, what I want to highlight and alert the member and the committee to is debt forgiveness as between a taxpayer and a third party. Having a mechanism to deal with those circumstances as it relates to the enforcement of the tax is what gives rise to the need for the definition. That’s debt forgiveness as between a third party and a taxpayer under this legislation.

B. Ralston: Then am I to understand that this is basically an anti-avoidance legal mechanism to avoid the illegitimate forgiving of debt, therefore, to reduce the tax obligation of the taxpayer or the partnership?

Hon. M. de Jong: That would be a component of it but, as we’ll see when we get to the later provisions, also general rules around how to deal with debt forgiveness for tax purposes — anti-avoidance being one of the issues that those provisions deal with.

[1350]

B. Ralston: In subsection (

a) of this definition it does not include “that portion of the debt obligation the proceeds of which are not used by the debtor for the purpose of gaining or producing income from an LNG source.” Can the minister give an example of how this definition might operate to separate proceeds which are used “for the purpose of gaining or producing income” and those which are not? How would that determination be arrived at?

Hon. M. de Jong: That particular subsection, I can advise the member of the committee, is designed to take into account circumstances where a taxpayer covered by this legislation might also be engaged in activities and engage in activities that extend beyond the LNG activities covered by this legislation and this taxation regime.

B. Ralston: In subsection (

b) it appears to specifically exclude that portion of the debt obligation which is what’s described as a “financing charge.” There’s a reference to a subsequent definition of “financing charge,” which I suppose we might get to. Can the minister explain: what is the purpose of excluding the financing charge from this definition of “commercial debt obligation”?

Hon. M. de Jong: The distinction is significant, I’m reminded, because for the purposes of the calculations, we have to take out interest charges on account of the fact that the legislation does not contemplate deductions for financing charges. The distinction is, therefore, important in calculating the overall obligation.

B. Ralston: So by a financing charge, that includes interest and any attendant fees? It seems to be defined, in the way in which the minister has expressed it, as a bit

[ Page 7897 ]

broader than simple interest. That would apply to any interest or any additional fee that might be related to a charge for receiving the benefit of a loan from a bank or other commercial institution. Is that correct?

Hon. M. de Jong: I believe, as I listened to the member, that he has correctly summarized the intention and the exclusion of fees and interest charges.

B. Ralston: Can the minister then explain why, in the scheme of the legislation, the decision has been arrived at to specifically exclude those — interest and any attendant charges?

[1355]

Typically, in many commercial enterprises and taxation statutes interest legitimately incurred for the purpose of operating or acquiring an asset is deductible from income. Can the minister explain the legislative choice that appears to be made by defining commercial debt obligation in this way?

Hon. M. de Jong: Fair question. The member may recall we had this conversation, to his credit, in a fair amount of detail with the previous bill.

This was the decision whereby, in pursuing an equitable application of the rules, it was decided that — in lieu of looking at individualized finance charges and costs — there would be a formula used that would apply to all taxpayers. It flows from that decision that the member and I discussed last fall.

B. Ralston: Well, I confess to not recalling that discussion in detail. I do note that there is a revision somewhat — which we’ll get to eventually — proposed in subsection (

d) of the definition of “financing charge,” which is contained in Bill 6. I suppose we can deal with that then.

The next definition is, again, an addition to the

definitions

section — the “determinable amount.” It poses a number of alternatives in terms of the definition of determinable amount: operating income, operating loss, net income, balance of the capital investment account and the amount of tax to be paid in (e).

Is the minister satisfied that this is an exhaustive list of all possible variances of determinable amount?

Hon. M. de Jong: I can advise the member and the committee that these are the categories that would appear on a notice of assessment. I asked whether there were parallels for this in other taxation processes. I’m further advised that this is similar to what you would see today with respect to other areas of taxation. So the reference to the categorization for the notice of assessment purpose is probably the most relevant here.

B. Ralston: The “determinable amount,” subsection (d): “the balance of the taxpayer’s capital investment account for the LNG source at the end of the taxation year.” Can the minister explain what that is and how that might be determined?

Hon. M. de Jong: There are a number of reasons that will be of interest. Perhaps, most importantly from the Crown’s taxation perspective, it is the decline in that capital investment account balance that determines the shift from the preliminary rate of 1.5 percent to 3.5 percent. So the Crown will be interested in tracking that as it declines.

B. Ralston: The next definition that has been added is “determinable partnership amount.” I understand from the briefing that the expectation is, or certainly the possibility is, that some of the proposed LNG companies may choose to structure their corporate affairs in the form of a partnership.

[1400]

In some of the proposals, there are a number of different corporate entities that have agreed to enter into, effectively, a joint venture, and that may be structured in a partnership arrangement. Obviously, calculating that, given that there may be some other applications…. I think there are at least four or five separate major companies that are entering into the partnership.

Can the minister, then, explain how this definition will work to determine the amount appropriate for taxation?

Hon. M. de Jong: I think the member’s recollection of what he derived from the discussion with officials earlier is correct. What’s contemplated here is a two-step process. In the case of a partnership — to first set out the allocations for the purpose of that partnership. Then that evolves into the corporate disclosure contemplated under the previous definition.

B. Ralston: In calculating the overall partnership amount, how will the entry or exit of new partners, or partners who participate for a certain period of time and then exit, be accommodated in this definition? Is it intended that that would be a residual that would be dealt with in subsection (e), which speaks of “any other amount, in respect of the partnership” that the commissioner considers relevant? That would appear to give the commissioner a very broad ambit for including, or not, balances into the determinable partnership amount.

Is that the way in which that distinct possibility, given commercial activity and sometimes the willingness of companies to enter and then divest at a fairly frequent pace…?

Hon. M. de Jong: I may not have properly understood the member’s question.

There are certainly provisions that would deal with circumstances where the makeup of a composition of a partnership changes, and we dealt with some of those

[ Page 7898 ]

provisions in Bill 6. The terminology here, as I said earlier, is designed to facilitate that two-step calculation.

[1405]

I think the member’s question focused more on the process that would be at play in circumstances where the composition of a partnership changes. That is not a fanciful scenario. That may well occur from time to time or on a regular basis. I’m not sure I’m equipped, without reference to some of the earlier provisions, to provide a detailed description of how that works beyond acknowledging that it is a legitimate scenario that could occur.

B. Ralston: Well, if I might…. I apologize if my question was not as precise as it perhaps should have been. So (

a) through (

d) in this definition appear to simply make an assumption that the partnership exists. There’s no reference to any change in any of the attributes of the partnership. Subsection (

e) refers to “any other amount,” and it’s fairly broadly written, which gives the commissioner a fairly, I think, wide power to determine other relevant factors. That’s how I read it.

Is that the way in which the mechanism — in order to calculate the determinable partnership amount, the commissioner will accommodate or recognize or fairly account for changes in the composition of the partnership? That’s my question.

Hon. M. de Jong: I’ll start by perhaps emphasizing what this is not. This does not refer to an allocation as between members of the partnership. The question that perhaps arises: what is another amount that the commissioner might be interested in taking into account if the partnership had reserves, if the partnership had forgiven a debt? These are things that the commissioner can take into account.

Again, I’ll end where I began. The purpose of the definition does not relate to the task of allocating, as between members of a partnership.

B. Ralston: Moving next to the definition of “feedstock spur pipeline inlet.” Later in the

definitions

section there’s an intention to repeal a number of

definitions — “feed stock pipeline,” “feedstock spur pipeline,” “LNG facility inlet meter,” “proceeds of disposition” — and substitute new

definitions for them.

[1410]

This one appears to take to regulation this definition rather than…. The feedstock pipeline inlet was specifically, I think, worded somewhat differently, although there is a power to designate by regulation.

Clearly there’s been a rethinking, on the part of the drafters and the part of the minister, of the entire legal definition of all of these terms, so perhaps the minister could just set out what’s changed. What’s been the nature of the rethinking that’s motivated this change in definition — although I think it’s a relatively minor one? Or we could deal with it later on when we come to the repeal of all the

definitions that were in Bill 6.

Hon. M. de Jong: The key here, of course, is the inlet and its relevance, from the point of view of calculating a whole series of calculations, in fact, that lead to determination of taxes owing. The original assumption around where feedstock pipelines would be, where LNG facilities and the relationship to LNG facilities…. Since the drafting of the original legislation, it’s become clear that these inlets may be different, and the location of a feedstock spur pipeline may be different for each facility, for different facilities. So the ability to designate individually was deemed appropriate, which gives rise to the regulatory power that the member has referred to.

B. Ralston: Well, perhaps just to further expand upon that…. I do recall an explanation being offered in the briefing that I think is relevant and probably should be publicly available on the record. As I understood it, initially it was thought that a single pipeline might head to the plant and that there would be a point at which the flow of that pipeline would be calculated.

I think the thinking is that there may be a pipeline, and then there would be spurs that would diverge off and that may go to different plants or different locations. I suppose what the legislative interest is, is: what is the significance of changing the definition?

I’d understood from the briefing that the point at which the spur pipeline or the pipeline entered the plant was the point at which the volume would be measured and that that may be not at the point that the pipeline enters onto the property of the LNG facility but actually into the plant.

[1415]

As I understood it, that was the nuance that was being captured by these changes in definition. But if I’m wrong, of course, I’d be happy to be corrected.

Hon. M. de Jong: I could try to repeat and perhaps confuse the issue. I think the member essentially has it, in terms of the realization that plants might be serviced not just by a main feedstock pipeline but a spur pipeline as well. That gives rise to the need for the definitional change we’re dealing with here.

B. Ralston: “Feedstock spur pipeline inlet” refers in its definition to a feedstock pipeline. I do recall that when we debated Bill 6 there was the reference to this phrase, a “series of systems,” which I think was in the original definition of feedstock spur pipeline. That appears to have been abandoned, that phrase.

It did seem to be a touch ambiguous. Is that the reason why the reference to the pipeline going from a feedstock pipeline to a series of systems has been abandoned? That would tie in with the new, proposed definition of liquefaction activity.

[ Page 7899 ]

Hon. M. de Jong: I think the most significant relevance of this relates to those activities which the Crown intends should attract taxation liability, activity on the feedstock spur pipeline falling generally outside of that, and making clear where the liquefaction activity and where taxation liability accrue.

All of these — LNG facility, liquefaction activity, feedstock spur pipeline and the inlet at which point measurements are taken — are intended to work together in providing the data — in some cases, transfer pricing rules — to ensure that there is accurate data against which to apply the taxation formula that is provided for in this act.

B. Ralston: Just so I might understand it, is this designed to capture a distinction between natural gas that might be used to power the trains and the natural gas that would enter the process of liquefaction? Obviously, those are two different parts of the operation of an LNG plant.

[1420]

Since some are considering, at least as I understand it, powering the liquefaction mechanism by using natural gas, would this definition make a clear distinction between those two streams of natural gas entering a plant for the purposes of taxation?

Hon. M. de Jong: I’m not sure that’s correct in this case. This has less to do with that distinction than ring fencing in the way that we have discussed in the past for the purpose of calculating the tax. The member is absolutely right. There may be differing purposes for which natural gas arrives at a facility, but I wouldn’t want to leave the impression that these provisions are focused on that distinction.

B. Ralston: Just arising, then, as a supplementary out of that answer. Are there separate provisions that would make that distinction clear if the gas is used for something other than the liquefaction process — simply as a source of power? Is there some other mechanism in the act? I don’t recall it, but perhaps it could be pointed out to me.

Hon. M. de Jong: In general terms, I think the distinction that the member has identified is the one which relates to cost expenses that are deductible relating to the powering of the facility. In some cases that will be natural gas. In other cases it might be electricity, and there are certainly deductions available relative to the operating costs that those pose.

Then the other stream, if I can use that term, of gas that is part of the production of the facility and the liquefaction activity…. They obviously have different relevances for the purposes of calculating costs, calculating expenses and, ultimately, revenues and taxation payable.

B. Ralston: Part of the effort here seems to be to place the meter legally at the point where the flow through that part of the pipeline or spur pipeline is the part of the gas that’s heading to be liquefied.

Presumably, if it’s going to be used for some other purpose, it may come in through a main line and then be separated out for the purpose of powering the trains — we’ll get to this; there’s a definition of an LNG facility inlet meter — or is it simply that all gas that comes into the plant and onto the property at the point of entry into the plant is measured and then the operator would claim back the cost of the gas that’s diverted to power the trains?

N. Simons: At the pleasure of the House, I’d like to introduce a couple of visitors in the gallery.

Leave granted.

Introductions by Members

N. Simons: In the House today I have a couple of constituents from Powell River returning from a month-long trip. Tom and Gillian Hannah are also teammates on the Legion Legends eight-ball team. I would like to ask the House to please make them welcome.

[1425]

Debate Continued

Hon. M. de Jong: I do, I think, understand the member’s question about gas arriving at a plant for two distinct purposes. I’m advised that in those sorts of circumstances it’s possible that an operator may choose to have two different meters, although the practical necessity for that may be limited insofar as from the point of view of calculations and deductions.

[R. Chouhan in the chair.]

The significance of whether that gas is used to power the facility or is there for conversion purposes may not be particularly relevant from the point of view of the calculations that need to flow. It could be two meters, I’m told, but from a practical point of view, that may not be necessary given the ultimate objective.

B. Ralston: Well, in the case where the streams are separated out and there was a separate meter, the collector would have objective evidence of what the deductible portion allocated to being used as a power source would be as opposed to relying on the operator to do their own internal calculation subject to audit.

It would seem that as a regulatory mechanism, it might be more prudent and simpler simply to know, if it’s not a great additional cost, how that division took place at the outset, rather than relying on a subsequent report by an operator. Although I’m sure they’re going to fol-

[ Page 7900 ]

low the law, they certainly are motivated to make sure that they achieve maximum deduction rather than the minimum one.

Hon. M. de Jong: Fair observation. I think, in part, the response here is that both are deductible. In both respects, the cost of that gas is deductible from the point of view of the taxpayer. The ultimate significance of the distinction…. There may be internal reasons that agencies want to track these things, but from the point of view of calculating tax payable under this legislation, that distinction isn’t particularly relevant or necessary.

B. Ralston: Just so we’re clear, then, I took the minister’s answer to be that that would be an option — the two-meter option, if I could put it that way. It would be an optional decision on the part of the operator and would not be required by legislation or by regulation.

Hon. M. de Jong: That’s correct.

B. Ralston: Turning next to the definition of “information return,” there’s a reference to

section 124.407, the “demand for information return.” I gather that this is — again, relying on the briefing — part of the mechanism of enforcement in order to make certain calculations about the operation of the plant that might be susceptible to taxation.

Can the minister just explain briefly the purpose and its place in the legislative scheme an information return will have?

[1430]

Hon. M. de Jong: I think the short answer is because the Crown, in this case, has an interest in the volumes of gas that are going in and out of a facility. That will have relevance for the operator of the facility, the operator of a feedstock pipeline. The Crown has that interest in tracking the volumes of gas going in and out.

B. Ralston: Similarly, the requirement to register…. There’s a definition of “registered.” It makes reference to

section 124.21. Can the minister explain the purpose of registration? Judging, again, from the briefing, that was an important part of the legislative scheme, requiring each person or partnership to register with the province if they were engaging in or receiving income from liquefaction activity.

Can the minister explain the purpose of that?

Hon. M. de Jong: I anticipate we’ll have a more extensive discussion about this when we talk about the provisions dealing with joint and several liability and, in some cases, the posting of the bond.

The Crown clearly has an interest in knowing who is engaged in activities for which the liquefied natural gas income tax is payable. The registration process provides that information and triggers certain other determinations around things like the posting of bonds, which I expect the member will discuss further when we get there. But the registration process in general is relevant from that point of view.

B. Ralston: Moving to subsection (b), we’ve touched upon this earlier in the discussion of the change in definition of a “feedstock spur pipeline inlet.” But in (

b) there are repeals of the definition in Bill 6 of “feedstock pipeline,” “feedstock spur pipeline,” “LNG facility inlet meter” and “proceeds of disposition.”

Can the minister explain the reason for the change in “LNG facility inlet meter” from the previous definition in Bill 6? There is a subtle change. Perhaps the minister could clarify it.

Hon. M. de Jong: Again, the short answer is because the objective was to have the meter located at the entry to the plant itself, as opposed to the LNG facility, which may include property that could potentially have the meter some distance away from the actual plant. The specific objective was to meter and measure natural gas as it entered the plant itself, as opposed to the facility, which may be somewhat larger.

[1435]

B. Ralston: I understand the distinction that’s being made between when the pipeline enters onto the property and then at the entrance to the facility. Perhaps I’m missing something here. There doesn’t seem to be much difference in the wording, because it does refer, in the previous definition, to “after the natural gas is delivered to an LNG facility.” The new definition is “after the natural gas is delivered to the LNG plant that it is part of the LNG facility.”

Is the difference between plant and facility the significant change there? Is that what captures the distinction that the minister is making?

Hon. M. de Jong: That’s correct.

B. Ralston: Unless I am mistaken, I don’t believe there’s a change in the definition of “LNG facility,” and I don’t believe there’s a change in the definition of “LNG plant.” It’s simply the way in which the addition of “to the LNG plant that is part of the LNG facility” that achieves the legislative objectives? Apparently, I think it would be axiomatic, but the drafters are confident and the minister is confident that that will capture the distinction that’s being expressed in terms of explaining this language here?

Hon. M. de Jong: There is actually, later in these provisions, a slight change to the definition of “LNG plant” for entirely different purposes. The description the member

[ Page 7901 ]

has offered relating to the significance of this change is, however, correct.

B. Ralston: In subsection (c), the definition of “capital investment property” is changed. A paragraph is added to subsection (a), which is defined in the original definition in Bill 6 as “property that is referred to in

section 7.” That relates to the LNG facility. There’s a refinement that appears to refer to tangible personal property and improvements to the land. Can the minister explain what the additional ingredient is that’s being added in the proposed (a.1)?

Hon. M. de Jong: What revealed itself in the aftermath of the discussion last fall was, in effect, a circular definition. What’s been added here is a provision which actually moved out of the definition of “LNG facility.”

[1440]

Upon analysis, we ended up with kind of a circular definition that, I guess, didn’t reveal itself to us in the drafting stage, nor to me, unfortunately, when we were discussing the matter in the House. That’s the rationale for the change.

B. Ralston: I appreciate the principle. Perhaps the minister can explain how this is not circular,

whereas the previous definition apparently was, or was in the judgment of some. I don’t quite follow that explanation.

Hon. M. de Jong: To be a little more specific than I was a moment ago, the circularity and the difficulties associated with it with respect to the definition of “liquefaction activities” and the LNG facility…. When it revealed itself, the concern was that it would make the determination of some taxpayers unclear. A person is a taxpayer if they engage in liquefaction activities where liquefaction activities include owning and operating all or a part of an LNG facility.

Prior to the proposed amendments that we’re dealing with, an LNG facility meant all of the following: an LNG plant, facility and land subjacent to that plant and contiguous to that land and other tangible property and improvements on that land. The combined

definitions and the cross-references in the “LNG facility” to the “liquefaction activities” created a test that seemed to be circular. In this case we think that we have addressed that by virtue of the shift that exists here.

Maybe the best assurance I can give the member and the committee is that having twigged to the issue, a fair amount of thought has been devoted to trying to ensure that it is a definition that works for the purposes it is intended.

B. Ralston: I think what the general legal principle is, is that tax statutes are interpreted in favour of the taxpayer rather than in favour of the state. So clarity is important. I suppose time will tell whether that legislative objective has been achieved. Hopefully, on behalf of the Crown, it has been achieved.

The next definition is “financing charge.” I take it that the purpose of this revision is to deduct from the broader definition of “financing charge,” which we dealt with earlier, the amount of the bond that will have to be posted in the event that a taxpayer doesn’t comply with their taxation obligations and that that can be deducted from the bond. So that would be deducted or not included in the broad definition of “financing charge.” I think that’s what it says. So perhaps I just can confirm that.

[1445]

Hon. M. de Jong: That’s correct — as long as we’re talking about the cost associated with obtaining the bond, not the bond itself.

B. Ralston: That distinction, I think, is an important one. It wasn’t clear to me.

The definition of “liquefaction activities” has been repealed — at least, paragraphs (

a) and (

g) in the Bill 6 version. Beginning, first, with (a), there appears to be the additional ingredient we spoke of earlier that would relate to the

definitions of “plant” and “facility” and the location of the facility inlet meter. Are those

definitions consequential to the redefinition that we spoke of, of the LNG facility meter and the way in which the feedstock pipeline and feedstock spur pipeline were defined? It would seem to be that those follow that change in definition, but perhaps I can just confirm that.

Hon. M. de Jong: The member is correct. There is a connectivity to all of these changes, and the overall objective that we are endeavouring to achieve here is to clarify with as much certainty as possible what is in and what is outside of the ring fence for the purposes contained within the act as it relates to calculating the tax payable.

B. Ralston: In the new (e), which was a new definition of subsection (a), there is a new addition of subsection (a.1). This would appear to be exceptions to the definition of “liquefaction activity.” Can the minister explain the rationale? It appears to apply to the right to deal with, in a commercial way, natural gas before it passes through the LNG facility inlet meter, at least in (

i) and (ii). Can the minister explain the purpose and the legislative intent of what appear to be exclusions from the definition of “liquefaction activity”?

Hon. M. de Jong: Hopefully, this will be helpful to the member and the committee. The comment I made earlier about the general intent of these provisions to bring as much clarity as we can to what is inside and outside the ring fence holds true here as well. The specific concern

[ Page 7902 ]

that was brought to us by proponents was a circumstance where the purchase and sale of LNG took place when that LNG was located on a ship in the harbour. To the extent that there is perhaps market activity or spot market activity, that could certainly take place.

Proponents, in that case, wanted to know with certainty that the act would operate in a way that did not include that activity for the purpose of the calculation of the LNG tax.

[1450]

B. Ralston: Okay, I’m not sure that I understood that explanation. That may be a personal failing. It would appear that there’s an exclusion for acquiring, owning or disposing before the gas passes through an LNG inlet facility, so that wouldn’t appear to accommodate the example that was provided about it being on a ship.

I can see in subsection (ii), disposing of the right to dispose of natural gas when it’s passed through and presumably out the other side, or especially and more particularly in sub (iii).

Can the minister explain why, if the natural gas is passing through an LNG facility inlet meter — which has been very narrowly defined, I would say — and it’s in the facility, why that would not be a liquefaction activity for the purpose of attracting taxation?

Hon. M. de Jong: This gets to be…. The precision in the language is important here. What we are endeavouring to achieve is to clarify that the moment the gas passes through the meter, it is captured. It is not at the meter or just before the meter. It is at that point when it has passed through the meter and is then in the plant.

That distinction is important with respect, for example, to calculation of the credit and the

definitions that apply there. The calculation takes place once the gas has passed through the meter — the moment it is through the meter, in the plant. Perhaps I wasn’t particularly clear for that part of the definition.

B. Ralston: I’m looking at the definition in Bill 6 and looking at (a.1) again. What the definition reads…. It appears to be an exemption from the definition of liquefaction activity which relates to the moment or the point at which a transaction take place before the natural gas passes through the LNG facility in that meter for the LNG facility.

Is this meant to simply capture a change in the ownership of gas?

Whereas it may be owned by one company in the pipeline prior to entering the inlet meter, there’s a purchase or a sale made, the gas would then continue on and the new owner would be subject to the definition? Or is it intended that that person would be excluded from the definition of liquefaction activity and therefore not subject to tax?

I’m not entirely clear what the intention or the purpose of this is by way of an exclusion. Why would gas, in those circumstances, be excluded from the application of the taxation regime?

Hon. M. de Jong: We might go through this bit by bit. The significance is that until gas is in the plant — that’s why these

definitions are significant — liquefaction activity is not taking place.

[1455]

The definition of liquefaction activity says it will take place once gas has entered the plant. The exclusions, for the purpose of the definition we’re dealing with, relate to the fact that liquefaction activity can’t occur or be considered to have occurred until gas is actually in the plant.

B. Ralston: Well, that would appear to…. I understand that in subsection (i). In (ii) it speaks of — and let me just read it — “disposing of a right to dispose of natural gas when the natural gas passes through an LNG facility inlet meter for the LNG facility.” The gas has passed through. Presumably, according to the definition, it’s then in the plant. Yet this

section purports to exclude it from liquefaction activity for the purpose of taxation. I don’t understand the purpose of that particular

section there.

Hon. M. de Jong: Hopefully, this will be more helpful to the member. You can own gas. To the moment it arrives — on the way to a plant and even to the point where it is at the meter — you can sell that gas or sell the right to that gas, and you are still not involved in liquefaction activity. The moment that gas enters the plant, that is no longer the case, and a different set of rules applies.

Insofar as sub (

a) and sub (a.1)…. Sub (a.1) refers to rights and the sale of rights to the gas. It is intended to mirror the provisions that deal with the gas itself. That’s the rationale: right to that moment, that point, you are not involved in liquefaction activity. The moment the gas enters the plant, a different set of assumptions and

definitions applies.

B. Ralston: Well, the language used in subsection (ii) — “disposing of a right to dispose of natural gas when the natural gas passes through an LNG facility inlet meter….” “Passing through” implies to me that it’s in the plant. I notice that in the definition of “LNG facility inlet meter,” it means “a meter at which the volume of natural gas…after the natural gas is delivered to the LNG plant….”

Is there some distinction intended between “passes through” a meter that means it has not been delivered? It seems to me to be a relatively arcane and not terribly clear distinction, if that’s what’s intended. Perhaps the minister can clarify that.

[1500]

Hon. M. de Jong: In general, what was sought with (a.1) was to mirror the language in sub (a). I think the

[ Page 7903 ]

provision that has attracted the member’s interest…. If we go back to sub (a)(ii), it reads: “disposing of natural gas when the natural gas passes through an LNG facility inlet meter for the LNG facility.” I think I appreciate the member’s point. This is an interesting notion of what a contract for sale would look like in terms of designating where that transaction actually took place.

The rationale behind the drafting…. Well, the rationale originally was that until the gas actually was in the plant, the exclusion could apply. So mirroring that language for the purpose of transactions involving the rights to gas…. The intention was to mirror that language as well.

B. Ralston: With respect, I don’t think the minister has answered my question. One can understand that for commercial purposes, in calculating the volume of gas, a purchasing party and a vendor might well want it to pass through the inlet meter in order to calculate what the volume is. But it seems to me that if it passes through an inlet facility meter, given the definition of “facility inlet meter,” it is thereby delivered and, therefore, part of liquefaction activity. Yet the intention appears to exclude it from taxation in that circumstance.

I’m a bit troubled by the distinction between “the natural gas is delivered to the LNG plant” and the disposing of the right of natural gas when LNG “passes through an LNG facility inlet meter,” because the two appear to be contradictory to my perhaps naive and untutored reading of this. I wouldn’t want to foresee problems, so perhaps the minister can take another stab at explaining the distinction that’s being drawn here.

Hon. M. de Jong: The good news, if there is any, is I think — but I won’t attempt to speak for the member — there is, I believe, a shared belief of what the intention is. I’m also told, from a drafting point of view, that the inclusion of the word “when” in the provision in the sub (ii) provision is what helps achieve that objective in terms of ensuring the distinction and the provision operate in the way intended.

I’m not, by the way, quarrelling with the member’s attempt to ensure that the provision operates in the way that it is intended. I am, however, as well, passing on to him the advice I have that, worded as it is, particularly with the inclusion of the word “when,” it achieves that end.

[1505]

B. Ralston: Well, if I’m wrong, or the minister’s wrong, I’m sure the drafters will consider that, and perhaps a subsequent amendment clarifying that

section might be in order. I don’t know. That may be a bit presumptuous.

Subsection (iii) speaks of when the natural gas leaves the LNG plant that is part of the LNG facility. Since we’re parsing this fairly precisely, I know that there was a schematic diagram that was given in the briefing. Presumably, there is an outlet pipe that leads to a shipping facility, and that would appear to be somewhere at the end of the pipe before the gas enters the ship. I’m presuming that’s where it is being deemed to leave the LNG plant. Would that be correct?

Hon. M. de Jong: That’s correct.

B. Ralston: The distinction between (iii) and (iv) appears to be…. There’s the use of the word “when”, which would be the specific point in time. Then (iv) refers to “after” it leaves the plant. Again, what’s the distinction between when it leaves — apparently there is a necessity to have these two

definitions — and the distinction of after it leaves? Why was that considered to be significant in a drafting sense?

Hon. M. de Jong: I think the short answer is to mirror the language contained in sub (a)(iii), and (iv) draws a similar distinction as the one the member is pointing to with the terms “when” and “after” in that respective subsection.

B. Ralston: Well, if I might be permitted an observation…. If it’s simply mirroring another earlier section, that’s not really a compelling rationale for the distinction. I suppose one is left with wondering why that distinction is drawn. Be that as it may, perhaps we can move on to subsection (g).

This appears, to my reading of it, simply to be a reordering of the wording in paragraph (

g) in Bill 6. Perhaps just the way in which it’s expressed is clearer, but it doesn’t appear to add any additional ingredients.

Can the minister confirm that?

[1510]

Hon. M. de Jong: I think the member’s question was whether I would alert the committee to whether or not this represents any kind of substantive change. I am advised it doesn’t. It is intended to clarify the distinction between core activities at a plant and other activities that, in the words of this section, “support the operations of the LNG plant.” To get back to what I think was the member’s original question — does this impart any substantive change to what previously existed? — I am advised that, no, it does not.

B. Ralston: Those are all the questions I have on this section.

Sections 1 to 3 inclusive approved.

section 4.

B. Ralston: This section,

section 4, repeals

section 7(1)(

c) of Bill 6. That is part of the definition of “LNG facility.”

[ Page 7904 ]

This would appear to be consequential to the definition that we spoke of involving tangible personal property in its relation to the plant itself. Unless there is anything else intended by this, perhaps I could just have confirmation that that’s an accurate description of the purpose of this repeal of this subsection.

Hon. M. de Jong: That is the case.

Sections 4 and 5 approved.

section 6.

B. Ralston: Looking at

section 6, it’s an amendment to

section 9 and adds a subsection. This

section describes the taxation year and adds a full subsection to

section 9. Can the minister explain the purpose of adding the subsection?

Hon. M. de Jong: The specific intention here is to clarify that the first taxation year of a person who is a member of a partnership where that person has no other LNG income is the person’s taxation year in which the partnership’s first fiscal period ends.

That’s consistent, I am advised, with the treatment in timing of partnership income by a partner under the federal Income Tax Act.

B. Ralston: Would the effect of that be to defer taxation for the partnership, then?

[1515]

Hon. M. de Jong: I think I understand the basis upon which the member is using the term “deferral.” In these circumstances of a partnership, there’s the calculation of a partnership’s income, and then it flows to the various partners in the next taxation year. I think, when the member suggested a deferral, that may have been what he was referring to.

That is the chronology, as opposed to a circumstance with a corporation, where it is income and attracts taxation rules for the original year. If I understood the question correctly, then, I think that’s what the member means by deferral.

B. Ralston: Perhaps to phrase it another way, it seems to exclude the first fiscal year of LNG income in new partnerships. The person has no taxation year that begins before the taxation year in which the partnership’s first fiscal period ends.

In effect, by structuring the timing of those, the obligation to pay tax may well be deferred up to a year, which sometimes is an object of tax planning. Totally legal, if it’s permitted. But I’m wondering why it’s being structured in this way.

Hon. M. de Jong: I suppose two responses. I think the member understands this. This is a one-time phenomenon for the purpose of the agency, the partnership, commencing. The desire was to have rules that were similar to the federal Income Tax Act.

Section 6 approved.

section 7.

B. Ralston: There’s an amendment to

section 10 of Bill 6 that adds a subsection (5). Can the minister explain why it was necessary to add this subsection?

Hon. M. de Jong: Two clarifications that I would highlight, part and parcel of this section. One is to make it clear that there is liquefaction activity taking place in the province presently. The intention is for the LNG income tax not to apply in any circumstances until on or after January 1, 2017.

[1520]

That’s the first clarification — to make it clear that that’s the intention, hopefully, of the Legislative Assembly. The second is to make it clear that it is the commencement of liquefaction activities that attracts the application of the tax after that date, January 1, 2017.

Sections 7 to 11 inclusive approved.

section 12.

B. Ralston: This deals with exemptions from tax. It’s a replacement of subsection (2) and refers to beneficiaries of a trust. From the briefing, there was some suggestion that with First Nations, there might be trusts that are entered into. I’m wondering what the effect is. If LNG proponents enter into trust with First Nations, what’s the impact on their obligation to pay LNG tax?

I suppose the concern is: is this an avoidance mechanism, or a potential avoidance mechanism, that would see a reduction in tax? What are the legal safeguards that would ensure that…? I’m sure that’s not the intention, but what are the legal mechanisms that would prevent that from taking place?

Hon. M. de Jong: The provision we’re dealing with here, I’m reminded, speaks to exemptions that are applicable in the circumstance where all of the beneficiaries are — to the use the terminology of this

section — Indians or bands under the Indian Act.

In a subsequent

section we deal with the apportionment rules that would apply in circumstances where only a portion of the beneficiaries fall under that definition. So this is very specific to a case where all of the beneficiaries are captured by the

definitions.

[ Page 7905 ]

B. Ralston: In the case of a project that was totally owned by a First Nation, then the usual rules of exemption from certain taxes would apply, and the LNG tax would not apply, by operation of the federal act. Is that correct?

[1525]

Hon. M. de Jong: I think this was the essence of the member’s question. In a circumstance where liquefaction activities were being undertaken by an agency wholly owned by an Indian band, in the definition of the Indian Act, and that would attract the exemptions that exist within the Indian Act — the member will know I’m qualifying this to the greatest extent I can — then in those circumstances an exemption would also apply to the LNG Income Tax Act.

Other circumstances in which business corporations are established, a different set of rules can apply. As I mentioned, we’ll come later to circumstances where there is a partial involvement by an Indian band or a treaty band that might have yet a different set of rules apply to it actually.

If I understood the member’s question correctly, in circumstances where the federal legislation operated to provide an exemption, in the case of a wholly owned operation, that exemption could apply as well with respect to the LNG Income Tax Act.

B. Ralston: I think the minister said that later on there are different rules that would deal with attribution of, I suppose, tax liability in the event of a partnership where one of the partners is a First Nation and the other partner or partners are non–First Nations. There would be some proportional allocation. I suppose we’ll get to that when we deal with the

section on partnerships. But just in broad terms — since we’re not dealing with that now, but in order to understand that — this

section applies to where complete ownership, total ownership, belongs to a First Nation. Is that correct?

Hon. M. de Jong: That is correct.

B. Ralston: Now, the language that’s used here is a trust, and there are different rules under the Income Tax Act for the taxation of trusts. There are, again, if my recollection is correct, substantial opportunities for deferral of tax within a trust until moneys from the trust are withdrawn and distributed to individual taxpayers. Are all those…?

If the ownership of the trust is a First Nation…. The reference here is to beneficiaries of the trust. Is tax, then, ultimately payable when money is withdrawn by the beneficiaries of the trust and not payable at the point that others might expect it to be paid — at the point that the taxation liability is triggered?

[1530]

Hon. M. de Jong: Again, I hope I caught the essence of the member’s question. Under the applicable and existing federal legislation, there is a rule applicable to trusts — the member has already alluded to this — that allows income in the trust to effectively be taxed in the hands of the beneficiaries. In circumstances where the beneficiaries themselves are exempt from the tax, it would follow that the income in the trust is ultimately tax-free through that mechanism.

In a circumstance where we’re describing a trust wholly-owned by the First Nation in which the beneficiaries are First Nations or Indians under the Indian Act, then the intention is for that similar provision and similar mechanism to operate.

B. Ralston: Is there an opportunity, then, if not to avoid paying the tax, to defer it by some arrangement since it’s not taxable within the trust until it’s distributed to beneficiaries — to designate certain commercial partners as beneficiaries and then — this is fairly typical tax planning — delay the withdrawal by beneficiaries for some period of time, typically years, in order to plan for the most opportune time to take that income, to make it subject to tax perhaps in a year when other income is lower, and therefore, it attracts a lower rate of taxation?

Or is that caught by the anti-avoidance mechanisms that we’ll deal with later on in the legislation? My recollection is that the anti-avoidance mechanisms focus largely on partnerships and not particularly on trusts, but perhaps the minister can clarify that.

Hon. M. de Jong: I’m going to answer that I think the member’s question shifted a little bit to trusts generally, in which case I’m reminded that the obligation, the tax liability, accrues in the year the income is earned by the trust. Those obligations are not deferrable, although the member may, in the case of a First Nations trust or a trust of the sort we were talking about a few moments ago, have asked about the length of time, how far down the road, when paying out to a beneficiary, this is tracked. But the general rule would be that the tax liability accrues at the time the income is earned by the trust.

Section 12 approved.

section 13.

B. Ralston: This is an amendment to

part 2, adding a new 22.1 and a new 22.2.

[1535]

It deals with, in the case of the first amendment, what’s described as apportionment if exempt for part of the tax year and, in 22.2, rules if the corporation or trust “becomes or ceases to be exempt.” This would appear to follow the discussion we’ve just had, but can the minister explain the purpose of those two new sections: 22.1 and 22.2?

[ Page 7906 ]

Hon. M. de Jong: A couple of things captured by these provisions. In the case of 22.1, it applies the federal act pro-ration rules where a taxpayer attracts exemption from tax but for only a portion of the taxation year. I think that’s relatively straightforward.

Section 22.2 ensures the federal act rules relating to becoming or ceasing to become exempt from tax and modifies those rules to adapt them to this act for corporations or trusts.

Section 22.1 also will provide guidance in the treatment of tax pool balances, the net operating loss account balance and the closure tax credit at the time of a change in the exempt status.

So transitions between exempt and non-exempt status are what we are endeavouring to take account of here by drawing on the rules from the federal act.

Sections 13 to 15 inclusive approved.

section 16.

B. Ralston:

Section 16 amends

section 31 and adds a paragraph. I’m looking at

section 31 here. This is what’s described as “Other income inclusions.” The outset of

section 31 says, “In computing a taxpayer’s income for a taxation year from a business or property…,” and it sets out a number of amounts. This adds an amount that appears to relate to the debt forgiveness rules. We’ll get to that, I suppose, if we do get to it in the time that we have. So perhaps the minister could explain why this is added?

Hon. M. de Jong: What we’re trying to do here is ensure that in computing the taxpayer’s net operating income, regard is properly given for any forgiven amount that wasn’t otherwise deducted from the taxpayer’s net operating loss account or capital investment account and that, if there’s any amount there, it is added to income.

[1540]

The way this is intended to operate is that where the debt forgiveness rules apply to add an amount to income where a commercial debt is settled, it goes as follows. The amount of debt forgiven is first used to reduce the net operating losses, then to reduce the capital investment account, and then, if there is an amount left over, it is added to income. This provision is designed to ensure that that can happen.

Sections 16 to 19 inclusive approved.

section 20.

B. Ralston: This would appear to be technical and administrative, to say the least, but there is a reference to the income tax regulations and a reference to the prescribed rate of interest. What is the rate of interest that’s being referred to and on what particular amount is that intended to give the power to change?

Hon. M. de Jong: Again, the short answer is that what we’re seeking to ensure is that the province is able to set the applicable rate of interest by regulation, as is done for all other interest rates in the LNG act, rather than relying upon the federally set interest rate.

Sections 20 to 22 inclusive approved.

section 23.

B. Ralston: These are a fairly substantive series of amendments applied to the applicability of

section 61.3 of the federal act, “deduction for insolvency with respect to corporations.” And there are new sections, 45.1 and 45.2. Can the minister explain, broadly, what those two proposed sections that are being added relate to?

Hon. M. de Jong: Two things that I would highlight. With respect to 45.1, the intention is to allow a taxpayer, who must include in income an amount as a result of their debt being forgiven, to take a reserve and include one-fifth of the amount in income each year for a five-year period. They have the choice to take advantage of the reserve or not. If the taxpayer is a corporation who begins to wind up, the reserve is no longer available.

With respect to 45.2, the intention is to provide that if a taxpayer must include, via the calculation we just went through, an amount in income after reducing the net operating loss account and capital investment account to zero as a result of their debt being forgiven, the taxpayer will have a tax liability under the LNG income tax. The 3.5 percent amount initially, until that changes to 5 percent, would be the liability they’d attract in those circumstances.

Section 23 approved.

section 24.

B. Ralston: This is an amendment to the Bill 6 description of investment allowance, which is a fairly significant aspect in the operation of the calculation of the tax. The amendment that’s proposed is to subsection 46(2), and I’m wondering if the minister could explain particularly what is intended by the proposed amendments to this important definition of investment laws.

[1545]

Hon. M. de Jong: Well, the general purpose here is to require that the taxpayer reduce the balance of their adjusted capital investment account by the unpaid portion of any commercial debt obligation that is forgiven. Sub (

d) is intended to clarify that the entire forgiven amount in respect of a commercial debt obligation reduces the adjusted capital investment account. That’s the objective behind the section.

[ Page 7907 ]

Sections 24 to 27 inclusive approved.

section 28.

B. Ralston: This is an amendment to subsection 61(1). These are amounts deducted from the capital investment account, again an important aspect of the operation of the taxation scheme. There’s an amendment to

section 61 by adding further subsection (f). Subsection (1) talks about deductible amounts and gives a number of instances in terms of deductible amounts. Can the minister explain what’s added by the proposed paragraph that’s being referred to in this amendment?

Hon. M. de Jong: We went through the process where a debt has been forgiven, and you can draw down on the net operating loss account and the capital investment account. What you can’t do, as a way of avoiding adding that amount to your income…. You can’t draw down the capital investment account to below zero. Once you’re at zero, you’re allocating into the income side of the ledger.

Sections 28 and 29 approved.

section 30.

B. Ralston:

Section 66 refers to proceeds of disposition if all or a portion is payable in the future. This amends subsection (2) and substitutes subsections (3) to (5) and adds a subsection, which is subsection (5). The note that I’ve been provided with says it provides that this

section does not apply in circumstances where property is seized by the taxpayer as a creditor in respect of a debt. Is that an accurate

interpretation of the purpose of this amendment?

[1550]

Hon. M. de Jong: Here’s the circumstance in which the provisions are likely applicable, the scenario. The taxpayer sells an asset and receives payment in the future, but at some point the taxpayer seizes the asset because the payments weren’t made. This is designed to facilitate the necessary adjustments that would have to be made in those circumstances.

Section 30 approved.

section 31.

B. Ralston: This amends

section 71 of Bill 6 and appears to refer to the non-deductibility of illegal payments. Can the minister confirm the purpose of this? It says that a

section of the federal act, 67.5, on reassessments, does not apply. Why is that?

Hon. M. de Jong: I do recall the conversation last fall. We spent a bit of time talking about the illegal amounts. In this case, though, the change is made to reflect the new provisions authorizing the commissioner here to make reassessments and determination — hence the adjustment to the application of the federal act.

Section 31 approved.

section 32.

B. Ralston: This amends

section 77.1, deleting the definition of “tax benefit,” repealing that definition. I understand that’s consequential to the definition of “tax benefit” in

section 1. So it’s consequential to the change in the definition in

section 1. Is that correct?

Hon. M. de Jong: That’s true. We’ve moved the definition into

section 1, and the definition now has application to both transfer pricing and the new anti-avoidance rule. That’s why it’s in

section 1 and why it has been moved.

Section 32 approved.

section 33.

B. Ralston: This

section amends…. It’s in the

section described in Bill 6 as taxpayer’s self-dealings. It strikes out several sections and adds a new section, (2.1), which refers to a deemed disposition of liquefied natural gas, natural gas liquids or natural gas when it leaves the LNG plant, deemed to be an activity of the taxpayer.

Since it’s in the

section relating to taxpayer’s self-dealings, it would appear to relate to transactions in and around the gas as it either enters or leaves the plant — and if it’s deemed to be a non-arms-length transaction. Is that correct?

Hon. M. de Jong: I believe the member has it. What we’re trying to do is clarify that deemed dispositions of natural gas, natural gas liquids or LNG as it leaves the LNG plant are self-dealings and should be valued using the transfer pricing rules that we talked about in the fall.

[1555]

Section 33 approved.

section 34.

[D. Horne in the chair.]

B. Ralston: This is an adjustment to the transfer pricing

section in the bill. It adds a subsection conferring power to the commissioner, additional powers over transfer pricing rules. I suppose the question is…. These powers would be exercised by the commissioner. What’s the purpose for or what’s the requirement or the think-

[ Page 7908 ]

ing behind adding this subsection to the transfer pricing legislation in

section 79?

Hon. M. de Jong: The immediate need for these provisions flowed from the addition of the general anti-avoidance rules. We wanted to ensure that the commissioner has the discretion to not make a transfer pricing adjustment if, in the commissioner’s opinion, such an adjustment wouldn’t be appropriate. It provides an ordering rule that transfer pricing provisions apply before the general anti-avoidance provisions apply. The idea is, candidly, to prevent a taxpayer from avoiding the transfer pricing penalties by claiming that the adjustment arises from a determination under the general anti-avoidance rule.

So the inclusion of the anti-avoidance provisions, by this bill, gives rise to the need to order them.

Sections 34 to 36 inclusive approved.

section 37.

B. Ralston:

Section 37 is an amendment to the definition of “qualifying expenditure” in

section 83. The amendment is adding a paragraph relating to a qualifying partnership expenditure. It would appear to change the computation for the first taxation year for a qualifying partnership expenditure. Perhaps I’ve not expressed that terribly clearly, but could the minister explain what the purpose of that amendment is?

Hon. M. de Jong: Broadly speaking, the rationale and the need for the inclusion of these provisions relate to the introduction and embedding of the rules around partnerships. The notion of qualifying expenditures, for the purpose of doing calculations for the first taxation year, existed but not with respect to a partnership.

[1600]

The inclusion and the reference to partnerships that we have been dealing with at various points through this bill also required that we introduce the term and the notion of qualifying partnership expenditures to ensure there was a parallel set of qualifying expenditures for that structure of agency.

Sections 37 and 38 approved.

section 39.

B. Ralston: This proposed amendment to

section 84(3) would appear to be consequential to the amendment to

section 83 that we had just discussed making reference to qualifying partnership expenditure under

section 114.1(3). Is that all that’s being implemented here?

Hon. M. de Jong: I am advised that is correct, yes.

Sections 39 to 41 inclusive approved.

section 42.

B. Ralston:

Section 42 strikes out

section 54(3)(

a) and substitutes

section 54(3)(a.1), so I’m going to just go back to that if I might. This relates to the calculation of net income. Is that a significant amendment, or is it simply consequential to a change in definition that we’ve dealt with already? It would appear to be the latter, but perhaps that could be confirmed.

Hon. M. de Jong: I believe, and it has been confirmed for me, that this is a consequential renumbering as opposed to altering any substantive provisions.

Sections 42 to 46 inclusive approved.

section 47.

B. Ralston:

Section 47, the proposed amendment here, adds a new section, 106.1, which is entitled “Forgiven amounts in respect of commercial debt obligation issued by partnership.” There does appear to be a wholesale rewriting or addition of language relating to the operation of partnerships. We have discussed commercial debt obligation, but perhaps the minister can briefly explain what the purpose of the proposed

section 106.1 is?

Hon. M. de Jong: The intention here is to require the partnership to calculate the forgiven amount when a debt of the partnership is forgiven, and then that forgiven amount is then allocated to the partners, who apply the debt forgiveness rules to their share of the partnerships’ forgiven amount. So it, again, is that two-step process that this is intended to clarify.

Sections 47 and 48 approved.

section 49.

B. Ralston: This is a major amendment to

part 6 which adds an entire new division. These would appear to be, as the division description suggests — “Computations for the first fiscal period” — fairly technical sections relating to partnership expenditures and partnership property. Can the minister explain briefly any significant aspects to these proposed amendments?

[1605]

Hon. M. de Jong: The member is correct. This is a new provision, again, relative to the notion of a partnership configuration. It requires the partnership, first and foremost, to determine the fair market value of all qualifying partnership property acquired prior to the first fiscal period, unless all of the members of the partnership use the

[ Page 7909 ]

capital cost valuation in their first-year election.

It does also require the partnership to determine the capital cost of all qualifying partnership property acquired prior to the first fiscal period, unless, again, all of the members used the fair market value valuation in their first-year election.

I should point out, as well, that each partner in this scenario has the choice as to which valuation method they use for their election regarding qualifying property. The valuation method they choose will determine which set of partnership valuation information they use — fair market value or historical capital costs — for the deemed acquisition of capital investment property prior to the first taxation year. Again, a blueprint for how the partnership determines the fair market value of a property.

Section 49 approved.

section 50.

B. Ralston: This

section adds a number of new sections that appear to be what is described as “Deemed income or loss if reversionary trust.” Could the minister briefly explain what “reversionary trust” is, and what is intended with these particular sections?

Hon. M. de Jong: We’ll start here. The reversionary trust rule is, of course, an anti-avoidance provision. But in some of the arrangements it may be used to ensure that First Nations’ financial arrangements are exempt from the tax, and we talked about that — we alluded to that — a little earlier in our discussion today. This provision is intended to parallel the treatment of reversionary trusts under the federal act and to replicate that treatment for the purposes of this act.

Sections 50 to 52 inclusive approved.

section 53.

B. Ralston: Chair, I suggest that we take a brief recess at this point. This

section is a very extended one. I know that my colleague from Oak Bay–Gordon Head has some questions as well, and perhaps this would be a convenient point at which to take a brief recess.

The Chair: The committee will recess for approximately ten minutes.

The committee recessed from 4:09 p.m. to 4:26 p.m.

[D. Horne in the chair.]

A. Weaver: I have a question with respect to subsection 124.600, collection bond —

part 8.6, recovery of amounts owing — in this, the omnibus section,

section 53, of the bill we’re discussing now. This subsection allows a commissioner to collect a bond from a taxpayer that can then be used to collect amounts owing under the act. Frankly, I think this is a good thing, to be able to have some bond on the books there they can claim against.

Under the LNG Income Tax Act, as it currently stands, we’re offering a 5 percent closure tax credit that taxpayers can claim against the costs of reclamation. Instead of simply requiring taxpayers to clean up any mess they make in the process of doing business, we pay them to do that through a tax credit. It’s sort of the opposite of a polluter-pay model. It’s a “we pay the polluter to clean up.”

I suggested back in the fall that instead of giving taxpayers a break for reclamation — and when I refer to taxpayer here, it’s obviously not the taxpayer of British Columbia; it’s the LNG taxpayer — we could use a system much like the collection bond to help ensure that they follow through with this important reclamation. This follows from the basic principle that we need to internalize externalities in business.

My question here is this. Could the minister please tell me if the collection bond could be used for reclamation purposes? If not, why wasn’t this applied for this purpose?

[1630]

Hon. M. de Jong: I think the member asked two questions. I think the answer to the first question is to confirm what I think he revealed is his suspicion, and that is that the bond elements, the bonding requirements, of the act relate to security for the collection of the tax as opposed to other elements of an operation. To the extent that the member has identified that, I wish to confirm that he is correct.

Since we clearly have contemplated a circumstance in which a bond would be posted to secure the interests of the people of British Columbia, the follow-up or ancillary question, of course, is: and why not? The limitation we are confronted by, certainly by convention — I don’t want to suggest there is an absolute legal limitation — would be the use of a taxation statute as a means for creating security instruments relating to other areas of operation.

The member will know that in some circumstances, the Crown does take security. It tends to be via other statutory instruments and is generally not done as part of a taxation instrument.

I understand the member has a different view and would urge the government to do so, but this bill and the LNG Income Tax Act statute do follow a traditional approach to seeking security for the payment of the tax and leaving security around other endeavours to other choices government can make via other statutes.

B. Ralston: I wanted to deal with

part 8.2 of this section, which is “Registration.” This, in a number of sections, sets out a scheme requiring registration and a number of rules transacting only with registered persons or partnerships.

Can the minister explain the registration scheme that’s

[ Page 7910 ]

proposed, its purpose and how it will operate? I may well, depending on the answer, have some follow-up questions on this part.

Hon. M. de Jong: Well, I guess in really short order, we want people to register so that we can ensure that we’re collecting the tax revenue from those to whom the obligation accrues. The requirement for registration applies to those who are engaging in liquefaction activities or earning income from liquefaction activities in respect of an LNG facility.

The

section also contemplates and recognizes that, particularly with respect to the latter category, there are likely to be entities earning income from liquefaction activity who do not otherwise have a presence within the jurisdiction.

We see that as an important element of enforcement — prohibiting transactions between persons where either party is not a registrant, except where an applicable exemption might apply. We see that as a key element to the enforcement mechanism, coupled with some of the other provisions that we have previously discussed and, I’m sure, will shortly discuss.

[1635]

B. Ralston: Given what the minister has described as the purpose of this registration scheme, can he explain why and in what circumstances the power that appears to be granted to the minister in

section 54 to exempt a person or classes of persons would be exercised? Given what he has described as the scheme, in its comprehensiveness, its purpose and the integral nature with which it will work with the taxation scheme, can he explain why there would be a contemplation of exempting parties from registration?

Hon. M. de Jong: The scenario that gave rise to the notion that at least the possibility or the mechanism for granting an exemption would be necessary relates to an individual, I am told. We have tried to turn our minds to precisely how that might operate. Here is a scenario where it might be appropriate to grant an individual an exemption — an individual who would otherwise, under the

definitions that exist under the act, have an obligation to register: an individual landowner who rented or leased a portion of the land that ultimately comprises an LNG facility.

Now, there are circumstances where it would be entirely appropriate to have that individual register, but there may be circumstances in which it would equally be appropriate to provide an exemption.

B. Ralston: Can the minister explain how the obligation to register will be enforced, firstly, and the rule, secondly, that appears to prohibit transactions with non-registered persons?

[1640]

Hon. M. de Jong: In response to the member’s question about how to drive registration, particularly in circumstances where someone required to be a registrant has no actual presence in the province, it’s really, I guess you could say, a three-part answer.

There is the requirement that the member referred to — not to engage in, not to do business, conduct transactions with a non-registrant who is required to register. There is a fine provision associated with non-registration. I don’t want to pretend or suggest to the member that I think that is going to ultimately drive the behaviour.

I think it is the third component to this that is intended. It will ultimately have the greatest impact in ensuring registration, and that is the application of the principles of joint and several liability that would accrue in a way that would have agencies, taxpayers, assume the liabilities for non-registrants. And I’m reminded: not just non-registrants with whom they have direct transactional relationships but other non-registrants at the LNG facility in question.

That is somewhat of a unique enforcement mechanism that we have employed to try and take account of the unique suite of participants that might be engaged in activities but who would, by virtue of the

definitions included within the act, be taxpayers for whom there is an obligation to register.

B. Ralston: I think I understand the theory of the joint and several liability if a registered party deals with an unregistered party. Is there any example, or is this enforcement mechanism drawn from experience of other jurisdictions? Or is this a unique solution that’s being legislatively tested here for the first time?

Hon. M. de Jong: First of all, I don’t want to suggest to the member of the committee that we drew this model from another jurisdiction or another part of the liquefied natural gas industry located elsewhere in the world.

You could, by way of comparison, look at how the Crown in British Columbia deals with the collection of stumpage in the forest sector and how that liability follows the log and the unique relationship that can exist between those harvesting and those processing that frequently Crown-owned resource and how that liability flows through to the manufacturing stage. That’s not a perfect comparison, by any stretch of the imagination, but may be somewhat analogous.

[1645]

B. Ralston: In

part 8.4 — that’s the administration and enforcement

section — there are a number of provisions granting certain powers to the commissioner and others to enforce the various provisions of the act. Can the minister explain the proposed anti-avoidance rule in

section 124.412 and why he thinks that will be successful in deterring or prohibiting avoidance of the tax?

[ Page 7911 ]

Hon. M. de Jong: I’ll begin by advising the committee and the member on what the objective was here.

It is, first of all, modelled upon the federal act and the B.C. Income Tax Act general anti-avoidance provisions and is designed to allow the commissioner to re-determine amounts such as tax payable, capital investment account balances or net operating loss account balances — these are all key defined terms and key mechanisms within the corporate structure — where the commissioner considers that a transaction or series of transactions is an avoidance transaction. The concept, the principle and the model are borrowed from both the federal act and the B.C. Income Tax Act.

B. Ralston: The minister has referred to the federal act. At page 84 of the bill,

section 124.412, there’s a definition of an “avoidance transaction.” Is that a definition that’s taken from the federal act, or was it modified for the purposes of this act?

Hon. M. de Jong: I’m advised that the definition of “avoidance transaction” contained in 124.412 is drawn from the B.C. Income Tax Act.

B. Ralston: In

part 8.6, “Recovery of Amounts Owing,” there is reference to a collection bond. The member speaking previously has spoken to this, on a specific aspect of it.

Can the minister explain how this would operate? And can he give some idea of the dollar value of the bond? How would that be calculated, so I might get some sense of the proportion or — I suppose if I could express it this way — the deterrent value of the bond? If it’s small, obviously, for some of these companies, it may not be terribly consequential one way or the other.

[1650]

Hon. M. de Jong: Two parts to the member’s question, I think — one, the rationale behind this, and then secondly, some insight into what the quantum might be for the bonds. The intention, again, is to provide security to the province, to the people of B.C., for the tax debt of LNG taxpayers, particularly, as I mentioned earlier, in those cases where LNG taxpayers have no assets in the province. Ultimately, that means assets that can be seized in certain circumstances where tax obligations haven’t been satisfied.

The member has alluded to some of the other mechanisms that are at play here. The registered taxpayer that transacts with a person or partnership that’s not registered assumes a liability, a joint and several liability, for those tax debts. Those are the mechanisms that are in place.

In terms of anticipating or looking forward to what the bond could be set at, obviously, there will be a determination based on the specific circumstances surrounding individual LNG taxpayers. There will be a risk assessment. That will take into account a number of factors.

First and foremost, I suppose, it will take into account the degree to which that LNG taxpayer has a presence in the province and has assets. That will influence the size of bond, if a bond is necessary at all. The anticipated LNG income tax liability in a given year would likely also influence the determination of what an appropriate bond amount is.

Risk factors such as that, coupled with an assessment of what the tax liability in a taxation year might be, I think, would all contribute to the setting of a bond. I will say this. In some circumstances there might not be a bond, if the determination is such that there is ample alternative security for the people of B.C.

B. Ralston: There appear to be two parts to the determination of the value of the bond. One is in subsection (4) — “the amount of the bond is to be determined by the commissioner.” But in subsection (6), the amount of the bond required to be deposited “may not exceed the maximum amount established by the regulations for the LNG source.”

Is the reference to “regulations for the LNG source” a specific regulation for an individual LNG entity or entity deriving income from liquefaction activity, or is there a general threshold for regulation below which the commissioner would exercise her discretion?

[1655]

Hon. M. de Jong: Here’s the model that hasn’t been finalized but is in the works. It’s, again, specific to an LNG facility. The intention at this point would be to set a maximum amount of a bond for a facility. Already I have to be cautious here. It doesn’t mean the owner of the facility would be automatically required to post that bond. But then agencies, registered taxpayers, engaged with that facility may have a subset of that assigned to them as a bonding requirement.

It wouldn’t necessarily in all cases add up to the specified total. It certainly wouldn’t in all cases be distributed equally amongst the various participants. The notion would be a maximum amount set that the commissioner could then, within that limit, apply specific amounts to taxpayers engaged with that LNG facility.

B. Ralston: The definition of an “LNG source,” looking back at Bill 6, means “liquefaction activities carried out at or in respect of a particular LNG facility. I gather, then, the total would be set for a given LNG source — the language appears to be fairly consistent there — and then be apportioned based on what the minister has talked about in terms of, I suppose, a variety of factors that would be considered in the regulation — I guess a measure of ownership or a level of activity or other determinants of the role of the individual person or partnership.

[ Page 7912 ]

In subsection (7), and I think this is what the minister may have been referring to, it says: “…the amount of the bond may not exceed the total of all amounts each of which is a maximum amount referred to in subsection (6).” There would be a maximum set for the source, and then it would be divided up. The sum of the parts couldn’t be greater than the maximum that’s set by regulation. That’s how I read that. Perhaps the minister could just confirm that.

Hon. M. de Jong: I believe the member is correct. The only thing I would add to that is that whilst the aggregate amount couldn’t exceed the maximum for that source, it might not, in all instances and at all times, add up to the maximum. The aggregate amount might fall somewhere below that maximum.

[1700]

B. Ralston: This part of the regulations gives the commissioner power to determine the satisfactory nature, or not, of the bond or cash that’s proposed to be deposited. It does say in subsection (12) that if there’s a reduction, “the commissioner may pay from the consolidated revenue fund to the person or partnership that deposited the bond an amount equal to the reduction.”

Is it intended that the bond or security or cash would be simply paid to the consolidated revenue fund, and then, in the event of a default or a reduction or any other change, would be paid back from the consolidated revenue fund?

My understanding would be that these kinds of amounts would typically be held in something more like a trust fund or a designated segregated fund rather than the consolidated revenue fund. Or is that just for the provision in the case of a reduction?

Hon. M. de Jong: Yes. This deals specifically with a situation in which there is a refund, essentially ensuring that there is the statutory authority required to provide payment back to the agency receiving the refund in whole or in part from the consolidated revenue fund.

B. Ralston: I think that clarifies that part of it. But the reference in the regulations is to “deposit or to have deposited on their behalf with the commissioner a bond.” Is the money going straight to the consolidated revenue fund in that circumstance, or is there a separate segregated fund that the commissioner would operate to hold this cash or security?

Hon. M. de Jong: If it’s cash we’re dealing with, then at the moment it’s contemplated that it would go directly to the consolidated revenue fund. For many of the amounts involved here, it is more likely to be letters of credit or another form of security for the bond. But in the case of cash, at the moment, it would be received into the CRF.

B. Ralston: The minister had spoken earlier of joint and several liability, and we had a brief discussion on it. There are a number of subsequent sections here that set out the legislation relating to joint and several liability.

I suppose the ultimate authority to…. There’s an ability to recover or to commence a legal proceeding. Are there any other enforcement mechanisms, other than commencing a legal proceeding, if it’s deemed that a taxpayer is liable and has not paid the required amount?

Hon. M. de Jong: Is the member inquiring: are there lien provisions and other mechanisms? I’ll ascertain to get an answer.

[1705]

I am reminded that all of the usual broad suite of collection devices that exist in taxation instruments have been embedded in the legislation, from liens to certificates. They are all here.

B. Ralston: So in the event of a member of a partnership or another participant that has no tangible assets here…. Would it be fair to say that, really, the only security for the payment of the tax would be the bond itself?

Hon. M. de Jong: Two circumstances. I can’t remember if the member alluded to an example where the debtor was registered or unregistered. In a case where the debtor is registered, the bond, where there are no other assets, represents the asset or the security to which the Crown would look. In circumstances where the debtor is unregistered, of course, the other provisions, principles of joint and several liability, would kick in, and we would look, ultimately, to the facility and those engaged at the facility.

B. Ralston: Just so, I suppose, people are clear, or for those who may wish to gain some enlightenment from this discussion, if there are such people, the mechanism of the joint and several liability really operates to require registered participants…. It’s a deterrent to registered participants from dealing with unregistered participants, because there’s a financial penalty that they may accrue if they deal knowingly with an unregistered participant who may owe tax.

That liability would accrue to them by the operation of those mechanisms, and one would presume they would be incented, therefore, to make sure they deal only with registered participants — and if they are not registered, to encourage them to register prior to entering into transactions with them. Is that essentially the value of the joint and several liability provisions?

Hon. M. de Jong: That is essentially it. The only thing I could probably add to that is that it is designed to create this incentive. It is also the law. The incentive we are embedding in this is for participations in this sector to

[ Page 7913 ]

encourage those with whom they are dealing to obey the law, and the law requires registration.

At that point, for the reasons that the member has already alluded to, risk transfers to the Crown to ensure that we have secured an appropriate level of security via the bond. But the member I think has correctly captured the mechanism by which we hope to secure the cooperation and a measure of self-enforcement on the part of those who will be engaged in the LNG industry in B.C.

B. Ralston: Now, there are, in this fairly expansive section, a number of, obviously, administered provisions relating to filing of returns, a registration process, information requests and the enforcement mechanisms.

[1710]

We’ve spoken of a commissioner. Is that all intended to be housed within the ministry, or will a separate

section or agency be developed to administer all these provisions separately from other ongoing administration of the general income tax provisions of British Columbia?

Hon. M. de Jong: What’s contemplated is that responsibility for enforcement, administration, collections would be within the income taxation branch within the ministry.

B. Ralston: In

part 8.7, there’s

section 124.78. It talks about the volume, heating value and sampling of natural gas and prescribes certain attributes to the heating value of natural gas and how it’s to be expressed. Can the minister just explain: what is the purpose of putting that in the legislation? I have an idea of what it might be for, but perhaps the minister could just clarify that.

Hon. M. de Jong: I think the member characterized this correctly. What we’re trying to do is set out a standard operating condition for the measurement of natural gas, to incorporate industry standards for measurement and ensure the accuracy of reported volumes. That is relevant, significant, in terms of determining the cost of the natural gas notionally required.

B. Ralston: Is there a provision to change this by regulation if that should be necessary? Or are these very standard measurements?

Hon. M. de Jong: No regulatory authority with respect to this act contained within this act, but the member will see in subsection (3) the reference to the incorporating of the regulations made under the Oil and Gas Activities Act. I don’t want to leave the impression that there might not at some point be a regulatory dimension to this, but this act contains none and seeks to incorporate the industry practice as reflected in the Oil and Gas Activities Act.

[1715]

B. Ralston: Subsection (3) makes reference to “the measuring and taking of samples of natural gas.” Under what circumstances would that take place? Would that be for enforcement purposes or for verifying the accuracy of the operation, of the calculation of volumes? Under what circumstances would that take place? Is there the authority within the act to enter premises to take those samples?

Hon. M. de Jong: If I understand the member’s question correctly, I think the answer that follows is as follows: no specific authority in this legislation to enter upon the premises — to verify, for example, the accuracy of the meter we were talking about earlier. That authority does, however, exist, I am advised, statutorily under other legislation — the Oil and Gas Activities Act.

B. Ralston: In the offence

section there’s a limitation period for prosecution.

Section 124.85: “The time limit for laying an information…under this Act is 8 years after the time when the subject matter of the proceedings arose.” It seems unusually long, but perhaps the minister can explain why eight years was chosen.

Hon. M. de Jong: The period selected here, I’m reminded, is consistent with the limitation period under the federal act and the B.C. Income Tax Act. I’m not aware of any other reason or rationale for why we selected eight years except for that consistency factor.

Section 53 approved.

section 54.

B. Ralston: These are powers to make regulations in relation to registration and bonds, information returns, the solicitor-client privilege and to appeals. Again, and in particular,

section 127.5 gives the power to the Lieutenant-Governor-in-Council to make regulations “for the purposes of

section 8 (1) (c) (iv), excluding from forming part of an LNG…all or part of a series of systems used or intended to be used for transmitting liquefied natural gas for regasification.”

I’m wondering, given that the definition, through the amendments that we dealt with earlier in the definition section, has I think fairly precisely circumscribed…. I think that certainly was the intention. I suppose subsequent practice will determine whether that opinion is supported. It seems to give broad power to the Lieutenant-Governor-in-Council — that’s the cabinet — to exempt key parts of the operation from forming part of a plant and, therefore, attracting liability for tax.

I’m wondering: what’s the thinking behind this regulation? It would appear to be unnecessary, given the very precise definition that’s been attempted to be formed.

[1720]

[ Page 7914 ]

Hon. M. de Jong: I apologize. I just wanted to make sure I was, again, providing as accurate information as I could.

Here’s the scenario where the possibility of a regulation drawing on this authority might be necessary. The intention is — as we’ve talked about, and the member correctly points out — through

definitions that are specific and technical and complex, to capture the LNG facility.

We are alive to the possibility, at least, that an LNG facility as contemplated by the act might purport to supply a retail outlet domestically within British Columbia. In those circumstances it would not be the intention of the government to include that within the definition of the LNG facility.

Having the regulatory authority to exclude that retail dimension, even though it might be connected with a pipeline…. That option would exist with respect to this regulatory authority.

[1725]

B. Ralston: Just upon reading my notes and reading the

section again while awaiting the minister’s answer, I do note that there is reference here to

section 8(1)(c)(iv), which refers to “transmitting liquefied natural gas for regasification.”

That’s the reverse of the process that we’re engaged in, in an LNG plant. It would be taking product which has already been cooled and then heating it up and making it back into gas. It’s the reverse of the process we’re talking about.

Is there some significance to that? From what I know about the technology, a regasification plant is not the LNG plant that’s contemplated in this legislation. Is there some other purpose for this

section and deliberately excluding transmitting liquefied natural gas for regasification?

Hon. M. de Jong: Only this. The tax is designed and intended to apply to the liquefaction activity, therefore ensuring that a mechanism exists to exclude the regasification function to the extent that that might materialize in B.C. That is the intention behind the inclusion of this enabling regulatory power.

Sections 54 and 55 approved.

section 56.

A. Weaver: I was wondering if the minister could please explain why a new prescribed percentage is being offered to companies as part of the natural gas tax credit. The question that comes to mind is: has the original offering of half a percent now been deemed insufficient, and if so, on what basis?

Hon. M. de Jong: In fairness to both members that have participated in the debate, they’ve both signalled earlier in the second reading their interest in this section. Perhaps some initial commentary coupled with what the members may have learned in the briefing will be of assistance.

When we debated the first part of this package in the fall, I hope I made it clear in pointing out that the tax credit we are now dealing with in

section 56 was deliberately intended to encourage LNG taxpayers who didn’t have a presence in Canada to set up permanent establishments in B.C.

If they do, they will pay federal income tax but — very much on our mind — they will also pay provincial income tax, benefiting all Canadians and certainly all British Columbians. The credit was also designed to encourage companies that are operating in B.C. to expand operations that are already in the province and all of the benefits that go with that.

We’ll get to this, but what we were trying to do…. Here’s what the intention was. The eligible cost of natural gas, which was initially set to 0.5 percent of natural gas, is established at the LNG facility inlet under the liquefied natural gas act. So we’ve got that 0.5 denominator calculator.

That was based on the initial calculation that, for most LNG taxpayers, this credit rate would be an amount that would bring the effective corporate income tax rate to 8 percent, so 8 percent’s the key here.

[1730]

To the extent there is criticism of the government — and I’ve heard some of it — about the break or the…. The break is taking the corporate income tax rate down to 8 percent. That is a deliberate policy choice that the government has made, and it is subject to analysis, criticism, for that.

We believed that by utilizing the 0.5 percent denominator in the average case or most cases, that would be sufficient to help an operator achieve that end, that reduction. We were wrong. We’re satisfied that we were wrong, and yes, it was proponents that came and said: “We don’t agree with you. If your objective is to create a credit that will assist proponents — operators, taxpayers — to take their corporate income tax rate to 0.8 percent, you will not achieve that with a 0.5 percent denominator.”

Officials, after spending a lot of time going through the numbers and going through the data, eventually came to me and said: “We think they’re right.” If the government’s objective is to establish a credit that will allow taxpayers, in reasonable circumstances, to, on the strength of their natural gas costs, take their corporate income tax rate down to 8 percent, you’re going to have to have the ability to change that denominator. And it may vary from time to time, depending on a variety of circumstances — hence, the regulatory power rather than changing the number in legislation.

I guess the point…. I’ve said enough. Members will have other questions and observations and, undoubtedly, criticisms.

[ Page 7915 ]

Nothing is changing here with respect to the benefit. The benefit stays at 8 percent. We’re actually encouraging taxpayers to make decisions that will allow them to realize on that benefit, for reasons I spoke to earlier. We were satisfied that the original denominator we chose was incorrect and wouldn’t do that. So we are changing the denominator, but the benefit that we intended for taxpayers, the benefit itself, is not changing.

A. Weaver: That actually answered the subsequent four or five questions I had, so I do appreciate the thorough answer. But it does beg the question, then: why not just specify 8 percent in the legislation as the tax rate instead of 0.5 percent plus some magical number that’ll make it to 8 percent? I don’t understand the logic in having 0.5 plus something instead of just saying 8 percent.

Hon. M. de Jong: I think the short answer is because we did want this to be tied to the purchase of natural gas and to the volume of natural gas that’s purchased. We could have said: “Come to B.C., locate here, and everyone qualifies for a reduced corporate income tax rate.” We didn’t do that.

It’s a credit. It’s a credit tied to the purchase and consumption of natural gas. Rather than an industry-wide reduction in the corporate income tax period, it is a credit tied to the purchase and utilization of natural gas and will fluctuate depending on the amount of natural gas that a taxpayer purchases. As we have discussed earlier in these debates, some taxpayers will not have purchased natural gas, and they won’t qualify for the credit at all.

[1735]

B. Ralston: As the minister said, we on this side of the House spoke against this provision, particularly at second reading.

Can the minister confirm, then, that the way this credit is calculated leaves open the possibility to the government at some point in the future, if sufficient volumes are purchased and the mechanism is adjusted, to reduce the corporate tax rate from 8 percent to, say, 5 percent?

Hon. M. de Jong: I actually do appreciate the question, because it’s an important one. I think the question is important. The answer is no, which is the point that I made clumsily earlier. Whatever adjustment is made to the denominator, only this chamber could change the benefit. The 8 percent is in the legislation, and the benefit of the credit could not see that amount reduced without this assembly authorizing that first.

B. Ralston: The effect of the mechanism would be, depending on the volume of purchase and the way in which the credit works, to see corporate income tax for some companies decline from 11 percent to 8 percent. But the minister is saying here that without a legislative amendment, it could not fall below 8 percent. Is that what’s being stated here, just for clarity and since this is on the record?

Hon. M. de Jong: That is correct.

A. Weaver: Since the introduction of Bill 6, it seems…. I appreciate the minister’s response to earlier questions. This was not my sense of what was happening in Bill 6 here. The way I read how

section 56 has been introduced is that, in fact, it’s there to take us down to 8 percent. That intention to take us down to 8 percent early on was not my understanding, nor do I recall hearing that back when Bill 6 was brought into place.

It suggests to me, then, in light of the new information, that in fact, this is another continuation of, with respect,

an act of desperation to try to land LNG, to try to do whatever it’ll take to get one company — one company, the chosen company, the winner that is picked in the marketplace.

It’s not only picking the winning technology or the winning sector, it’s picking the winning company in the winning sector. I mean, this is supposed to be a free enterprise government. That strikes me as counterintuitive — that one would be picking winners and losers not only in the market but actually companies within the sector of the market.

I cannot support this

section 56 as amended, because it changes the playing field in more of this continuation of a giveaway. I put on notice an amendment to strike all of the additions in

section 56 that changed it from its original introduction in Bill 6 in the fall. For the sake of Hansard, I cannot read the entire amendment into record, but it is on notice.

It strikes everything in

section 56 that changes it from what it was in the fall, which was the original intention of this section. That was to have a half percent rate — no “plus ministerial amount,” just a half percent.

[SECTION 56, by deleting the text shown as struck out:

Section 129, as it enacts

Part 13 of the Income Tax Act, R.S.B.C. 1996, c. 215, is amended

(

a) in

section 172 (1) of the Income Tax Act by adding the following definition:

“credit calculation change” means the prescribing of a percentage for the purposes of subsection (4) (b), including any amendment to the regulations that effects a change in or the repeal of a percentage prescribed for the purposes of subsection (4) (b);- ,

(

b) in

section 172 (3) (

b) of the Income Tax Act by striking out “ subsection (7), ” and substituting “ subsections (7) and (8), ”,

(

c) in

section 172 of the Income Tax Act by repealing subsections (4) to (6) and substituting the following:

(4) A qualifying corporation’s annual natural gas tax credit for a taxation year that begins on or after January 1, 2017 is the total of the following:

(a) 0.5% of the qualifying corporation’s eligible cost of natural gas for the taxation year;

(

b) the amount, if any, determined for the taxation year under subsection (4.1);

(

c) if the qualifying corporation is a member of a partnership, as determined under the Liquefied Natural Gas Income Tax

[ Page 7916 ]

Act, the amount, if any, determined for the taxation year under subsection (5.2).

(4.1) Subject to subsection (5.1), the amount to be included under subsection (4) (

b) in determining the qualifying corporation’s annual natural gas tax credit for the taxation year is the prescribed percentage, if any, of the qualifying corporation’s eligible cost of natural gas for that taxation year.

(5) A qualifying corporation’s eligible cost of natural gas for a taxation year is an amount equal to the total cost, as determined under the Liquefied Natural Gas Income Tax Act, of all natural gas acquired or notionally acquired in the taxation year by the qualifying corporation at the LNG facility inlet meters for an LNG facility.

(5.1) If, during the taxation year of a qualifying corporation, there are one or more credit calculation changes, the qualifying corporation must determine its eligible cost of natural gas for that taxation year in accordance with the following:

(

a) the corporation must divide its taxation year into notional taxation years as follows:

(

i) the first of those notional taxation years begins on the first day of the corporation’s taxation year and ends on the day before the day on which the first credit calculation change that occurs in its taxation year takes effect;

(ii) subject to subparagraph (iii), a notional taxation year will begin on each day in the corporation’s taxation year on which a credit calculation change takes effect and will end on the day before the day in its taxation year on which the next credit calculation change takes effect;

(iii) the last notional taxation year begins on the day on which the last credit calculation change that occurs in the corporation’s taxation year takes effect and ends on the last day of its taxation year;

(

b) the corporation must, for each notional taxation year within the corporation’s taxation year, multiply the percentage prescribed for the purposes of subsection (4.1), if any, on the first day of that notional taxation year by an amount equal to the total cost, as determined under the Liquefied Natural Gas Income Tax Act, of all natural gas acquired or notionally acquired in the notional taxation year by the qualifying corporation at the LNG facility inlet meters for an LNG facility;

(

c) the corporation must add to the amount determined under paragraph (

b) for the first notional taxation year within the corporation’s taxation year the amounts determined under paragraph (

b) for each of the other notional taxation years within its taxation year;

(

d) the total amount determined under paragraph (

c) is the amount determined under subsection (4.1) for the corporation’s taxation year.

(5.2) The amount to be included under subsection (4) (

c) in determining the qualifying corporation’s annual natural gas tax credit for the taxation year is the amount equal to the total of all amounts each of which is the qualifying corporation’s appropriate portion of a partnership’s annual natural gas tax credit for the fiscal period of the partnership ending in the taxation year of the qualifying corporation, as determined under subsection (6).

(6) For the purposes of subsection (5.2), the following rules apply for determining the amount of a qualifying corporation’s appropriate portion of a partnership’s annual natural gas tax credit for a fiscal period of the partnership:

(

a) the amount of the partnership’s annual natural gas tax credit is to be determined by applying subsections (4) to (5.1) as if the partnership were a qualifying corporation and the partnership’s fiscal period were its taxation year;

(

b) the appropriate portion is that portion that may reasonably be considered to be the qualifying corporation’s share of the amount determined under paragraph (

a) of this subsection.

(8) For the purposes of subsection (3) (b), if a qualifying corporation is subject to a loss restriction event, within the meaning of

section 251.2 (2) of the federal Act, at any time in a particular taxation year, the total of the qualifying corporation’s annual natural gas tax credits for all taxation years preceding the particular taxation year, less any amounts that were previously deducted by the qualifying corporation under subsection (2) for those preceding taxation years, is deemed to be zero.,

(

d) in

section 172 (7) of the Income Tax Act by striking out “ in those preceding taxation years ”, and substituting “ for those preceding taxation years, ”, and

(e) (

a) by adding the following sections to

Part 13 of the Income Tax Act:

Amalgamations and wind ups

(1) If, on or after January 1, 2017, 2 or more corporations amalgamate within the meaning of

section 87 (1) of the federal Act, the new corporation is deemed, for the purposes of this Part, to be a continuation of each of its predecessor corporations.

(2) If, on or after January 1, 2017, a subsidiary corporation is wound up within the meaning of

section 88 (1) of the federal Act, the parent corporation is deemed, for the purposes of this Part, to be a continuation of the subsidiary corporation.

Filing requirements

(1) A qualifying corporation that wishes to claim a deduction under this

Part in respect of a taxation year must

(

a) file, with the return of income filed by the corporation under

section 29 for that taxation year, an application for the deduction in the form, and containing the information, required by the Commissioner of Income Tax, and

(

b) have filed all tax returns required to be filed under the Liquefied Natural Gas Income Tax Act for the taxation year and all preceding taxation years.

(2) A qualifying corporation is not entitled to a deduction under this

Part in respect of a taxation year unless, within 18 months after the end of the taxation year, the corporation files the form containing the information required under subsection (1) (a).

Commencement

57 This Act comes into force on the date of Royal Assent.]

On the amendment.

A. Weaver: It does beg the question: why are we starting with 0.5 percent? I do understand what the minister said in terms of that he thought 0.5 percent would take us to 8 percent. But why not 0.1 percent, 0.2 percent? It seems to me that this whole narrative about taking us to 8 percent was missing in the fall. I don’t think that’s fair to British Columbians to change this again in this attempt.

With that, I put the motion on the floor to amend as on notice.

[1740]

Hon. M. de Jong: Look, I know the member is entitled to his views on the matter, and he has, as always, articulated them well here. I won’t belabour the point, except to say this. The first thing I’ll say is that if I was unclear in the fall when we dealt with Bill 6 about what the intention was, it was certainly not by design. I regret that, because the rationale has not changed — the rationale for what we are endeavouring to do.

We are, as I said, endeavouring to create something of an incentive for agencies that might not otherwise have a presence in Canada and British Columbia to come here. We see benefits that would accrue from that. But I was listening carefully in the second reading debate — I say this respectfully — and what I thought I heard frequently

[ Page 7917 ]

was a concern that what the government was trying to do was acquire the ability to surreptitiously, via regulation, change the benefit that LNG tax payers were going to receive.

If what was being sought here was a regulatory power to, at the whim of the executive branch, change the 8 percent number to 5 percent or 7 percent or whatever, then that would be a valid criticism. But that’s not what we’re seeking. I’ve tried to be clear, and if I wasn’t in the fall, in the member’s mind, then I regret that.

We’ve purposely, and not all members will agree with this, tried to create a structure in which it would be possible, via a credit relating to the purchase of an essential ingredient in the liquefied natural gas process — that is, the natural gas itself — to take down a taxpayer’s corporate income tax rate in B.C. from 11 to 8 percent.

That was our stated purpose, and it turned out that through the selection of the denominator, we weren’t going to achieve that. So the inclusion of this

section represents something of an admission on the part of the government that whatever our intention was, we didn’t embed in the original bill a mechanism that would achieve that intention.

The intention hasn’t changed. The benefit, the potential benefit, hasn’t changed. Were the government seeking authority for the executive branch to alter the benefit by regulation, I would say members would be entitled to be suspicious and concerned. We are not endeavouring to do that, and, whilst I understand the member’s point, for that reason I am disinclined to accept the amendment.

B. Ralston: Speaking to the amendment, what this provision does permit is not only the reduction to 8 percent but the ability to carry unused credits forward until they can be used.

One may recall…. I don’t believe the minister was the Minister of Finance at this point, but Advantage B.C., which is a government agency, did a comparative study of the corporate tax rate — obviously, this is stock and trade of some of the representations that the government makes about British Columbia and its tax structure — and compared the corporate tax rates in Beijing, Singapore and, I believe, Malaysia. I’m not sure. I can’t recall from memory.

The B.C. tax rate was lower than all of those jurisdictions. It was lower than the Communist Party in the People’s Republic of China has deemed to impose on corporate earnings in China. So I don’t understand why the minister thinks it’s necessary to drive the corporate tax rate for these proposed entities to 8 percent. There’s no compelling rationale been advanced. Doubtlessly there are private representations from proponents.

Of course, every company wants to pay as little tax as possible. But given the very generous provisions in the capital investment account, the lower rate until the capital investment account is depleted….

[1745]

In other words, until the entire capital investment is accounted for, the LNG tax doesn’t rise. We’re a first-world country with many, many advantages, and yet the minister feels that it’s necessary for the business environment to drive the corporate tax rate for these entities below that of any other jurisdiction in Canada, allegedly to attract business. There’s no compelling case advanced for that, other than some sense of an ideological position on the part of the government.

I support the amendment, and I’m frankly surprised that the minister continues to reiterate the necessity to have this credit that would enable some entities to pay as little as 8 percent corporate tax, which I don’t think is necessary to attract business to this province.

Hon. M. de Jong: I’ll be brief, but I do want to respond to the member’s comments.

I think I better understand his opposition. I disagree with it, but I think what the member is saying is that he fundamentally disagrees with the proposition of a credit that could see LNG tax payers reduce their corporate income tax obligation to 8 percent. I disagree. He disagrees with me, and I disagree with him. I can’t recall if he and the official opposition articulated that same position in the fall.

What I would say is this. Changing the denominator does not alter the benefit. I better understand that the member is opposed to the benefit itself, and that is a different matter.

The last thing I will say is, in addition to whatever ideological biases that the member may wish to assign, there is a rationale that extends beyond that which relates to the advantages that accrue from attracting those who conduct activity in B.C., have no presence and therefore pay zero corporate income tax in British Columbia.

Time will tell whether the measure achieves its intended objective on that front: to draw some of these agencies that would otherwise have no presence in British Columbia and therefore pay no corporate income tax in this jurisdiction — whether this credit achieves its stated objective of drawing some of those agencies in.

Thanks to the members for the amendment, but the governmen