Vol. 145, No. 14 — July 6, 2011

Registration

SOR/2011-130 June 23, 2011

SOFTWOOD LUMBER PRODUCTS EXPORT CHARGE ACT, 2006

ARCHIVED — Expiry of the Application of Section 12.1 of the Softwood Lumber Products Export Charge Act, 2006 Regulations

P.C. 2011-732 June 23, 2011

His Excellency the Governor General in Council, on the recommendation of the Minister of National Revenue, pursuant to section 102 of the Softwood Lumber Products Export Charge Act, 2006 (see footnote a) hereby makes the annexed Expiry of the Application of Section 12.1 of the Softwood Lumber Products Export Charge Act, 2006 Regulations.

EXPIRY OF THE APPLICATION OF SECTION 12.1 OF THE SOFTWOOD LUMBER PRODUCTS EXPORT CHARGE ACT, 2006 REGULATIONS

1. Section 12.1 of the Softwood Lumber Products Export Charge Act, 2006 ceases to be in force on July 1, 2011.

2. These Regulations come into force on July 1, 2011.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary


Issue: It has been determined by the Canada Revenue Agency (CRA), in consultation with the Department of Foreign Affairs and International Trade (DFAIT), that the additional 10% export charge imposed under a 2010 amendment to the Softwood Lumber Products Export Charge Act, 2006 (the Act) is no longer necessary. As provided for at section 102 of the Act, a regulation is required to set the date on which the provision that imposes this charge ceases to have effect.

Description: The Act was amended to provide for an additional 10% charge on exports to the United States (U.S.) of Canadian softwood lumber products originating from Ontario, Quebec, Manitoba and Saskatchewan — referred to as “Option B Regions” — under the 2006 Canada-United States Softwood Lumber Agreement. Canada began collecting this new export charge on September 1, 2010.

The additional 10% export charge was implemented for the sole purpose of complying with a 2009 decision by the London Court of International Arbitration (the Tribunal) which ruled that Canada had breached the 2006 Canada-United States Softwood Lumber Agreement (the Agreement). The Tribunal directed that Canada collect C$68.26 million in compensatory adjustments. The additional 10% export charge was imposed with the full expectation that it would be terminated as soon as practically possible once the amount was collected.

The Expiry of the Application of Section 12.1 of the Softwood Lumber Products Export Charge Act, 2006Regulations (the Regulations) establish July 1, 2011, as the date on which the provision that imposes the additional 10% export charge will cease to have effect. Ending the additional 10% charge at this time will ensure that exporters of softwood lumber products originating from the Option B Regions are relieved of the charge as soon as practically possible subsequent to Canada’s having satisfied the Tribunal’s ruling.

Cost-benefit statement: As the administration and enforcement of the additional export charge was integrated in the CRA’s existing policy, procedures and systems, the Regulations terminating the application of section 12.1 of the Act will generate no additional costs or savings for the CRA. The 10% export charge is levied in addition to existing export charges imposed under the Act. Accordingly, exporters have integrated the calculation and the remitting of the charge into their existing systems. Consequently, they will incur no additional compliance costs in connection with ceasing to remit the additional 10% export charge.

Based on current export volumes, the additional export charge would result in Canadian exporters paying approximately $36 million annually. The elimination of the 10% export charge will enable exporters of softwood lumber products originating from the Option B Regions to export product to the U.S. on a more competitive basis.

The Government of Canada is required to disburse amounts collected under the charge to the provincial governments of the Option B Regions net of administration costs. As the 10% charge is not giving rise to any incremental costs, the elimination of the charge would result in such provinces having to collectively forego an estimated $36 million annually.

As the benefits to Canadian exporters from the reduction in export charges are offset by the reduced revenue for the four provinces, the net quantified benefit of these Regulations is $0. However, these Regulations have associated qualitative benefits, including the increased competitiveness of softwood lumber exports from Option B Regions, reduced risk of mill closures and job losses, and the maintenance of Canada’s good international reputation resulting from its compliance with the Tribunal’s decision and with the terms of the Agreement. Therefore, the benefits of eliminating the additional charge exceed any associated costs.

Business and consumer impacts: Exporters of softwood lumber products originating from the four Option B Regions will be relieved of a charge that is no longer necessary.

Based on current export volumes, the additional export charge would result in Canadian exporters paying approximately $36 million annually. The elimination of the 10% export charge is expected to result in positive outcomes for the Canadian softwood lumber industry as it represents an over 60% reduction in the export charges paid by exporters from Option B Regions. Eliminating the 10% export charge will improve the business climate for the Canadian softwood lumber industry and help position its participants and the communities in which they operate to be more successful.

Domestic and international coordination and cooperation: The CRA, in consultation with DFAIT, projects that sufficient amounts will be collected by July 1, 2011, for Canada to have fully complied with the Tribunal’s ruling.

The CRA and DFAIT continue to monitor the dollar amounts collected in connection with the additional 10% export charge. DFAIT continues to cooperate with the United States Trade Representative and U.S. Customs and Border Protection.

The provincial governments of Ontario, Quebec, Manitoba, and Saskatchewan accept that disbursements from the federal government will be decreased annually due to the cessation of the additional 10% export charge. The provincial governments are not required to administer matters in connection to the end of the export charge.

Performance measurement and evaluation plan: These Regulations seek to set the date on which a provision of an act will cease to have effect and no evaluation plan or performance measurement will be undertaken.


Issue

In 2010, the Softwood Lumber Products Export Charge Act, 2006 (the Act) was amended by adding section 12.1 to provide for an additional 10% charge on exports to the United States of softwood lumber originating from Ontario, Quebec, Manitoba and Saskatchewan (Option B Regions). The additional 10% export charge was implemented for the sole purpose of complying with a 2009 decision by the London Court of International Arbitration (the Tribunal) which ruled that Canada had breached the 2006 Canada-United States Softwood Lumber Agreement (the Agreement). The Tribunal directed that C$68.26 million be collected in compensatory adjustments. Parliament imposed the additional 10% export charge with the expectation that it would be terminated once that amount had been collected.

The total remedy amount is expected to be collected at some point during the month of June 2011. It is therefore necessary to terminate the application of section 12.1 of the Act so that exporters from the Option B Regions do not pay amounts in excess of the Tribunal’s ruling.

Objectives

The objective of these Regulations is to ensure that exporters of softwood lumber products originating from the four Option B Regions are relieved of the 10% export charge as soon as practically possible subsequent to Canada’s having satisfied the Tribunal’s direction to collect $68.26 million in compensatory charges.

Description

In August 2007, the United States (U.S.) requested arbitration before the Tribunal to settle a matter relating to the Agreement. The U.S. was of the view that exporters of softwood lumber products originating from the four Option B Regions had not paid the correct amount of export charges in the first half of 2007 due to quotas not having been properly calculated in accordance with Annex 7D of the Agreement (a technical aspect of the Agreement referred to as the “adjustment factor”).

On February 26, 2009, the Tribunal ruled in favour of the U.S. and directed that compensatory adjustments, in the form of an additional 10% export charge, be added to Canada’s export charges until $68.26 million was collected.

On September 30, 2009, the Government of Canada tabled a Ways and Means Motion to add section 12.1 to the Act to levy the additional 10% export charge on softwood lumber products originating from the four Option B Regions and destined for the U.S. The amendment received Royal Assent on July 12, 2010, and, as agreed with the U.S., the charge began to be levied on September 1, 2010.

The CRA and DFAIT continue to closely monitor the amounts collected as a result of the additional 10% export charge and DFAIT continues to cooperate with the United States Trade Representative and U.S. Customs and Border Protection. It is fully anticipated that the full amount of the remedy will have been collected during the month of June 2011.

When the Act was implemented, Parliament provided that a regulatory mechanism would be the means by which charges imposed under the Act — including the additional 10% charge — would end. Such a mechanism was designed to allow the Government to react in a timely manner to international trade developments. Specifically, section 102 of the Act sets out that the Governor in Council may, by regulation, declare that any of sections 10 to 15 cease to be in force on a day fixed in that regulation. Accordingly, to eliminate the possibility of underpayment, minimize overpayments, and facilitate federal accounting and system adjustments, these Regulations establish July 1, 2011, as the date on which section 12.1 of the Act ceases to have effect.

Regulatory and non-regulatory options considered

Only regulatory options were considered to end the application of the charge as the Act provides that a regulatory mechanism would be the means by which charges imposed under the Act — including the additional 10% charge — would end.

The alternatives of retaining the additional 10% charge or ceasing its application on an earlier or later date were considered. These options were undesirable since retention of the charge beyond July 1, 2011, would cause the federal government to collect amounts in excess of what is required to the detriment of exporters and the softwood lumber industry they support. Ending the charge prematurely would have resulted in Canada’s failing to collect the amount directed by the Tribunal and the undesirable outcomes associated therewith.

Benefits and costs

The costs and benefits of retaining the additional 10% charge are projected based on CRA data (September 1, 2010, to March 31, 2011) on amounts assessed, export volumes, and the absence of administrative costs incurred to date. Present value amounts in the table below assume an 8% discount rate and monthly export volumes that remain unchanged from current levels for the period of 2011 to 2020.

The additional export charge affects exporters that ship softwood lumber products originating from the four Option B Regions to the U.S. Based on data for the period of September 1, 2010, to March 31, 2011, these exporters are collectively remitting approximately $3 million per month on account of the additional export charge. The termination of the additional charge is expected to result in positive outcomes that include increasing the competitiveness of softwood lumber exports from Option B provinces, reducing the risk of mill closures and the associated job losses, and aligning outcomes with provincial expectations.

Terminating the additional charge will not impact the compliance costs of softwood lumber exporters given that the 10% export charge is levied in addition to existing charges imposed by the Act. The mechanisms they maintain to calculate and remit the charge form part of procedures and systems of a broader nature. Similarly, as the administration of the additional 10% export charge was integrated into CRA’s existing policy, procedures and systems, ending the additional export charge will generate no additional costs or savings for the CRA.

The removal of the additional export charge is not anticipated to result in any negative effect on exporters or producers in other Canadian jurisdictions. Instead, Canadian exporters and producers will be placed on a more competitive footing vis-à-vis exports to the U.S.

Under the terms of the Agreement, the Government of Canada makes quarterly, statutory disbursements of the export charges collected under the Act to the four provincial governments of the Option B Regions. These disbursements are net of any federal government costs incurred to administer the Agreement. The termination of the additional 10% export charge will therefore not result in any foregone revenue for the Government of Canada. The provincial governments of Ontario, Quebec, Manitoba, and Saskatchewan are projected to experience a reduction in annual revenue of $10.6 million, $25 million, $79,000, and $384,800, respectively.

The removal of the additional charge is supported by Canadian exporters, softwood lumber producers in the Option B provinces, and the governments of those same provinces. These Regulations ensure that the additional charge will no longer influence commercial relations within the industry and they will help reduce the risk of mill closures and job losses in the producing communities. These Regulations are consistent with Canada’s international trade obligations and Canada will keep its good international reputation as a result of having complied with the Tribunal’s decision and the terms of the Agreement.

As the benefits to Canadian exporters from the reduction in export charges are offset by the reduced revenue for the four provinces, the net quantified benefit of these Regulations is $0. However, these Regulations will have the above-mentioned qualitative benefits. Therefore, the benefits of eliminating the additional charge exceed any associated costs.

Cost-benefit statement

Base year: 2011

2012

Final year: 2020

Total (PV)

Average annual

A. Quantified impacts $ (constant year 2011 dollars)

Benefits

Federal government — administrative savings

none

none

none

   
 

Provincial governments — administrative savings

none

none

none

   
 

Exporters — Quebec

$12.5M

$25M

$25M

$156.1M

$23.3M

 

Exporters — Ontario

$5.3M

$10.6M

$10.6M

$65.9M

$9.8M

 

Exporters — Manitoba

$39,385

$78,770

$78,770

$492,084

$73,335

 

Exporters — Saskatchewan

$192,392

$384,783

$384,783

$2.4m

$358,235

Total benefits

$18M*

$36M*

$36M*

$225M*

$33.5M*

Costs

Federal government — administrative costs

none

none

none

   
 

Provincial governments — administrative costs

none

none

none

   
 

Provincial governments statutory disbursements Quebec

$12.5M

$25M

$25M

$156.1M

$23.3M

 

Provincial governments statutory disbursements Ontario

$5.3M

$10.6M

$10.6M

$65.9M

$9.8M

 

Provincial governments statutory disbursements Manitoba

$39,385

$78,770

$78,770

$492,084

$73,335

 

Provincial governments statutory disbursements Saskatchewan

$192,392

$384,783

$384,783

$2.4m

$358,235

Total costs

$18M*

$36M*

$36M*

$225M*

$33.5M*

Net benefits

$0

$0

$0

   

B. Quantified impacts in non-$

Positive impacts

 

n/a

n/a

n/a

   

Negative impacts

 

n/a

n/a

n/a

   

C. Qualitative impacts

Canadian exporters of softwood lumber products originating from Option B Regions

— The removal of the additional charge is supported by Canadian exporters. They would be relieved of having to pay it and it would no longer influence their commercial relations.

Canadian softwood lumber producers in the four Option B Regions

— The removal of the additional charge is supported by Canadian softwood lumber producers in the four Option B Regions. If removed, it would no longer influence their commercial relations.

Softwood lumber producing communities

— The removal of the additional charge would help reduce the risk of mill closures and job losses in the producing communities.

Government of Canada

— Maintenance of Canada’s good international reputation resulting from compliance with the Tribunal’s decision and with the terms of the Agreement.

Provincial governments

The provincial governments of the four Option B Regions support ending the additional charge.

*Numbers in the table may not add up due to rounding

Rationale

The additional 10% export charge was imposed as a temporary measure to collect a set amount of compensatory damages directed by the Tribunal. To eliminate the possibility of underpayment, minimize overpayment and facilitate federal accounting and system adjustments, these Regulations establish that section 12.1 of the Act will cease to have effect on July 1, 2011.

The additional export charge is currently costing Canadian exporters who are shipping softwood products originating from the four Option B Regions to the U.S. approximately $3 million per month. These additional costs have heightened the risk of mill closures and job losses in the communities that seek to benefit from softwood lumber exports to the U.S.

The termination of the application of the additional 10% export charge will result in a reduction in statutory disbursements to the provincial governments of the four Option B Regions. The provincial government support the termination of the charge in view of its negative impact on their softwood lumber industry.

Consultation

Advance public notice of the termination date for the 10% additional export charge would likely have caused a significant commercial impact on the timing of softwood lumber exports to the U.S. Therefore, no prior consultations were conducted with the affected exporters or other industry stakeholders. Exporters that are currently paying the additional charge would be expected to react positively to federal action to end the charge. They and others that rely on the strength of Canada’s softwood lumber industry would be expected to oppose the continuation of the charge.

The provincial governments of the four Option B Regions understood that the additional export charge was of a limited duration and that payments received as a result of the collection of this charge would come to an end once the Government of Canada complied with the Tribunal’s ruling.

These Regulations have been developed by the CRA with the advice of, and in consultation with, the Department of Foreign Affairs and International Trade.

While softwood lumber producers and other interested parties have not previously been made aware of the exact termination date for the additional export charge, they are aware that significant progress has been made toward the payment of the $68.26 million remedy amount. Therefore they fully expect and eagerly anticipate the termination of the additional export charge.

Throughout the collection period, DFAIT has worked closely with the United States Trade Representative and U.S. Customs and Border Protection.

Implementation, enforcement and service standards

As these Regulations provide for the cessation of the application of section 12.1 of the Act, all administration, enforcement and collection of the additional temporary charge on the export of certain Canadian softwood lumber products will be done in compliance with existing policies and procedures and using existing systems.

Upon approval of these Regulations, the CRA and DFAIT will advise the softwood lumber industry and other interested parties of all developments in connection with this proposal including the date on which the charge will cease to have effect.

Upon reconciliation of collection data with the United States Trade Representative and U.S. Customs and Border Protection, payments collected above the stipulated remedy amount will be refunded to Canadian exporters.

Performance measurement and evaluation

Administration measures connected with the additional 10% export charge will cease upon its termination or soon thereafter. Therefore, performance measurement and evaluation will be limited to ensuring final collections, reconciliations, and other matters of a routine nature.

Contact

Mr. Phil McLester
Director
Excise Duties and Taxes Division
320 Queen Street
Place de Ville, Tower A, 20th Floor
Ottawa, Ontario
K1A 0L5
Telephone: 613-954-0111
Fax: 613-954-2226
Email: Phil.McLester@cra-arc.gc.ca

Footnote a
S.C. 2006, c. 13