Senators have amended the government's budget bill to remove automatic tax increases on alcohol, defying the Liberal government's request to pass the legislation intact.
The changes were made Tuesday afternoon by members of the Senate national finance committee. Further amendments to the budget bill are possible as it moves to third reading. The full Senate voted 46-32 late Tuesday to approve the committee's amendments.
If the Senate passes the bill at third reading with amendments, the legislation will need to go back to the House of Commons. The House could then choose to accept or reject the changes. If the House rejects the changes, the Senate would then vote on whether to insist on its amendments or defer to the elected chamber.
The development puts the Liberal government's pledge of a more independent and effective Senate up against its desire to pass its budget and implement key parts of its agenda before the House of Commons breaks for summer. "We were not surprised, but we're not happy," said Independent Senator Diane Bellemare, one of three Senators who act as representatives of the government in the Senate. "We would like the budget to pass as it is because the government thinks that what they are doing is good."
The wide-ranging omnibus budget bill, C-44, includes a section that would increase the excise duty rates on alcohol products by 2 per cent and automatically adjust the rates in line with inflation on April 1 of each year, beginning in 2018.
The second part of the tax change, which has become known by critics as an automatic escalator, was strongly opposed by Canada's beer, wine and spirit makers. Several senators criticized the escalator, with one Liberal senator saying that the government should "have the guts" to request a tax hike every year if it wishes to increase taxes.
Both Finance Minister Bill Morneau and Prime Minister Justin Trudeau made public appeals last week urging the Senate to pass the budget bill intact.
"It's important to understand that the House of Commons has the authority when it comes to budgetary matters," Mr. Trudeau said at a news conference last week.
Neither Mr. Morneau nor Government House Leader Bardish Chagger would stop to comment on the Senate Tuesday. The House of Commons is scheduled to rise for its summer recess on Friday.
In a committee appearance last week, Mr. Morneau dismissed the concerns.
He said the clause should not be referred to as an escalator, because it would actually keep alcohol taxes constant in real dollars by adjusting to inflation.
The government says this year's increase represents less than 1 cent a bottle of wine and 7 cents for a bottle of spirits and the change will have a "negligible" impact on the industry.
Liberal Senate Leader Joseph Day said he expects other amendments will be proposed when the bill is debated at report stage and third reading in the Senate. Mr. Day said that while it is unusual for the Senate to amend taxation provisions of a budget bill, senators are expressing their opposition to omnibus budget bills that include new proposed laws that should be introduced separately.
"We've got to show some general dissatisfaction with this process," he said.
"I've been warning for 10 years that this is coming. I've been telling the government to stop doing this. The government promised during their election campaign that they wouldn't be doing these omnibus bills and putting everything in there. … It's too much and it's not necessary."
On Monday evening, the Senate voted to defeat a motion by Independent Senator André Pratte that would have divided the bill in a way that removed a section called the Canada Infrastructure Bank Act.
The provisions would create a $35-billion infrastructure bank, which Mr. Pratte said should be dealt with on their own.
The motion was narrowly defeated Monday in a 38-38 tie vote, with one abstention.
No amendments related to the infrastructure bank were proposed Tuesday at committee.
It is not clear what type of amendments may be proposed, if any, when the Senate resumes its debate on the budget bill.
Liberal MP Wayne Easter, who chairs the House finance committee that studied the bill and made amendments, said the House is unlikely to accept any changes from the Senate on the budget bill.
However, he said the pushback in the Senate over the so-called escalator tax should force the government to look more closely at the issue.
"There's a message to the government here, I would submit," he said.
"We have to look at that. Is that the right principle in the future? In terms of this budget, I think it has to go ahead the way it was originally proposed in the House."