Proceedings of the Standing Senate Committee on
National Finance
Issue 20 - Evidence
OTTAWA, Monday, May 2, 2005
The Standing Senate Committee on National Finance,to which was referred Bill C-33. A second Act to implement certain provisions of the budget tabled in Parliament on March 23, 2004, met this day at 12:37 p.m. to give consideration to the bill.
Senator Donald H. Oliver (Chairman) in the chair.
[English]
The Chairman: Honourable senators, I would like to call this, the twenty-third meeting of the Standing Senate Committee on National Finance to order. I remind you that this committee's field of interest is government spending, either directly through the estimates or indirectly through bills.
[Translation]
On April 20, Bill C-33, A second Act to implementcertain provisions of the budget tabled in Parliament on March 23, 2004, was referred by the Senate to our committee.
[English]
We have already heard from the Minister of Finance and officials from the Department of Finance. Today we have a full slate of witnesses to make presentations on this bill.
Our first witnesses are the two co-chairs of the Joint Committee on Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants. Brian Carr is a lawyer with Fraser Milner Casgrain LLP and Chair of the National Taxation Law Section of the Canadian Bar Association. Paul Hickey is the national tax partner with KPMG's National Tax Centre.
Before calling upon you make your presentation, there is a preliminary matter that I, as chair, wish to raise and put before the committee. I will call on honourable senators to speak about it.
In addition to the committee, there is a subcommittee of this committee called the Subcommittee on Agenda and Procedure. That subcommittee is composed of the chair, who is me, the deputy chair, Senator Day, and one other member, Senator Downe. That subcommittee has the power to assist the committee with respect to its agenda, to invite witnesses and to schedule hearings. That is the power of the subcommittee. The steering committee met with respect to witnesses a while ago. I would like to discuss with honourable senators what they would like to do about the fact that the floor is closed with respect to new witnesses.
Senator Stratton: It had come to my attention that a former minister of the government, Marc Lalonde, requested to testify before this committee with respect to Bill C-33 and the retroactive amendment to GAAR in the budget, although the government is not calling it retroactive. I discovered as well that the subcommittee decided in its wisdom not to have former Minister Lalonde appear. I would ask the question why. I think the committee would want to hear from the expertise of a former minister, particularly Mr. Lalonde. If the answer is insufficient, I would then ask that we discuss the issue around this table and call the question as to whether or not he should appear. I think he should. I do not see anything wrong with that. If we are taking the time to hear from a very extensive list of additional witnesses, why would we not hear from former Minister Lalonde?
The Chairman: I would like to call upon the deputy chair of this committee, Senator Day, who was on the steering committee, to give you an explanation.
Senator Day: As a steering committee, we try to invite witnesses so that we may hear a cross-section of views. We asked the Canadian Bar Association to attend. We also asked the Canadian Institute of Chartered Accountants to attend, even though we have seen a letter sent to the government and we knew the position at least a year ago of the Joint Committee on Taxation. We had several opportunities to bring lobbyists in to give evidence, but we felt that it would be inappropriate for us to invite lobbyists who are specifically registered as lobbyists on this particular legislation.
Senator Stratton: You are implying that Mr. Lalonde is a lobbyist. Is that correct?
Senator Day: He is registered as a lobbyist on Bill C-33, which is this bill. Mr. Roger Tassé will speak to us later this afternoon. He indicated he had been retained by Stikeman Elliott LLP to give an opinion some time ago, but he is not registered as a lobbyist on this particular bill. We therefore said that we would be interested in hearing his position on this bill and that we would make it clear at the beginning of the hearing that he has this potential conflict so that everyone knows about it.
We felt that bringing registered lobbyists before this committee would compromise the integrity of the work of the committee. This is a recommendation of the steering committee. If any of members feel otherwise, the subcommittee is quite prepared to be guided by this committee as a whole because in effect thesteering committee has been delegated the authority to identify a cross-section of people to come for the main committee to give evidence.
The Chairman: Senator Stratton, the answer to your question is that we received an email from Mr. Marc Lalonde, and I will read it for the record.
Dear Madam,
I would be grateful if you would draw to the attention of the Chairman of the Committee that I wish to appear as a witness not only as an adviser to Davies Ward Phillips & Vineberg LLP, but also as a former federal Minister of Justice and of Finance. I would appreciate it if, in the circumstances, the Steering Committee would agree tore- consider its previous decision. I can be available on reasonably short notice.
Yours truly,
Marc Lalonde.
Senator Murray: Mr. Chairman, people like Mr. Lalonde and others who are lawyers or who are in various professions acting on behalf of clients have appeared before this committee on numerous occasions. We always make due allowance for the fact that they are here in pursuance of the interests of a client. There is nothing new about this committee hearing from ``lobbyists.'' We hear from all manner of advocacy groups who are registered to advocate on behalf of particular interests, or indeed, people registered to lobby in respect of a particular bill. I do not have all that documentation in front of me, but I recall the anti-tobacco legislation we had before us, and I could cite numerous other such cases. There is nothing new about that. We make due allowance for the fact that anyone who comes before us — and they usually acknowledge it — may be acting on behalf of a client. I see nothing untoward about hearing from Mr. Lalonde or anyone else on that basis.
Mr. Lalonde has also reminded us that he is a former Minister of Justice and a former Minister of Finance. Even if he had not done so, I would have done so because regardless of what he may have to say on behalf of a client, he brings to this or any other issue a background and expertise that I, for one, as a member of the committee, would want to tap. He may come in here with a prepared text as others do. However, I and other members of the committee will want to take advantage of his background and expertise and ask him questions on the generality of the policy that is involved in this matter as well as on the law.
Finally, I do believe it would be a discourtesy for us to refuse to hear Mr. Lalonde given that he has asked to appear several times to be heard. I would take the same position at least as strongly were it the Honourable Michael Wilson or the Honourable Don Mazankowski or someone from another political party.
For all these reasons, I urge members of the committee to agree to hear from Mr. Lalonde on this bill. I would be prepared to make the necessary motion if that is in order at this point. Is it?
The Chairman: There are more senators who wish to comment.
Senator Cools: What is the question before us?
The Chairman: There is no motion before us as yet.
Senator Murray: The Honourable Marc Lalonde has asked to be heard on this issue. Senator Stratton brought it up, and Senator Day explained some of the reasons why the steering committee had not acceded to that request. I have spoken in favour of hearing Mr. Lalonde, and there the matter rests for the moment.
Senator Cools: We are not on a point of order, are we?
Senator Murray: No, Senator Oliver raised the question.
Senator Cools: Senator Oliver, were you making a proposal?
The Chairman: I was not making a proposal.
Senator Stratton: I would like to place the forward the motion. I move that we ask the former Minister Lalonde to appear before this committee. I will formalize it in that way.
Senator Austin: I am sorry. I was not here for Senator Day's explanation of the decision of the steering committee, but I would like to comment on some of the views that Senator Murray has put forward.
We have had a practice — it is not invariable and it has had exceptions — of not usually being willing to listen to witnesses who represent client interests. Mr. Lalonde's client in this case is a law firm and that law firm has a client behind it. That client has an interest of a special kind in the proceedings.
Mr. Lalonde may be able to help us with respect to the principles. He ceased to be a minister in 1984. These events occurred after the time in which he was a cabinet minister, so I do not think he comes with special knowledge. He comes with general knowledge of tax practice, and perhaps some specific knowledge of the circumstances on which he is asking to come forward.
The principle on which we have generally tended to avoid inviting people with a specific interest, people who may or may not be contemplating litigation, is that the witness will not be forthcoming with respect to the interests represented. If Mr. Lalonde will tell us who the client behind the client is, then we could better assess what the particular interests of the client would be, but I am sure he is not prepared to do that. I am only speaking about the general principle. I am not speaking about Mr. Lalonde and his client, but rather to illustrate the general principle that we do not have a situation in which we can pursue all lines of inquiry.
The Chairman: You are referring to Solicitor-client privilege with respect to divulging certain information.
Senator Austin: Exactly. He has a special relationship, so he has a parameter and is engaged for a fee to make representations. Here again, unlike the Canadian Bar Association or any other professional association that is here to discuss public policy from the background of their experience, we have knowledge that this witness is acting as a professional, as a lawyer, in advocacy. I would like the committee to take that into account.
I am not opposing the appearance of Mr. Lalonde, if that is the wish of the committee. However, I think that in weighing the evidence, you would have to take into account the special interests that are represented. Sometimes we feel that this kind of evidence is not the kind of evidence that necessarily assists the examination of the public policy issue.
The Chairman: I do not know if you were here, Senator Austin, when I read from the email that Marc Lalonde sent to the clerk of our committee. In it, he wrote that he wanted to appear ``also as a federal Minister of Justice and of Finance.''
Senator Austin: If he is not appearing for a fee, if his time is not paid and he appears as a volunteer, he puts himself in a different category. However, if he is paid to come and represent a client, and he has disclosed that he has a client, a law firm, which is —
The Chairman: We do not know if he is being paid. If the committee votes to have him appear, I do not know whether he is being paid to come here or not. We could ask him.
Senator Austin: If the committee wants him to come, he should disclose his position. Is he coming as the former Minister of Finance and the former Minister of Justice because he has a general knowledge of these issues, or is he coming because a law firm, which is not his own firm, has retained him to make a presentation here for a fee because he was a former Minister of Justice and former Minister of Finance?
Let us be clear, because there is more than just this issue of whether Mr. Lalonde comes or not. The issue is what should our practice be? What is good practice for our committees in terms of categories of witnesses?
The Chairman: Senator Austin, I hear your comments. After the committee makes a decision, I will ask our clerk to make those inquiries in response to the questions you have asked.
Senator Cools: I apologize for being late. I went to room 705, which is our usual meeting room.
A number of statements have been made that I would love to take issue with. I would like to begin at the end by taking issue with some of Senator Austin's statements. Mr. Lalonde has put before us a request to appear before the committee. I do not think that request should suddenly place Mr. Lalonde under any cloak of suspicion or under any cloud regarding whether he is or is not being paid.
We are talking about good practice; it would be very good practice for Mr. Lalonde to appear. It is very bad practice, I would submit, to put his testimony or anything he is saying under a cloud of suspicion before we have even agreed to hear him.
I would like to say very strongly that, in my view, a committee is within its purview and its proper constitutional function to hear from anyone or anyone's representative if that person or group of persons is adversely affected by anything in a bill. It is quite in order. If we are talking about good practice and there are some concerns, those concerns should be raised in the proper form that Parliament would demand rather than just being put forth in this way, because it becomes something of a slur.
I want to make it clear that I would even go further. This committee has a duty to hear from any Canadian or representatives of Canadians who are negatively affected by any bill that is before the Senate.
Is a motion coming forward?
The Chairman: A motion from Senator Stratton is on the floor.
Senator Day: We are speaking on the motion.
Senator Cools: I just asked a few moments ago and there was not a motion.
Fine, we are on a motion. That gives us more latitude then.
Senator Austin: I want to say, on a point of privilege, that there was no slur with respect to Marc Lalonde. Senator Cools referred to my comments as ``something of a slur.'' That is absolutely, in the most generous way I can say it, a misinterpretation of my remarks. I was endeavouring to create categories under which a witness would appear with appropriate transparency with respect to the interests involved.
Senator Stratton: Senator Austin as raised a point of privilege and I would like to speak to it.
In reality, Senator Austin, it is my impression that you were questioning Mr. Lalonde's integrity just by putting this issue on the table.
Senator Austin: I am sorry for that impression. I am saying that if someone comes with a professional fee-paid interest, we should know so that we can take it into account. That item should be transparent to us so that we can weigh the evidence brought before us on that basis.
Senator Cools: Are we on a point of privilege or a motion?
The Chairman: Motion.
Senator Cools: I would like to apologize. I did not intend my remarks to be taken as a slur against Senator Austin. I was attempting to say that given that Mr. Lalonde is a prospective witness, Senator Austin's statements open up a new and vast area of questions. Perhaps there is no time today to respond to some of those questions. However, from what I heard, those statements definitely put Mr. Lalonde's integrity and purpose for being before us in some doubt. That is what I understood.
All of this is neither here nor there. I still do not know how this subcommittee operates, but the fact of the matter is Mr. Lalonde is an exceptionally qualified man. I had the great privilege of serving in the Senate in the last months of Mr. Trudeau's time as Prime Minister. I have great respect for Mr. Lalonde and the many portfolios he held and his wealth of knowledge and experience.
Since we are speaking on a motion, I am soundly in the category of being prepared to hear Mr. Lalonde. I do not understand why his appearance has become a matter that is being discussed at this committee.
The subcommittee prides itself on being a super committee; there is nothing ``sub'' about it.
Let the record show he is grinning ear to ear as I say that.
I would have thought that Senator Day, in doing his due diligence, would have proposed Mr. Lalonde's name at these mysterious subcommittee meetings. I do not understand why his appearance is a matter of public debate here and why he was overlooked by the steering committee. I also do not understand why Senator Day is speaking for the steering committee today.I do not understand so much, but perhaps I will be enlightened as we go along. I do not even understand why the committee is meeting today, on a Monday. Today is not one of the regular days for the committee to meet. I also do not understand why all of these hearings have been jumbled into one day in such a rush.
Perhaps we could get explanations to these questions as time goes on, but I do not approve. I have said before at this committee, and I will say it again, that as a member of this committee I expect to be fully involved in the selection of witnesses and in the setting of the business of this committee. I do not believe that the constitutional purpose of the subcommittee is to supplant and replace the larger committee. A subcommittee, after all, is just a subset of the committee.
I also do not like the fact that Senator Day is answering questions on behalf of the subcommittee. I was under the impression that is the proper purview of the chairman.
Mr. Chairman, I would expect Mr. Lalonde to be open to a wide range of questions, and I would also expect Mr. Lalonde to act with transparency, which is the word that was being used. I have no doubt that he will act in accord with the finest principles that are known to us. Whether that is called transparency or not is another matter.
I must admit that I am now eager to listen to Mr. Lalonde and am curious as to how he will respond to the debate before us today.
Having said that, Mr. Chairman, list me as speaking in support of Mr. Lalonde.
While we are at it, are there other witnesses who wanted to appear who are having difficulty being heard? Perhaps we could have a discussion about that. Is that the end of those witnesses? On the floor of the chamber last week I raised the issue, saying that it is very important that witnesses be given a good chance and that all the witnesses should be heard. Are there others who are trying to appear and are not succeeding?
The Chairman: Thank you, Senator Cools.
Senator Day: In speaking on the motion, the point I made earlier is worth repeating. The witness that we are scheduled to hear at 1:30 this afternoon is Mr. Tassé. He informed us that he had been retained by the same law firm and had given an opinion in relation to the portion of this bill that is likely to elicit a number of questions in relation thereto, but he is not registered as a lobbyist. We indicated that this would be fine and that we would invite the former Deputy Minister of Justice to appear before the committee. We said that we would put on the record at the beginning of the meeting that in having given that opinion he had an interest but that he is not registered as a lobbyist.
We are informed that Mr. Lalonde is registered as a lobbyist with respect to Bill C-33. The steering committee decided that would be the dividing line. The same point of view will undoubtedly be brought forward by each of those witnesses. We were looking for a cross-section of opinions so that we could come forward with a reasoned decision on this portion of the legislation after hearing different points of view.
We already had Mr. Tassé lined up to appear. When we heard from Mr. Lalonde and discovered that he was registered as a lobbyist on this bill, we felt that, for the integrity of the committee, it was not necessary for him to attend. We did, however, indicate to him that we would be pleased to receive any written submissions he might like to make and that we would ensure that they were distributed to all committee members.
The Chairman: Senator Murray, you have the last word before I put the question.
Senator Murray: Committee members will know that I spoke on this bill at second reading, as I spoke several years ago with regard to not dissimilar retroactive legislation that was brought in during the course of a budget implementation bill by the Department of Finance.
I do not know who the clients of Mr. Lalonde or Mr. Tassé or anyone else may be, and I do not care. I think you know that my view now, as it was two years ago, is focused on the question of the retroactivity of legislation, period. I will put the question to Mr. Tassé when he is here, and I will put it to our friends from the Canadian Bar Association when they speak. I very much want the opportunity to put to Mr. Lalonde the questions about retroactivity to learn what he knows about it on the basis of his long experience, especially as Minister of Justice, but also as Minister of Finance.
The fact that Mr. Lalonde has a client is something we can all make due allowances for. I am just happy to hear that he wants to come and testify, and I would be delighted to have the opportunity to ask him a few questions, not about who his clients may be or how their interests are being affected, but rather about the propriety of legislation of this kind. On that basis, I certainly support the motion that Senator Stratton has put forward.
The Chairman: Honourable senators, are you ready for the question?
Hon. Senators: Question.
The Chairman: Will all those in favour so indicate by saying ``yea?''
Some Hon. Senators: Yea.
The Chairman: Contrary minded?
Some Hon. Senators: Nay.
The Chairman: The ``yeas'' have it.
I will instruct our clerk to get in touch with the former minister and put to him the questions that Senator Austin has raised.
Senator Murray: Mr. Chairman, if he or anyone else is appearing on behalf of a group of taxpayers or an individual taxpayer, I think it is quite proper, indeed necessary, that he say so or that we establish that fact. However, to go from there to asking him who the taxpayer is and what the situation of the taxpayer may be will get us into an area into which it will be highly improper for us or anyone to go publicly.
Senator Cools: Everything is proper if it is handled in the proper way. There are procedures to handle these twists and turns. Unfortunately, people do not instruct themselves of these twists and turns. Mr. Lalonde's request is quite in order. There is nothing irregular about it at all.
The Chairman: Mr. Hickey and Mr. Carr, thank you for your patience. You now have the floor.
Mr. Brian R. Carr, Co-Chair, CBA-CICA Joint Committee on Taxation and Chair of CBA National Taxation Law Section: Mr. Chairman, I believe you have before you a letter dated July 29, 2004, which was submitted by the joint committee to the Honourable Ralph Goodale. I believe that you also have before you a second letter dated April 25, 2004, also submitted by the joint committee to the Honourable Donald H. Oliver.
The first letter sets out in detail our submissions as to why we object to the retroactive changes made to what are known as the GAAR provisions of the Income Tax Act. That letter contains appendixes and schedules outlining our arguments in more detail.
The letter of April 25 was intended to be a Coles Notes version of those arguments, and we hope it was a succinct form for quick understanding. I will try to be even more brief and more straightforward in my oral presentation.
First, the legislation is clearly retroactive. You need only look at the form of the legislation, which says that it applies to transactions occurring after September 18, 1988. There is a difference between retroactivity and retrospection. If you passed a law today that states it is illegal to own dogs, and you bought a dog two years ago but owned it today, the application would be retrospective. It would make it illegal going forward because of something you did in the past. This bill is clearly retroactive. If you did something in 1990 and you finished doing it in 1998, this legislation would still subject you to tax on rules that you were not aware of at the time you carried out the transaction. That is our fundamental disagreement with the retroactive nature of the proposed legislation. The Department of Finance has sparred frequently on the issue of retroactivity. We have objected to it in the past and we continue to object to it.
Our second point is that this proposal is not clarification. People continue to say that it is clarification in the hopes that people will accept it. It is a bit like the story by Hans Christian Andersen about the emperor's new clothes. Most who saw him admired his new clothes, but a little boy pointed out that it was not the truth because the emperor wore no clothes. The Department of Finance says the proposal is clarification in hopes that everybody will accept that is right.
Consider the meaning of ``clarification,'' which could have two separate concepts in this case. The first is that you take what you have and package it in a different set of words that presumably means the same thing but illustrates it more clearly. Certainly, the Department of Finance hopes that the proposed legislation will result in taxation of some individuals or corporations that were not subject to taxation before. Putting it as a lawyer, if you go to court under the existing wording, you would expect a certain result in a certain set of circumstances. One does not assume that the Department of Finance would pass this bill with the intent that the exact same result would apply in the exact same factual circumstances. Clearly, it would be a waste of time for that to be the case. There cannot be clarification in that sense.
The second concept is that it is clarification because it gives rise to a result that everybody thought would have been the case. However, it was not well drafted and so we are trying to change the words a little so they are clearer and so the result that everyone expected is in fact the case. We do not think that is correct. We assert that it is incorrect on the position of clarification. We think this proposal is a substantial change in the law.
We then come to the guidelines of the Department of Finance as to when it will pass retroactive legislation. The guidelines state that:
Where the Department of National Revenue publicly and unequivocally advocates a given interpretation over a long period of time, and where such interpretation has been followed by most taxpayers in the filing of their income tax returns, it does not unduly disrupt the reliance of taxpayers to amend the law so as to confirm this interpretation following an adverse decision which, while constituting a legal interpretation of the existing legislation, has an effect equivalent to a change in law.
The Department of Finance commented that the Canada Revenue Agency has stated unequivocally that the revised legislation carries out the policy that they have had in effect since 1988. The Department of Finance said that it was simply implementing something that had unequivocally stated the position of the Canada Revenue Agency. Our detailed submission, at footnote 11 of the appendix, states our position such that this unequivocal policy cannot be found elsewhere. Some officials of the CRA might have said, from time to time, that this might be a position. Commentators have said that the CRA could take this position, but you cannot find a clear, unequivocal policy.
Even if you could find one and even if we give the Department of Finance that position, it seems to have been forgotten that there is a second part to the test, which is that this interpretation has to have been accepted by the preponderant majority of taxpayers who file their tax returns accordingly. That is not the case. In our appendix, you will see a number of quotes from different commentators in the tax area who have pointed out that it is far from clear as to whether this proposed legislation would extend in the manner in which the Department of Finance is now amending the law to do so.
On page 5 of the background of our submission, there is a quote from Professor Brian Arnold, who has made it clear to the tax community that he consults from time to time for the Department of Finance. He makes it clear when he states that:
The relationship between the GAAR and tax treaties has been hotly debated in the Canadian tax community. The risk that tax treaties might override the GAAR has been known by the Department of Finance for 15 years.
Clearly, it is not settled that the tax community has accepted that GAAR always applied to treaties as the Department of Finance has asserted.
The Chairman: Mr. Hickey, please proceed with your comments.
Paul B. Hickey, Co-Chair, CBA-CICA Joint Committee on Taxation, Canadian Institute of Chartered Accountants: Thank you. I will continue with the guidelines.
The next guideline is that the amendments are intended to prevent a windfall benefit to certain taxpayers. My understanding is that if there is a clear and unequivocal position by the Department of Finance and the CRA on the one hand and taxpayers accept that position on the other hand, and a taxpayer swims upstream against all of this and is successful, then he should not benefit from that lucky draw. We do not meet the clear and accepted policy statements by the government and widespread acceptance from the community. We do not meet that guideline, so I do not think we are into this windfall guideline.
The next guideline is that the amendments are necessary to preserve the integrity of the government's revenue base. I have not been convinced that the government has made its case, as yet, or if there is a case to be made. In the 2004 Budget document there is a schedule that speaks to the federal revenue impact of proposed tax measures, and it schedules out for three years. The various measures are included. I am looking at page 323 of the document. Under the general anti-avoidance rule, there are no numbers. The little dash means small, non-existent or prevents revenue loss. I am not sure in the context of GAAR which of those they are getting at, or perhaps it is all three.
The statements made before the committee by the Auditor General and by the Minister of Finance referred to about 55 offshore trusts. Those trusts were pointed out in the 2001 Auditor General's report. Approximately $800,000 in capital gains had not been subject to tax. The tax number would be 25 per cent of the $800 million, although I am not certain.
In addition, the CRA has encountered 155 additional cases subsequent to the Auditor General's report, although I do not know the dollar figures. Again, it is not clear to what extent the CRA would rely on the general anti-avoidance rule to challenge these transactions. I find it hard to believe that it is the only avenue of attack. I expect there are some other well-reasoned, technical arguments and other weaponry in the tax act that the department has at its disposal.
The last of the guidelines are the amendments or corrections of ambiguous or deficient provisions that were not in accordance with the object of the act. It seems to me that of all the provisions of the act to have a retroactive amendment, the general anti-avoidance rule — the heavy artillery, as the courts have referred to it — the less ``fail- safe'' that applies to all parts of the act would be subject to a retroactive amendment. When the law was brought in 1988, I would have expected the government to have thoroughly examined the rule and to have given it due consideration before proceeding. If the government now feels that there is a deficiency in the law, I think it should be severely criticized for not acting properly.
As we have mentioned in our submission, since the introduction of the rule, there has been uncertainty in this area and lots of debate. There has not been a clear rebuttal by the CRA or the Department of Finance to the debate by taxpayers.
Finally, if the government really does feel that this proposal is a clarification, I am not sure why you just do not make the amendment on a prospective basis or not at all and let the matter go to court. If they are so convinced that there is a clear and unambiguous intent here, then the courts will decide.
The Chairman: This is a very important piece of government legislation. Bill C-33 is really meant to implement measures in the budget, not from 2005 but from 2004. It is not something that can go on forever.
In view of the comments you have both made, what recommendation would you have for this doctrine of retroactivity that you have talked so much about? What should we do about this important piece of government legislation?
Mr. Hickey: It would be my view that the criteria for retroactive legislation is not met and that the government pull it out of the bill. If they choose, they could make it effective on a prospective basis from March 2004 forward.
The Chairman: What is the significance of an information circular or something being put in an information circular or something not being put in an information circular in relation to tax laws?
Mr. Hickey: An information circular or an interpretation bulletin is a public announcement of the CRA's administrative positions on various matters. I would suggest it is the most common way to get that administrative policy out to the public.
Senator Stratton: The Minister of Finance appeared before this committee two weeks ago. He went on quite extensively about clarifying the true meaning behind this clarification on the GAAR. He concluded by noting that absent abusive behaviour, there is nothing that the taxpayer needs to worry about. That is, I think, a direct quote. Paraphrasing, he is saying that if you have done nothing wrong as a company or a corporation, we will not go after you. We will go after only those who have abused the system. That was my interpretation of what he said. We actually asked some questions in with regard. I am curious how would you respond to that?
Mr. Carr: My thought was it sounded like King John back at Runnymede. ``We really do not need this document. Just trust me; I am a good guy.''
Our objection to this legislation is that taxpayers are entitled to rely on the language as it exists. This is not a mere changing of a few comas to make it clear. This is a substantial change. In our submission, it is unfair. You should not be going back 17 years to change a law.
Senator Stratton: But if you are honest —
Mr. Carr: I hope I am honest.
Senator Stratton: Well, if a corporation acts in an honourable way and within the law, it is are fine and does not have any worries, but if it does not, then they are going to take on the corporation. That is really what I am getting at.
Mr. Carr: They can take you on, as you like, under the current system. They can go to court. If they are right about the legislation, that it has always been interpreted that way, go to court and get the courts to accept that.
Senator Stratton: So we do not need this proposal?
Mr. Carr: If they are right in their position that this proposal is simply clarifying the words and that that is what the words always meant, why do we need to make it retroactive?
Senator Massicotte: If you do not mind, I want to get back to the question, because I do not think you answered it. Senator Stratton quoted the minister very appropriately. I call it a moral argument — probably not very relevant legally, but it is relevant to convince one person. If it is deemed to be abusive to start off with, you have to admit there is a lot less sympathy for the cause. Deal with that issue. The point was, ``Hey, this issue will only apply if it is abusive.'' If they were abusive, why do you have sympathy for them? They abused the system.
Mr. Hickey: I wish it would be so easy to identify an abuser. Like beauty, abuse is in the eye of the beholder. It is not black and white.
From my analysis of the 21 or so GAAR cases that have gone to court where issues have turned on GAAR, obviously where the CRA felt there was abuse involved, five or six went in favour of the CRA by my count. In the other two thirds, the taxpayer was successful.
Senator Massicotte: Was the issue always on the definition of the word ``abuse'' by the judge? Was that the relevant criterion?
Mr. Hickey: As part of the essence of whether GAAR applied, you have to determine whether there is use or misuse of a provision of the Income Tax Act.
Senator Massicotte: I am not a lawyer and I am trying to get my head around something. What has been the preponderance of thought since 1988? If it is very clear that everybody agreed, with a high degree of probability, that this was the intention of the act even though it was not clear, I have a lot less problem with it.
We received a document from the minister, from the department, showing quotes where they tried to explain their intent and their interpretation of the act. We also have in your submission an appendix that basically does the same. Help me out a little bit.
I look at 1989. The CRA stated that it intended to use GAAR in situations where there was blatant use of the treaty provisions in treaty shopping transactions. They say somewhat the same thing in 1993 and in 1992 a couple of times. Why would that not ring the bell and make it very clear at least as to what they intended to say in the act? I appreciate it is not the most relevant issue, but it is relevant to determine what the thought was.
Mr. Carr: As a matter of interpreting the provisions of the act itself, nobody thought they could get there. There are a couple of ways of looking at abuse under GAAR. One is the abuse of the act itself. For example, in the one case quoted and referred to by the Department of Finance, you turn a dividend into a capital gain and hope that the treaty protects you. The other one is what you just referred to, treaty shopping. Now, in the first case, the case to which the Department of Finance referred, the waters get muddy as to what the judge is saying there, and it may be that if you have abused the act, the treaty might not protect you. In the second case of treaty shopping, I do not see, after some of the Supreme Court of Canada cases on treaty interpretation, how they could ever come to the position that the general anti-avoidance rule could apply to treaty shopping. The interpretation is just not there. It was certainly never accepted by the tax community in general that that is how one interprets the words. They might have been right. The Department of Justice may well take some of these cases to court and be right. However, that is not the accepted view of the profession right now.
Senator Massicotte: What you are saying is that you also have 1993. They do not talk about treaty shopping, but they basically set the intention. You are saying, ``We understood what the intention of the CRA was in those years; we just did not agree with the interpretation of the law.'' Is that what you are saying?
Mr. Carr: I am not sure the CRA ever put out their interpretation that clearly. It is one thing to grab quotes from various conferences where people have said certain things and say that that was CRA policy. It was not in a circular as far as we know. It was in an interpretation bulletin.
If you go back to their bulletin, the CRA took some extreme examples where they thought they could apply GAAR. By and large, as Mr. Hickey has pointed out, they have been very unsuccessful in court.
Taxpayers have a right to challenge the CRA and say, ``No, we think you are wrong. We think the Department of Finance did not draft it correctly. We do not think you are on the right side, and we think the courts will support us.''
Senator Massicotte: You are saying, ``We did know. We do a search and say that we know you expressed this opinion, and this information would have been available to the person expressing an opinion.'' You are saying, ``That is their opinion, but given the responsibility to interpret the law and not their opinion, we do not agree.'' I think I am summarizing your opinion. Is that accurate?
Mr. Hickey: That is fair, although back in 1988, it was not quite as easy to search things. I would suggest that it is more common than it is today to publish administrative policies and positions. Given the fact that technology was not what it is today, that was an accepted way of getting out administrative policies.
Senator Massicotte: If you were giving advice at that point in time — I am sure both of you were because you have been in the industry for a long period of time — your opinion would have been this: ``We understand their opinion, but irrespective of that we think the law will be interpreted and we offer you an opinion to say you can behave in this way and still be lawfully appropriate.''
Mr. Carr: We would have said it is more unclear than that. The rule has evolved over the last 17 years since GAAR was implemented. We note that there are no comments about the treaty in the circular. However, the circular took a very broad approach to where they thought the CRA could apply GAAR. Subsequently, the courts narrowed those interpretations, set a very high bar as to when GAAR would apply, and in general rejected most of the positions of the CRA. In fact, as Mr. Hickey has pointed out, CRA has lost about two thirds of the cases up to now on GAAR. We probably would have advised the client that the issue is very much in doubt. If you take a certain course of action, if you enter into a certain transaction, you may well be reassessed by the CRA. Depending on when I was giving the opinion, whether it was 1992, 1994, 1996 or 1998, I would have told you what your chances of success were in court depending on what the courts had said up to that time about GAAR and about the interpretation of legislation generally.
Senator Massicotte: It has been grey all along.
Mr. Carr: It has been grey all along.
Senator Austin: The minister in his evidence on April 20, 2005 referred to the case of RMM Canadian Enterprises Inc. that was commonly known as Equilease. That was a decision of Judge Bowman in 1997. He said that this was the only decided tax case that dealt with the application of GAAR to and in respect of tax treaties concluded. Judge Bowman concluded that GAAR has, implicitly from its inception, had this reach. Judge Bowman is now the Chief Justice of the Tax Court of Canada.
The minister also said that this was obiter because the case was decided on some other point. However, so far as the tax courts have applied themselves to the question of whether the tax treaties are included in the law that set up anti- avoidance, GAAR, the courts are leaning towards the answer yes. I would imagine that this would guide tax advisers in their to advice their clients.
Mr. Carr: As you pointed out, it was an obiter comment. He had already decided that the taxpayer did not satisfy the technical provisions of the act. He made it quite clear he was not trying to be definitive on the application of a treaty. He was also dealing with one specific factual situation before him. I gave you two factual situations. They did not have to apply GAAR in the Equilease case. He did not even get to GAAR. He said, ``I do not have to make a decision on GAAR. You clearly have not met the technical provisions of the act, so I do the have to go to GAAR.I do not have to go to the treaty on GAAR either because, again, you have not met the test.'' He was dealing with a very narrow provision of the application of treaties. In the area of treaty shopping, he did not have to consider that.
I think the best one would have said is that there is some concern. However, when you deal with the tax courts, you have to wait and see what the Court of Appeal will add to that.
Senator Austin: I agree, but here is an experienced tax court judge who did make a comment specifically on the issue that is before this committee, and that is the application of GAAR to the tax treaties. I agree it is obiter, but that is still the best guidance we have so far as to whether it applies or not.
Mr. Hickey: I understand that at least two cases have gone through the court process and have been settled before getting to court. These cases involved treaties and in at least one of them, as I understand, that issue was dropped.
The Chairman: By whom?
Mr. Carr: The Crown gave up.
Senator Austin: It is very complicated, Mr. Hickey, to discuss cases that have been settled and the reasons therefore.
Mr. Carr: In our brief we quote two separate cases where the court said that GAAR did not apply to the regulations. If Judge Bowman is saying that GAAR applies to treaties and then another judge saying that GAAR does not apply to the regulations, all that does is add to the uncertainty and the confusion that exists.
Senator Austin: Again, we will have argument on how to distinguish those two cases from the application of the treaty. We have a witness who will deal with that issue.
Senator Murray: I take from your dialogue with Senator Austin that with respect to the two cases in which the courts found that the GAAR did not apply to regulations under the Income Tax Act, the government did not appeal, and in the two other cases that have come forward having to do with the applicability of the GAAR to treaties, government settled them out of court.
This government is inordinately fond of references to the Supreme Court rather than sending hard cases. Would this be a situation in which proper terms of reference could be drafted to send to the Supreme Court of Canada to get their view as to whether the GAAR applies to treaties and regulations?
Mr. Carr: I guess you could put that general question to the Supreme Court of Canada. It would be unusual to do so. Certainly, you are outside the scope of my technical tax knowledge. Usually courts, especially the Supreme Court, likes to have a full, rounded set of facts that it can look at and make a determination on the words. I suppose you could try to come up with a general statement of facts and ask the Supreme Court of Canada to comment.
Senator Murray: The court dealt with the so-called constitutional case having to do with the Quebec secession reference and then later on the same-sex marriage issue. The reference was later amended and they got replies in both cases. There is no lower court to which the Attorney General can refer a case, is there? Could they refer to the federal Tax Court of Canada?
Mr. Hickey: Things have moved slowly with GAAR. It has been around since 1988. It took a while for cases to go to court. It is only now, 17 years later, that we have two GAAR cases before the Supreme Court. They were heard in March.
Senator Murray: You said you sparred frequently with the Department of Finance on the question of retroactivity. You do not take the position that Parliament does not have the right to legislate retroactively or that retroactivity is everywhere and always wrong? Do you agree that there are cases where it is acceptable?
Mr. Carr: Certainly Parliament has every right, the ability and the authority to legislate retroactively. We are not questioning that authority. We are saying that to use it generally in an effort tighten up tax laws retroactively is unfair to the subject. People plan their affairs when the law reads a certain way, and they should be entitled to go to court and argue the facts on the rules that were in effect at the time they did the planning.
Senator Murray: It is not only the fact that it happens to be a 17-year retroactivity that you object to?
Mr. Carr: In an ideal world we would object to retroactivity of even one taxation year. We do become more concerned when it goes back 17 years. It is the degree as opposed to a black and white issue in that sense.
Senator Murray: What is different about this one?
Mr. Hickey: This is the first time in my memory that we have taken a hard look at the guidelines followed by the Department of Finance. With respect to this very potent section of the Income Tax Act, we thought that the bar would be set pretty high for these guidelines to take effect. As we have discussed, we do not think the guidelines are met in this case.
Senator Murray: You saw Mr. Goodale's testimony to the contrary and you are not convinced?
Mr. Hickey: No, I am not convinced.
Senator Day: Do the two cases that you indicate have just been heard in the Supreme Court of Canada with respect to general anti-avoidance rule have any basis in the subject of applicability to regulations or international tax treaties?
Mr. Hickey: No, not that I am aware of.
Senator Day: Do either of your professional associations have written guidelines that go out to your members with respect to various aspects of the Income Tax Act?
Mr. Carr: The joint committee is not an educational body, as such. The Canadian Bar Association has its own educational programs, as I suspect does the Canadian Institute of Chartered Accountants. The joint committee exists primarily for the purpose of commenting on draft legislation proposed by the Government of Canada.
Senator Day: Is there a reference book from the profession that a chartered accountant practising in a small town could go to — not from the Canada Revenue Agency — that would indicate generally how the CRA interprets certain sections and how you should proceed?
Mr. Hickey: There are various newsletters and things that the Canadian Tax Foundation and various firms like Mr. Carr's and mine put out. Our letter to Mr. Goodale is in the public domain.
Senator Day: Did you sent this letter to all of your members?
Mr. Hickey: We did not send it to all of our members. It is on various websites.
Senator Day: To go back to my question, the Canada Revenue Agency publishes guidelines from time to time. We talked about that and you indicated that there was nothing with respect to GAAR. Has either of your professional associations published anything generally to your members on GAAR, specifically as it relates to regulations or international tax treaties and the shopping of tax havens?
Mr. Hickey: I cannot think of anything specific from our organization. The Canadian Tax Foundation, the research organization in which both the CIC and the Canadian Bar Association have many members, frequently has speakers who talk about these types of issues.
Mr. Carr: We are not as well organized as the Government of Canada. We are not sending out a complete set of positions for taxpayers to adopt. There are people who write books; there are professional publication houses that turn out volumes on tax law; and there are speakers who attend conferences and publish papers on the meaning of the Income Tax Act. That is what professionals look at.
Senator Day: When you were answering the questions of Senator Massicotte, you indicated that the profession generally was aware of the CRA's position with respect to the GAAR and its applicability, but the profession felt that there may be an argument with respect to the CRA's position. Were you speaking for the profession or for your firm?
Mr. Carr: I was speaking for the profession.
Senator Day: How does the profession generally form that point of view?
Mr. Carr: I am not saying that this is the one voice of the profession. A number of people in the profession make comments at conferences and publish articles in which they allude to the fact that the Canada Revenue Agency takes this position. However, have they considered all the problems they have in taking that position? They recognize that there is a position that the Canada Revenue Agency may take, but they also recognize in their publications that those are not necessarily positions that will be followed by the courts.
How do I determine what the position of the profession is?I look at what is on the website and I look at books and articles published by members of the profession.
Senator Day: Mr. Hickey, is your position generally the same, that the profession would have known the Canada Revenue Agency's position, but you tell them there may be some wiggle room here?
Mr. Hickey: Yes, but in 1988 some of these articles would not have been as well known as an information circular to which people would absolutely go to look, especially a CA in a small town.
The Chairman: Honourable senators, we are over our time limit for these witnesses and I still have on the list for the first round Senator Cools and for the second round Senator Massicotte. Our next two witnesses are Roger Tassé and Scott Wilkie who will be able to respond to questions of law and policy and retroactivity. Did you want to extend the time to have those two senators put questions to these two witnesses? What is your wish?
Senator Day: Perhaps we can finish the first round.
Senator Cools: I was baffled and even bewildered by the minister's testimony and, quite frankly, could make very little sense of it. I just do not understand how an enactment, as we have in the relevant section of Bill C-33, that clearly states that it is retrospective, could possibly be an action of clarification. It is among the weakest set of arguments I have ever heard in my life. Having said that, the minister is persisting with it.
My question has to do more about a law that has become terribly cryptic and to some degree arcane. It is what we call the law of Parliament, which is the law that governs how we pass laws. My understanding of the rule of law in this respect and of the substantive issues has always been that when it comes to a matter of taxes, the government must be extremely judicious and extremely vigilant because the business of raising taxes is what Parliament is all about, if one looks at the relationship between Parliament and the financial initiatives of the Crown.
I would say that retroactivity in general in law-making is undesirable, but it may be allowed in certain instances. I would be prepared to assert that in matters of taxation, retroactivity in law is repugnant to the rule of law, to the law of Parliament, and to that whole constitutional system which governs how we make laws.
I know that individuals can quote this judge and that judge, but I was always under the impression that judges did not have much say in the business of raising taxes. That is how I have always read the law and customs of our system.
In your research have you examined these issues from the point of view that this is a matter of taxation? Parliament has a special role because the notion is that governments should not reach into people's pockets without ample notice and without some clear outstanding or agreement as to exactly what is the law. Maybe I am a little naive, but I still have a few ideals left, thank God.
I view these sections as so repugnant that they should never have been admitted. Those sections of the bill should never have made it to first or second reading, never mind being referred to committee. They should not be before us at all.
If the government wants to act properly, it should amend the bill to repeal these sections or to delete them.
The Chairman: What do you say to those comments, Mr. Hickey?
Mr. Hickey: Some of the comments Senator Cools made are actually embodied in the preamble to the department's guidelines to the Standing Committee on Public Accounts about retroactive legislation, as to when the guidelines will be applied. We agree with general principles that taxpayers should be able to expect stability and continuity in tax rules. They should be able to expect certain tax results when they run their investments on the basis of the rules as they know and understand them. Retroactive changes to tax rules should not frustrate taxpayer expectations when they are both rational and legitimate.
Senator Cools: You agree with me?
I do not know, Mr. Chairman, if the list of witnesses includes individuals who will address this particular question in respect to the law of Parliament and the financial initiatives of the Crown as they come together to raise taxes and to enact legislation in respect of passing such bills. As I look at the list of witnesses, maybe there is someone who will address that issue, but I think it should be addressed because this matter that is before us is far more serious than it appears. Retroactivity was presented by the minister and the parliamentary secretary as just a little thing, as being not all that serious. ``Do not fuss, senators, pass it in 24 hours.''
I submit that is a very serious matter and something that, if ordinary Canadians understood, they would be quite distressed about. I am very aware of a sense that perhaps the application would be to a small group of individuals who are a bit wealthy and therefore nobody would mind. To my mind, that assertion has nothing to do with the issue. It is a question of how we pass law. I feel very strongly that we should call witnesses to examine this particular point.
You are tax lawyers and your business is taxes. You provide legal advice once that particular statute is in place. What I am talking about is constitutional law that tells us how and why we should pass such laws.
Mr. Carr: I go back to Senator Murray's comment about whether we disagree with Parliament's right to pass this provision. I was saying before, we do not think we have any basis for saying Parliament cannot pass it. We just think it is unfair to pass it.
Senator Cools: I would go a lot further. Parliament is passing things these days that would be unheard of a hundred years ago. Ministers would have been impeached for this. The weight of the law and the weight of the jurisprudence is that Parliament should always act prospectively, not retrospectively. Parliament may act retrospectively when urgent circumstances properly demand it.I know of nothing that looks at that whole question as it relates to taxation. These are very deep constitutional questions, I believe.
Let the record show yet again that clauses 60(1) and (2) of Bill C-33 are irregular, improper and, I would submit, unparliamentary. Quite frankly, honourable senators, we should not let this bill go forward.
Senator Downe: I want to follow up on the point Mr. Hickey alluded to as to the revenue involved. When the Minister of Finance was here a couple of weeks ago, he indicated, as you indicated in your comments, that $800 million in capital gains is affected in this proposed GAAR section. I asked the parliamentary secretary at that meeting what would be the revenue loss for the government if this GAAR section did not pass. He indicated it would be $800 million. Do you have clear understanding about the loss to the treasury if this does not pass?
Mr. Hickey: No, I do not. That was my point. The Auditor General's report of in 2001 referred to capital gains, as I understand it, of $800 million. I do not know whether he is talking about another $800 million or if he has costed out these 55 cases and the 157 other cases that have been ferreted out under audit since 2001. I am unclear.
Senator Downe: We will follow that up.
Senator Massicotte: The application of the GAAR provision would only apply if there is a misuse or abuse of the provisions of the act as read as a whole. I agree that the dispute has always been in front of the courts relative to the definition of what is misuse or abuse. Give me an example of how someone would be dealt unfairly if the bill passes as intended. If the court interprets it the way you have, the only negative would be where the judge rules something to be a misuse or abuse of the provision. Only in that case would a person lose; is that correct? Obviously, if there is no misuse or abuse there is no change to that person. Give me an example of a situation where someone would lose.
Mr. Carr: Let us go back to treaty shopping. We will make some suppositions because we do not have any jurisprudence.
Let us suppose that the legislation as it currently exists does not apply to what people call treaty shopping. Let us take a corporation in England as an example and say that the rate of withholding tax on dividends from Canada to England is 10 per cent. The English company holds shares of a Canadian company. Instead of holding those shares directly, it puts them into a Netherlands subsidiary and the withholding tax rate is only 5 per cent. If we are right that the legislation did not previously apply, then if CRA challenged that person, the Canada Revenue Agency would lose and the rate would stay at 5 per cent.
If the act is amended retroactively, presumably it does apply to treaty shopping and the rate of tax will be 10 per cent. Therefore, that person will be disadvantaged under the new legislation as compared to his position under the old legislation.
The Chairman: Subject to being reassessed.
Senator Massicotte: There have been very few court cases so far in the lower courts in this regard. I think there is one this spring.
How do they define abuse? What are the characteristics of an abuse? Should we have sympathy for that person if it is deemed to be abusive?
Mr. Carr: I am not looking for sympathy. I am looking for a technical interpretation of the law. What you are saying, going back to my King John example, is that if you are not an abuser, one of those naughty people, you do not have to worry about things. I guess I am trying to uphold what I consider to be a very important principle of the law: that you are entitled to govern your affairs under the law as it then exists.
If you go to court under the old rules and the court holds that the GAAR does not apply to treaty shopping, surely you are entitled to organize your affairs in that way. If the court says no, that the provision has always applied, then the Department of Finance the CRA win and we have no objection.
However, if we are right, if the GAAR does not apply to treaty shopping now but will apply in the future, there is an example where somebody will be worse off. Is that an abuse? Is it so bad to be able to organize your affairs to get a lower rate of tax? I do not know.
The Chairman: On behalf of the committee, Mr. Carr and Mr. Hickey, I want to thank you both very much for excellent presentations. There are many more questions we wanted to ask, but we are out of time. There are other witnesses today and perhaps I will have an opportunity to put some other questions to them.
On behalf of all of us, thank you for helping us with what is a technical and difficult area for most of us. You have helped clarify a lot.
Honourable senators, the next two witnesses I would like to call before us are Mr. Roger Tassé and Mr. Scott Wilkie. They are appearing before us as individuals.
Roger Tassé is a partner with Gowling's law firm in Ottawa. He has a long career as a senior public servant in many departments, including roles as a Deputy Minister of Justice, the Deputy Attorney General of Canada, and principal constitutional adviser to the Government of Canada.
Mr. Scott Wilkie is a senior partner in the taxation department of a law firm called Osler, Hoskin and Harcourt in Toronto. He has particular expertise in international taxation, corporate taxation, taxation of financial transactions and transfer pricing. He is also the former Chair of the Joint Committee on Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants.
Mr. Wilkie and Mr. Tassé, welcome to the committee. We look forward to hearing your views.
Who would like to go first?
Mr. Roger Tassé, As an individual: We agreed that I should go first.
[Translation]
I should perhaps begin by immediately clarifying that as indicated by Senator Murray and by yourself, Mr. Chairman, I received a mandate from a legal firm I had not dealt with previously. The question put to me was the following: are you familiar with this amendment that the government wishes to make to GAAR retroactive to 18 years ago? I answered that I found that rather surprising, that I would look into the matter and get back to them. I then was asked whether, if I believed it was somewhat excessive, I would accept to appear before the Senate committee. I studied the matter, and after having read numerous documents and then done the necessary research work in order to reach a conclusion, I was indeed astounded to see the proposal passed by Parliament. Amending an act in order to make it retroactive over close to 17 years is without precedent. To my knowledge, this has never been done before.
I am not appearing here as a tax expert. I do not purport to be a specialist in taxation matters. I am appearing on the matter of principle, namely, in the case at hand, is it justified to pass a bill amending an act of 1988, making the change retroactive to that date. I believe this is a serious matter that brings up serious questions that deserve to be discussed independently from the fiscal aspect. This is why I accepted to appear before the committee and to submit to you my ideas in this regard. My starting point is that Canadians and taxpayers are entitled to plan and organize their affairs, be it with regard to tax law, business law or securities law, in the context of the knowledge they have of the laws in place at the time they make their decisions and with the advice given to them by the experts they call upon to this end. It is my belief that the reasons invoked to justify retroactivity in this case do not hold. In my humble opinion, this does not abide by the criteria developed by the Department of Finance in 1995 with regard to justifying retroactive rate changes. I do not believe the finance department has been able to demonstrate that this change reflects a clear and unequivocal initial intention that section 245 apply to Canada's international treaties, after the tabling of the amendment.
This is the criterion it itself established in 1995, and after having reviewed the material I do not believe that this criterion is fulfilled. Having listened to previous witnesses, clearly there were and continue to be differences of opinion regarding this issue, namely if the clause as drafted and passed in 1988 was clear and unequivocal. Differing opinions have been expressed by tax practitioners and specialists from the very beginning.
As for the initial intent, I would refer you to what I state in my more elaborate submission in this regard. I believe you have received copies of it. It is on page 4.
[English]
On page 4 of my brief, under the heading ``The initial intention of Parliament,'' when the section was adopted by Parliament in 1988, by its very wording it applied only to the Income Tax Act. That is the first indication that it was meant to apply to the Income Tax Act. It did not refer to tax regulations or tax treaties.
The Department of Finance has produced noevidence contemporaneous with the introduction ofthe GAAR in 1987-88 which would show that the intentwas that the GAAR would apply to tax treaties. Furthermore, shortly after the coming into force of the GAAR on September 13, 1988, the CRA published a detailedinformation circular analyzing the possible application of the GAAR to 22 separate hypothetical transactions, none of them involving the interaction between the act and either a tax treaty or a regulation.
[Translation]
The initial intention of Parliament was that this apply to the act and not to the treaties. These differences of opinion that usually exist with regard to acts, and in this case between fiscal experts and the agency, are not rare. We have a tax court that deals with taxation issues as well as other matters, although taxation is its specialty. Every year it hears hundreds of cases; there are often differences of opinion between tax practitioners and the agency as to the way of understanding and interpreting the act. When there are diverging opinions, the matter is resolved by the courts. Between 1998 and 2002, the Supreme Court decided in certain cases in favour of the taxpayer. Because the agency had one opinion over the course of time and gave its point of view on the way the act was to be understood, that would mean that when it loses, it could, in each case, come back to Parliament and say: we thought it was this that should have been withheld, this is the interpretation that should be given to the provision following upon the decisions of the Supreme Court, in the cases that I have just mentioned, from 1998 to 2002. The agency is therefore asking Parliament to pass retroactive legislation so as to ensure that our initial opinion on the interpretation to be given to this provision be confirmed. It seems to me that asking the question is somewhat absurd. The Department of Finance, in its 1995 guidelines, recognizes that this is not the way to go about things.
In other words, it does not suffice, to justify a retroactive act, that the Canada Revenue Agency express the way in which this clause could be interpreted and even its intention to go to court to defend its viewpoint and have the court confirm its intention. The test in order for the government to be able to say that it believes it is justified in imposing retroactivity through legislation is much higher than that. This is how I read the very language of the department's guidelines. The Minister of Finance says:
[English]
It is only in highly exceptional circumstances that we will make that kind of change and propose that kind of change to Parliament. I do not think it has been met, quite frankly, that is why I have decided to appear before the committee.
Our country has taken pride in guiding itself by the rule of law, but we would not be respecting the rule of law if we were to say that, in the circumstances of this case, it is proper to amend the law back to 1988. People acted on the basis of the law as they understood it and on the advice of tax petitioners who had studied the matter and come to the conclusion that maybe a case can be made but the courts have not decided. The agency had not clearly and unequivocally stated what its position was with respect to that matter. It had occasions over the years where it could have come forward and said, ``Despite what is being written by this or that tax expert, our view is that from the very beginning the meaning was clear. The GAAR did cover tax treaties. It did cover tax regulations.'' They had that opportunity and they did not do it.
In a nutshell, the government did not meet the test they had fixed for themselves and, in my humble view, it is acceptable or proper or appropriate for Parliament to adopt a retroactive change in the circumstances before you.
Mr. Scott Wilkie, As an individual: Honourable senators, I would like to make clear that I am here in a personal capacity and not as a representative of any organization that I have been associated with or am associated with, including my own firm. As you will have heard from the presentation earlier, professional colleagues do disagree with some of the views that I will put forward, and that includes members of my own firm. I say that so you can appreciate my remarks fairly.
I am here because I am known generally in the profession to be much less critical of the proposed amendments to the Income Tax Act and the Income Tax Conventions Interpretation Act than others, not because of reasons of fairness or morality, but for legal reasons that I would like to share with you.
I have four points to discuss. The first concerns the interpretation of the existing general anti-avoidance rule itself and the interpretation that I think that provision without the amendments can withstand with respect to both the regulations and, importantly, tax treaties.
Second, and perhaps more important — again, this is maybe one of the reasons why I am here — much of the discussion about these proposed amendments has focused on the interaction between the Income Tax Act and the general anti-avoidance rule and tax treaties. As far as I can understand from the material that you have had the opportunity to consider, there has not been very much discussion about the international law concerning treaty abuse, which I think is important to consider and may go some distance to responding to if not answering some of the very probative questions that Senator Cools has asked of previous witnesses.
I formulate this next question acknowledging the state of the process by which these questions are arising. Is there a retroactive change in the law as opposed to the legislation? It is certainly the case that the legislation as it is to be written will read differently than it did in 1988. There is no denying that fact. There is a case to be made, however, that these changes do not effect a retroactive change in the law, but even if they do, the change that they effect is consistent with what underlies the legislation in the first place.
The third point I will address relates to some of the terms of the proposed changes and how they reflect, in my view, an interpretive capacity of the existing rules.
Finally, what recourses do taxpayers have to protect themselves in the event that they feel aggrieved about the application of these changed rules should they be enacted?
First I will deal with the GAAR as it was enacted in 1988. It is important to appreciate that it applies to ``tax consequences,'' a defined term, and ``tax benefits,'' a defined term, which are expressed as they only can be with respect to the only enactment under which tax liabilities are determined, namely the Income Tax Act. It is fair, however, and consistent with tax practice generally and with the legislation to expect that collateral enactments that themselves do not result in tax liabilities and do not result in the computation of income or taxable income or refunds are nevertheless relevant in order to inform the application of the Income Tax Act. Tax treaties and regulations are those kinds of enactments.
Second, the GAAR itself has the misuse or abuse limitation that has been discussed by other witnesses. It is important to understand that the application of the GAAR, changed or not, is not automatic. It is subject to an objective reasonableness standard that requires an adjudicator and advisers to take into account the circumstances in which the provision might be applied and to make reasonable judgments about whether or not the limitations that are in the GAAR have or have not been observed.
There is a second point that I think is interesting on the face of the legislation itself. Again, this is not a point of fairness or a point of impression. I am reading the legislation. The generalanti-avoidance rule does not apply unless it can be determined that there has been — and this is in the same sentence — a misuse of the provisions of the act or an abuse having regard for the act as a whole. It does not say an abuse of the act but, rather, an abuse having regard for the act as a whole — ``the act'' meaning ``the statute'' in this country that subsumes the income tax system. Certainly, that interpretation is open.
Again, it does not say abuse of the act, but says abuse having regard for the act; and it does not say having or not having regard for anything else. It is reasonable in my view to interpret that collateral enactments that exist for the purpose of affecting tax liability reasonably are subsumed within the expectation of that rule.
The question affecting the interpretation of the GAAR that is before you has certainly been made more complicated insofar as the Income Tax Regulations are concerned. In two cases the Tax Court decided, narrowly in my view and to great surprise in the practicing community, that the GAAR did not apply to the Income Tax Regulations. I think it is correct to say that the Income Tax Regulations do form part of the act, although they are the companion to the statute, as such.
Those two cases raised curiosity because of the way in which they were argued. Given the linguistic construction of the misuse or abuse limitation in the GAAR, the cases were put with reference to the regulations. I wonder and speculate whether the cases might have been considered differently had they been considered with reference to the operative provision of the Income Tax Act that provides taxpayers with the entitlement to claim tax depreciation, or so-called capital cost allowance in the act. That is paragraph 20.1(a), which in its application as anticipated by the act is informed by the regulations. In that case, I suggest that if the abuse or misuse had been couched in terms of paragraph 20.1(a) of the act rather than particularized in reference to the piece of the regulations that affected that determination of the capital cost allowance rates in circumstances applying, it would have been more difficult to dismiss those cases in relation to the application of the GAAR.
In any event, those cases directly concern the regulations and not the tax treaties, which I think are more easily insinuated into the Income Tax Act than into the Income Tax Regulations, which, in some respects, are embellishments on the act and intended to be so because they are promulgated under the authority of the act to do so.
I will turn now to the international aspect of the issue, which is more interesting to the committee and has not been widely discussed. Apart from the domestic law of any country, there is an evolving anti-abuse notion that is consistent with the GAAR in that it refers to abuse. Before the GAAR, abuse was not a notion common to the Canadian tax system.
It is subsumed generally, underlying all tax treaties to which Canada is a party. This notion can be expressed in various ways, such as the abuse of rights in a civil law sense. Essentially, it means that there is a limitation on the use of treaties for planning or otherwise to concede relief if the underlying requirements for the application of the treaties of the entitlement to benefit from them have not been satisfied or have been manipulated in an unfair or undue fashion with reference to what those treaties and the tax systems affected by them are meant to achieve.
The application of the GAAR insofar as treaties are concerned is directly an issue in deciding whether the proposed amendments, whether palatable as retroactive changes to the law, are within the contemplation of our income tax system. That is the important question. It is directly affected by what treaties are. Tax treaties are not tax planning instruments. They arise directly as accommodations to trade between countries whose entitlement to tax, to exercise fiscal sovereignty, is essentially unlimited as a matter of international law. They operate to avoid the interference with trade that the gratuitous application of a tax system or systems of the treaty partners would create in circumstances where each of the treaty partners can legitimately assert a claim to tax the same taxpayer, the same tax base. An allocation must take place in respect of each country's prior entitlement, if it can be established, to have more of the taxpayers' income in its tax base or to have an entitlement to tax the taxpayer relative to the other.
That point is important because it establishes the expectation that each of the treaty partners in the circumstances has a legitimate and genuine tax claim with respect to the affected taxpayer and the affected income; and it needs to be adjudicated. It informs the expectation, which is also present in the history of treaties, that treaties are not to be used for fiscal evasion, which originally had a criminal notion in the development of tax treaties but has evolved to include civil tax avoidance that is considered untoward in terms of the intent of the treaties.
The decisions of the International Court of Justice, the implications of the Vienna convention on the interpretation of treaties, which applies to tax treaties as well as others, and the decisions of particular countries that have considered whether their domestic avoidance rules apply in the treaty context suggest that there has been an evolving expectation that the notion of underlying tax treaties is inherently an anti-abuse notion that, in my view, is not inconsistent with what the GAAR recommends in our statute.
That evolving development is reflected in, but not dependent on, comments on model tax conventions on which the Canadian treaties are predicated. An example of that is the Organization for Economic Cooperation and Development, OECD, which in its commentaries purports to express international legal implications with respect to the significance of treaties.
That international law point, quite apart from informing the sense of the GAAR in relation to treaties, is also important to consider with respect to a paramountcy argument that has been put to this committee. Tax treaties are enacted by a separate statute, not by the Income Tax Act, that states in all cases that in the event of an inconsistency between the treaty and other law, including the Income Tax Act, the treaty prevails.
In evaluating what is an inconsistency, the question occurs whether the international law inherent in and relevant to the interpretation of treaties, including Canada's tax treaties, is such that it can be determined that there is consistency between what treaties expect fundamentally in relation to their treaty partners — such as bargains between countries, which taxpayers are entitled to enforce; concessions made by countries to other countries in relation to their taxpayers, where the other country has a better claim to tax the income; and what the Income Tax Act says in 1988 and what it may say if these amendments pass.
The proposed amendments to both the Income Tax Conventions Interpretation Act and to the GAAR are expressed fundamentally with respect to tax consequences, which are nevertheless tax liabilities or refunds or income computations that arise under the act.
I think the amendments are meant to be indicative and more descriptive of what ``the act'' means in terms of an embodiment of the income tax system, which results in tax liabilities being levied under the act. I would be happy to further discuss that matter if you have questions about it. However, I would like to move to the last point, which is almost as important if not more important than the substantive one, again because of where this matter is being debated in terms of the parliamentary process.
It strikes me that the issue would be much more serious if either the GAAR applied as an automatic adjustment to a taxpayer's tax liability — which is does not — or if taxpayers were disadvantaged by being somehow deprived of the recourses and the expectations that they have about the fair administration and adjudication of the act. This is a point to be considered in terms of the fairness guidelines for retroactive legislation.
First, it remains open for a court not to find that there has been an abuse of the act in relation to a tax treaty or regulation by finding that within the contemplation of the treaty — and again, the international law on treaties is important — the outcome that a taxpayer contends for is sustainable, even if it involves an artful use of the treaty, for example, to get withholding tax advantage or some other advantage.
It is important to recognize that, apart from the question about the general anti-avoidance rule we are discussing, tax treaties themselves, as reflected in the Income Tax Act Conventions Interpretation Act, are defined in their application to the domestic law of the country whose tax is in issue. For example, terms that are not defined in the treaty, such as ``tax benefit,'' are defined as a matter of treaty interpretation in terms of the domestic law of the country whose tax is in issue.
It is also interesting to observe that the income tax application rules specifically adopt and incorporate, by reference to our statute, the lower withholding tax rates that treaties provide. It would be fair to interpret that if the rates themselves as arithmetic measures are incorporated into our act, the basis on which a taxpayer may be entitled to have them reflected in the treaty is also subsumed within the act in order to inform their application.
The second point, which bears directly on the retroactive question, is that, in my view, it remains open for a court to find that it is not reasonable to conclude that a transaction results in the targeted misuse or abuse that is contemplated by the changes to the act in section 245, the GAAR, and the Income Tax Conventions Interpretation Act, if it is reasonable to consider that, because in the relevant period the act was not as specific as it may be, a taxpayer could not fairly have governed its affairs by anticipating that its conduct would somehow be considered to be proscribed within the GAAR. I think it is open for a court to find that.
The third point, going back to the international law context, is that treaties are negotiated between countries. Taxpayers are able to enforce them or cause countries to enforce them, but they are bargains between countries. If a country feels that the interests of its tax citizens, its residents, are unjustifiably aggrieved or are interfered with in an unwarranted way as a result of these amendments to the Income Tax Act and their purported application to tax treaties, all tax treaties to which Canada is a party anticipate a procedure for countries to deal with that. It is called the mutual agreement procedure under which countries can, on behalf of their tax citizens, contest the behaviour of other countries in order to reach a resolution that includes a reasonable interpretation of the treaty.
Competent authorities — that is, the tax authorities of the countries operating under the mutual agreement procedure — are not obligated to come to a conclusion but, again, all of this takes place within the ambit of international law that requires countries to behave properly and to give good faith effect to tax treaty bargains into which they enter.
Finally, Canadian courts, including the Supreme Court of Canada, have severely circumscribed the entitlement of tax authorities to use tax avoidance doctrine or case law or the general anti-avoidance rule itself to impose tax consequences on taxpayers that are inconsistent with the legal transactions in which they entered, that is, by way of some economic reconstruction of their affairs because of the appearance of those arrangements or the art involved in their tax planning. Within that context, superior Canadian courts have also given effect to very artful tax planning, using, for example, the interposition of entities in a flow of funds between countries in order to secure withholding tax advantage.
Recognizing that important definitional and other aspects of treaties are nevertheless established by Canadian law as provided in the Income Tax Conventions Interpretation Act as it now exists, the legal limitations on the use of the GAAR to enforce a reconstruction of a taxpayer's affairs simply because they are organized in a very beneficial way has been severely limited under our law. The only decided case on this point, as you will have heard, is the so-called Equilease case that went before now Chief Justice Bowman.
The Chairman: Mr. Tassé, would you like to comment on one of the first comments made by Mr. Wilkie, that is, the distinction he drew between retroactive change in the law and retroactive change in the legislation? Do you see Bill C- 33 as being a retroactive change in the law?
Mr. Tassé: Yes, I see it clearly as a retroactive change in the law because it means to change the law that existed in 1988. That is what I would call retroactive law. Even if we say that it is to clarify the intent, the intent of Parliament is important, and nothing was said about the intent of Parliament at the time this was passed. As far as I can see, no word was pronounced in Parliament saying that it applies to treaties as well as to the act. Nothing was said by the agency administering the law at the time to the effect that this applied to treaties. I think the intent was clear, and that is one of the first tests that must be met.
After the law was adopted, what was the reaction of the authorities? Their position was clear and unequivocal. The words of the Department of Finance in the 1995 guidelines were that this was meant to apply to treaties. This was not said. There may have been good reasons for that. I can only speculate on why it was not said. Perhaps it was because GAAR was very controversial when it was presented, because it was a new way of reaching out for misuse or abuse of the law. Tax practitioners resisted that concept. The international community was divided as to whether this was a good way to proceed. It was only in 2001 that the OECD countries developed a consensus to have GAAR-type rules in each member country of the OECD. In 1988, it was not that clear that all countries with which Canada had treaties or wanted to enter into them wanted to have GAAR-type rules.
Times have changed since 1988, and Mr. Wilkie provided good evidence that in effect there are two ways of reading this. I would not take a position on who is right or wrong. What to me is wrong is to take away from taxpayers, who have entered into transactions which might possibly give cause for the agency to be concerned and to issue assessments, the right to raise the matter before the court and obtain a decision. If the GAAR applies, it applies. If it does not apply, on what basis would you say we want to make it retroactive to 1988? I am not disputing that there are differences of view here.
The Chairman: There clearly are.
Mr. Wilkie: One might ask, given the way in which the GAAR is written, whether the department needed to say, ``We really mean it and it applies to regulations and to treaties.'' What it applies to is the determination of tax liability under the only enactment which does that, which is the Income Tax Act. It is reasonable to expect that collateral enactments that affect that are relevant.
The retroactivity point is an important one from a parliamentary point of view and from a taxpayer expectation point of view.
The Chairman: Public policy point of view.
Mr. Wilkie: All of that.
What needs to be said is that tax legislation is very commonly passed retroactively. Honourable senators will have the benefit, subject to events, to consider a mind-numbing bill coming with respect to the foreign affiliate rules that has retroactive amendments of a relieving nature requested by taxpayers dating back to 1994. It is very common, particularly where they are relieving something, for tax bills to be retroactive.
Senator Ringuette: Mr. Wilkie, you are certainly much more of an expert than I ever hope to be in this field. You mentioned at the outset of your presentation that you differ from comments or opinions from your colleagues on this issue. In regard to the opinion that you have provided us, have you made any similar presentation or comments to any public or private forum on this issue?
Mr. Wilkie: My comments are well-known publicly. I have spoken about them. I have spoken to members of the joint committee about them. I have spoken to officers of the Department of Finance about them. They are known generally, both in the private and the public sector. I have been an adjunct tax academic for over 17 years, so what I have had to say about that is also well-known.
I wish to discuss a point relating to a question previous witnesses were asked. In some respects this question can be addressed at two different levels. It is a difficult legal and parliamentary question. Properly so, that discussion can take a life of its own. If you asked most practising professionals what they actually do with the rule regarding international transactions, you would find, much as Mr. Carr said to you, that they say this, that and the next thing with respect to the tax planning underlying a particular set of circumstances with reference to the factual circumstances. However, GAAR may apply to intervene and change the consequences you are otherwise expecting.
We can say, ``on the one hand this and on the one hand that,'' but it would be incautious to disregard this rule or, in my opinion, regarded obiter or not, what Chief Justice Bowman had to say about it.
Senator Ringuette: You mentioned that you have given your opinion on this issue to the officials of the Department of Finance. Was that in a consultative paid capacity?
Mr. Wilkie: No, it was not; absolutely not. For the record, I am here as a volunteer and I will bear the scars for it.
Senator Ringuette: As a legislator, I am always of the opinion that rules must reflect the legislation. You mentioned two cases that were won in the tax courts based on rules. Are you of the opinion that the rules did not reflect the tax act?
Mr. Wilkie: No. I have two points to make, if I may. First, anti-avoidance rules, anti-avoidance doctrine, anti- avoidance limitations on behaviour are inherently imprecise. It is unreasonable to expect that they can foresee precisely all of the circumstances to which they might be applied. There is judgment inherent in applying them in any set of circumstances.
The point I was trying to make with respect to the two cases concerning the Income Tax Regulations, the reason they were decided the way they were was based on a reference in a particular provision of the Income Tax Act to the act as opposed to the regulations and treaties, or the act and regulations and treaties, even though it is generally understood that the regulations do form part of the act. I was suggesting that if the case had been put differently, saying that paragraph 21(1)(a) of the Income Tax Act, which gives taxpayers the entitlement to claim a capital cost allowance, had been misused or abused, even though the capital cost allowance would have been calculated under the regulations, the opportunity to say that the GAAR does not apply because what is in issue is the regulations would not have been quite so clear. The offended enactment would have been a section of the Income Tax Act, and therefore it would not have been open to the court to say, ``By the way, it is not the act that is in issue, it is the regulations.''
Senator Ringuette: Do you not think in such a case that the department or the agency should have requested the appeal?
Mr. Wilkie: I cannot speculate. I am just looking at the arguments that have been put and offering another way of looking at that set of circumstances to try and rationalize whether it is an impediment to what this committee might otherwise choose to recommend.
Mr. Tassé: On these two cases, I just wanted to point out that my information is that appeals were taken but they were dropped. Why were the appeals brought but not continued?
At the Canadian Tax Foundation conference, the department was asked whether they agreed to follow this, and the answer was no. During that period of time, 2001 and 2004, no corrective amendment was proposed. There was no news bulletin indicating that they would bring a corrective amendment. There was no intention announced by the department that they would bring forward an amendment. Was the department's position clear in 2001, 2002 and 2004? It was not clear on the regulations and I would say on treaties as well.
Senator Murray: These are extraordinarily complex matters for laymen to grapple with.
The Chairman: You have that right.
Senator Murray: For example, Mr. Wilkie, you said that the decisions that found that the GAAR did not apply to regulations under the Income Tax Act came as a considerable surprise to the tax community generally. When the minister was here, I confess that as a layman I found that surprising. I would have thought that something that applied to the act would have included the regulations. Then I am told by people who count these things that there are 40 instances of the Income Tax Act that refer either to the act, or to the act and the regulations, or to Canada's tax treaties. Mr. Tassé helpfully cites in his brief the judgments that said that if the legislator had intended that these apply to the regulations as well as to the act, they would have said ``the act and regulations.''
In situations like this, I keep searching for a principle or searching for, in the broadest sense, the politics or political or policy issue that is involved. The principle of retroactivity is there, but I do not hear a convincing argument that we are not acting retroactively. On the face of it, we are acting retroactively. As a matter of policy and practice, is there a fairer way or a better way to have done what they are trying to do here?
Taking a cue from the Auditor General, I think that Parliament should clean this thing up for the future with prospective legislation. As for the past, 1988 to 2004, they should take their chances in court. Why did they discontinue those two appeals, and why did they settle the two cases that had to do with the treaties, which they appear to have settled on the courthouse steps?
This evidence severely undermines the credibility of the government in coming forward, telling us that it is necessary to act in this way, to make the GAAR retroactive to 1988.
Mr. Wilkie: First, I want to address your point regarding the settlement of these cases. I have settled lots of cases and I am sure other professionals in the room have, too. Cases settle for many reasons, quite frequently not on the basis of any academic purity with respect to the law concerned. There are many practical circumstances involved — cold feet or a hot opportunity or whatever it happens to be.
The second point is that I am concerned about principle, too. I do not want to be mistaken. What I am saying here concerns as much whether the law, or the legislation if it be different, is or is not retroactive. I think what the retroactivity guidelines try to do is to discern whether or not it could have been within the reasonable contemplation of the law that apparently is being changed retroactively to contemplate this particular outcome. I think that is an important question.
With respect to what Senator Murray says about cleaning things up for the future, I do not think anyone, even if he or she has different views about this point, would contest that an acceptable outcome would be simply to cut to the chase and amend the law forward from some date or leave it retroactive.
The Chairman: There is no opinion on that.
Mr. Wilkie: That is a point that is fairly taken as long as it is not taken because the opportunity to deal with the past has not been fairly dealt with.
The Chairman: That is Mr. Tassé's point; he put it quite eloquently.
Mr. Wilkie: Let us assume this legislation is retroactive. Then the question becomes, is it unfairly retroactive? Unfairness can be answered in a variety of different ways. It can be answered subjectively, morally or impressionistically; or, as I would choose to do, it can be answered by looking for signposts in the law, not only the statute and the Canadian case law but the international law that affects treaties, looking for objective signposts in the law. However, regardless of what people hoped or wanted — because the GAAR is controversial and has been controversial since 1988 — we should look at whether there are objective signposts in the law which suggest that this outcome was within the reasonable contemplation of the act. So be it if it is not, but a court will find that.
That would be my answer to the question. I am concerned about principles, too, but that is how I would look at it.
The Chairman: Can you comment on the department's use of the word ``clarification'' as opposed to ``retroactivity?''
Mr. Wilkie: I prefer ``re-articulation'' or ``restatement'' rather than ``clarification.'' Clarification is something that, in light of circumstances, arises because there is a misunderstanding or misconstruction of what was intended. Clarification merely states what can be found to be evident, or at least possible or tolerable within the law as it existed.
We have heard what retroactive legislation is. Legislation is retroactive if it states something differently and results in a consequence that is different than what would have been anticipated. In discussions with the minister, Senator Cools referred to Theodore Sedgwick's definition of retroactivity; but at the core of that definition, is anyone disadvantaged as a consequence of this restatement or re-enactment? I think to make that conclusion one has to look at not only what you have already looked at but also at the international context or the international law in order to decide whether, like it or not, in acknowledging what the tax court did in the Equilease case, obiter or not, someone can say we are surprised.
Mr. Tassé: The question, as put by my colleague, is whether someone has been disadvantaged. I do not think that is the right way to put the question. The question is whether taxpayers in 1988 up to 2004 could plan, organize and arrange their affairs under the law as they understood it with the advice of their tax experts.
I do not want to repeat that there were some different views about this, and it emerged over time that the agency was taking a different view. To me that is the first point: whether taxpayers had the right to arrange their affairs, plan their affairs in accordance with the law as it stood, not as it was retroactively adopted in 2004.
The other point is a comment I made, not so much in response but as a comment on what Senator Murray said earlier, about why do we not just have a law that is retrospective, applies to the future, and let the past be handled under the previous 1988 law. Some comments were made before you when the minister and his officials were here that there was a concern that the new law, if it is adopted only for the future, might make it more difficultfor them to have their interpretation of the law as it stoodin 1988 sustained by the court.
There is a very clear rule in the Interpretation Act that says where an enactment is repealed in whole or in part, repeal does not affect the previous operation of the enactment so repealed or anything duly done or suffered thereunder. In effect, what this section says is that you may amend the law in 2004 for the future or for the past. If the Department of Finance wants to test its interpretation of the law as it is proposed to you, it could go to the court and the court could not read in 2004 — they would have to apply the law as it is interpreted by the court after debate with the taxpayer, and the decision would be made. In other words, the argument could not be made that Parliament has changed the law of 1988 and for the future that is how it reads. It would take away from the department the possibility of presenting the opinion that despite the fact that there was no law applicable, because you would not have made it retroactive, a court could find that was the right interpretation to give to the section.
Senator Murray: By the way, thank you both for coming. This is extremely interesting. I was open hoping at some point we would be able to get some free advice from you, Mr. Tassé, about same-sex marriage, but that will have to wait.
I will put all my questions at once. First, I would like to ask how far off base I was in suggesting that perhaps a reference might be possible with regard to the situation in 1988 to 2004, for example, and to whom the government or the Attorney General would refer.
Second, Mr. Tassé, you were here two years ago on a not dissimilar case that involved retroactivity.
Mr. Tassé: That was the only time I was invited to come.
Senator Murray: I recall your arguments at the time. I do not know whether you want to comment on similarities between those two cases. I think it was only two years ago that we had that discussion.
I would like you to reflect — and I do not want to embarrass you as a former Deputy Minister of Justice, but I think you have reflected in a fair and balanced way, since it has to do with our governance — on what the role of the Department of Justice is with regard to legislation of this kind going through. Must we assume that once the legislation comes to us from the government that the Department of Justice has satisfied itself that there is no problem with regard to the rule of law, for example, in provisions of this kind? Would you mind reflecting on that? I think there is a more general question here about the way things are done in the cabinet system. It did not start this year.
Mr. Tassé: I was the deputy minister when we agreed at the time that the senior legal adviser to the Department of Finance be detached and located within the Department of Finance. I think that is still the case. It was felt at the time that it would be much easier and more effective for the Department of Finance to have the drafter and key legal adviser from Justice right within the Department of Finance. I think that was a good move.
I left the department 20 years ago, so I am speculating when I say this. When an issue like this arises and key, fundamental principles of our government's rule of law, for example, are at stake or could be affected, I would hope that the core group of people in the Department of Justice responsible for advising departments and the government on these matters really play a role in the discussions and debate that should take place to advise the minister and people like you about the appropriateness of moving an amendment of that type. Do you see what I mean? In other words, I am not sure at all that there is that kind of conversation. I would be surprised if there is because Department of Finance proposals, unless things have changed, are very tightly held to the vest of the people in Finance. I am not saying it is wrong. I am saying that it creates constraints in the way that matters should be debated and discussed. It may have been discussed. People are entitled to different views. I am just sharing my own view with you. I would have preferred that there would have been much more discussion about this question.
Senator Murray: Is there a potential Charter issue here?
Mr. Tassé: Directly, I do not think so. I do not think that a claim could be made that this proposal is offensive of one or the other of the principles of the Charter. However, in the reference that you alluded to earlier in your remarks about the secession case, Senator Murray, the Supreme Court has been saying that a number of key, fundamental principles derived from the Charter and other constitutional provisions should be respected. A court of law will not intervene and say you have offended. However, it remains to be seen how far a court would want to go in sustaining these principles.
Since 1982, there have been many changes in the way we look at ourselves, at the rule of law and at the role of the rule of law in the debates of Parliament. It is not because there is no offence to the Charter that this is the appropriate thing to do. The mother Parliament decided years ago that a woman was not a person. They had the power to do it. Was it the proper thing to do or an appropriate thing to do? Certainly, there are things that are not appropriate to do because it could be offensive to the rule of law. The rule of law is a very large concept, but one of the things that it does provide is that the citizens, the taxpayers, should know what is the rule of law they should abide by. Parliament is now being asked to enact a law years after the original law had been first initiated and change it retroactively. It is like saying, ``You have been following the rules and have been consulting with advisers, but we will change the rules because we have the power to change them.'' You must have good reasons for changing the rules. I am not saying that there are not cases where it could be done and should be done.
Senator Ringuette: At our last meeting I asked Parliamentary Secretary McKay, who was before us, the following question:
What was the Department of Justice's position in regards to the position regarding retroactivity of 17 years?''
Mr. McKay replied:
We could not proceed without the Department of Justice signoff on this bill. This is in part put forward indirectly by the Department of Justice as well.
I then said:
The Department of Justice concurred with the Department of Finance to proceed with this legislation, is that correct?
His answer was: ``Yes.''
The Chairman: Before you answer, I should say that our last witness today is Yvan Roy, ADM and Counsel for the Department of Finance, Officer of the Assistant Deputy Minister, Department of Finance, Law Branch, from the Department of Justice to answer this question. However, if you would like to comment, please do, but we have the head person coming to address this very issue today.
Mr. Tassé: I am not aware of the circumstances and the consultation, or if there was any kind of discussion or consultation. Mr. Roy is a justice lawyer located in Department of Finance. I cannot speak to the relationship he would have and the issues he would discuss regarding the central core of the department on matters like retroactivity.
The Chairman: Can we have an answer to Senator Murray's last two questions.
Mr. Tassé: Yes.
Courts are very reluctant, and the Supreme Court particularly, about proceeding with or receiving a reference for an opinion without the lower courts having had a look at the matter and issued pronouncements and also in matters where there is not a complete factual context. It might be tricky to meet these tests before you get to the Supreme Court.
Mr. Wilkie: Sections 173 and 174 of the Income Tax Act specifically provide for references to the Tax Court of Canada on issues to mixed fact and law that concern assessments or proposed assessments. I am not advocating that. I do not think it is necessary in the circumstances. However, in answer to the senator's question, he should not leave this room without knowing those provisions are there.
Senator Day: You will sleep better tonight.
[Translation]
Senator Massicotte: Mr. Tassé, I have a moral question for you. In other words, if this bill were adopted, the parties that would be interested in it would be those who abuse the Income Tax Act. Why show them sympathy if the Supreme Court has decided that these people have abused the Income Tax Act? Could you give me some examples? I understand the legal argument, but talk to me about the moral one.
Mr. Tassé: I am not a tax expert. According to my knowledge of the GAAR, we have given the department a new tool to ensure that there will not be any fraud. It is not a matter of fraud, of immoral and reprehensible behaviour.
It is simply that the Income Tax Act, I am convinced of this, is very complex. It is a book that is this high. Carter, in 1971, had stated that we should try to streamline it, to go straight to the principles. There are a lot of technical rules and rules that are very precise in nature. I had understood that what we wanted to do with the GAAR was to have the right to use taxes and to pay the least amount of taxes possible, not by cheating but simply by using the law as it stands, without being accused of fraud. With regard to the cases that concern us, we are saying that if the GAAR applies, then it is because there has been abuse. If there has been fraud, we do not need the GAAR, because the other measures will apply. We are not really dealing with the moral issue; we are dealing with determining if a very complex act is being used for real business purposes, income purposes, or if it is solely being used in order to draw an advantage that has no relationship whatsoever with business decisions. Is this a moral issue?
Senator Massicotte: I had thought that what the GAAR says is that if your find in the act a clause that is contrary to the principles and intent of the Income Tax Act that can be used to your advantage, then the GAAR would apply. In other words, if you twist a section of the act that goes against the intent of the act as a whole, then I thought that the GAAR applied.
Mr. Tassé: It could perhaps well apply, but the example that I gave you could also arise. Taxpayers examined the state of the law in 1988. There is the Income Tax Act and there are the treaties. Treaties can grant different advantages from those conferred by the act. Unless we have a provision such as the GAAR and unless it applies to treaties, then why would we prohibit taxpayers from using these advantages? That is the question that must be asked.
Senator Massicotte: Only if it is abusive, if a conflict can be abusive, because otherwise the section in question would not apply.
Mr. Tassé: It is up to the court to define abuse; this is the matter that was put before the Supreme Court in both cases: are the criteria in clause 245 of the act sufficiently precise; if the act is too vague, if you do not really know what the situation is and if it is difficult for a court to reach a conclusion, to determine if the test is met, there is a principle stating that it is not a valid act. It is on this basis that the GAAR was challenged before the Supreme Court. I do not believe it is a moral issue. It is not because the agency decides that a person has not met the GAAR criteria that it should be presumed that he or she abused the provisions of the Income Tax Act or of a treaty and is therefore deemed immoral.
Senator Massicotte: One can always appeal to the court, and it is the court that can decide when there is a difference of opinion.
Mr. Tassé: What I am saying is that even if the court renders a decision, it is not the people who are immoral. Perhaps for other reasons, but not for that reason. I would say that the adjective ``moral'' should be used exclusively in cases of fraud and abusive avoidance. This is not what we are talking about here.
[English]
Mr. Wilkie: One of the difficulties in discussing the GAAR, changed or unchanged, or any anti-avoidance document, particularly when you are not dealing with it every day as one of your tools, is the expectation, or perhaps the hope, that someone will self-reveal its limits. However, the circumstances in which it applies are completely antithetical to that. As with any difficult question that seems to be imponderable, you look for objective touchstones that might guide you in the direction of an acceptable, if not the only, resolution.
You might find an evolving notion of intolerance for abuse, which has some reflection not only in case law of other countries but also in a convention that Canada observes with respect to treaties generally. You might find in the history of treaties a notion of that anti-abuse and why they are there or not there; and that is helpful. Under the terms of the GAAR, with the benefit of hindsight, you might or might not have interpreted the rule in a certain way but you might understand how to read these rules more precisely. It is like spokes on a bicycle wheel. That is my only point.
Senator Massicotte: Mr. Wilkie, I read your paper and I heard you speak, and you are convincing when you say that probably the GAAR would apply to treaties. You acknowledge from the beginning of your discussion that this is a grey zone in that people, even in your law firm, do not agree with your opinion. Mr. Tassé expressly said the same. He asked you if it is a grey area why you would wish to impose legislation that would take away the right to somehow resolve a dispute through the court system. You answered the question but I did not understand it fully. Why not agree to a day in court? Why would you use the big hammer to kill the fly?
Mr. Wilkie: I do not think the fly is dead yet, although it is a big hammer. Was the hammer in the hand in 1988, given the way we now appreciate it, or do not appreciate it? That is a fair question, and it would be foolish of me to suggest otherwise.
The Chairman: The question is different in terms of the hammer and the fly. Senator Massicotte is saying that if you use retroactivity, the retroactivity will kill it. That is the issue.
Mr. Wilkie: My point is that it is not the issue.
Senator Massicotte: However, you acknowledge that there are strong opinions contrary to your opinion. In respect of the industry, per se, it is a vague and grey area.
Mr. Wilkie: Yes it is, but in answer to your question directly, the GAAR does not apply automatically to anything. It remains such that taxpayers will have their day to argue whether the GAAR, changed or unchanged, should apply to their circumstances. That is a complicated analysis.
Senator Massicotte: One might ask why limit it to that issue only?
Mr. Wilkie: If the question is whether taxpayers are being deprived of their rights by this change, I would say that no, it may well be that the push up the hill is a little harder than it was before; but I am not prepared to concede even that. As well, it is open for a court to conclude that it is not reasonable to apply the GAAR as it would be changed.
Senator Massicotte: You are saying no because it is your opinion that this proposed legislation would not hinder or reduce taxpayers' rights as the legislation stands. You acknowledged earlier that other credible people, one sitting beside you, say they do not agree with that starting point. Why will you not allow, then, a third party called to court to make a decision as opposed to letting legislation get in the way?
Mr. Wilkie: Whether the legislation is passed, allegations will be made that the GAAR applies to such circumstances regardless of what the legislation states; and the courts will be the adjudicators. The GAAR will be applied, or not be applied, to a set of circumstances. If it is applied, then the court will be asked to adjudicate it if a taxpayer feels aggrieved because his or her rights as a taxed citizen of another jurisdiction have been interfered with in an unwarranted fashion.
Senator Massicotte: Even if the bill is passed, it would not prejudice the right to go to court?
Mr. Wilkie: Yes.
Senator Massicotte: Why pass it then? Why pass the bill if it provides no clarity?
Mr. Wilkie: It does provide clarity, and that is the point.
Senator Massicotte: You have lost me. If it provides clarity, does it diminish your rights to go to court?
Mr. Wilkie: If it provides clarity with respect to existing rights or obligations, then it does not change anything.
Senator Massicotte: I agree, but we are going in circles. You acknowledge that other professionals who are qualified do not agree with the starting point. It seems that you are taking away their right to go before the court to resolve the issue.
Mr. Wilkie: I am not suggesting that my view ought to prevail. I come at the answer to the question in a different way. As I said, an argument can be made that it is not retroactive. However, even if it is, a sound argument can be made that the change does not interfere with either the substantive rights or the procedural rights of taxpayers. However, it is evidently the case that the law, as it was written in 1988, with the benefit of hindsight, may not have been as revealing of the circumstances to which it applied as could be understood, and therefore the change is clarification.
Senator Massicotte: You say that GAAR was applicable. However, if your starting point was that GAAR was not applicable to treaties, would you still have the view that the legislation would not affect the outcome?
Mr. Wilkie: That is a hard question to answer because it is a hard conclusion to say that GAAR does not apply to tax consequences under the acts.
Senator Massicotte: However, what if you did start from that point?
Mr. Wilkie: If you assumed that the GAAR did not apply to tax treaties, then, as amended, it will be easier to say that it did apply to tax treaties. If, on the other hand, you ask whether the GAAR applied to tax consequences under the act that are affected by tax treaties, I am not sure that is a different question or a different answer.
Senator Cools: I would like to thank the two witnesses for coming before us and providing excellent testimony. My questions are probing, as Mr. Wilkie said earlier.
A few minutes ago, Senator Murray inquired of the witnesses as to whether there was a better way in which the government could have attained its purposes in respect of this bill. One of the things that is wrong with this bill is that the government is trying to effect a result by using a roundabout means. The government is attempting here to avoid the consequences of certain judgments in the courts. In my view, the government is trying to guarantee certain results in the courts.
When governments ask Parliament to look at that sort of thing, it should not proceed by way of retrospective legislation. It should do what it is really doing, which, in the language, is called ousting the jurisdiction of the courts and ousting judgments that may or may not be made. If this is what the government wanted, the government should have bit the bullet and asked Parliament.
Senators may recall the Pearson bill that the Senate voted down. If you looked into the viscera of that bill, you would have seen that the bill was trying to limit the jurisdiction of the courts as well. I have real problems with the retroactivity.
I disagree with your conclusion, although your thinking is most interesting. If that is what the government is trying to do, that is what the government should do. I agree with Mr. Tassé. If this sort of clause in a bill is proper, I submit that if a government has changed and did not like a lot of what had happened in the last ten years, the government could use clauses like this in every bill to overturn what they did not want.
That is why, historically, the law has limited retroactivity in bills to particular circumstances. The law has been so circumspect because the law is concerned that the consent of the governed remains intact. In other words, we cannot now go back and make laws retroactive to when other governments were in power, because we cannot impugn Her Majesty's agreement to bills back then.
This area of law becomes so unknown. You cannot ask Her Majesty to admit that she was wrong.
Let me go at this another way. You said that treaties are bargains between countries. I would not have defined it that way. I would have said that treaties are agreements between sovereigns. I would then say that there is another principle, being that the sovereign must rule with the consent of the governed. There is yet another principle, which is that the sovereign cannot tax without the consent of Parliament. It is how these three principles work together that governs how we should write the laws.
For that reason, I argue that the sovereign cannot go back to 1988 when another government was in power. The government in power today was not elected in 1988.
It is not an easy thing. Perhaps Mr. Tassé can help you with it.
The Chairman: I will give both witnesses an opportunity to respond.
Mr. Wilkie: I cannot speculate what the intention of the government is, but I do try to look objectively at what I have in front of me, and to draw significance about whether there is an inconsistency that is so material that it would warrant discontinuing the bill with this clause in it. I do not find that, frankly. I have told you the context in which I have that view. For that reason, I think a fair case can be made that it is not retroactive. However, even if it is, it does not matter, given the guidelines.
I respect the same principles with respect to the legislation as you do. I can only say that if you can form the view, not based on a political view but on the basis of an objective analysis of the law as it was written and the context that matters in interpreting it, that you are informing the application of the law and not changing it, then the fact that it was a different government that passed the law in the first place is not an impediment to doing that. You are not doing something that the population the government serves objectively should or would be concerned about.
The Chairman: Mr. Tassé, the last word is to you.
Mr. Tassé: The question of retroactivity arises in the context of the authority of Parliament, not the Queen. There are situations where retroactivity is an appropriate means of providing taxpayers with some relief. No one would object to Parliament providing relief retroactively because a tax was unjustly imposed on a given group of people.
By the way, I do not know any people who may fall into this category. I have not inquired who they are and I am not one who would benefit. However, it would change the fiscal impact of previous years.
There may be situations where that might be possible. Let us say that a law is passed today and for years the intention of Parliament was clear. The taxpayers and their advisers were clear as to what this meant. Suddenly, there is a court judgment that says this is not the way it should be interpreted and comes up with a different conclusion. Then I think that although this could have been passed years ago, there could be a clarifying amendment that would say, despite that judgment we stick to the views we have expressed and have always expressed, and people have understood the meaning to be. Then we will make a change. In that kind of circumstances, I do not think there would be anything wrong with doing it.
Here, I am saying the initial intention was not clear. It was not unequivocal. There was no position taken by the taxing authorities in the administration of the act to say that they were given the opportunity over time because of the views that were expressed by taxpayers. There was a doubt. Nobody spoke about it, and then you end up saying, by the way, we will change this and make it retroactive.
For the future, I have no difficulty. Parliament can, and it does often, change the tax rules for the future. In the Speech from the Throne they will change the rules.
However, to go back before that and change the rules is not something that is appropriate to me. It is not against any rules of the written Constitution, but it is not friendly to the Constitution principles, the value attached to the rule of law that we find in the Charter. We say in the Charter that Canada is a country that is founded on the principle of the rule of law and the supremacy of God, so we cherish the rule of law and to me that would be contrary.
The Chairman: I thank you very much for that. We are out of time. The last word will go to Senator Day.
Senator Day: Thank you very much. I will try to be brief.
The first question I have goes back to my last seminar on tax before this afternoon, which was that tax evasion had some criminal element to it, and then there was tax avoidance, which was good tax planning. Now is there something in the middle? Is it still possible to have good tax planning so you can avoid paying some taxes, or will this get caught up in this new legislation since 1988?
Mr. Wilkie: I think the kind of tax avoidance short of criminal behaviour that the general anti-avoidance rule or the anti-abuse notion and treaties would be concerned about is a set of circumstances where, notwithstanding what taxpayers would have appeared to have done based on the formality of their arrangements, the way they behave to each other, their legal obligations as a matter of evidence, are inconsistent. They say they did one thing, but in fact their behaviour and how they conducted themselves, how they have related to each other, says they did something else. For that reason, I would suggest that tax systems apply to the legal substance, not the economic substance, of their arrangements, which is the sum of how they organized themselves formally, contractually or what have you, and what the evidence shows they actually did.
If you and I are in a contract, do we have certain expectations of each other, and are we behaving in a fashion that expects those expectations and obligations to be honoured, or is that just a subterfuge for something else? That is the point.
Senator Day: That would be abusive.
Mr. Wilkie: It could be. I alluded to a case that was decided by the Federal Court of Appeal some time ago. This case involved the artful placement of a company within a corporate group between Canada and another jurisdiction, where if the payments had been made directly, there would have been a higher rate of withholding tax than there was as a consequence of the payments making their way through, even in circumstances where there was a great deal of formality and an automatic nature of the transmission of the payments.
It was legally effective. Rights and obligations were created. The parties abided by the contract. It was given effect. It was a treaty shopping case.
Senator Day: Thank you for that.
My final point arises out of the two cases on regulations that we talked about, and each of you have commented on that.
I do not know if you have had an opportunity to review our transcript of April 20, but the question was posed by Senator Murray to Minister of Finance, Ralph Goodale. The third part of his question — he was using the same technique of asking a whole lot of questions to get his time in — was why not appeal those two cases, talking about the two cases on regulations.
The minister responded:
The reason was, as I said in my remarks but perhaps not clearly enough, those cases turned on several arguments in favour of the taxpayer. The issue of whether or not GAAR applies was one of the things that the judges talked about; but there were several other arguments in favour of the taxpayer that made an appeal on the one narrow point about GAAR rather irrelevant.
Do you concur with that, or do you know anything about the appeal and why they did not proceed?
Mr. Wilkie: It was only speculation. I think it was important to those cases that the tax court concluded that the GAAR did not apply to regulations.
Mr. Tassé: It did; and my information is that there was an appeal but it was dropped. The more revealing point is that, from that point on to 2004 when the budget was presented, there was no indication as to the position; if the department had been so clear that since the beginning they had a clear and unequivocal position, they could have indicated by some means that the position was the reverse, and they intended to provide some changes to Parliament to look at and implement. Their silence was a bit —
Mr. Wilkie: Just a supplementary, senator. This is speculation I will make. As a practical matter and giving advice, one would think long and hard about giving important advice on the basis of those two cases — the GAAR does not apply to the Income Tax Regulations and therefore that tax avoidance, in some manner or other, influenced by the Income Tax Regulations, is all right where tax avoidance under the act would not be.
Somebody might well think hard about whether or not the case would be put that the provisions of the act, if we want to look at the statute that narrowly, are being abused and all the Income Tax Regulations are doing is telling us how the act operates in that set of circumstances.
Senator Day: Thank you.
Mr. Tassé: I understand in that situation the tax adviser will alert the taxpayer that there is this decision, that there are views that have been expressed many times by scholars and tax experts that it did not apply, and ask the client whether he wanted to proceed. It is his right to say I want to proceed. Having proceeded, for the agency to come back later on, four or five years later to say, no, you were wrong, why would the agency not allow the taxpayer to proceed to court and get a judgment on the matter? That is how our system works. That is what the courts are for.
Senator Day: You indicated the tax adviser would tell his client about these cases, but would you be surprised if a tax adviser did not tell his client the position of the Canada Revenue Agency?
Mr. Tassé: If you are advising, you should advise fully on the basis of your understanding of what the position of the agency is, what the others are, what the case law says, come to a conclusion and say, well, it is not clear.
The Chairman: This applies to the information bulletins as well.
Mr. Tassé: They said it did not apply; they did not follow it and the agency does not accept it. It means that the agency will eventually come to the court in another case, maybe. They did not say we do not accept it and we intend to change the law.
The Chairman: Mr. Tassé and Mr. Wilkie, on behalf of the committee, I want to thank you very much. We are 40 minutes over because of the excellence of your testimony. It was absolutely superb. You have done what witnesses are supposed to do. You have given us a lot of helpful opinions and ideas to help the committee make the decisions it has to make, and you are both excellent.
Senator Cools: Chairman, could we have an update on Mr. Lalonde?
The Chairman: We will give an update on Mr. Lalonde later.
Our next set of witnesses is from the charitable sector. Georgina Steinsky-Schwartz is President and CEO of Imagine Canada launched in January 2005 by the Canadian Centre for Philanthropy, CCP, and the Coalition on National Voluntary Organizations, NVO.
Part of Imagine Canada's mission is to help Canadians understand how the work of charities, non-profit organizations and community-minded businesses is important to our country and its future.
Bob Wyatt is Executive Director of the Muttart Foundation. Since its inception in 1953, the foundation has provided millions of dollars to support projects in Canada and overseas.
Hillary Pearson is the President and CEO of Philanthropic Foundations Canada, which is a national membership organization for Canada's independent grant making foundations.
I thank you very much for sending your presentations in advance. They have been circulated to honourable senators, but I would now call upon you to make some brief opening statements and then honourable senators will have questions to pose to you.
Georgina Steinsky-Schwartz, President and CEO, Imagine Canada: Thank you, senators. I would like to thank the committee very much for inviting us here today to discuss the most important piece of legislation affecting the charitable sector in the last 25 years. It is a very important piece of legislation that was derived as a result of a collaborative process between the government and the charitable sector, and my colleague Mr. Wyatt was part of that process called the Joint Regulatory Table.
To give you a better appreciation of the bill's impact, my role today is to tell you about some research about the charitable and non-profit sector, and then I am going to turn over comments to Mr. Wyatt and to my colleague Ms. Pearson.
Let me begin by stating that, generally, we support those sections of Bill C-33 that affect the charitable sector. Overall it is a very positive step in the regulation of charities in Canada, and we also commend the Department of Finance for the collaborative process that was used to derive most of the provisions of the bill.
There is one clause, clause 35, which we believe will have a very significant adverse impact on the charitable sector. This is a clause that Mr. Wyatt will explain in greater detail, but it relates to requirements concerning receipted donations. We believe that if the provisions go ahead, future regulatory reform will be required to deal with the shortcomings of this clause. We also hope that future reform initiatives will be informed by a consultative process that clause 35 was not.
Given the economic importance of the sector and the importance of good regulation for it, we think this is only appropriate. To give you an overview of the size and dimension of the charitable non-profit sector in Canada, there are 161,000 non-profits and charities in the country of which about 80,000 are registered charities directly impacted by this bill. These groups boast about 139 million memberships. This means that each Canadian belongs to about four organizations.
Most of these organizations are small groups. More than 80 per cent have less than $500,000 in revenue and more than one-half depend solely on volunteers.
Cumulatively, non-profit and voluntary sector groups contribute $75.9 billion annually to the economy, which constitutes about 8.5 per cent of the GDP; and 12.1 per cent of the economically active population are involved with charities, including about 2 million workers and about 2 billion volunteer hours.
When looked at as an economic sector, and these statisticsare from Statistics Canada, it ranks ahead of constructionand transportation in terms of employment in that 63 per cent of these groups serve primarily local needs and less than 10 per cent have revenues of more than $1 million. This is important for this proposed legislation because our research shows that modest-sized groups are most likely to rely on funding that does not come from government and they are challenged by capacity problems. Over reliance on project funding and the unwillingness of many funders to cover core costs puts a strain on these groups, and they often struggle to meet their missions with inadequate resources.
One way they try to meet this challenge is throughreceipted donations. In 2003, some $5.4 billion passed ininter- organizational transfers among charities between various sector groups. Some flowed to registered charities and could be used to offset some of the difficulties posed by project funding such as administrative or overhead expenses that other funders could not cover.
With proposed clause 35 and the changes to the disbursement quota, the flexibility for these charities will be lost. Worse, in complying with the new disbursement quota obligations, charities will be faced with an additional administrative burden that Mr. Wyatt will address in further detail.
In some ways, from the point of view of charities, Bill C- 33 is a good bill. However, clause 35 is a major negative that will affect those least able to comply with it. More than 50 per cent of charities are heavily dependent on receipted donations and are run by volunteers. I would ask Mr. Wyatt to explain in greater detail.
Mr. Bob Wyatt, Executive Director, The Muttart Foundation: Mr. Chairman, honourable senators, let me stress that Bill C-33 is the most comprehensive set of amendments to the law related to Canadian charities in more than two decades. These are not technical amendments; rather they represent fundamental changes to the rules under which Canadian charities must operate.
Most of these amendments had their origin in the work of the Joint Regulatory Table convened under the Voluntary Sector Initiative. The work of this table represented a new way of developing recommendations for legislative change. It brought together people from the voluntary sector and from the senior ranks of the public service so that they could find ways to create an appropriate legislative regime for the country's 81,000 charities.
As one of the co-chairs of the Joint Regulatory Table, I can say that my colleagues and I were delighted with the government's quick and positive response to the committee's recommendations. The amendments before you have been endorsed generally by the voluntary sector. The Department of Finance and the Charities Directorate of the Policy and Legislation Branch at the Canada Revenue Agency deserve significant credit for the way in which they embraced the work of the JRT and the views of charities from coast to coast.
Our purpose, as Ms. Steinsky-Schwartz mentioned, is to endorse those amendments that flowed from the JRT process and to raise concerns with this committee about one change that was introduced without notice and without consultation and which will create significant problems for Canadian charities.
Senators will be aware that Canadian charities must meet a disbursement quota. The rules for charitable foundations are different than the rules for charitable organizations. In it is simplest form, private and public foundations must spend 4.5 per cent of their assets on charitable activities, usually in the form of grants to other charities. Bill C-33 would reduce that rate to 3.5 per cent. This change has been discussed for a number of years and reflects a long-term study of investment returns by the Department of Finance. It is a change we endorse, although I hasten to add that many foundations have decided that they will maintain their granting at a level of at least 4.5 per cent.
To date, charitable organizations — charities that are not foundations — have faced a disbursement quota that relates primarily to the amount they receive by way of receipted donations. Such charities must spend 80 per cent of such donations on charitable activities in the year following receipt. The requirement that this expenditure be on charitable activities is significant. Costs of fundraising and administration do not qualify, according to the interpretation of the Department of Finance and the Canada Revenue Agency, although a decision of the Supreme Court of Canada calls that interpretation into question.
Bill C-33 will fundamentally change the disbursement quota for charitable organizations. In addition to the 80-per- cent rule, charities will have to expend 3.5 per cent of the value of assets not used in charitable activities. For the first time, gifts received from other charities will be subject to a disbursement quota requiring either 80 per cent or 100 per cent expenditure in the year following receipt. There are also new rules that set up a concept called ``enduring property,'' and there is a new requirement for a capital gains pool calculation.
If this sounds complicated, senators, although not as complicated as the GAAR, it is. I would refer you to slide 26 of our handout, which sets out the disbursement quota formula proposed in Bill C-33. I would also invite senators to look at slide 27, of which you have a colour copy that is easier to read. This slide depicts the decision tree that a charity would have to go through if it receives a gift from another charity, such as a foundation.
Senator Ringuette: I see that someone put a great deal of work into this chart.
Mr. Wyatt: Mr. Terry Carter, a lawyer from Ontario, prepared this chart as part of his advice to our foundation.
In the text of the bill before you, the changes to the disbursement quota calculation run to five pages. Senators, many of you have been involved in charities of various sizes over the years. I do not think it is unreasonable to suggest that the provisions in Bill C-33 will be incomprehensible to the majority of charities in this country, which have no staff. Indeed, even among the professional advisors that some of us can afford, there is disagreement about what these new disbursement quota rules will mean.
In fairness, the Department of Finance made some changes to the draft legislation before tabling Bill C-33. While some concerns have been addressed, the end result is the same: virtually incomprehensible legislation that is supposed to be interpreted by people who are trying to provide public benefit. One of my colleagues said that it should not be this hard to do good.
The disbursement quota changes before you have been introduced without consultation and without discussion. The sector has been given no explanation of what public policy purpose is furthered by these amendments. They add a level of complexity that is well beyond the comprehension of most people, even with the help that we are certain will come from the charity's directorate at the CRA.
Such complexity virtually guarantees non-compliance, inadvertent or otherwise. There is a feeling among many that the disbursement quota, a concept introduced about 30 years ago and which is unique to Canada, needs to be fundamentally rethought. We agree with that view.
We believe that the proposed changes to the disbursement quota applicable to charitable organizations should be removed from this bill. We encourage a process similar to the JRT to help understand the problem we are trying to solve and to find an appropriate solution. These changes are not that solution.
Finally, Mr. Chairman, we would like to mention two recommendations from the JRT that were not accepted by government. We encourage this committee to consider these recommendations in the future. The first is the appealmechanism by which decisions of The Charities Directoratean be challenged. If an organization is denied charitable registration or if the government proposes to revoke the status of a charity, the organization's first court appearance is in the Federal Court of Appeal. Charities and registered pension plans are theonly entities that start court proceedings in that court;everyone else has access to the Tax Court of Canada. Indeed, under Bill C-33, charities will have access to the tax court to appeal the intermediate sanctions introduced in this bill, but registration and revocation proceedings will still be exclusively within the jurisdiction of the Federal Court of Appeal. Virtually every commentator has criticized this system, and both the Federal Court of Appeal and the Supreme Court of Canada have discussed the problems. It should come as no surprise that organizations do not have $50,000 sitting around to finance an appeal to the Federal Court of Appeal. In our view, there is no reason why the Tax Court of Canada could not conduct the registration and revocation proceedings.
We encourage the Senate to review this matter at an early date and consider putting charities or would-be charities in the same position as virtually every other entity covered by the Income Tax Act.
Finally, I draw your attention to the Joint Regulatory Table's recommendation that allows federal and provincial regulators of charities to exchange information about their investigations. The sector endorsed this recommendation and we are at a loss to understand why it should be a problem. It is in the interests of everyone to expedite investigations in those rare cases of apparent fraud by a charity. Given the constitutional division of responsibility for charities in our country, the sharing of information between federal and provincial regulators only makes sense for regulators, for charities and for the public they all try to serve.
In conclusion, Mr. Chairman, the voluntary sector has endorsed much of what is contained in Bill C-33 and we commend it to the committee. We do ask, however, that the committee seriously consider recommending removal of the new rules relating to disbursement quota. This would allow for are-examination of the whole concept of a disbursement quota for Canadian charities.
Ms. Hilary Pearson, President and CEO, Philanthropic Foundations of Canada: Mr. Chairman, I do not have any additional comments. I am here to answer questions. Mr. Wyatt and Ms. Steinsky-Schwartz have outlined our point of view.
The Chairman: At the beginning, our understanding was that these sections were the result of much consultation with many charitable organizations and groups and that you were commending the department for the way in which they reached out to do accomplish that goal. On the other hand, you have some concerns with respect to this disbursement quota.
As you know, this bill is a major government bill that deals with the budget from 2004, and we need to pass a number of parts of this important piece of government legislation. I gather that you do not want to stop or hold up the bill, but have you talked with the department about the possibility of not enforcing this section? Have you approached them in any way to find ways around the use of this new disbursement quota?
Mr. Wyatt: Yes, Ms. Pearson and I attended a meeting with the Department of Finance in our roles as members of the Advisory Committee to the Minister of National Revenue on charities. It is fair to say that the sector and the Department of Finance have agreed to disagree. Once the bill is legislated, there is no provision, no authority, for the charities directorate to ignore the provisions. The guidelines are already being prepared based on the legislation as it appears in Bill C-33, and having seen an earlier version of the guide I can tell you that the explanations are as incomprehensible as the bill itself.
Senator Massicotte: What explanation did they give you for why they did not consider your recommendations?
Mr. Wyatt: Although officials from the department are here who can speak for themselves, my recollection is that they felt there was some need for the rules for all charities to be similar. In our view, that ignores the fact that there are reasons why there are three designations of types of charities in the Income Tax Act. Foundations do different things from charitable organizations. There is no need for the same rules to apply to them.
Senator Ringuette: I attended a briefing and the department officials did not discuss this issue.
You pointed out that this is a joint jurisdiction, whereby the provinces issue credits for registered charitable donations and they have a say in certification with regard to tax implications for the three different charitable certifications.
Were the provinces at the consultation table?
Mr. Wyatt: To clarify, the consultations I spoke of were by the Joint Regulatory Table prior to submitting its final report in2003. That table did not have the disbursement quota issue before it. The change to the disbursement quota, as it relates to charitable organizations, came as a surprise at the introduction of the 2004 budget.
Senator Ringuette: When you were in discussions with officials from the federal department, were officials from any provincial departments present?
Mr. Wyatt: Provincial officials were present at a number of the consultations of the Joint Regulatory Table. As we travelled across the country, officials from the appropriate departments participated in a number of sessions.
In Ontario, which has the most sophisticated regulatory system for charities, we met with officials of the Public Guardian and Trustee's office. The Joint Regulator Table officials invited the officials from the trustee's department to make submissions concerning these changes.
I have heard nothing at the provincial level that raises concerns about the majority of these provisions. I do not know what is behind the decision not to amend the confidentiality provision of the Income Tax Act to allow the sharing of information with provinces. That is something that came up from the provinces and is one of the things that led to the Joint Regulatory Table's recommendation.
Senator Ringuette: Although I have worked with many charitable organizations, I was not aware that Bill C-33 would fundamentally change the disbursement quota for charitable organizations.
Now, assets are more than cash, and buildings are assets. How can you require charities to expend 3.5 per cent of the value of their assets, which is completely different from their cash on hand?
Mr. Wyatt: This issue came up in discussions with the Department of Finance. We asked, for example, whether the reserves that a charity holds as a form of prudent management would be subject to the 3.5 per cent rule. They told us that they would use the same provisions that relate to capitalization in other parts of the Income Tax Act. We asked our accountants to find and explain the rules to us but they were unable to find them. Included in the deck before you is an example of a problem we found in the land trust section. A land trust may have land worth many millions of dollars, but be cash poor. The phrase in the act is, ``Three and a half per cent of assets not used in charitable activities.'' We do not know whether those would fall into that category. There is no certainty. This is one of the reasons we think we need to rethink this whole provision.
Senator Ringuette: In New Brunswick, and probably across the country, communities establish non-profit charitable organizations to set up social housing. They are non-charitable organizations. They have a charity tax number, because the community gives to this organization. They have assets; the asset is the non-profit housing.
The way I am reading this is that if you spend 3.5 per cent, this is an asset. This is the organizations physical assets. If we contemplate a regulation that they have to expend 3.5 per cent of their assets on a yearly basis, then out goes the non-profit housing charitable organizations in small communities and probably across the board in Canada.
This is a serious issue.
Mr. Wyatt: Mr. Chairman, Senator Ringuette, I think Senator Day was beginning to say that social housing would probably be considered an asset used for charitable activities. That would be my view. It is not clear to me that this is what the law says. We do not know. As I indicated in my remarks, fundraising and administration are not considered charitable activities, although a decision of the Supreme Court of Canada is leading to some interesting conversations between CRA, the Department of Finance and the sector.
We do not know what the rules are under these amendments, and the disbursement quota as it exists is unique to Canada. We need to find out what public policy purpose we are trying to accomplish.
In answer to your question, Mr. Chairman, we recognize that this is an omnibus bill. We recognize there are a number of provisions in it that are not controversial. This one is controversial. The world will not come to a crashing end with the removal of this clause and if the rules related to disbursement quotas remain as they are now for another year while we try to find a solution. However, forcing charities to change the whole way they operate by enacting this amendment, and then changing it a year from now will create a level of confusion that we do not believe the sector can endure.
Ms. Steinsky-Schwartz: The issue goes back to the structure of the sector. Volunteers who cannot deal with the level of complexity run most of the charities, and even our professional advisers have difficulty understanding this legislation. We just want you to know that we believe there will be a very high degree of non-compliance. It is probably not good legislation, to know that in advance.
The Chairman: The three of you have appeared before Senate committees before, certainly recently before the Standing Senate Committee on Banking, Trade and Commerce in relation to matters of charities, and you know how Senate committees work.
You are aware that from time to time Senate committees can bring in observations when they report back a bill on third reading.
If this committee were to think about having some observations go following our clause-by-clause tomorrow, what observations do you might think would be appropriate to make your case with respect to the disbursement quota?
Mr. Wyatt: The observations I would make are the uncertainty, the effect of change and subsequent change, and the lack of clarity in the problem we are trying to solve.
I do not know why there is suddenly a need to create a disbursement quota for charitable organizations other than the one that existed, which was 80 per cent of receipted donations.I work for a private foundation. We now have to amend all of our granting processes to avoid a situation where a charity has to go through this decision tree.
Senator, in your part of the world and in mine, particularly in the rural parts of our provinces, we have the same two dozen people who run virtually every charity. The T3010 was a theoretical issue because the auditors completed it as part of their audit assignment, but then my parish named me treasurer of our church. I had to face the T3010, and senator, as my colleague said, ``It should not be this hard to do good.''
The T1 rules are far simpler than what we are now asking charities to complete. I think there is something wrong with that process, Mr. Chairman.
Senator Stratton: I do not think this is a tree, it is a jungle.
I have one other comment with respect to clause 35. It is about seven pages long, including the French, and it is really quite extensive. It looks as though tax lawyers wrote it for tax lawyers to interpret it.
Is it your assessment that the only way to make this work is to remove this clause from the bill?
Ms. Steinsky-Schwartz: That is our preference.
Senator Stratton: Is there a second move other than an amendment to remove the clause?
Mr. Wyatt: Mr. Chairman, Senator Stratton, in order to avoid having to make this change several times, the removal of these amendments would leave the current disbursement quota as it is. The charities understand the current disbursement quota guidelines.
My choice is to leave it as is for another year. The Joint Regulatory Table produced an almost acceptable report the met everyone's needs in terms of the regulatory stream. Let us send the question of disbursement quota to the same type of body and have them figure it out and come back and make recommendations for what the change is or whether there is even a need for a disbursement quota.
Honourable senators, I think that would be a good observation for this committee to put forward.
Senator Stratton: We would have to hear the government's side as to why they put this clause into Bill C-33. Surely, there is an explanation and I do not think we could put forward an amendment on this without having the explanation.
I am curious, though, is there a second position? There is no second position from what I understand. You are shaking your head.
Ms. Pearson: To be fair, the Department of Finance said that if there were issues of compliance or even just a plain understanding of these provisions, the department would consider technical amendments to be brought forward later. They often employ this technique to correct problems.
Our concern is that technical amendments do not receive the priority that budget bills receive. We are still waiting for technical amendments tabled in 2002; they still have not seen the light of day. They have been made public, but have not been put into Parliament. It is a concern for us that if changes are not made to this bill the technical amendment process will take an awfully long time to make its way through.
The second position is that if the bill does go through as is, we would very much like the Department of Finance give priority to a review of both the provisions and the practice of what is going on in the sector. We would need a commitment that the department would act quickly as organizations try to cope with the changes.
Ms. Steinsky-Schwartz: I will add that the review should follow the broad consultation process used by the Joint Regulatory Table.
Senator Stratton: What happened to this in the House committee?
Mr. Wyatt: A number of organizations including Imagine Canada, PFC and the Muttart Foundation asked to appear before the House finance committee. That committee did not have hearings. The chair of the committee said the committee was not aware that anyone had written and requested permission to appear before the committee.
Senator Day: First of all, I would like to apologize to Senator Ringuette. I was trying to be helpful in pointing out that the 3.5 per cent disbursement of assets is only assets that we would describe as investments, that you might have an asset as an investment as opposed to assets used for charitable activities.
As I understand it, if the charity has an asset that is used for charitable activities, they do not have to take out 3.5 per cent of that and disburse it.
Senator Ringuette: Mr. Chair, these organizations that work on social housing need to put aside reserves in case of emergency repairs and so forth, so the reserves would certainly be looked on as an asset because they are not in active use.
Senator Day: I would say a reserve sitting there to help maintain the physical asset is a liquid asset that is being used for charitable purposes.
Ms. Steinsky-Schwartz: In this exchange, you are illustrating the reason we are asking for a consultative process. Perhaps the provisions are correct, perhaps they are not; but the problem we now have is we believe they do not take into consideration the many different realities, of which Senator Ringuette's example is only one. There are many realities; there are land trusts, for example, and many other realities that we believe will create a huge amount of uncertainty, and a great deal of unnecessary administrative burden.
Senator Day: These provisions you are talking about came outside of the Joint Regulatory Table on charities, and there has been no discussion prior to the legislation being introduced, notwithstanding that wonderful consultative process that took place beforehand.
Was there no discussion with the charitable sector?
Mr. Wyatt: Mr. Chairman, we had no idea. I found out about it at the budget lock-up.
Senator Day: Has there been any discussion since as to what these things mean?
Mr. Wyatt: Yes, there has been discussion, but there has not been clarity.
Senator Day: I understand.
Ms. Steinsky-Schwartz: There was not the extensive consultation that took place about all the other provisions.
Senator Day: Has the definition of the term ``charitable activity'' been discussed in any other place?''
Mr. Wyatt: According to the Supreme Court of Canada in the Vancouver Society of Immigrant & Visible Minority Women case, any activity that furthers a charitable purpose is a charitable activity. That is not the position taken by CRA or the Department of Finance, a matter that is subject to some discussion.
We do not know whether the sports arena a local charity in your community owns will now have to spend a disbursement quota equal to 3.5 per cent of the capital value of that arena. I do not know the answer to that question, which is the problem because this bill provides that the disbursement quota is retroactive to the date of the announcement of the budget. Charities have not been able to plan for their spending because we do not know to what it applies.
Senator Day: Is the Joint Regulatory Table on charities continuing?
Mr. Wyatt: It was part of the VSI.
Senator Day: Voluntary Sector Initiative tables are continuing, are they not?
Ms. Steinsky-Schwartz: They are winding up. However, because many of the organizations are clearly still there, it would be possible to launch a very similar process and that is what Mr. Wyatt mentioned.
Senator Day: The existing ones are winding up so we would have to trigger something new, do I understand you correctly?
Ms. Steinsky-Schwartz: The sector is constantly talking to government departments, senator, so this would not require a huge initiative.
Senator Day: I understand. I wanted to know whether the tables continued.
Ms. Steinsky-Schwartz: The Voluntary Sector Initiative is due to wind down in March 2006, but the tables themselves are winding down now.
Senator Day: The formula on page 26 of your presentation replaces the old 80 per cent rule; is that correct?
Mr. Wyatt: Yes, that replaces the 80 per cent rule.
Senator Day: Has anyone ever worked through this to see whether it would be less than or more than 80 per cent?
Mr. Wyatt: It is in addition to; it does not replace the 80 per cent rule. It is a change in that you still have to expend the 80 per cent of receipted donations plus other things. It is a cumulative amount.
At the moment, a foundation grant to a charity is not subject to a disbursement quota. If the Muttart Foundation makes a grant to a charity to hire a fundraiser there is no disbursement quota implication for the charity. Under the new rules, there will be.
In the first draft of the legislation, The Department of Finance corrected a problem found in that legislation. The problem was that fundraising was not a charitable activity, so the disbursement quota applicable to the foundation's grant would have to be found from revenue found somewhere else. The Department of Finance has now made it possible for a foundation to establish what is called ``an enduring property grant'' to be expended over not more than four years, which will be used for administration or charitable activities.
We are still trying to work through this; but this is the formula as it appears in Bill C-33, and we have not tried to work through it because it requires an understanding of what falls within various pieces of this formula.
Senator Day: You have to know what all the variables are in the first place.
Mr. Wyatt: That is what takes most of the seven pages.
Ms. Steinsky-Schwartz: Can I make a point of clarification in response to a question Senator Day asked? We were just exchanging notes with our Department of Finance friend, and we believe there is a transition period..
I think that there is a transition so that the new disbursement quota would only apply in 2008. Having said that, the difficulty is that everyone would have to be getting ready immediately to apply to it. Therefore, the other points we have been making around complexity and a lot of the difficulties are going to be major.
The Chairman: We would like to call to the table two officials to help deal with the very questions you have raised. I would like to call up Mr. Carl Juneau, the personal income tax division expert with the Department of Finance. I would also like to call Mr. Len Farber, the general director, administrative office of Tax Policy Branch.
Mr. Juneau, you have heard the discussion and you have heard the concerns about this new section 35 that deals with this new disbursement quota that the charities have indicated. It is, first, hard to understand and it would be harder to apply. We would love to have your comment on that, as to how it will be implemented.
Mr. Len Farber, General Director, Assistant Deputy Minister's Office, Tax Policy Branch, Department of Finance Canada: We are pleased to have heard the testimony here today. To put things in context, my colleague, Mr. Juneau, has spent most of his career working for The Charities Directorate at the CRA and iswell-versed in these issues. It is important to point out that the issues raised here were not done without consultation. There was a fair amount of discussion before the tabling of the bill. In the course of the discussions about the disbursement quota, certain amendments were made precisely as a result of the representations that had been made, particularly with regard to many of the small charities that did not have the staff or the ability to deal with some of the complex issues raised by Mr. Wyatt. In that context, we made amendments to ensure that the complexity of calculating the capital gains part of the disbursement quota was done on an elective basis. If a charity did not want to take that into account for whatever reason, they had that right.
We also put a de minimus rule in for charities that had raised $25,000 did not have to abide by the disbursement quota. These items, Mr. Chairman, were put in directly as a result of discussions that we held just before the introduction of the bill.
The disbursement quota has been part of the rules under the Income Tax Act for as long as I can recall and it likely goes back further than my association with the Income Tax Act. What was not discussed with the sector during the course of any of our discussions was the fact that we were reducing the disbursement quota. Rather than apply the 4.5 per cent, we were reducing it.
One other thing that is important to note, and I would ask my colleague to comment on this, is the apparently unknown rationale as to why we extended the disbursement quota to charitable organizations. As we have heard, charitable foundations can meet their disbursement quotas by moving assets or moving things over to other charities. A charity can meet its disbursement quota by expending on other charitable activities. Therefore, a foundation might meet its disbursement quota by moving its funds or assets into an organization that it has set up; and it can sit on those assets.
The idea behind charitable organizations, Mr. Chairman, is to ensure that the monies raised are expended on charitable activities. In that context, there ought not to be any difference between the monies being held by a foundation or by an organization. In that way, we have levelled the playing field and ensured that the disbursement quotas are met and that the assets are not held and allowed to appreciate but rather expended for charitable activities, which is the primary purpose of these organizations.
That is a general statement and I would be pleased to take any questions.
The Chairman: Thank you, Mr. Farber. Mr. Juneau, did you wish to make additional comments on clause 35?
Mr. Carl Juneau, Senior Tax Policy Advisor, Department of Finance Canada: No, because my comments are substantially the same as the comments that Mr. Farber made. The intent of clause 35 is to treat foundations and charitable organizations more equally.
Senator Downe: You indicated that some charities do not meet their requirements because they allow their assets to accumulate. Does that happen frequently?
Mr. Juneau: The dividing line between foundations and charitable organizations is becoming increasingly blurred.When the disbursement quota was originally established back in 1976, foundations were established to raise funds and fund charitable organizations, which were the doers of charitable acts, such as the delivery of food baskets to the poor. Today, many charitable organizations are involved in their own fundraising and many invest funds that normally would have gone to the foundations.
Senator Downe: Were any of these changes motivated by security concerns about Canadian charities raising monies to fund terrorism or other activities outside the country?
Mr. Juneau: No, these changes were not motivated by security concerns.
Senator Ringuette: I would like clarification on the disbursement quota because there seems to be a discrepancy in respect of the consultative process. It was said by three people who work in non-profit organizations that the disbursement quota had not been discussed prior to its inclusion but only after it was in the draft bill. There was an after-the-fact discussion.
When did the discussions on the disbursement quotas take place?
Second, did I understand correctly that the disbursement of assets is targeted mainly at foundations to ensure that they meet their legal requirements to disburse 3.5 per cent of their assets to a charitable or non-profit organization?
Is it a true statement that in the following year, a foundation must set aside another 3.5 per cent of its assets to move to another charitable organization?
Mr. Farber: I will deal with your first question on the consultations. Senator, I believe that what you said is correct on all accounts. The disbursement quota issues and their extension to organizations, both the reduction in the disbursement quota from 4.5 per cent to 3.5 per cent and its application were not the subject of discussions at the Joint Regulatory Table to which Mr. Wyatt referred. These were not part of those discussions. However, when the draft bill was put out for consultation, as per usual, meetings were held. At one meeting in particular the changes that I talked about and the rationale for extending it to charitable organizations was clearly put on the table. Some discussions took place with the advisors to the various groups as part of the committee on the mechanisms that we could put in place to alleviate some of the real hardship concerns expressed to us. Some of those concerns related to the small charities that function thanks to many volunteers and their incapability of abiding with some of these difficult things to which they were not accustomed. That is why the $25,000 threshold was put in place. It was thought at that time that 3.5 per cent of a $25,000 asset threshold was not enough to make a difference, and we did not want to create the kind of burden that that might apply in those kinds of situations.
Certainly, an explanation of our policy, what we were attempting to do and why we levelled the playing field between foundations and charitable organizations was made clear. Whether the parties involved agreed with the explanation was another matter. The notion that we did not explain the where and the why is somewhat unfair.
I will let Mr. Juneau speak to your second question.
Mr. Juneau: On your second question about the 3.5 per cent disbursement quota, it is true that it originally applied only to foundations, but we must place that in context because foundations also have an 80 per cent of receipted donations quota. The characteristic of a foundation is not to send money immediately out to charitable organizations; there is a tendency to invest the money. Due to the size of the investments, we felt that a 3.5 per cent disbursement quota was appropriate and that an additional quota would be suitable for foundations.
However, as I said before, because of what we see now as the blurring of distinctions between foundations and organizations, we feel it is more appropriate to even the playing field and impose that disbursement quota to charitable organizations as well.
Senator Ringuette: Who is ``we'' who feels this?
Mr. Juneau: The Department of Finance.
Senator Ringuette: The Department of Finance feels that this is levelling the playing field between foundations, most of which are dealing with millions of dollars in potential charity investment, and non-profit groups dealing with social housing?
Mr. Juneau: It is true that there are some very small charities, but there are some very large ones as well. We know of some charities that have contingency funds of $20 million.
Moving to your third question, you were concerned about charities moving money around among themselves in order to satisfy the rules.
Senator Ringuette: That is per the example that your colleague gave earlier.
Mr. Juneau: A charity can certainly park money in a charitable organization, and that is one reason we imposed a 3.5 per cent disbursement quota. There is also an existing provision in the act that allows the minister to take action if there is a transfer of funds among charities in order to appear to meet the quota.
Senator Stratton: The fundamental concern I heard from charities was with regard to the complexity of this new clause 35.
What do you offer for small charities run by volunteers? What are their alternatives? Can they opt out or stick with the old forever, or is there an opt-in phase?
You have said not to worry about it, that it will work itself out. In the old days, most people could do their income taxes on their own. Now most people find it very difficult to do that, although it is supposed to be relatively simple.
Is it going to remain simple for those small charities?
Mr. Farber: Senator, I mentioned two issues in my earlier comments. The first is with respect to the capital gains element which, without question, is a complexity that was not there before. It is there on an elective basis. If it is too complex to deal with, or the gain is not sufficient to worry about, then the charity does not have to use that element.
Senator Stratton: How will they determine that, if volunteers without an appropriate background in finance or taxes run the organization? You must realize that these are volunteers who do not have that kind of background.
Mr. Farber: I understand that, senator, but I suggest that you do not need a lot of financial background to know whether the disposition of an asset gives rise to a gain significant enough that it should be taken into account in terms of a disbursement quota.
Senator Stratton: You are assuring me that small organizations run by volunteers will not have a problem with this section.
Please, I would like just a ``yes'' or ``no'' answer.
Mr. Farber: I cannot give a ``yes'' or ``no'' answer because I do not know the circumstances. However, we have a de minimis rule there as well. We are saying that very small charities run by one or two volunteers do not have to abide by it at all. In the context of an organization of that size, that being small, that ought not to be an issue at all.
When we discussed this with the sector, it was thought that a combination of those two measures would be sufficient to get the very small charities out of it, so this ought to accommodate that kind of situation.
Senator Stratton: I hope you are right.
Senator Downe: You said that $25,000 is the cut-off. If they have $27,000, the rules are different?
Mr. Farber: That is right. That is the threshold. We set up a de minimis rule, something hard and fast so that the smallest charities would be outside the ambit of that rule.
Senator Downe: Of the charities that you monitor, what percentage falls under $25,000? Do you have any case history?
Mr. Farber: No. We would have to speak to the agency about the size of the disbursement. It has to be a significant number because the sector wanted it.
The Chairman: We would normally ask that you table that kind of information, but if you do not have it readily at hand, that is fine because we are going to move to clause-by-clause consideration tomorrow.
I would like the witnesses to have an opportunity to respond to the representations that have been made by the department.
Ms. Pearson: I will speak to some of the things that were said about foundations, because that is the group I represent.
We would like to dispute the question of whether there is a blurring of the distinction between foundations and charitable organizations. I represent mostly private foundations, but that is the vast majority of foundations that exist, certainly in the private category. There are many small family foundations.
The 3.5 per cent disbursement quota on assets is well understood. In fact, foundations are set up with assets and that is a clear model that they follow. That formula was not difficult to apply.
I think that many foundations will be baffled, just as many charities will be, by the provisions that apply to them with regard to inter-charity gifts. As Mr. Wyatt mentioned earlier, a number of provisions have now been introduced that will make foundations think very carefully about, for example, whether in making a gift to a charity they have to specify whether the gift is to be part of capital or is to go into some other category. They will have to think about the impact on the charity of giving them a gift. It is no longer a simple transaction.
While many foundations have more in assets than the charities to which they are giving, they are usually very small organizations run by volunteers. This will be difficult for them to comply with as well.
The concern of the foundation world is primarily for the impact that these provisions will have on charities. It is the complexity of what will be happening with charities that is worrying to many foundations. Foundations exist, by and large, in order to support the charitable work of charities. They certainly do not want to make things more complicated through their own gifts, and they certainly do not want charities to be tied up in knots.
I will now put on my hat of a member of the Charities Advisory Committee to the Minister of National Revenue. As Mr. Wyatt mentioned, the two of us have been appointed by the minister to advise him. We meet three times a year. Ever since that draft legislation was put forward, our committee has had great concern about the complexity this represents for the charitable sector. While we have had an opportunity to meet with the department, it was not a very lengthy opportunity. We are worried that the nature of these changes will make the job of the agency, which is to bring about an educated compliance for the 21st century for charities, very difficult.
Ms. Steinsky-Schwartz: I will reiterate my first point. We want this legislation to be clear about whom it applies to and why. If this legislation means to deal with perhaps a few offenders, those cases of difficulty where perhaps there is some blurring of lines, then we agree that clarity is necessary to catch the offenders.
In our view, 80 per cent of our organizations have revenues below $500,000. Most of those organizations of that size are run by volunteers. We believe that we are going to put a sector into a great deal of turmoil for an unclear cause. There may be perhaps a public policy reason for this bill and we are very open to discussion of that policy reason in a fulsome way. However, we are asking that before we put people into major change in already very difficult fundraising environments, that we have this very clearly thought through and administratively simplified to the extent possible.
The Chairman: Mr. Wyatt, we will give you the final word.
Mr. Wyatt: I just want to clarify a couple of minor points.In answer to Senator Downe about the $25,000 versus$27,000, please understand that threshold applies only to the capital gains pool, not to the overall revenue of the charity. The de minimis rule and the threshold apply only to that, not to the charity as a whole.
The $25,000 threshold results in a disbursement quotaof $875. There had been discussion at one time of a threshold of $500,000, in which 3.5 per cent might actually make some difference, but we have gone for a $25,000 threshold.
I am sorry if I gave members of the committee the impression that there had not been any discussion about disbursement quotas. I thought my comments were clear that there had been discussion about the effective disbursement quota on foundations, but not on charitable organizations.
As Mr. Juneau has pointed out, there are already existing provisions for the charities that try to do an end run around the disbursement quota by transferring funds back and forth. There is also within this bill, as part of the intermediate sanctions reported or recommended by JRT, a penalty if a charity does that end run. We think that is enough. If there is in fact a blurring between foundations and charitable organizations that would suggest to me, senators, that there is a need for a broader look at how we categorize charities and the entire Income Tax Act provisions as they relate to charities. I would be delighted to participate in that, but to make this change now without looking at the underpinning does not make any sense to me.
Senator Stratton asked whether there was a second position and Ms. Pearson outlined it. That second position is a far back second position. We think it would be a very bad solution. We do not think these changes are appropriate for the charitable sector as it exists today, and do not think it necessarily deals with some bigger issues. Therefore, let us find ways to do those things.
The Chairman: We have reached the end of the time. This has been a most useful panel because we got both sides of the issue, and you had a chance to have a wonderful interchange, and the department clearly understands your position, and so for all of that we thank you very much.
Honourable senators, we have two more presentations, and we have asked them to appear together. Therefore, I would now like to call forward Mr. Wayne Adams from Canada Revenue Agency. He is the Director General, Income Tax Ruling Directorate, Policy and Planning Branch, and I would also like to ask an official from the Department of Justice, Mr. Yvan Roy. He is the ADM and Counsel to the Department of Finance, Office of the Assistant Deputy Minister, Department of Finance, Law Branch.
Their presentations will be short, honourable senators, but there will be a great opportunity for you to pose questions on the issues of clarification, retroactivity, and the cases before the court and the role of the Department of Justice in giving the go-ahead opinions that led to this legislation and to the retroactive clauses. Therefore, as soon as the witnesses have an opportunity to get their files open, on behalf of the committee, I would like to extend to both of you a very warm welcome, and I do not know which of you would like to go first.
Senator Cools: Before the witnesses begin, chairman, could I get an idea of what time this meeting is going to adjourn?
The Chairman: These are the last witnesses for the day.
Senator Cools: I know, but how long?
Senator Stratton: 6:00 p.m.
Mr. Tassé: Depends on how many questions.
Senator Cools: It is always that way, is not it, Senator Day? The less we ask the better for you, right?
The Chairman: Mr. Adams, if you would like to proceed, please.
Wayne Adams, Director General, Income Tax Rulings Directorate, Policy and Planning Branch, Canada Revenue Agency: Good afternoon. Thank you for allowing me toappear before this committee to assist in your examination of the 2004 budget measure that proposes to clarify the governments positions that the general anti-avoidance rule applies to the Income Tax Act, the regulations and the income tax treaties.
This clarifying measure is proposed to be effective from the date of the General Anti-avoidance Rule, from when it was introduced, which was in September 1988. I understand that concern has been raised that this is, in effect, a retroactive tax measure and speculation also exists that once this measure is passed, the Canada Revenue Agency will pursue arrangements that it cannot presently pursue.
I would like to assure you that officials at the Canada Revenue Agency have considered that the general anti- avoidance rule, from its inception in 1988, applied to protect Canada's sovereign tax rights and that the GAAR could apply to international transactions that result in unacceptable tax avoidance.
I would emphasize that the abusive tax avoidance arrangements that Canada seeks to tax are not arrangements that abuse the other country's tax system. It is the Canadian tax system that is being abused.
Tax practitioners often claim that CRA could not challenge most international avoidance transactions, particularly those where a claim for treaty protection allegedly existed. CRA did not agree with this view, and in fact publicly stated on many occasions that GAAR would apply, even in situations where arguments existed to say that the tax treaty granted tax rights to another country. Commentators speaking on international tax planning often noted the CRA position.
I can attest to the CRA position because I have been directly associated with the administration of the GAAR. I have worked in the tax avoidance program, including the period when the GAAR was introduced. I have been a member of the GAAR committee for a number of years, and I am currently the chair.
I have given information sessions within the agency on what types of transactions GAAR could apply to and always personally considered that GAAR did not conflict with tax treaties.
Chief Justice Bowman stated in 1997, albeit an obiter comment in a decision that he rendered, that GAAR does apply to tax treaties.
Now, it is important to note that two of the top practitioners in the country asked Justice Bowman explicitly to reject the government's position because GAAR did not apply to tax treaties. After several pages of analysis, Chief Justice Bowman rejected their arguments, and his view clearly applied to treaties, but he did not need that to hold to the government's position.
I do not think it is insignificant that Justice Bowman is now the Chief Justice and probably is one of the top tax jurists that exist in Canada.
We have also heard about two cases that GAAR did not apply to the Income Tax Regulations. I do not want the committee to think that was the view of the courts.
These are two tax court decisions issued by Justice Archambault in March 2001 where he said that he did not think GAAR applied to Income Tax Regulations. Shortly thereafter, Justice Miller, at the same level, considered a case involving capital cost allowance in the Canada Trust Co. case and he rejected Justice Archambault's ruling, although he still held that Canada could not challenge the Canada Trust Co. transactions.
In 2002, the Federal Court of Appeal, Justice Marc Noël, who was a tax practitioner before he became a justice, explicitly said that GAAR applied to the Income Tax Regulations and he rejected a company's claim to have $4 million of terminal loss related to capital cost allowance on a computer that they admitted was only valued at $7,000. It is important here that you be aware that neither the courts nor the Canada Revenue Agency has been confused over the last couple of years. There has not been a vacuum as to whether GAAR applies to Income Tax Regulations and it is important that you appreciate that fact.
I also get the impression that there is worry with this particular provision that perhaps revenue is going to go out and disallow transactions, that perhaps people's RRSP contributions for the last 17 years will be disallowed, should you agree with this motion.
The Chairman: I do not know anyone who has said that.
Mr. Adams: I am saying it is important that you recognize that the government must meet this test of abuse. I do not know that it would be fair to say that taxpayers should be worried or concerned that perhaps on computer equipment that is worth $7,000, whether they should have a deduction for $4 million.
The Chairman: You have cited several cases that are not in your report. Normally, lawyers give citations; can you give us citations? I have no idea of the cases to which you refer.
Mr. Adams: I did not know that there would be so much focus on the two capital cost allowance cases. Those cases are Fredette and Rousseau-Houle, decided in 2001. The cases to which I refer are Canada Trust Co., decided in 2003, where the Crown lost, and Water's Edge Village Estates (Phase 11) Ltd., which was decided in 2002 at the Federal Court of Appeal, a level higher.
The Chairman: Can you give the citations to the clerk?
Mr. Adams: Yes. Over the years in administering the general anti-avoidance rule, I have consulted with justice and finance officials to gain their insight and understanding as to what the general anti-avoidance rule applied to. I have also been Canada's delegate to the OECD, the Organization for Economic Development and Co-operation, in particular the workingparty that examines tax avoidance and tax evasion, which gave me exposure to how other countries administer domesticanti-avoidance rules and to appreciate the OECD position that domestic anti-avoidance rules do not conflict with tax treaties.
I am available to explain how certain transactions, including those described by the Auditor General in 2001, achieve an artificial transfer of property taxable by Canada, and in the simplest terms possible, have these individuals assert that the amount is taxable in another country and, in this instance, a country that does not tax that type of income. It is important to note that in these instances Canada is not trying to tax an amount that properly belongs to another country. These are gains or income amounts that arose in Canada.
Certain arrangements have the potential for fraud, and CRA will continue to examine and challenge these arrangements vigorously. The government's view is that many of these arrangements do not work technically to achieve the desired results and are challenged on a technical basis. GAAR is often just an alternative position.
CRA must still establish that these arrangements are inappropriate or abusive arrangements, and if the court agrees that it has been established to their satisfaction, these individuals, trusts or corporations cannot hide behind a treaty.
Tax treaties strive to ensure that Canadian individuals and businesses are not subject to double taxation when they participate in international business or investment transactions. In fact, the treaties are often referred to as double taxation agreements. However, countries also remain vigilant in ensuring that their treaties are not use to achieve double non-taxation.
I am available to explain how safeguards are built into treaty administration to ensure that countries do not impose taxes contrary to their treaties. Countries are compelled to meet to resolve disputes if these exist.
It is important to understand that GAAR, from revenue's perspective, intends to apply to the transactions to which we are currently applying it. While these legislative amendments would be helpful to clarify confusion, I worry that if they come into date at any point between the dates of the general anti-avoidance rule of 1988 and today, they could cause confusion in the sector.
Mr. Yvan Roy, ADM and Counsel to the Department of Finance, Office of the Assistant Deputy Minister, Department of Finance, Law Branch, Department of Justice Canada: I am not going to be able to improve on the presentation that Minister Goodale made to this committee 12 days ago. He said what I think I would have been able to say much less eloquently.
I would like to address one of the issues raised here this afternoon. My friend Mr. Tassé tactfully and elegantly raised the issue of the role played by someone in my position, given that I am a justice counsel working closely with the Department of Justice. Mr. Tassé left the impression, which I will try to dispel, that lawyers working for a client like the Department of Finance are literally co-opted, and will do whatever the Department of Finance wants them to say or do.
My predecessors had a portfolio that was certainly narrower than the one I am responsible for at the Department of Justice, where I am also responsible for the other central agencies where the advice is to be given. That means, in the context of this hearing today, the Treasury Board, the Public Service Commission and the agency that is responsible for personnel issues in government, and sophisticated clients nowadays do not want their lawyers to tell them what they want to hear. They want to hear the state of the law, as best we can ascertain it, and then they make their decisions on that basis.
As the head lawyer in that portfolio I do not see that my role is any different from that of any other justice lawyer, which is that of someone who has a professional obligation to advise on the state of the law whenever I am asked for that advice.
Mr. Adams informed you that in 1997 a decision came from a man who became the Chief Justice of the tax court. His decision was exactly in line with the advice of the government and the lawyers to the Department of Finance. There was a decision in 2001 by a different judge, a decision that was not appealed for reasons that perhaps we will want to get into later, if we can. It seems to me, Mr. Chairman, that a situation like this calls for a clarification.
The Chairman: It calls for clarification or retroactivity.
Mr. Roy: Or retroactivity; but from our perspective we were trying to clarify the state of the law. If there are questions as to whether this is also in line with the notion of retroactivity and what we do in those circumstances, I would be more than happy to respond.
The Chairman: Why not clarify it effective the date of the bill, 2004, the date of the budget?
Mr. Roy: I believe that this was a question that was actually asked of the Minister of Finance. He indicated that if you are going to clarify this as of the date when the announcementwas made, you are agreeing that it was not the state of the law in 1988, which is certainly not what was intended by the government.
Let me explain to you why, in my view, what we are only talking about here is a clarification. In 1998, when that amendment was made, in order for this to be something other than a clarification, it would have had to have been the intention of Parliament that the GAAR rule that we are talking about — and let us go back to what that means, it is a misuse or an abuse of the tax system — would apply only to certain instruments and not others.
In other words, Parliament would have told Canadians that if they were going to abuse or misuse the system by means of a treaty, that is okay, but if this is being done within the confines of the legislation only, we will go after you.
I submit to you, Mr. Chairman, that an interpretation like this does not hold water. It seems to me that Parliament's intention with this provision had to be to try to protect the tax system. The purpose of this amendment is, because there has been debate and there have been court cases that seem to be going in different directions, to ensure that everyone understands the state of the law as was intended in 1988.
That does not mean that in the future all transactions will be reviewed on the basis of GAAR. It simply means that those transactions that may be for the purpose of misusing or abusing the system will be reviewed on that basis.
Not making this clear would mean that, because transactions have gone that route, they are not reviewable, and I submit that this would not be the right interpretation of the law. Thus, it is our view that this constitutes a clarification and not retroactive application of the law.
The Chairman: Mr. Adams, you said you have given information sessions to the agency on how GAAR would apply to certain types of transactions. Could you briefly outline some of those transactions?
Mr. Adams: We look at transactions where you spend a dollar and get a $5 deduction. There are structures that are marketed, some related to donations and some related to tax shelters, where complicated financing transactions are put in place.
The Chairman: Give us an example, please.
Mr. Adams: When the GAAR was first introduced, there were a number of tax shelters that involved giving you the exclusive right to market a particular product in a localtelephone exchange, be it a speed-reading course or some type of game. You would put in $5,000 cash and a Caribbean company would be so excited about the prospect of you being successful at that business that they would offer a performance bond of $20,000. You would take that $20,000 and purchase a tax shelter for $25,000. You would claim your deduction that year of $25,000 and you would get a $10,000 refund. If the company did not deliver on its goods, it forfeited the money back to you. You had a $10,000 refund for a $5,000 payment. Our experience was that most times you could not care less whether that company ever marketed anything, because next year you were going to buy a different shelter.
Those shelters continued to exist through that period. We challenged them on artificiality. We had some success and we had some lack of success. GAAR applied to that type of transaction.
In big companies it was much the same thing. The company to which I made reference found a superframe computer that was worth $4 million in the 1970s. That type of technology was in the back of many people's watches 20 years later, so in this case the computer was worth $7,000. They were able to orchestrate an arrangement whereby a U.S. partnership would become a Canadian partnership. They sold the computer immediately thereafter and, to their complete surprise, it was only worth the $7,000 that it was claimed to be worth, and they proceeded to try to write off $4 million as a terminal loss.
The structures we are trying to challenge have financing transactions between them that look like the wiring diagrams of the space shuttle, so they are very difficult to challenge. They are generally deductions whereby you get a tax write-off of some multiple of the amount of cash you have to put in and the amount of real debt.
Our friends at the Department of Finance have struggled with these for 20 years to try to introduce rules to ensure that the relationships are arm's length, that the financing is real financing and that it is full recourse debt. It is a game of implementing a rule after which the behaviour manifests a little differently.
A number of these structures occur of that type that we would have considered in 1988. We had just had three major press releases to deal with aggressive tax planning, saying that the provision was effective as of 4:30 that afternoon Eastern Time. It habitually grandfathered some of the really aggressive schemes.
The GAAR was meant to obviate the necessity for all these press releases and to give the fullness of time to think about a good legislative fix. The general anti-avoidance rule was meant to be a tool, provided the taxpayer navigated around all the other avoidance provisions, to stop inappropriate tax results.
The Chairman: I appreciate that answer.
What will the passage of Bill C-33 do to the investigative work you are doing in relation to the type of GAAR case you have just explained to us?
Mr. Adams: I do not know that it would represent a real change to any investigative action we take. Some of the commentary in the public has proven to be a distraction for our lawyers as they prepare to go to trial on these cases — the question of whether it might apply to treaties or to regulations. I think is clear that it does, but there is no doubt that it adds an additional burden.
Senator Massicotte: I believe it is relevant to determine whether there is has been confusion in the marketplace since 1988. I suspect that GAAR would apply to treaties but many people with high credibility, including the Canadian Bar Association, have said that they are not sure that GAAR applies to treaties. Your announcements in 1989 said that it may apply to treaty shopping. It was not until 1995 that the Department of Finance stated a position.
I appreciate that you have a firm opinion on this issue. Would you not acknowledge that, although it was your intention that it apply, there was confusion in the marketplace?
Mr. Adams: There was not a whole lot of treaty shopping in 1988. In 1988, there were cases such as Irving Oil dealing with transfer pricing. There were a few people pretending to be resident of a Caribbean country who still had their golf membership and their home in Canada. However, it was not until the advent of databases that people had the capacity to appreciate how a particular type of income might be taxed anywhere around the world.
Canada has 90 bilateral treaties. If you look at all the treaties that those 90 countries might have, it is a very complicated network.
In 1988, you would not have seen many people planning the types of transactions we are seeing today such as with Barbados spousal trusts.
Senator Massicotte: Mr. Tremblay would have probably written a legal opinion to me if I solicited one in 1989. He gave the same opinion to a public conference in that same year. In other words, he says that legislative history, GAAR, and legislation itself showed no intention that it should write a tax release and did not provide a treaty override.
While you are probably accurate, you certainly have to acknowledge that some intelligent and knowledgeable people disagree with you. In other words, at that point in time, they were not so sure that GAAR seemed to apply.
Do you agree with me on that point, there are very intelligent people who disagree with your affirmation that it should apply, that they had a contraband.
Mr. Adams: Clearly, there are many.
Senator Massicotte: These are sincere honest people, if that is the case, why would you want to impose legislation and win your argument, why do you not allow the courts to decide whether their interpretation or yours is accurate?
Mr. Adams: First, I would say the practitioners are not quite writing with the clarity that you would have the committee consider at this time. Most of the opinion letters are simply in the context of, ``arguments exist that this will be treated as this type of transaction,'' or ``this will be considered an arm's length relationship,'' or ``this trust will be considered a non-resident.'' They are all written that way.
In fact, our own lawyers often write opinion letters in that way. I am not suggesting that these are very difficult questions and findings of fact to answer. As I say, I do not envy the tasks that either those that advise taxpayers or those that advise us, the role they have. I would simply say that it is possible that both sides are guilty of some self- serving statements.
Senator Massicotte: However, if it is grey, like you seem to acknowledge.
Mr. Adams: All tax avoidance is grey.
Senator Massicotte: Why do you not allow the courts to decide rather than unilaterally deciding that your interpretation is accurate?
Mr. Adams: I would leave that up to the drafters of legislation, in the Departments of Finance and Justice. I would only be saying passionately that the cases are difficult enough to challenge to begin with, and I think that a prospective piece of legislation might be unhelpful from the government's perspective and withdrawing it and leaving it to the courts might be unhelpful as well.
Senator Massicotte: You seemed to be saying that given the choice to make it effective today, and you saw it to be prejudicial to your case, you would probably see us take it out completely rather than put the date 2005 in it.
Mr. Adams: Someone will shoot me for saying that statement.
Senator Massicotte: That is on the record.
Mr. Adams: My own personal view is that I would like it to be effective, not retroactive, from the day GAAR was introduced because I truly believe that it is just a restatement, as Mr. Wilkie would have said as opposed to clarifying. I sense there is confusion out there, but I do not think that the courts have supported that claim.
Mr. Roy: I just wanted to say that the practitioner that you are talking about who would have given advice in 1989 would certainly have had a lot of trouble with the obiter dictum by Chief Justice Bowman in 1997. That was the understanding that was certainly the state of the law.
In 2001, Justice Archambault seemed to disagree with Justice Bowman. I understand Mr. Adams to say that because of the disagreement between the two judges that there was a reversal of the line-up of cases. I believe this calls for clarification, restatement, call it what you want. This uncertainty as to Parliament's meaning aught to have and amendment like the one before you in order to clear up any problems.
Senator Massicotte: In 1999, another computer person said there was a powerful argument that GAAR should not be applied. In other words, you are probably right and I hope you are right on behalf of all Canadians, but it looks like there are some intelligent people without prejudice or opinion seem to disagree with you.
Why do you impose your wishes upon people who disagree with you? Why not be tolerant of other people's opinions?
Mr. Roy: From the perspective of the lawyer, we think that the law was clear in 1988. It has been supported by one of the very top practitioners in this country, Chief Justice Bowman. It is time. It could have been done after 2001, for instance.
Senator Massicotte: Why would you wait until 2005 to come forth with this legislation? It is obvious that there was confusion in the marketplace. Why now? Why not 1997? Why not 1988? In fact may parts of legislation makes it very clear that it is the act regulations tax. It allows many to bear this conclusion.
Mr. Roy: These words come from a subsection in the act that calls for greater certainty in order to address a phenomenon and they are not the words that we are talking about here, if you want to be technical about this subject.
Senator Massicotte: Why introduce it 16 years later? Why not before when it obvious when it was not clear?
Mr. Roy: It was clear in 1997.
Senator Massicotte: Why not in 1997?
Mr. Roy: Why would government come before Parliament to make a clarification when the person who was to become the Chief Justice of the Tax Court of Canada said that it was clear?
Senator Massicotte: It has not gone to the Supreme Court yet. Every citizen has the right to say, ``I disagree and I will choose a court to decide.'' You are saying this case is very clear. I am not sure it is very clear to a lot of people including people who expressed opinions after that date. You have to acknowledge that a lot of people do not agree.
The Chairman: Mr. Roy you are not making clear to Canadians that it was only obiter. Most Canadians will not understand what the obiter is and it is not the law. You keep stating it as if it is the law and it is not.
Mr. Roy: A judge does not have to render a judgment on that type of issue can say that it seems to be the right way of looking at the law on that issue, and that although he will not rule on the case it should go in that direction.
The Chairman: That is not a ruling.
Senator Massicotte: Are you saying that you are comfortable with that situation? Are you saying that it is a certainty, and therefore, if it is certainly, it is not retroactive?
Mr. Roy: There is no such thing as certainty in the law. That simply does not exist whether it is criminal law, administrative law, or tax law. If anytime there is a disagreement in the community about a piece of legislation, we need to come before Parliament and try to have this clarified, the books would be that high.
Senator Massicotte: In this case you are saying that it is very clear given that decision; what the law states; what the intent of the law was?
Mr. Roy: I would say to you.
Senator Massicotte: Yes or no?
Mr. Roy: Whether it was completely clear? There is no such thing as something completely clear.
Senator Massicotte: If it is clear you do not need the legislation. We are not sure it is there.
Mr. Roy: The purpose of the clarification is to make this perfectly clear.
Senator Massicotte: For something that is not clear today, obviously. This is where the problem lies.
Mr. Roy: Yes.
Senator Ringuette: I guess that I agree with Senator Massicotte. You are clearly telling us that it is a clear case based on a judgment by Chief Justice Bowman in 1997. Therefore, the situation is that (a) if it is clear then, we do not need these two articles, 52 and 60, and (b), if it is now needed, why was it not needed right after 1997? Why was it not needed after the Auditor General's report in 2001?
Your clear case seems to be extremely grey in regards to date, and greyer as we go backwards to 1988. I am not giving you a legal argument; I am giving you an ordinary person's argument that tries to look at things in a logical way. To me, it is either clear and does not need to be clearer or it is not clear and needs to be applicable in a clearer fashion back to 1988. There are two options only and this is a retroactive intention on your part.
You said earlier that you went to court and prosecuted people on these offshore avoidances and abuses. Who argues your case before the court? Is it lawyers that are employees of the Department of Justice or of the Canada Revenue Agency or do you out-source lawyers to argue such cases for the department?
Mr. Adams: We use lawyers from the Department of Justice. We do not prosecute people, although if you deem it a trial then perhaps we do. A prosecution implies criminal action and we litigate.
Senator Ringuette: I do not have a legal background.
Mr. Adams: I did not want people to receive the impression that we will go retroactive with criminal charges.
Senator Ringuette: For all the cases that go before the courts, your arguments are put forth by lawyers within your department?
Mr. Adams: Yes.
Mr. Roy: They are from the Department of Justice. There is a tax litigation group within the Department of Justice that has lawyers located across the country. They argue these kinds of cases before the courts.
Senator Ringuette: They are located in the Department of Justice?
Mr. Roy: Yes, they are.
Senator Ringuette: You are located within the agency or you are with The Department Justice?
Mr. Roy: I am a Department of Justice lawyer who has responsibilities with a number of clients, including the Department of Finance, the Treasury Board and the Public Service Commission.
Senator Ringuette: Your cases include money-related items.
Senator Downe: Where is your office located?
Mr. Roy: It is with the Department of Finance.
Senator Ringuette: You are working for Justice but your office is in finance, as mentioned earlier.
Mr. Roy: That is my situation, which is the case for many lawyers with justice. For example, some lawyers are located in defence and their role is to be the central agency with respect to the application of the law. They are located on site to remain apprised of what is happening. They are part of the operation of the client, understanding what they are doing and provide legal advice.
Senator Ringuette: Further to this question, how many lawyers from justice would be on your team located at finance?
Mr. Roy: Within finance there must be between 20 and 25 lawyers.
Senator Ringuette: Do these 20 to 25 lawyers deal with the drafting of money bills? How often do you interface with people at justice who deal with other kinds of bills or legislation?
Mr. Roy: We communicate constantly. The Department of Finance is not only working on the Income Tax Act but also the landscapes of the Bank Act, the Insurance Act, the Trust and Loan Act as well as the day-to-day work such as the drafting of contracts or personnel issues, et cetera. We provide advice on many issues.
If I may, I would like to come back to that 1997 decision to ensure that I have made myself as clear as possible. In 1988 the proposed legislation was passed. During that nine-year period, a number of practitioners claimed that the GAAR provision did not apply in the context of treaties. In 1997, there was the first pronouncement by a judge. The chair will remind me that the decision occurred in obiter dictum. That was the first pronouncement made by a judge on what that means with respect to treaties. It is only right for the government to assume that what it thought was the case in 1988 continues to be the case in 1997 when a judge stated his understanding of the state of the law.
That continued until 2001 when another judge ruled differently, but that was overturned by a higher court. Senator, in 1988 the government thought that the legislation applied to regulations, legislation and treaties was affirmed, and that opinion continued in 1997 and to the decision in 2001. Surely we are entitled to believe that that is the way it should be.
I do not know what is required of the Department of Finance and the Department of Justice to affirm that this is where we are going with this provision. That was the case in 1988 and has been confirmed since.
Senator Ringuette: Mr. Roy, you are telling us that in 2001 a decision was reversed by a higher court, in addition to the finding of the Auditor General of 55 cases at the agency with offshore activities. You are saying that, essentially, it took three and one-half years to draft two articles in a budget bill.
Mr. Roy: In 2002, we would have had the same debate that we are having now.
Senator Ringuette: Why did we not have that debate in 2002?
Mr. Roy: First, with respect to those two cases, a decision had to be made whether to appeal. They were not appealed to the next level and so the uncertainty continues in the system as to whether we should go with 1997 decision or the 2002 decision. With that uncertainty, the government determined the need for clarification.
Senator Ringuette: Before the courts and in the opinion of the department you have confirmed that there was uncertainty and lack of clarity.
Mr. Roy: As I said to Senator Massicotte, there was a need for clarification because by definition it was unclear. There was a glitch in the system that had to be eliminated.
The other possibility is that the proposed legislation is either retrospective or retroactive. I thought that someone would ask me whether that would be unconstitutional. In our view, it is not unconstitutional. When the Minister of Finance testified 12 days ago, he went through the five conditions that in policy should be followed for an amendment of that nature to be brought before Parliament. He said that unequivocally, in his view, this meets those five conditions.
Is it possible to go retroactive in every piece of proposed legislation? The answer is, ``no,'' senator, because the Charter applies in some circumstances. It applies when Parliament is trying to create an offence. We will not tell someone that their behaviour is such that we will pass legislation to find them guilty of that offence ipso facto. That is the only circumstance known in our law where retroaction is not possible. Other than that, it is possible, and that becomes a matter of policy for Parliament to decide.
Senator Massicotte: I understood your last comment to explain why we came so late to this legislation. You must admit that if that was indeed your motivation, you obviously do acknowledge that another reputable person, a judge, felt differently than you did about the application of regulations.
Mr. Roy: That is true.
Senator Day: Mr. Adams, in your discussion with Senator Massicotte, you talked about how there was a sense of confusion. Now I am a little confused, and I need some clarification. We heard earlier from the Canadian Bar Association and the Canadian Institute of Chartered Accountants. The discussion we had was that the government's position was understood by the profession. The professional advisors would, in all likelihood, be bringing this position to the attention of their clients, but they would also probably bring to their attention the various court cases. They may not agree with the government's position, but there was no confusion, was there, with respect to that position?
Mr. Adams: There was no confusion of the government's position.
Senator Day: Would you agree that generally, the profession is aware of the government's position, but some of them have started developing arguments as to why it would not hold up?
Mr. Adams: Sometimes you have to appreciate that the returns on some of these arrangements are quite lucrative. They advise the client that Revenue Canada could challenge it. They may even say, ``In our view, we think we have an arguable case.'' When you have returns as lucrative as they are in some of these tax schemes, a number of clients still agree to pursue them.
Senator Day: I was just reading the various attachments to the submission of the joint committee of the Canadian Bar Association and the Canadian Institute of Chartered Accountants, and I think this rather encapsulates their argument. In 2000, in a presentation to the 1999 tax conference by D.A. Ward, Ward suggested that there ``may be very powerful arguments'' that GAAR should not be applied.
He is talking about making arguments to go against the position that Canada Revenue Agency has taken.
You seem to suggest that the motivations for all the other opinions in that appendix are greed and financial gain. I read them as professionals expressing their opinions, period. They do not say, ``We think we could win,'' or, ``You have a pretty good case.'' They say, ``We do not think it applies.'' Financial gain and greed as motives were not determinants at all.
Mr. Adams: I am not impugning the fine reputation of those practitioners, but listen to the terms they are using. If David Ward is saying it should not apply, he's either talking rule of law or government-to-government type agreements. I do not think anybody is saying it clearly does not. I think that is a real dispute.
Senator Massicotte: If you look at many of the statements, they are expressing the probability of success. Everything is grey in life. The context of their opinion was, ``With a high probability degree of success, we do not think it will apply.''
Mr. Adams: They might be saying, ``We do not think revenue can win this,'' which is a completely different statement.
Senator Massicotte: They are saying that. Frankly, it is irrelevant what the Canada Revenue Agency thinks. It is just one opinion among many. The right question is ``What is the law?''
Mr. Adams: It is very difficult to predict how judges will view tax avoidance. There are two cases that the Supreme Court heard in March. If you put them up just as very basic schemes, they might look very similar.
The Chairman: Are they GAAR cases?
Mr. Adams: Yes, they are both GAAR cases. They are the Trustco Mortgage Company case and the Eugene Kaulius case. The Supreme Court of Canada heard them both on March 8 of this year. People think we are going to win one and the taxpayer is going to win the other.
Senator Massicotte: I hope you win both cases, but you win them based on the law, not based on speculation.
Mr. Roy: It does not mean that because someone has used the provisions of the tax treaty that the provision falls under GAAR. GAAR remains what it is. It is simply that it opens the door. It says, ``We are going to be reviewing those transactions that have gone through a tax treaty in order to unduly avoid paying taxes that are owed to the Government of Canada.'' The scope of GAAR as such, as a tool for government, has not changed. It is simply to say it applies whether you are using regulations, treaties, or the law itself.
The Chairman: If, as Senator Massicotte suggested, the department wins the two cases that were heard before the Supreme Court of Canada in March, and if the Supreme Court of Canada when it hands down its decision makes it clear that GAAR applies to tax treaties and so on, why do we need the amendments in C-33?
Mr. Adams: I do not think we really have a treaty issue before the court, although the Trustco Mortgage Company case does involve several countries. There could be an argument related to the capital cost allowance and therefore the regulations. I did not attend the Supreme Court hearing, but I understand that it really was not a major part of the argument. I do not know that the Supreme Court will opine on either regulations or treaties in those cases.
The Chairman: That is not before them.
Mr. Roy: No, the issue in those two cases is not whether treaties are covered by this but rather the meaning of misuse of the act. That is the test that exists currently. The court may go narrow or may go broad.
The Chairman: I thought it was bigger than that.
Honourable senators, are there any other questions you wish to ask?
Senator Cools: I do not know about the other members of this committee, but I have a singularly sinking feeling of greater confusion now than existed even before. Mr. Roy keeps talking about Parliament and Parliament's intention, but obviously there are many members around this table who are not as convinced and who are having enormous problems.
The day is over, and I have to leave. Perhaps Mr. Roy can come back, because I was expecting Mr. Roy to give us the legal and constitutional basis for his conclusions. He has basically just given us his conclusions, and he has repeated what Mr. Goodale has said, but I was expecting more than this. I am wondering, chairman, if it would be possible for Mr. Goodale and this witness to return.
In addition, would it be possible for us to get a witness who is not from an ``interested group'' to give us some objective testimony on these matters? For example, perhaps we could hear from some of the academics who study the proper relationship of Parliament and the courts.
I have a great problem with a judge being cited as the end-all and the be-all for us to pass something that we are finding extremely questionable, especially as a lot of this relates to what I would call the ``taxing power of the House of Commons and the BNA Act, sections 53 and 54,'' which no one has opened. Would it be possible for us to get some testimony from some academics that could perhaps assist us in these rather cryptic and arcane ways of law?
What I am hearing Mr. Roy say is that this is a retroactive enactment, and that is the end of the matter. To my mind, I do not think that is the end of the matter.
The Chairman: I will take it up with the other members of the steering committee, Senator Cools.
Senator Cools: I hoped the committee could address some of these questions. I think it is very important that committee members express some of their concerns; otherwise, you have a day like today, where we have heard one witness after another. There is no dialogue. There is no debate between us. There is no exchange. I just got a note saying we are going through it clause by clause tomorrow, and you said that a moment ago. I do not think this committee is nearly ready to make a decision to go into clause-by-clause consideration, not with such sharply divided testimony and not with such sharply divided members of the committee.
I would like to hear more about the constitutional position of Parliament in respect of its taxing power and the notion that these kinds of initiatives should begin in a certain place.
He keeps citing the judge. They do that all the time, and I overlook it.
The Chairman: I would like to thank the witnesses for coming. We appreciate the evidence that you have given. You have enlightened us on the types of practices that GAAR has been designed to cover. You have given the legal position as set forth by the Minister of Finance 10 days ago, and for that we thank you.
Honourable senators, that is all the witnesses we had on our agenda for today. This committee will meet at 9:30 tomorrow morning in Room 705 in the Victoria Building. The first witness will be the Honourable Marc Lalonde. Following that evidence, we will go to clause-by-clause consideration of Bill C-33.
There will be no meeting of the committee on Wednesday of this week. In terms of other business, we will meet the week of May 10 to continue our study of foundations with officials from the Department of Finance, although that is yet to be confirmed. Our research staff is working on a number of draft reports to follow up on our work on the issue of foundations and on our meetings with the Officers of Parliament.
Meetings will also be scheduled on May 11 and May 17 to review and revise the drafts of those reports. On May 18, there is a possibility that we will follow up on our promise to hear from the Public Service Human Resources Management Agency, although that is yet to be confirmed.
Senator Cools: Mr. Chairman, I do not know if I misunderstand the system, but this committee has made no decision to go to clause-by-clause study of the bill. You cannot simply announce that we are doing clause-by-clause consideration tomorrow.
The Chairman: I did not do that.
Senator Cools: You just read it after I raised the question to you.
The Chairman: A notice was sent out to senators last week about the work of this committee for today and tomorrow, including clause-by-clause consideration of Bill C-33.
Senator Cools: Chairman, the fact that a notice was sent out does not mean that this committee took such a decision. This committee has taken no decision to go clause by clause. This committee has set aside no time to discuss the extensive and complex testimony that we heard today. These are decisions of this committee, and this committee has taken no such decision. That is what I was trying to speak to. I am glad that you are eager to proceed tomorrow, but I am saying, as a matter of general instruction and debate, that this committee is not ready to move on to that stage because the committee members are obviously not satisfied, and there is great consternation.
The Chairman: We will be hearing more evidence onBill C-33 tomorrow morning.
Senator Cools: That is one witness. I was speaking about witnesses who could perhaps give us insights into the whole phenomenon of Parliament acting retroactively, particularly on the question of taxing citizens. That is what I am interested in.
The Chairman: We had excellent evidence on that issue.
Senator Cools: If you do not want that testimony, you should say that, but you should not say that the committee does not want it.
The Chairman: I did not say that. Roger Tassé came here today and gave excellent evidence on the two points you just raised. This committee has in fact had evidence on those points.
Senator Cools: Mr. Tassé is a wonderful and very knowledgeable man, but on the law of Parliament he is not so well informed. We should have someone to speak to us explicitly on these very important points.
The Chairman: We are going to hear from Mr. Lalonde.
Senator Cools: Mr. Lalonde is not an expert on Parliament. I was thinking of getting out of this box we are in of those who speak for the department and those who speak against and to get some testimony outside of that. There are many academics in this country who study these matters.
Perhaps Professor John Stewart, a former member of the Senate, could give us some insight on these matters. This is a very deep and complex matter. I am not satisfied that what Mr. Roy has said here today is correct. This is retroactive legislation in respect of taxing. To my mind, the fact that it is a tax introduces a wide range of variables that have not been touched.
The Chairman: The good thing about the evidence we heard today is that it has not all been from one side. It has not been only from the department or only from the dissidents.
Using as an example the panel of Mr. Wilkie and Mr. Tassé, you could not get two more different approaches to the interpretation and application of a bill, and that is good. The committee is supposed to hear different arguments and points of view, after which we, as a committee, will make our decision.
Senator Cools: The witness who appeared with Mr. Tassé did not agree with describing this phenomenon as a clarification. He talked about rearticulating. He is not totally in this corner, as one would think, because even rearticulating brings you back to retroactivity.
The clauses are very clearly retroactive. It speaks about the application. As soon as you talk about the application of a statute, you are into retroactivity. As soon as you go into the period of time that something is being applied, you are into retroactivity. There is no doubt that this is a retroactive clause.
I am just thinking that we should have some other witnesses who can speak to the interests of Parliament in this matter. Parliament is so under-represented in all of these debates and discussions, and the studies of Parliament's rights in the matters are so unknown.
I would like to hear some more witnesses, Mr. Chairman.
The Chairman: I have heard your representations. Senator Downe and Senator Day, who are on the steering committee, have heard them as well. We will meet and discuss them.
Senator Cools: I would like to make the point again that the subcommittee on agenda does not replace the committee in making these decisions, yet the affairs of the subcommittee are being conducted as though they do. You are not our directors; you are our servants. The subcommittee is the servant of the committee. I have never seen this sort of thing before. It should operate as a subcommittee.
From the debate around the table it becomes abundantly clear that this committee is not ready to go to clause-by- clause consideration. Perhaps Mr. Lalonde will be so enlightening tomorrow that he will convince us that we should move to clause by clause, but this committee is not ready to go to clause by clause yet.
The Chairman: Thank you.
Honourable senators, this meeting is now adjourned.
The committee adjourned.