Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence - Meeting of December 13, 2007
OTTAWA, Thursday, December13, 2007
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:50 a.m. to study BillC-10, an Act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that Act.
Senator W. David Angus (Chair) in the chair.
[Traduction]
The Chair: Welcome to the Standing Senate Committee on Banking, Trade and Commerce. Today, we are continuing our study of BillC-10, an Act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that Act.
[Français]
We are not on the webcast today, nor are we on CPAC, but we are continuing our study on BillC-10, which had a previous life as BillC-33 known as the Income Tax Amendments Act 2006.
BillC-33 was introduced in the House of Commons on November22, 2006 by the Minister of Finance. However, it died on the Order Paper with the dissolution of the first session of this Parliament and was reintroduced in the second session as BillC-10. It came right through to the Senate without study or amendment in committee down below, contrary to some advice that we have received here.
We had hearings yesterday, and I have heard from a number of witnesses, including witnesses from the Department of Finance and testimony notably from Mr.Gérard Lalonde of the Department of Finance. He is here today with some of his colleagues. Mr.Lalonde, as I indicated yesterday, I thought you gave some very fine explanations of very complicated issues. Feel free to indicate if you want to make an intervention, either personally or through Mr.Nash or other colleagues.
We have here our last stakeholder witnesses this morning, from the Investment Counsel Association of Canada, Ms.Katie Walmsley, President; Mr.Tom Johnston, Chair, ICAC Industry, Regulation and Tax Committee; and Ms.Pamela Moore, Chair, ICAC Member Services Committee.
Katie A. Walmsley, President, Investment Counsel Association of Canada: I will begin with some opening remarks and will keep them fairly brief. I will turn it over to Mr.Johnston to give some specific examples, and then the three of us will be available for questions.
The Chair: Before I ask you to begin, first, my name is Senator Angus. I am Chair of the committee, and I am from Quebec. Senator Goldstein, the Deputy Chair is also from Quebec. From Toronto, we have Senator Eyton, Senator Harb, from Ottawa; Senator Moore, from Halifax; and Senator Nolin, from Quebec.
Ms.Walmsley: Thank you for allowing us the opportunity to provide input on your deliberations on BillC-10. I will keep my comments brief to allow time for questions. We did have the opportunity to listen to your discussions yesterday, and I know there were many questions from the senators. We will be happy to comment both in terms of our presentation today and the presentations yesterday.
The Investment Counsel Association of Canada represents investment counsel and portfolio managers across Canada. We invest the assets for individual Canadians who are saving for retirement, and we invest the assets for pension plans across Canada. This is in every province and territory in Canada. The total assets that our members are taking care of for their clients are $600 billion.
Why are we here today? We share a common goal with the government, and that is to ensure that there are sufficient resources in place to support Canadians in their retirement. We believe that BillC-10, in its current form, unintentionally undermines this goal.
ICAC fully supports the general principle and the spirit of BillC-10, which is to close off offshore tax havens. However, instead of solely targeting those individuals who wrongfully evade paying their fair share of taxes, the legislation captures legitimate tax-exempt investment accounts. We believe that this was not the intent and it should be fixed immediately. A simple amendment to the Income Tax Act, we believe, is all that is required.
As you know, the Income Tax Act exempts registered pensionplans, RSPs and certain other Canadians from tax. Thisexemption has clearly not been taken into account with BillC-10 with regard to non-resident trusts, or NRTs, as they were referred to yesterday.
These pension plans and RSPs have no motive to invest abroad to avoid taxation, as they are exempt from income tax in Canada. Investing abroad is part of a sound investment strategy. Asset managers invest both domestically and abroad to diversify, reduce risk, and potentially enjoy higher, long-term gains.
Canadian capital markets, as you know, represent a small portion of the global marketplace — $3 trillion is the estimate in a $96 trillion world — and diversification beyond Canadian markets is essential to establish prudent portfolios for Canadian investors. As the October2007 federal Budget correctly recognized, and I quote, "Increased access to global markets in a wider range of investment instruments will provide greater opportunities to earn higher returns.''
What happens if BillC-10 goes through? I want to quote a letter that was submitted to the Minister of Finance, James Flaherty, from the Pension Investment Association of Canada. It is an association that manages the assets for most of the major large pension plans in Canada, with over $900 billion in assets.
Examples of foreign trusts that many Canadian pension funds are already invested in, likely to the degree of billions of dollars, are investment funds that are trusts established outside of Canada and which invest primarily in non-Canadian securities;. . .
...If the NRT regime is applied to Canadian pension funds, they will be forced to divest of many of these holdings, and avoid them altogether in their future investment strategies. Some foreign trusts are already prohibiting investments by Canadian investors in light of the proposed investment rules— thereby limiting the investment alternatives available for Canadian pension funds. The overall effect will be to leave Canadian pension funds with investment portfolios that are sub-optimal.
The extent of the tax liability and sub-optimal allocation of investments that would be created if this legislation is not amended are substantial. The resulting unintended potential impacts for Canadians would include the following: Significant decrease in their savings; cause avoidance of potential investments that otherwise would be in Canadians' best interests; having investments subject to more risks than would be normally necessary; higher administrative fees, causing a reduction in their portfolio assets; and will cause some foreign trusts to simply prohibit investments by Canadians.
In addition, I am sure the committee is aware that many Canadian pension plans, both large and small, are having problems with solvency with unfunded liabilities, and are facing increasing difficulties meeting the retirement needs of their plan members. They will continue to do so should BillC-10 pass in its current form. With the retroactive wording of the bill, pension plans will have the impact of paying tax in this year.
We listened to Mr.Lalonde's comments yesterday and we were encouraged that the Department of Finance has acknowledged the problem and is willing to have some discussions. I want to clarify, however, that Mr.Lalonde was under the impression that because we submitted this recommendation to this committee but also as part of the 2008 Budget consultation process, that we did not see an urgency for this issue to be addressed today, and this is not the case. We did submit the recommendation as part of the 2007 budget consultation process and we will continue to submit it until there is a change, an amendment made. There is an urgency, particularly with the retroactive wording to the 2007taxation year, and a simple fix is required.
It should be noted that there would be no loss of expected revenue to the federal government by adopting an amendment that brings this legislation in line with exemptions provided for registered pension plans and exempt taxpayers under the Income Tax Act that invest in foreign entities and they are already exempt from tax.
I referred earlier to the letter from the Pension Investment Association of Canada, which is urging a change to this bill. I also will provide Dr.Gravel copies of a letter from the OMERS pension fund and Ontario Teachers' Pension Plan, all of which are urging the government to amend this bill.
In total, this group represents $1.5 trillion in assets that are looking after the interests of Canadians' retirement savings and are urging a small amendment which we believe will ensure that registered pension plans and RRSPs will continue to be exempt from tax.
The amendment we are suggesting is very simple. It is a new subsection, 94(2.1), which is included in your formal submission. We suggest an amendment along these lines:
In determining whether any entity is a resident contributor to a particular trust or resident beneficiary under a particular trust, each contribution made or deemed to be made by an exempt taxpayer to the particular trust shall be deemed not to have been made.
It simply ensures that pension plans and RRSPs that are not subject to that taxation today would continue not to be subject to taxation.
Tom Johnston, Chair, ICAC Industry, Regulation & Tax Committee, Investment Counsel Association of Canada: I would like to emphasize the comments of my esteemed colleague with respect to our views. We are supportive of the macro principles of BillC-10 and the comments made regarding Canada as a relatively small market in the global context, 3percent are pension plans and investors need to invest abroad. In so doing, in investing abroad, there are some bona fide and unavoidable situations where pension plans and non-taxable investors may invest in non-resident trusts. I will give you three examples.
The first, which is the most common, will arise in smaller asset classes — European small-cap equities, Indian, Brazilian and Russian equities, and U.S. small-cap equities. All these asset classes, pension plans or advisers managing their portfolios will invest generally in foreign funds, where they can mingle like assets and mandates. They may be set up as trusts, but they are commercial trusts in all senses of the word.
The second example is an operating business, a particular issuer that may be listed on an exchange in a market but happens to be set up and established as a trust; much like in Canada we have income trusts and REITs. In certain markets of the world, this is not uncommon. Singapore is an example.
The third example relates to a comment raised yesterday by one of the senators. Infrastructure, REITs, private equity — the promoters set these structures. These are increasing asset classes. Oftentimes these are set up as trusts and it is unavoidable.
The irony is that if those same pension plans or non-taxable investors made those investments in those structures but they happened to be set up as corporations, the other half of BillC-10, the FIE rules, as they are called, foreign investment entity rules, would kick in. However, in the legislation, pension plans have a complete out, a complete exemption, and all we are saying is theother side of the pant leg needs fabric; it needs to be on the non-resident trust rules. It is just a structure. The fix has been noted by my esteemed colleagues.
The consequence is that these trillion dollars, which is a significant amount when you compare it to the GDP of the country, are forced to traverse through, in the words of the yesterday's witness, the "minefield'' and "bramble bush'' of 800pages of legislation to try to find an "out'' under the exempt non-resident trust definition. There is a paragraph(h), which I will not go into, dealing with commercial trusts, but it is in the 150pages of definitions and 200 pages of commentary.
Suffice it to say when reputable organizations like the Pension Investment Association of Canada, the Ontario Teachers' Pension Plan, OMERS and the ICAC say you have a problem with those provisions, you can bet you have a problem. It was encouraging, indeed, to hear the Department of Finance officials acknowledge they do have an issue.
In addition to those three examples, there are situations where even with the best diligence and the most resources that a pension plan can bring to a situation, you may not even know you have a non-resident trust. There are markets in the world where the trust concept does not exist, but they are investments that have trust-like attributes.
I will give you an example of co-ownership structures, where a custodian manages money, managed by a third party. There are hundreds of billions of dollars of these structures: Irish contractual funds, funds in Switzerland and Luxembourg and Germany. The guidance from CRA is somewhat contradictory in that, on the one hand, CRA says that some German funds are trusts but Irish contractual funds are not, and so that uncertainty creates a lot of risk.
Additionally, there are investments that may be corporations abroad, but they may be master feeder structures into a trust. Therefore, again, you do not know if you have an NRT issue.
There was a question that I think Senators Massicotte, Meighen and Biron raised yesterday. They asked whether it is possible that some foreign managers are saying "no'' to Canadian investors because they do not want the risk of being deemed to be doing business in Canada simply by a non-tax paying contributor.
The answer is yes. Underwriters are being advised, in many cases, not to make U.S. securitizations available to the Canadian pension market. We are seeing that in the REITs and the infrastructure of these new assets classes, where our pension plans are trying to find alternative sources of returns, that they are being denied access to that system. The end result is more than just a compliance cost; it is now an economic or a potential economic cost to these pension plans and their advisers, but ultimately to the working Canadians whose pensions are at risk and who are looking for the returns.
What we are talking about is a $1 trillion flaw. There was a comment that Bob Brown raised, who had been a long- time adviser to the Department of Finance, that the tax system should be like a wooden ship. It must be seaworthy at the end of the day, but is a trillion-dollar exposure, handicapped, on our 3percent market, on our pension plans, to be invested globally, in the best interests of the government, of the Canadian public and the policy to promote retirement savings for Canadians?
The Chair: Thank you for those comments, sir. You have highlighted your concerns about BillC-10. I understand you are aware that similar concerns were expressed yesterday by witnesses, and the senators and the committee is concerned as well. We need to understand a little better how the concerns can be remedied. As you know, this legislation has been hanging around for a long time. I think this may be the third or fourth iteration. I would urge senators to ask questions.
We do have Mr.Lalonde. We would like to know if either of you has found some way your concerns can be addressed other than by amendment of the bill.
Senator Harb: Mr.Lalonde yesterday made us comfortable trying to address the bill as it is by stating that he fully understands there are some concerns when it comes to issues of pension funds and investment of those funds and certain trusts. Do you feel comfortable with working with Mr.Lalonde's department, perhaps through regulations or through some sort of a memorandum? Would that ease your concerns until such time as they bring forward a proper amendment to address those points?
Mr.Johnston: We are certainly amenable to having discussions with the Department of Finance, but the concern is, as was brought up yesterday, the current legislation has retroactive effect to January1, 2007.
The Chair: When you say the current legislation, do you mean BillC-10 as drafted or the laws presently in effect?
Mr.Johnston: BillC-10 would have implication and force from January1, 2007. The entire trillion-dollar pension industry would have to potentially unwind billions of dollars of investments that may now traverse the non-resident trust ruleuntil such time as a potential amendment could be made to just correct the flaw, which we would argue is a flaw, that the pension plan should have the same exemption on NRTs as they do on FIEs. That is a tenuous situation. You could have a federal election or delays. At the end of the day, we are saying we should wait a year and subject the savings of Canadians and their need to continuously invest abroad until there is an arbitrary act and the political will of going through the motions and processes of getting it into a new bill and passed.
Senator Harb: I would like to hear from Mr.Lalonde on this point, that in essence it will create a problem. Is he here?
The Chair: Yes Mr.Lalonde is here today.
Senator Harb: What if there is any measure that the department could come up with in order to address this point?
The Chair: Brian Ernewein is here. You were not at the table yesterday, but you were at another committee on BillC-28, I believe. We have three officials: Mr.Nash, Mr.Lalonde, and Mr.Ernewein from Department of Finance Canada on the tax policy side. They have been following this closely. We are trying to find a solution that works for everyone. This is a very big piece of legislation. If we can find some way that it can be dealt with without going through the amendment process, you will be throwing the baby out with the bathwater that way. We are trying our best.
Senator Harb: Mr.Lalonde heard the question and that is to address the concern that was raised by the witnesses, how and if there is any way, through regulation or order-in-council or delegated authority by the minister to the staff to deal with this point.
Brian Ernewein, General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: To answer the question directly, the proposition that the Investment Counsel Association puts forward, and I believe there was reference yesterday as well, contemplates an amendment to the legislation. It is not seeking a different interpretation or perhaps a regulatory change, although I treat a regulatory change as being in the nature of a legislative amendment as well. The relief being sought, and I am certain we can seek affirmation from the witnesses, is an amendment to the rules.
Having said that, I have several points. One is that the question or point had come up about the application of this to 2007. That is true. The rules are applicable to 2007. What is not clear to us is whether this is a new issue in the sense that we have non-resident trust rules today on the statute books that apply. Certainly, thenew proposals in BillC-10 would seek to tighten those non-resident trust rules, as well as the foreign investment entity rules, but as matters stand, we do have non-resident trust proposals, and as I understand there is no exemption in those non-resident trust proposals for pension funds or other tax exempts.
It is not clear to us that this is a new issue. I will echo the comments Mr.Lalonde made yesterday that this seems to us, even with respect to the new legislation, to have been brought up fairly recently and deserves some consideration, but it is not clear to us that this is a new issue and that the problem, if it exists, may exist already.
Senator Harb: You mentioned that it could be done through regulation, but then you moved on to say it would mean an amendment. If it can be done through regulation, you do not need an amendment. If that is the case, I suspect that could answer the prayers of the witnesses, who are telling us today — the first time I heard it — that we are talking about unwinding billions of dollars. That explains why yesterday we were not able to get that information from the witnesses in the private sector or the department.
Thank you very much to counsel for putting those figures on the table. Now we are talking about a big elephant in the room. Mr.Ernewein or Mr.Lalonde, can those issues be addressed by regulation? If so, why would you need an amendment?
Gérard Lalonde, Director, Tax Policy Branch, Department of Finance Canada: I do not think I heard Mr.Ernewein to say that it can be done by regulation, other than to indicate regulations are just as much an amendment to the law as are changes to the act. However, regulations can be implemented only if there is statutory authority for those regulations in a bill. For example, you will often see in the text of the law something as prescribed by regulation. There is no current "out'' like that in the bill. That is not an avenue that would be available at the present time.
Mr.Ernewein's point was that in the existing law — never mind BillC-10 — there are rules that apply to foreign trusts, and this issue is there in respect of that law. If pension funds are in a position where they may be offside of BillC-10, it may very well be that they are offside of the existing law as well. Last, in the context of the types of investments that were referred to here today, I think the witness did mention the exceptions for commercial trusts. That is the route we had looked to provide an exemption for commercial investments in trusts, such as pension funds would make. There are obviously different categories of investment. We have an exception for commercial trusts that look to more or less portfolio investments in trusts where there are 150 or more participants in the trust. The types of investments that Mr.Johnston described and certainly the types of investments that RRSPs would get into should accommodate those.
There are other circumstances, and it was indicated yesterday that private equity might get involved in large investments with fewer than 150 investors in a trust. We also sought to deal with those by putting in an exemption for those kinds of commercial trusts where there is no restricted property in the trust, restricted property generally being freeze shares on an estate freeze that we think inappropriate for commercial trusts, although there are other categories of restricted property, and a requirement that the trust indenture be filed with the Canada Revenue Agency.
There are some issues surrounding that may be looked at, but the point that I want to make is that the existing law raises some issues that these pension funds already have to deal with.
The proposals in BillC-10 do have outs. Mind you, you have to go through the administration to ensure that you are into the exemptions proposed in BillC-10, and we understand the comments that they would sooner not have to go through that administration, but much more convenient if pension funds were simply excluded. There is some relief available under the text of the bill. I do not think that regulations are an avenue to deal with the issue right now, even if we had come to a conclusion exactly what to say in the regulations. What is left is a change to the text of the law which, unfortunately, at this point in the game — and again, as I indicated yesterday — while we had received some informal representations to this a few years ago, the more informal representations that we have received in this regard have come more recently and have not been available. We have not had time to properly analyze them and deal with them in this bill. However, we have indicated, as said yesterday that we would be more than happy to discuss the issue with the representatives from ICAC.
Senator Harb: I am sure all of my colleagues appreciate your sincerity and your trying to address what is truly an issue that needs to be addressed. I understand your rationale that you only heard just recently about the points being raised. We fully appreciate that. What we are trying to figure out here is a way for us, given the magnitude of the dollars and cents being raised today, is how you could help the committee to make your job easier.
We are trying to figure out a way if you could give us some sort of guidance as a committee. What can or should we do so we can make your job easier in order to address those last-minute issues that came to your attention, which you admit need to be addressed.
Given what you have in the existing bill, you believe they would not address all of those concerns because you would need some sort of an amendment. Is there some sort of simple wording that perhaps we could put in the bill that would make it easier for you through regulation? Regulations can be changed to give you have a little bit of leeway. Is there some friendly amendment that we can rush through both Houses and then address that particular point?
Mr.Lalonde: Can I correct something I said a minute ago? Please excuse me for being off-line. This was an important point that my colleague, Mr.Nash, wanted to point out. Happily enough, there is an authority for prescription that was inserted into the definition "exempt foreign trust.'' It is paragraph(i) of that definition. It had slipped my memory. It is on page29 of the bill, the last paragraphin the definition.
Senator Harb: That would mean what?
The Chair: How would that work?
Mr.Ernewein: If I can interject. It provides authority for providing an exemption for certain trusts, using the regulatory process. That still requires a decision to do that and I had said earlier that from one perspective amendments to the Income Tax Act or amendments via income tax regulations is the same essential substantive decision process to be required. We would still want to sit down with the Investment Counsel Association of Canada. They have acknowledged we have expressed an interest in doing that.
To answer the question, it has proven to be a helpful line of questioning. There does seem to be a couple of different routes to make a change if a change is recommended, one being an amendment to the legislation, the enactment itself; the other being to invoke the regulatory authority included in the legislation today.
Senator Harb: I would suggest, given what you just told us, we would like you to undertake now, in a public way, that you will take the regulatory rulebecause there are issues in the bill many would like to see implemented, and to sit down with the counsel to work out those details. Would that be possible?
Could you point that out to us, Mr.Nash?
Grant Nash, Acting Chief, Tax Policy Branch Department of Finance Canada: In our version, we have it at lines 17 through 19of page29.
Senator Tkachuk: What clauseon page29?
The Chair: The exemption for trusts. Let us be clear Senator Harb. This is helpful. I think everyone sees now what I was driving at. The point I want to bring out, Senator Harb, and so we are all on the same page, Mr.Ernewein, I think, said that heregards an amendment to a regulation through using maybe eventhis provision on page29 requires a decision. He regards it as the same as a tax act amendment. Let us not go down a path unless it is a real path. Who has to make that decision?
Mr.Ernewein: In the case of regulations, it is the Governor-in-Council; in the case of tax regulations it is the Governor-in-Council on the recommendation of the Minister of Finance.
The Chair: You are saying if we have an undertaking they will do that, that will obviate the necessity to amend.
Senator Harb: Exactly, you represent the Crown. As an agent of the minister or the agent of the department, would you undertake to do those kinds of things?
Mr.Ernewein: I am neither the Minister of Finance nor the Governor-in-Council, of course, so I am not in a position to undertake to make an amendment to that effect. What I can provide is an undertaking, as I had understood the honourable senator to have expressed it, which is what we would do as a matter of course in any event, to meet with the Investment Counsel Association of Canada and others who have raised this issue and to determine whether we can develop a sensible rulethat would seek to provide the relief they are looking for and to, if we can, recommend such a change to the Minister of Finance.
The Chair: As a matter of urgency?
Mr.Ernewein: Yes, we would not let grass grow on this one.
Mr.Johnston: I want to comment on a couple of comments made by the Finance officials. The first is that the existing law, section94, already subjects pension plans to non-resident trust rules. The answer is yes, that is the case. However, and this is a big however, the current rules divide non-resident trusts into discretionary trusts and non- discretionary trusts and they do not have this rubric of restricted foreign property. The trillion dollars in pension plan assets and retirement savings can easily fit into the non-discretionary exemption and this is not an issue. It is the current rules pending in BillC-10 that fundamentally change the trillion-dollar landscape.
The other comment I would like to make is this is just a new issue that has not been raised. I think the entire financial services industry would take some exception with that. The CICA, CBA, which is a well-regarded and well- known group, put essentially the same exemption we are asking for, almost word for word, in their 2003 submission: Pension plans should not be subject to this legislation. They are not tax evaders. They do not pay tax. They invest abroad for reasons to diversify. When they invest abroad in many countries, they do not get their tax-exempt status recognized, so they would actually prefer to invest locally and they should have a carve-out.
Certainly the proposals that the senators are making are a positive step in the right direction. However, the existing problems with the exempt non-resident trust definition, in paragraph(h), for commercial trust, there are so many examples that are out there of trusts that have less than 150unit holders.
I will give you one example.
The United States of America represents more than 40percent of the world markets. In the institutional world, fund companies operate under an exemption to the Investment Company Act where they have less than 100 unitholders. Essentially thousands of legitimate commercial trusts have less than 150 unitholders. The current rules have provisions that just do not work.
I will give you one example because I do not want to go into the full rubric of the rules. When you have less than 150unitholders, the trust cannot hold any restricted property, which is a provision in place to address family planning situations. That is understood. However, it is so broad that any security may be listed on the New York Stock Exchange. You might have a U.S. equity fund that has one out of 100 securities that has a preferred class of shares and a 10percent shareholder. You can have a situation like Microsoft; the entire fund does not meet the test.
The most important thing is we are talking about pension plans and non-taxable investors. Why are they even under the rule? The policy clearly exempts them from the other half of the FIE rules. Is there a policy rationale why they were subject to the NRT rules? We are talking about a trillion dollars, unwinding billions of dollars, preventing our Canadian savings from being invested properly in a period of potentially uncertain time before a fix can be made. Or do we say, no, we are not going to let the car leave the factory with a defective wheel?
Certainly, we encourage discussions, but the gravity of the situation, a trillion dollars and unwinding billions, needs to be brought to bear. This is a patent error in the bill and it is in the best interests of the government, the minister and the public at large to be able to invest.
Senator Nolin: Mr.Johnston, you heard the department officials referring to the definition of exempt service. Do you have the same reading of that exemption?
Mr.Johnston: Senator Nolin, the rules for commercial trusts do not work. It is not just it is a pain to go through them, and that means every pension plan, every investment adviser has to do an analysis of 800 pages of legislation for each foreign investment. That will already occur. We are saying the current exemption is not workable, especially for trusts under 150 unitholders. There is no reason why pension plans and exempt taxpayers should nothave the same exemption that is in BillC-10 for FIEs. Put it on the other side for trusts and you resolve the issue.
Certainly, it is a step in the right direction if they will try to work on an additional exemption under utilizing this new paragraph(i), but there are thousands of examples. At the end of the day, why are we encumbering our advisers and pension plans trying to protect the assets of Canadians and increase them so they will be able to live and survive and provide for their families and pay tax in the future when there is no policy rationale why they should be brought under the rubric of the taxation system in this regard.
Senator Goldstein: We are trying to resolve a problem. The legislation is retroactive to the taxation year that starts after 2006, whatever that may be. Is there any compelling reason to pass this legislation immediately? To put it another way, what harm would be done if we were to wait until the end of Januaryso as to give the department and stakeholders the opportunity to have discussions and find a way to overcome the problems? There would be no harm done to anyone if we wait that period of time. If, on the other hand, we pass the legislation now, Finance Canada is obliged to apply it as is, without an exemption. Can you help us overcome that problem?
Mr.Ernewein: That is a fair question. I want to follow up on the comments made. It does seem to me there are some different approaches to addressing the issue. Among the concerns identified in the most recent comments made by The Investment Counsel Association of Canada are issues with the restricted property definition, a suggestion that these are really investments in commercial trusts — so we might make some relief on that — or the exemption.
I would like to reiterate the effect of the comment we made earlier: It may not be the best way to do it, but it is a way of providing the relief the Investment Counsel Association of Canada seeks is by regulation in the existing legislation. There is authority to provide relief. Again, I think we would benefit from discussion to know whether that is the ideal way to do it.
To respond to the questions raised by Senator Harb, I think there is an ability under the current legislation to get to that result. I want to make that clear.
In response to the last question, you heard yesterday from STEP, and among the criticisms or complaints that STEP raised was the length of time that this legislation has been out there. We believe that was a reflection of a generally positive consultation process, but the legislation is expressed to have application to 2007. People deserve, I suppose, to know what their rights and entitlements are under that legislation. Having it enacted before they file their tax returns seems commendable.
Senator Moore: That is backward.
The Chair: Has the witness finished his comment?
Senator Moore: What kind of a comment is that? You set the rules and then you make your investments. You do not make your investments and someone sets the rules after the fact. What kind of thinking is that? That is preposterous.
Mr.Ernewein: I am sorry. I am suggesting that there is a general set of rules.
Senator Moore: I know what you are saying and it is unbelievable.
Mr.Lalonde: If I could make a comment directed to what I think Mr.Johnston wants to do, which is to resolve the issue and connect that with the question about timing. If the committee were to, as Mr.Johnston suggests, recommend an amendment to the bill, the bill, of course, would have to be referred back to the House.
Senator Nolin: That is the process.
Mr.Lalonde: Mr.Johnston might not know that. It would have to go back to the House and through the whole parliamentary process again and back here.
I think what Mr.Johnston would like to resolve this quickly rather than in a manner that would involve a parliamentary process that could take a substantial period of time. Accordingly, given that Mr.Nash has kindly identified a possible regulation, it strikes me that it is in the interests Finance Canada and Mr.Johnston that we look and explore what we can do in that avenue rather than sending this bill back through the House.
As Mr.Ernewein has indicated, there has been some criticism of the length of time it has taken for this bill to come to fruition. It strikes me that the optimal result would be to continue with this bill and to deal with Mr.Johnston's issues using other avenues that are available to us.
The Chair: There are two things. First, Senator Goldstein was in the middle of his questioning. I know Mr.Johnston is able to speak for himself. I am just addressing the statement by Mr.Lalonde. We will hear what Mr.Johnston can live with.
Senator Goldstein: I understand that your optimum solution would be to pass it and then discuss it. You have heard around the table some people saying that that is not the optimum solution from the perspective of some others around the table. My question was, and still is: What harm would be suffered if we were to wait six weeks and then deal with it on the assumption that you would, in the interim, be able to have fruitful discussions with STEP and with the people here this morning to see if you can find a solution? If you can, that would be wonderful. If you cannot, we will talk about it again in January.
What harm would be suffered? This bill has been in the making for seven years. Will six weeks make a difference?
The Chair: To whom are you addressing that question, Senator Goldstein?
Mr.Johnston: I take issue with the witness from the Department of Finance, Mr.Lalonde's, assessment that we would like to have the bill passed and make changes afterwards. We are talking about trillions and billions of dollars having to be unwound to the detriment of the entire working Canadian population, whose money is being invested, as well as the untold harm to the reputations of Canadian investors all around the world with the financial community, when they will be closing investments off to our investors, including pension plans. We would certainly much prefer the fix so that harm is not impacted onto the Canadian financial markets.
I would like to make it clear that the fix really needs to carve pension plans out of the NRT rules just as the FIE rules. Not one type of particular commercial trust will resolve, but there are 95 other ones that may emerge down the road, which could be problematic. We want a complete fix for the pensioners of Canada.
The Chair: Senator Goldstein, are you okay now?
Senator Goldstein: I am not okay. I have asked a question and I did not receive an answer.
The Chair: We have an answer from Mr.Johnston. He says it is not satisfactory.
Senator Goldstein: I directed the question to the Department of Finance.
The Chair: Gentlemen, do you have a solution or not? Do you agree, by the way, that it is a trillion dollar problem? This is serious business. We are here to review this legislation as our duty as senators, giving it sober second thought. We are aware that it is taxation legislation and it is a confidence issue if it goes back to the House of Commons. We are aware of all of these things.
Yesterday, we did not hear evidence to quite this grave extent. I have senators around the table sending me notes saying that they cannot support the bill, unless you come up with a workable solution that would perhaps involve a letter from the Minister of Finance. I do not know.
Senator Goldstein: Not for a trillion dollars, no way.
The Chair: There is one comment.
Mr.Ernewein: It is a serious question, and I appreciate the attention the committee is giving to it.
I appreciate the response that Mr.Johnston has provided in respect to the potential application of the current rules as well as the future rules. It does seem to us that this same question arises in respect of the application of the current rules. That does not make the question less important; however, but I do record it as an observation that the same absence of an exemption for pension funds and other tax-exempt or deferred income plans, investing innon-resident trusts, if an absence can occur, it occurs under the current rules as well. Yes, the new rules are more stringent, but at a level of abstraction, you do have the same issue.
Thank you to Senator Harb for your questions. We have identified an ability to address this issue under the current legislation. I have undertaken that we would consider that and work with the Investment Counsel Association and others who have done this to determine whether or not we can make a recommendation to the Minister of Finance to use that authority to provide relief.
As an official, not the Minister of Finance or the Governor-in-Council, I cannot do more than that. However, I renew that undertaking and do so with alacrity.
Senator Goldstein: Surely they can do so in the next six weeks. I do not understand this.
I would like you to answer this question: What harm would the fiscs or Canada suffer if you waited six weeks? You said you could do it with alacrity. I just heard you say that. "Alacrity'' to me means within the next two, three, four, five or six weeks. If you can do it and fix it within the next six weeks, what is the compelling reason to pass it right now if it has languished for seven years?
The Chair: To help you understand Senator Goldstein's point, this committee is scheduled to meet on January29 and 30. We have meetings scheduled, and the Senate will be in session.
We have a serious problem here. It is not being generated by us. It is coming from the witnesses. We are trying to do the right thing.
Senator Tkachuk, I know you were unable to be here yesterday, but you are getting the drift now.
Senator Nolin: Can we get the answer with respect to the harm? What harm will be caused? Why not wait six weeks until the end of January? I think that is the valuable answer that we are waiting for.
The Chair: Let us put it into perspective. If I understand where the senators are coming from, if this can be revolved between now and January29, we can pass it in a day.
Senator Nolin: We can come back.
Mr.Ernewein: The sun will continue to rise in the east if the law is not passed today. There will be uncertainty for taxpayers, however, during that period. We would like to minimize that, and that is why we are seeking enactment at the moment.
The second is a question for the committee, if I am allowed to do that, namely, is there any further opportunity this week or next to return to the committee to discuss this issue?
Senator Tkachuk: There might be next week.
The Chair: I do not know the answer to that question. We will consult amongst ourselves and let you know. Much of it depends on whether or not the Senate adjourns. I have been told several scenarios. We will give you the answer to that later.
You are saying that if you can come up with a solution in 2007 as opposed to 2008, it would be your preference. Is that right?
Senator Nolin: We can adjust to that. I do not think we can fairly ask that of the witness.
The Chair: How?
Senator Nolin: If need be, I am sure the Senate can adjust to that.
The Chair: If the Senate adjourns today or tomorrow, we cannot.
Senator Nolin: That is an "if.'' There are too many "ifs'' around the table. If we have a definite undertaking from them, I think we can do that.
The Chair: I do not think so.
Senator Nolin: If they can work something out and come up with a solution soon, I think we can soon contemplate to live with that solution.
Senator Goldstein: Once we have passed the legislation —
Senator Nolin: No, I am not talking about passing it and thereafter fixing it. The legislation is here, and it will remain here. If they come up with an agreeable solution from both corners of the table, then I think we can adjust and do our job accordingly.
The Chair: You may think so.
Senator Tkachuk: So that I am clear, I know this bill has been around a long time. Have you provided briefs to the Department of Finance about this issue in the past?
Mr.Johnston: I can answer that question. ICAC member firms have. In fact, I have had conversations with Department of Finance officials.
Senator Tkachuk: I did not ask you that. Has the Investment Counsel Association of Canada talked to the department about this previously?
Mr.Johnston: We made a formal submission last year for the 2007 budget to the House Standing Committee on Finance. Our views replicated the views of the formal submissions by the Joint Committee on Taxation of the CBA and the CICA, CICA/CBA, specifically on this point, that pension plans need to be carved out of these rules, given the disastrous consequences to the local markets and the global financial markets, if they are shutting out Canadian investors.
Senator Tkachuk: Was there no response on the House side from the Finance Committee on this issue? Why did they not fix it at that time?
Mr.Johnston: I do not know why they did not fix it. My own personal view is that it is in the interest of the government and the Minister of Finance not to put out something so patently flawed. Everyone will remember 1984 and the sacred trust with the indexing of pensions or the reversal in the 2004 Budget on capping pension plans on income trusts.
This is an issue that galvanizes the entire public. It is their savings and their investments. There is no tax leakage. Pension plans should not be subject to the rule.
Senator Tkachuk: So that I am clear, this has been around for seven years. This was a big issue for the Investment Counsel Association in October2007 but not during all this other time that this legislation was being contemplated.
Mr.Johnston: We presented it in October2006. Our member firms had discussions with the Department of Finance. We have had our views expressed by a reputable group, the CICA/CBA and this reputable group made this very point in a 2003 submission. Therefore, our views were being communicated, and the expectation was the obvious fix, with no policy rationale for subjecting pension plans to this, that it would be fixed. The rules have gone through six iterations. There is a constantly moving process, and the expectation was that this fix would be made.
Senator Tkachuk: Your recommendation in your presentation says:
If BillC-10 is passed without amendment, Canadian pension plans, Registered Retirement Savings Plans, and tax-exempt investors may face a tax liability.
Are we discussing an amendment that you are not quite sure of?
Mr.Johnston: I used permissive language. The situation is where you have a Canadian contributor, including a non- taxable Canadian contributor, into a foreign trust that does not fit the exemption on the commercial trust, which we note is just non-workable. That foreign trust is deemed to be doing business in Canada and is liable for tax on its worldwide income and the Canadian Pension Plan. Ironically, this non-taxable trust is jointly and severally liable.
The answer is yes, we will have many situations where investments that are absolutely appropriate and commercial in nature will have to be unwound or deferred. Worse yet, the foreign investment players will say no to Canadians because they are afraid of incurring the tax liability. This is a certainty, and it is something that will not reflect well on the capital markets or the current government.
Senator Tkachuk: I refer to "may face a tax liability,'' and then you speak about different groups of investors. Is it the trillion dollars of investors that will be affected or a portion thereof? Of that portion thereof, how much of that, or is the trillion dollars the whole of the investment? Not all of them will be targeted by this. Let us talk about what it really is.
Mr.Johnston: We are saying that with 3percent of the global market, any pension plan or non-taxable investor that invests abroad to diversify their holdings, to reduce risk or increase returns, has the potential and likelihood, given some of the patently obvious flaws in the commercial trust definition of paragraph(h), to face a tax liability that, from a policy standpoint, it should not face. It is so obvious that is the case. There is the complete carve out on the FIE rulebut not on the NRT rule.
Senator Tkachuk: I understand that, but when you say a trillion dollars, do the trillion dollars come from the 3percent of the total foreign investment pension amounts, or is it something that will be directly affected by that section?
Mr.Johnston: Senator, it is any investment abroad of the trillion dollars.
Senator Tkachuk: Of that group, how many will be affected?
Mr.Johnston: I do not know the answer to that, but there will be many.
Senator Tkachuk: That is important to us.
Mr.Johnston: I would feel very comfortable stating on the record billions of dollars.
Senator Tkachuk: So it is not trillions? It is billions?
The Chair: It is not even millions.
Senator Tkachuk: We are dealing with someone who wants a change to the legislation. I want to make sure that we are exactly sure of how much of that money will actually be affected; and a trillion dollars, even though I do not understand that, I know is a lot more than $1 billion.
Ms.Walmsley: I could clarify some of the math.
The Pension Investment Association of Canada, which also made a submission, has over $900 billion in assets under management. Even though some of those assets are invested in Canada domestically and some are abroad, all of those pension plans have an investment strategy which includes international investment. All of those pension plans would incur the administration cost and the due diligence if these rules are put in place to make their way through this piece of legislation.
Our membership is over $600 billion, and over 50percent ofthat is pension assets. Again, on all those members, part of a well-thought out, sound and prudent investment strategy includes international investment. Even though a portion of the dollars are abroad and local, it is the individual pension plans and pensioners that are impacted.
The Chair: Senator Tkachuk, are you comfortable with that answer?
Senator Tkachuk: I am comfortable with the bill, actually.
The Chair: As drawn?
Senator Tkachuk: Yes, I am comfortable with the bill as drawn, and with the explanation given by the Department of Finance.
The Chair: Is it correct that all of these points you have raised are not news to the people in the Department of Finance, even if, maybe, the office of the minister does not know about them?
Mr.Johnston: We cannot answer what they may or may not know. I can only tell you that these are the same substantive provisions that the CICA- CBA made in 2003. Member firms, including mine, presented provisions directly to the Department of Finance, and ICAC made presentations in October2006 to the Standing Committee on Finance.
I do think that if as a country we have such an obvious patent flaw it will send our markets into turmoil. They are already in turmoil with the asset-backed commercial paper. There is potential to have to unwind some of these investments abroad that may not even be liquid because of a retroactive effect of 2007. There is also the existing and real chill right now with foreign managers saying "No, we cannot accept Canadian pension plan investments because, for some strange reason, they are included in the NRT rules but not the FIE rules and could be subject to tax.'' We are talking about the world capital markets versus six weeks of making the right fix and not embarrassing the government on a macro issue.
Senator Moore: I will pick up on something that Senator Goldstein mentioned in the brief of the Investment Counsel Association of Canada. You say that there would be no loss of expected revenue to the federal government by adopting the amendment that you suggest for registered pension plans and exempt taxpayers which are already exempt from tax.
Have you made that point in the past?
Mr.Johnston: Yes.
Ms.Walmsley: That is right.
Senator Moore: I am astonished that the people from the department say that this was sort of new to them.
Senator Nolin: He did not say that.
Senator Moore: He said they did not have a formal piece of paper. I am not sure what it was. How would they not be aware of the position of these witnesses and their membership unless perhaps they were not at the Finance Committee hearings in the House of Commons? Were you there? Was anyone there monitoring that or did you not ask?
Mr.Ernewein: I do not want to get too deeply into this. The issue is to be engaged today. I am interested and appreciate the opportunity to respond to this question.
The Department of Finance has never received a submission from the Investment Counsel Association of Canada on this issue. We became aware of their submission when the Investment Counsel Association of Canada sought to be a witness at this committee in 2007. We were not aware until it was mentioned today that there was a submission made to the Finance Committee in 2006. To our knowledge, the Finance Committee has not brought that to our knowledge. Perhaps we ought to have been notified, but we were not.
They referred to a submission in 2003 or thereabouts by the Joint Committee on Taxation of the Canadian Bar Association and the Institute of Chartered Accountants of Canada. Yes, there was a submission made on this point, to which we made changes on the commercial trust definition.
I have only met with the Investment Counsel Association of Canada once or twice several years ago. I did not meet with these people but with their predecessors and on different issues.
Senator Moore: That is interesting because, Mr.Johnston, you said that your organization sent a written submission into the minister in Octoberof 2006. Did you not say that?
Mr.Johnston: As part of the House Standing Committee of Finance, absolutely. I spoke to officials at Finance Canada on the same point and at the time, the amount was only $800 billion. I made them aware of the possible ramifications and asked them to tell me the policy rationale for bringing pension plans under this rubric.
Senator Moore: This is the only organization with membership that manages these huge sums. It is the only one in Canada, and I do not know why you would not be seeking them out for input anyway. You talk about a big stakeholder. I am surprised that you are sitting there waiting for a formal presentation from probably the biggest association of this type in the country.
Mr.Lalonde: Can I take that as a question?
Senator Moore: Yes.
Mr.Lalonde: Ms.Walmsley, in your opening remarks, you indicated that your group has under administration some $600million, and then I heard later that about half of that is in pension funds.
We have heard recently — and within the last two or three weeks before the run up to this committee meeting — from, in particular, another pension fund. I think I mentioned it several times yesterday, namely, that there was another player that had been in to talk to us. This organization is dwarfed in comparison to that other player, by far and the other organization has expressed a willingness to work with us on the issue and have certainly not taken the position that the sky is falling at this particular point. However, they want to deal with the issue. We understand that and we are working well with the. We will work with the ICAC also.
I think we have identified some ways to deal with this issue. One of this issues raised by the ICAC is the coming into force of 2007 and that being retroactive. In fact, it was indicated at the time this bill was tabled in Novemberof 2006 that it was the coming into force and that coming into force had been moved up from the previous coming into force. It is certainly not retroactive from when it was announced.
To the extent that the coming into force to the beginning of this year is bothersome for them, that would not be something that we would in any way support. We would recommend our minister against that, were this bill to be amended to deal with that particular issue and sent back through the House, in our view, it should still be effective for 2007, given the serious tax avoidance opportunities that would otherwise be available.
You should also recognize that this bill has a number of amendments in it that have been sought by taxpayers over the years and upon which they have relied.
Senator Moore: I would like to clarify one thing. I am interested in the letter that went from this organization to the minister. Were you not aware of that?
Mr.Lalonde: The letter that went from this organization to whom?
Senator Moore: To the Minister of Finance of Canada.
Mr.Lalonde: I understood them to say that they had sent it to the House of Commons Finance Committee.
Mr.Johnston: That is correct. It went to the House of Commons Finance Committee.
Senator Moore: And who else? Did you send a copy to the minister or did this go to the committee?
Ms.Walmsley: It just went to the committee.
Senator Moore: Were members of the department in attendance?
Mr.Johnston: There was a wide range of party members that were there listening to the issue where we expressed, with clarity, the gravity of the issue and the situation.
Senator Moore: Ms.Walmsley you wanted to say something in response to a comment that was being made by Mr.Lalonde. Would you like to put that on the record, please?
Ms.Walmsley: Yes. I want to clarify the size of our organization in terms of assets under management. Mr.Lalonde referred to our size as $600 million assets under management. We are roughly $630 billion as of today.
In terms of a pension plan making a representation to the Department of Finance that dwarfs us, the largest pension plan in Canada is CPP, which has about $110 billion assets under management, and it is one sixth of our size. The next largest one is probably the teachers. We have a letter of support from them today with regard to an amendment to BillC-10.
Senator Moore: What is their size?
Ms.Walmsley: They are $100 billion. Our other letter of support is from OMERS, which is roughly $50 billion.
Senator Moore: Thank you very much. They are $50 billion and these people are $600 billion. They are pretty significant. That is the only point I was trying to make.
Mr.Lalonde: I was sitting at the back. I heard $600 million and I apologize for that comment.
Senator Moore: I am surprised you would not know the biggest investment dealers in the country. Thank you.
The Chair: Are you okay, Senator Moore?
Senator Moore: Yes.
Senator Eyton: Thank you for your submission. It is to the point and clearly understood. In the morass of BillC-10, I appreciate it entirely.
You have made a valid point and a very important one. The issue you have raised is so important that, in a way, the history does not matter very much — that is, whether or not you made a history or spoke to X, Y or Z. It does not really matter that we are not certain there is a problem in every respect relative to your submissions and it does not really matter if we are a little uncertain as to the amount that may be affected by failing to take action. It seems to me that what we are dealing with is something that is significant and we should try for some kind of solution.
I will put is in simplistic terms. What I hear suggested around the table is, in effect, deferring now and making the appropriate legislative change in short order; that is, in five or six weeks, which, in Ottawa would be miraculous timing. The second alternative would be to legislate on this issue — there are some reasons for doing that — and to carve out or arrange some sort of interim solution leading up to the perfect legislative change.
The rationale for trying to do it now is that BillC-10 has been around for a very long time and it includes other provisions. It isdifficult to carve out a piece of this or a piece of that, particularly at this stage and time. There is quite a lot of momentum to BillC-10 on its own. It deals with a whole lot of cleanup and a variety of more modest provisions that are really non-contentious. Where the rubber hits the road is on the subject that we have talked about and the subject that your submissions touch upon.
I gave you two alternatives: To refer and seek perfect legislation or to pass BillC-10 for some of the reasons I have mentioned, but, in the meantime, to agree on some interim solution that will bridge it to a moment in time when we have perfect legislation. Is that reasonable or possible? Is that acceptable?
Mr.Johnston: We would strongly endorse the view expressed by Senator Goldstein that this is a major flaw that has a major impact on the retirement savings of Canadians. The uncertainty of a potential prescriptive fix after the fact, first, subjects the retroactive cleansing of billions of dollars of investment; second prevents the globalization of our investment, which is necessary; and, third, continues to trigger the chill around the world with foreign investment managers and entities saying that they cannot bring a Canadian investor into a trust because of the potential of being brought under the Canadian tax regime.
I would like to ask a question in reply. There is clearly a cost to push this through. What is the harm of waiting a few more weeks so that we do not subject our entire capital markets to additional turmoil with the ABCB crisis looming to make the fix when we are talking about pension plans that should not be under this in the first place? Should we let the car with the defective wheel leave the factory? That goes to the integrity of the entire process, as far as I am concerned.
Senator Eyton: Could I go back, then? In effect, you find in BillC-10 some form of interim solution that you can agree on and the legislative perfect solution, six, seven or eight weeks from now to be disagreeable?
Mr.Johnston: The issue is that BillC-10 in its current form affects $1 trillion. Our entire investable assets are about $2.3trillion. We are talking about a huge sum that disproportionately outweighs a potentially easy prescriptive fix that can be made in the next few weeks before we roll it out of the factory with a flaw. If there is a reason why pension plans are subject to this, I would like to hear from the Department of Finance.
The Chair: Senator Eyton is the sponsor of this bill. We would like to hear from him.
Senator Eyton: Let me say that you have my attention.
Senator Goldstein: This is directed to the gentlemen from The Department of Finance. We are faced with the following set of issues — and I want to be as candid as I can. First, I think there is a general reluctance on the part of the committee — and I do not want to speak for the committee; I certainly speak for myself — to tamper with tax legislation in the chamber of the Senate for two reasons, one of which is constitutional and the other which is practical. I do not want to have to go into those because you are as aware of them as I am.
On the other hand, I think there is virtually unanimous consensus around the table that the flaws that have been pointed out to us are serious — or the particular flaw; let me not even talk about what we dealt with yesterday. On the other hand, I understand your position. You must consult with the minister before you make any kind of commitment. I appreciate and admire your discipline in this respect.
Again, I have not heard from you about where the harm would lie if we wait the six weeks so that you can agree on the fix. Even if you cannot amend it now, if the minister would be willing to issue a formal undertaking — that is, a letter — stating that there will be an amendment as soon as possible and, in the meantime, there will not be an enforcement with respect to pension funds, that would suit, I presume, our witnesses here; it would suit the ministry, because you could get it done rather quickly; and it would allow us to pass the legislation in six weeks.
The other alternative is to hope that the Senate will be sitting next week so that we can sit as a committee — and I doubt that will happen, quite frankly. If we do sit, we will be sitting only with respect to BillC-28, which is an urgent piece of legislation, as you know, and which we must deal with before the end of the year.
From all of the things that you have said, I have not heard that there will be any harm done to anyone. Conversely, we have all heard that there will be extremely serious, potential harm — let me not even say certain harm — if we pass this bill now.
It seems to me that as responsible people, it will be very difficult for us when we go in camera, which we will in a few minutes, to pass this bill with regard to the testimony that we have heard.
Senator Tkachuk: I would like to follow up on my line of questioning and get a more specific idea about what you are talking about; I am not quite sure I understand. You are very concerned that commercial trusts are not as widely defined as you would like them to be defined. Is that what your specific concern?
Mr.Johnston: Our specific concern is the definition — because it is the reverse under the tax act — to get into the exempt, non-residential trust is unworkable. The commercial trust definition is unworkable, yes.
Senator Tkachuk: Why is it unworkable?
Mr.Johnston: It is unworkable because many multi-series, non-residential trusts, which happen across the world, will not get over the eligible trust definition that applies under both tests. They may be retail investors side-by-side with institutional investors or a promoter of a fund that may have an element to have distributable income that is subordinate to the interests of the investors.
The second specific issue is the paragraphof the exempt non-resident trust for commercial trusts for funds with less than 150 unitholders has an unworkable definition of "restricted property.'' That does not work.
If I can evidence again, PIAC, which is the representative organization for the pension industry, which has over $900billion; and our group, with $600 billion; are saying it is unworkable; OMERS and teachers have written a letter. These are reputable groups that are managing the money of Canadians and they are saying that these rules do not work. The question at the end of the day is this: Why are pension plans under this legislation? They are not tax avoiders; they have been carved out on the FIE side. What is the policy rationale for the Department of Finance to include them on the NRT rules in the first place? Even if they are able to traverse through a trust over 150unitholders, they have had to bring lawyers and accountants to do it. It is decreasing the taxpayers' of Canada whose pensions are involved. What is the policy rationale for bringing pension plans under this legislation? We are affecting a trillion dollar market unnecessarily.
Senator Tkachuk: There were a number of formal opportunities by the department in the past number of years where they sought the advice and solicitation of groups across Canada, yet this matter was not brought up by your organization.
Mr.Johnston: Senator, this matter was brought up by the CICA/CBA, which is a widely respected organization. Member firms of ICAC, including myself, have raised this specific matter to the Department of Finance, at the time using the reference of $800 billion because the markets had grown; they have grown since then. It had been raised formally in 2006 to the Standing Committee on Finance. People should be listening to the views of these large, reputable groups when we are talking about a trillion dollars with no tax avoidance motive. I would take issue that this is something that they might not have been able to hear.
Senator Tkachuk: I am trying to be very specific because this was brought to the elected members — that is, the people who have to face the voters every number of years — and they chose not to deal with this issue but to pass the bill.
Mr.Johnston: I cannot answer why those views from those reputable groups were not heard.
Senator Tkachuk: You were not able to convince them of your case?
Mr.Johnston: I think the facts speak for themselves. Where are we right now?
Senator Tkachuk: I do not think so but okay.
Mr.Johnston: Again, I would like to ask the Department of Finance this question: What is the policy rationale for including pension plans in the trillions of dollars of savings of hard-working Canadians to this legislation when they clearly are obviously exempting them from the FIE side.
The Chair: Do you want to answer that, Mr.Ernewein?
Mr.Ernewein: I would like to do so, and I would like to respond to a couple of other points as well.
To deal with that question first, we think that the number of $1trillion and the actual foreign investments by Canadian pension plans has been sited. Notwithstanding the comments that have been made about the exemption or the application or interpretation of the ruleand the definition of "commercial trust,'' we think that the vast majority of those investments will fall within the definition of "commercial trust.'' Therefore, there is not a problem today.
Perhaps what has been identified as an issue are things like private equity, and so on, which do not follow the definition of "commercial trust.'' Therefore, the question is whether or not there should be some change to the definition of "commercial trust'' or whether we ought to deal with it differently. That is, by addressing it head-on, as the Investment Counsel Association of Canada suggests today, by exempting outright larger pensions plans — perhaps, small pension plans and RRSPs as well — from the application on the non-resident trust rules. I do repeat myself, but I think this bears repetition. We have non-residential trust rules today that do have such exemptions. This comes to us as a new issue. What matters is not the history, as Senator Eyton has said, but what is on the ground today. We have not had the submission from the Investment Counsel Association of Canada before. We have had the issue identified to us by the joint committee before, which led us to suggest some changes to commercial trust, but the proposal for an exemption is something that we have only had from them within the last couple of days, as my colleague Mr.Lalonde has said. It is something that was mentioned by a particular pension plan within the past few weeks. It is a question that deserves consideration.
I come back to the point, hopefully aided by this committee, that there is the ability to use the law, as it is put forward, to provide relief in these circumstances. It is not necessary to provide an amendment to that effect. I still reserve that, even if it is determined that it is it appropriate to provide relief, there might be better ways of doing it. There is an ability to do it under the terms of the existing law.
Senator Goldstein, thank you very much for what you accurately described as a candid assessment of things. I want to add, helped by Senator Eyton's remark about the importance of this bill, that I did mention the certainty of the rules around theforeign investment and the non-resident trusts for taxpayers and the certainty of application for taxpayers. I think that is important.
I am also reminded and want to draw out the point that this bill is not simply about the foreign investment entity and non-resident trust rules. It also includes a large number of technical changes, most of which provide relief to taxpayers and they are largely relieving for taxpayers. Year end is coming up for some taxpayers and the reporting requirements turn on whether or not the law is enacted. I do not want to overstate it, but I want to ensure that we put on the record that that is an issue.
Senator Moore: I have a brief point in view of those last comments.
Maybe what we could do here is just carve this out and deal with it separately, as a separate piece of legislation, and pass the other items that you want to have passed.
The Chair: Honourable senators, I would ask everyone to leave but the witnesses may stay around because we will continue in a few minutes. We need to discuss amongst ourselves for a few minutes.
I would point out to the officials that there are senior representatives of the minister's office here and in the corridor with whom you might want to consult. If there is a way that relief can be done under the existing law and we can have some kind of undertaking that will happen, that is probably the best solution. The deputy chair has made that clear.
The committee continued in camera.
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(The committee resumes in public)
The Chair: So you are aware — and again I reiterate, my colleagues, if I am not stating this as a consensus that I believe exists on our committee — the minister's office and the officials will work very hard, and work with you, also, Mr.Johnston, and your colleagues, between now and January29, to find a mutually acceptable solution. With the comfort that it will happen, we feel that exigencies of time will be dealt with. We will meet on January29, at 4 p.m., and on January30, at 10:45 a.m., to finalize this bill. If those conditions are met, all the senators will be comfortable in passing it.
Do I state the consensus accurately?
Senator Eyton: You did not mention the letter to the minister.
The Chair: The letter was going to be if we did it today. We will need some proof of that, absolutely. Not only will the work have been done in the meantime, but we will have been given a letter in strong terms that will give us the comfort we need that the issue is resolved — even if it the unsatisfactory way of being under the existing legislation.
I must say this clearly for the record: There are some senators who would have preferred that this bill went to clause- by-clausestudy and was returned today. There will be ill consequences for certain taxpayers by not having the bill passed in 2007, but those, in our consensual view, are outweighed by the desire to address your concerns, sir, and those of some witnesses we heard yesterday, to get this matter done properly and the bill will go forward.
I will now bring down the gavel on BillC-10. Our discussions are adjourned.
Senator Goldstein: I have a question for the department. Since you are to address the issues that were raised this morning, I am wondering whether you can also at the same time address the issues that were raised by Mr.Gagnon yesterday. You may choose to dismiss them; you may choose to accept them. Whatever you choose to do will be a choice that you are certainly entitled and obliged to make. However, I would feel more comfortable if I knew that the department had addressed those issues and made whatever decision it did make in the intervening period of time.
We are talking not only about the concerns expressed this morning but also the concerns expressed by Mr.Gagnon yesterday on the subject of pensions.
Senator Eyton: We have a clear consensus on what we are dealing with today. I wondered whether it was wise to mix these issues.
The Chair: No, he means in regard to exempt trusts.
Senator Eyton: The same issue?
The Chair: Yes. I believe that is what you meant.
Senator Goldstein: No, I meant the family type of trusts. Again, you may decide to dismiss it. I will understand that is a policy issue. If Mr.Gagnon is right, the public will deal with that. You are certainly obliged and have the right and the obligation to make policy decisions, but I think you should consider those as well.
The Chair: In regard to BillC-10, that is the state of play. You have made an excellent presentation. We thank you for it. In your own interests, dealing with big government is a tricky thing. You have been largely criticized by people that we have been talking to for not having continually made your point. I know you have made it to the House of Commons Finance Committee, but that is not to the appropriate people. You have got to us. We hear you and, hopefully, we will help you. Thank you very much.
Colleagues, we now turn to the next item on our agenda, BillC-12. The steering committee had a meeting somewhere on Wellington Street recently and it concluded that my original suggestion that we deal with this bill, being a series of amendments to BillC-55. BillC-55 did not receive RoyalAssent because it was identified to us that there were some 60-plus necessary amendments and that it had not been addressed in committee in the House, so we needed to look at it. It came to us in the form of BillC-12, which is a bunch of amendments to the old BillC-55, which is chapter 47 of the Statutes of Canada, 2005.
Today, we have heard from many witnesses, including the Minister of Labour, the parliamentary secretary of industry, and some representatives of CAIRP. It became clear to us, first, that there is great urgency in at least some portions of that bill. On the other hand, that the minister stated clearly to this committee that already his officials are preparing additional amendments, which all these 21 witnesses were going to talk to us about. These amendments were being introduced as part of an ongoing upgrading of framework legislation, which this is.
Therefore, it is the steering committee's recommendation that we go directly to clause-by-clauseconsideration of BillC-12 and that we report it back to the Senate this afternoon with a series of observations, which are set forth. I think we have circulated them. We worked on these last night, in anticipation that you would agree. They basically outline the minister's statements that they are working on additional amendments and we understand they will be forthcoming. We are doing it only by way of observation. The bill has been here twice now.
That is our recommendation. If you all agree with our recommendation, let us proceed.
Senator Tkachuk: Proceed, Mr.Chair.
Senator Nolin: I have one question. Without disrespect to the chair, the deputy chair is probably the most knowledgeable person in Canada on bankruptcy. What is your take on that?
Senator Goldstein: I agree with the chair. We are faced with the following choice: There is a wage earner protection scheme that is grafted on to the bill in a way which cannot be separated from the bill. We do not know if there will or will not be an election, but if there is an election before we finish and we find ourselves with amendments that then have to go back to the House of Commons, there is as good a chance as any that we will not have this Wage Earner Protection Act for another two or three years. I do not think Canada can afford that luxury.
Senator Nolin: So we have to proceed.
Senator Goldstein: We really have to pass it.
The Chair: That was our thinking. There are substantial amendments contained in this bill that certainly improve BillC-55 substantially. I consulted both departments overnight.
They are very pleased to think we are doing this.
[Traduction]
It is a very good idea for the government and the provinces.
Senator Nolin: With BillC-55, it is important for us to be sure. We must not pile another mistake on top of the many mistakes that have already been made.
[Français]
The Chair: Is it agreed, honourable senators, to proceed to clause-by-clauseconsideration of BillC-12, An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005?
Hon. Senators: Agreed.
The Chair: Carried.
With leave of the committee, I would like to group the clauses of the bill. MayI have your leave?
Hon. Senators: Agreed.
The Chair: Shall the title stand postponed?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clauses 1 to 60, the amendments in respect of the Bankruptcy and Insolvency Act, carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clauses 61 to 82, the amendments in respect of the Companies' Creditors Arrangement Act, carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clauses 83 to 94, the amendments to the Wage Earner Protection Program, carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clauses 95 to 109, the amendments to chapter 47 of the Statutes of Canada, 2005, carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clause110, the transitional provisions of the Bankruptcy and Insolvency Act, carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clause111, the transitional provisions of the Companies' Creditors Arrangement Act, carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clause112, the coordinating amendments to BillC-52, carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clause113, the coming into force, carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall the title carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall BillC-12 carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall I report BillC-12 —
Senator Goldstein: Can I make an observation before that happens?
The Chair: Absolutely. We must refer to these observations.
Senator Goldstein: As you know, I have a bill pending dealing with student loans. If I vote in favour of this bill at this time, I am voting for the establishment of a student loan provision which is contrary to the bill that I have put forth. I would therefore like to have it noted that this is being carried, Mr.Chair, on division, so that I can reserve my right to continue with my bill.
The Chair: Are the senators over here okay with that?
Some Hon. Senators: Yes.
The Chair: Carried, on division.
Shall I report this bill back to the Senate with observations but no amendments, as per the observations I have circulated?
Hon. Senators: Agreed.
The Chair: Carried.
[Traduction]
The Chair: Carried. I will report back to the Senate this afternoon.
[Français]
On the other issue, I would welcome any further input. I felt that we were caught in a difficult situation. I feel senators on both sides were concerned about this bill. I may be consulting you further as to how strong a letter we get from the minister. The record will not necessarilly show our earlier discussion.
My understanding is that we want an assurance that they will use the provisions of the existing legislation to amend a regulation, which will make clear the exemption for these particular kinds of trusts and pensions.
Senator Goldstein: They will not be able to do that because the provision that allows for the regulations deals with the issue of the definition of "exempt trusts.'' We are not talking about exempt trusts; we are talking about exempt investors. With great respect — and, again, I do not want to get into law on this — I do not think we can change that by regulation. It will have to be an undertaking to amend. I hope that the minister will give us that undertaking and, in the interim, issue a press release saying that it will be amended, that this is what the amendment is and that pension funds can operate on the assumption that this amendment will be, in effect, as retroactive as the legislation. That is what we need.
The Chair: That is a fair statement.
The Senate is in session in 15 minutes.
The committee adjourned.