Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 17 - Evidence - Meeting of April 30, 2008
OTTAWA, Wednesday, April 30, 2008
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-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, met this day at 4:20 p.m. to give consideration to the bill.
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good afternoon, ladies and gentlemen. My name is David Angus, from Quebec, and I am chair of the committee. Other committee members are: Senator Yoine Goldstein, deputy chair of the committee, from Quebec; Senator Tommy Banks, from Alberta; Senator David Tkachuk, from Saskatchewan; sponsor of Bill C-10, Senator Trevor Eyton, from Ontario; Senator Dennis Dawson, from Quebec; and Senator Pierrette Ringuette, from New Brunswick.
This meeting will be shown on CPAC and on the World Wide Web. Continuing our consideration of Bill C-10, we are privileged to welcome the Honourable Jim M. Flaherty, Minister of Finance, who is accompanied by Gérard Lalonde and Brian Ernewein.
Minister, you have been very much on our minds. Bill C-10 has many chapters with numerous twists and turns and we have been trying to understand them fully. Your officials have assisted us, as has your fine staff, and, today, we are close to the end of our hearings on the bill. I understand that you feel strongly about the bill. Therefore, you have agreed to come before us this afternoon to tell us why.
Minister Flaherty, please proceed.
Hon. James M. Flaherty, P.C., M.P., Minister of Finance: Thank you and good afternoon. I realize this bill is a long one. One of the reasons for its length is the habit of announcing things in notices of ways and means that do not come into force. I have heard repeatedly from chartered accountants, certified general accountants and tax lawyers that this situation is somewhat disconcerting in their practices. This bill, in no small measure, deals with many of these things that have built up over a number of years and that were not dealt with legislatively by the previous government. We should be proficient in what we do and if something is supposed to be the law, we should move it forward and not have it administered pursuant to a notice of ways and means.
The Chair: Minister, what you refer to concerns us all a great deal, the fact that this bill has become an omnibus bill rather than a particular ad hoc piece of proposed legislation. When the bill leaves this committee, I suspect it will have negative observations about the concept of omnibus bills. Feeling as you do about such bills, I hope those observations will be noted.
Mr. Flaherty: As Finance Minister, I want to stay up-to-date, and we have an accumulation of previous business that was not dealt with.
I thank senators for an opportunity to appear. This bill proposes to implement certain measures or amendments to the Income Tax Act.
[Translation]
I will keep my remarks brief so as to allow time for any questions you may have about this proposed legislation.
[English]
Bill C-10 seeks to implement numerous measures, many of which can be traced back to the 1999 federal budget or the early part of this decade. Bill C-10, including its earlier form as Bill C-33, has been before the Thirty-ninth Parliament since November 2006. It has also been before this particular Senate committee since December 2007. During these lengthy deliberations, I hope that all parliamentarians fully recognize the importance of the proposed measures in Bill C-10.
The bill includes taxation of non-resident trusts and foreign investment entities along with a number of proposed technical amendments to the Income Tax Act.
[Translation]
These measures will improve tax fairness and respond directly to concerns raised by the Auditor General concerning the use of non-resident arrangements such as a trust to obtain tax advantages.
[English]
Regarding the bill's amendments to the Canadian Film or Video Production Tax Credit legislation, I understand my colleague, the Minister of Canadian Heritage, recently appeared before this committee and answered many of your questions. The intent of this bill before the committee today is to help make our tax system fairer and more competitive. All Canadians and I am sure, all senators, support this objective.
How do we accomplish this objective? Lower taxes are part of the answer. Lower taxes lighten the burden shouldered by taxpayers and they enhance incentives to work, save and invest. Lower taxes will help us to create an environment that welcomes investment, increases job creation and encourages businesses to flourish.
The fact remains that Canadians still pay too much tax. Our government is committed to providing further tax relief as resources permit.
[Translation]
To that end, this year's budget continues to reduce debt as well as taxes. Lower taxes encourage investment in Canada, which boosts economic growth and job creation. It is a fact that Canadians still pay too much taxes and our government is taking action to provide relief.
[English]
Measures that we have introduced since taking office, including measures in this year's budget, our third budget, will provide almost $200 billion in tax relief in 2007-2008 and the following five years. These measures are all part of our government's larger economic plan called Advantage Canada, which includes a tax advantage for Canada. This bill is a key component of our long-term economic plan. We are also reducing federal debt to the tune of more than $37 billion by 2009-2010.
As a result, we will provide personal income tax reductions under the tax-back guarantee that amount to $2 billion annually. Every time we reduce public debt and, therefore, avoid interest because we are reducing the principal, we take that interest and use it to reduce personal taxes in Canada every time. Those tax reductions for Canadians is approaching $2 billion.
[Translation]
All this to say that our government's objective is to reduce taxes to encourage people to work, save and invest — all aimed at creating a competitive tax system for Canada.
[English]
Advantage Canada is a plan that is real and responsible, and it works. Bill C-10 is part of that plan. The measures in Bill C-10 build on this government's framework for a competitive and fair tax system.
I will deal with this issue of non-resident trusts and foreign investment entities for a moment. The intent of the measures proposed in this bill is to prevent tax deferral and tax avoidance through the use of foreign investment funds and non-resident trusts. If someone tries to reduce taxes by using foreign investment funds, measures proposed in Bill C-10 will ensure that any income earned on that investment will be taxed as if it were earned in Canada.
[Translation]
This is only fair. Our goal is to ensure equity and integrity — qualities that must be at the very foundation of a competitive tax system.
[English]
Fittingly, today, April 30, is the deadline for Canadians to file their personal income tax returns. The vast majority of those Canadians will diligently pay their fair share of taxes and, I might add, pay a lot less tax under this Conservative government. Those hard-working Canadians would be disappointed if they thought Parliament was not taking steps to ensure that everyone pays their fair share. That goal is the only way our tax system can work effectively in Canada. Bill C-10 meets that goal head on. It proposes to amend provisions of the Income Tax Act relating to the taxation of income earned from non-resident trusts and foreign investment entities.
These two types of investment intermediaries are used by some Canadian taxpayers to obtain an unfair advantage. It is important to keep in mind when considering this proposes legislation that the amendments in this bill were not developed in isolation. Finance Canada officials have consulted extensively with Canadians, including professional tax advisers, taxation authorities and taxpayers themselves. That is not to say all those consulted expressed satisfaction with the result. Clearly, it would be contrary to their interests to do so. However, the government has had an opportunity to take this input into account. Again, Canadians who pay their fair share of taxes would not look kindly on a Parliament that allowed tax unfairness to continue due to the representations of a small number of self-interested individuals.
[Translation]
The amendments contained in Bill C-10 are important and necessary to maintain fairness in our tax system.
[English]
An income tax incentive exists for Canadian residents to earn investment income using non-resident trusts and foreign investment entities based in a country that imposes less tax than does Canada. In other words, using these investment vehicles to earn investment income, select residents of Canada with the resources and capability to do so can defer the payment of taxes. In some cases, they can avoid paying any Canadian or foreign tax on this income.
This situation is blatantly unfair to those hard-working Canadians who are filling out their taxes today and paying their taxes, and it goes against the principles of basic fairness. It also erodes Canada's tax base and creates inequities that undermine the integrity of our tax system. This situation is unacceptable to this government, and, I hope, to all parliamentarians.
[Translation]
The amendments proposed in Bill C-10 will help accomplish this objective by eliminating the incentive to reduce Canadian income tax through the use of non-resident trusts and foreign investment entities.
[English]
My officials from Finance Canada have consulted broadly on the rules and responded to many issues that were raised. Notwithstanding that consultation, a concern arose during this committee's deliberations on Bill C-10 in December of 2007. It was with regard to the application of the non-resident trust rules to investments made by Canadian pension funds. I understand that a resolution to address that concern, with which I am in agreement, has been reached following discussions between the Canadian pension funds industry and Finance Canada officials.
In summary, the measures in Bill C-10 are essential to help ensure taxpayers pay their fair share of tax and represent a concrete step toward a competitive and fair tax system.
[Translation]
I now welcome any questions from the committee members about this bill. Officials from Finance Canada have joined us here today to help clarify any details of this bill.
[English]
I am pleased today to be joined by officials from the Department of Finance.
The Chair: Thank you, minister. That summary is succinct. I have a list, and I know everyone has a lot of questions. I will start with Senator Dave Tkachuk.
Senator Tkachuk: Welcome, minister. So much of the public discussion on this bill, not in this committee but in the media, has been about the movie tax credit. The bill itself, as the chair said, is extensive and deals with many issues. Two issues were raised by the pension industry in relation to Bill C-10. You touched on them in your remarks but you were not specific as to how you addressed that problem that they have raised. There was also the question of non- resident trusts.
Can you focus on those two issues and how they have been addressed, or whether their complaints are valid?
Mr. Flaherty: Mr. Ernewein will deal with this question, with your understanding, I hope, because he has been involved in the discussions directly.
Brian Ernewein, General Director, Senior Assistant Deputy Minister's Office, Tax Policy Branch, Department of Finance Canada: When we were here in December, an issue was raised late in the day and we were flat-footed in terms of responding because we did not have an opportunity to discuss it in any great length beforehand. It concerned the question of the application or potential application of the non-resident trust rules to pension funds. There were other entities as well, but predominantly to pension funds.
At that point, we suggested that the types of investments that pension funds make would be accommodated by the commercial trust rules. In all cases, perhaps that result would obtain; namely, the pension funds would obtain an exemption, practically, from the rules on that route.
Having said that, I think it was the will of the committee that we go back and take a look at that question and discuss it with the investment counsel association that appeared before you as well as some pension funds that had approached us individually on the issue. We were asked to determine whether it was possible and appropriate to consider a change that would not have the pension funds run through the commercial trust definition to see if they were exempt, but to provide an explicit exemption for the pension funds from the rules in order to obviate that more detailed examination. That is where we ended up in terms of our discussion with the pension funds and our recommendation to the minister. While, for some purposes, we maintain that we could have achieved this result under the bill as currently proposed, we recommended an amendment be brought forward at an early opportunity to provide that the pension funds would be exempt from the rule directly. We have discussed that amendment with the pension funds, and the details of that amendment, and we think we have support from them on that score.
Senator Tkachuk: What about the non-resident trusts?
Mr. Ernewein: The issue in relation to the pension funds concerns the question of non-resident trust rules. Perhaps you are thinking of the issue that Mr. Gagnon from Stikeman Elliott raised on the U.S. trust.
Senator Tkachuk: That is it.
Mr. Ernewein: It is a bit uncomfortable sitting beside my minister while I speak on this issue, but we have not changed our recommendation to the minister on that point for the reasons we gave in December.
Mr. Flaherty: It is true. That is correct.
Mr. Ernewein: We can review those rules, but we have not proposed a change in that respect.
Senator Tkachuk: Do I have time for one more question?
The Chair: Please proceed. Perhaps, Senator Tkachuk, before moving to your next subject, on the subject of pension, the witness indicated something about an amendment. Is it possible to elicit what that was and if there is an interim measure such as a letter of comfort?
Senator Tkachuk: That is a good supplementary question by the chair.
Were you thinking of proposing the amendment here or in the House? Was there any reference to that?
Mr. Ernewein: The process we propose was is one that actually finds itself in this bill in many manifestations. The Department of Finance and the tax section has what I have sometimes described as a quasi-ruling section where, in terms of technical changes, it recommends changes to our minister to the income tax rules. These recommendations have been come to be known as comfort letters. The bill before you contains the implementation of a number of these comfort letters from years past. That is what we have proposed in this case as well, namely, a comfort letter to the industry on the points that we have discussed. I think it has been shared more broadly and, according to our process, it will be distributed as well. The letters we have written were to the Investment Counsel Association of Canada and the Pension Investment Association of Canada, representing the various pension groups.
Senator Tkachuk: Although the comfort letters may be comfortable, the minister mentioned amendments and I am confused. Will there be amendments in the future as a result of the comfort letters or do the comfort letters have some force in law that will make the organizations feel comfortable?
Mr. Ernewein: Parliament remains supreme and the amendments must be enacted. In general, the tax community and business community are prepared to rely on the comfort letters the Department of Finance issues.
In this particular case, we have received written confirmation from the pension industry association, and what we regard as similar confirmation via email from the Investment Counsel Association of Canada. I believe we are joined by people from that organization and they can speak for themselves on that score. However, I represent to you that yes, it will come in the form of an amendment in a later bill, but consistent with past practice. That approach seems to be acceptable to those involved.
Senator Tkachuk: Are you happy with that, chair?
The Chair: No, but I think we are all at cross purposes. Let us not beat around the bush. The understanding is that on this major issue, which came to light in our December hearings, there have been substantial, ongoing discussions between these stakeholders and you and your officials, Mr. Ernewein.
We were advised by them that only at the late hour yesterday was final comfort achieved between the two sides; and that today you would issue a letter that would be tabled at this hearing. In like manner, we would then call these individuals to confirm that they are happy.
We cannot proceed with the bill without seeing the comfort letter. That would be inconsistent, to use your words, with past practice. We always see the letter, so where is it? I think that is your question, Senator Tkachuk.
Senator Tkachuk: It is a great supplementary question.
Mr. Flaherty: I am happy to table the correspondence.
Senator Tkachuk: Can I move to the next question?
The Chair: What was the response?
Senator Tkachuk: He said he would be happy to table the letter.
The Chair: Very good, thank you, minister.
Senator Eyton: I want to pursue that last question. From the testimony we heard before, the concern was the inclusion of the pension funds in a place they were uncomfortable with and where they felt they were wrongly included and they should have been exempted. Will the comfort letter have the effect that non-resident trust provisions will not apply? Is that the end effect of the comfort letter?
Mr. Ernewein: Yes, in relation to pension funds and pension fund pooling vehicles that comprise more than one fund, that is the effect. They are exempt from being either resident contributors or resident beneficiaries under the rules in the section. In short, it is fair to say that means they can stop reading.
Senator Eyton: That was a specific request and as far as you know, they are satisfied now?
Mr. Ernewein: I believe so. The Investment Counsel Association of Canada has raised other issues that they want to discuss with us in the future. However, in terms of the issue they brought to the Senate's attention — again, they are here and they can speak for themselves — I believe there is agreement on what we have done.
Senator Tkachuk: I have one more question, because I cannot go by the film tax credit without addressing the issue. We had a showdown in the Centre Block on this issue, and it has received a lot of media attention. Can you comment on it and give us your particular take on the debate taking place?
The Chair: Do not turn on your microphone if you do not intend to.
Mr. Flaherty: These provisions that deal with this issue relate directly to the responsibilities of the Minister of Canadian Heritage, as you know. Minister Verner has been here and has responded, I understand, to the questions posed by saying that she will work with what is a divided industry to develop a solution that is mutually agreeable to ensure movies that promote things like hate propaganda will not receive federal funding.
I have with me a copy of the press release that was issued November 14, 2003 by the previous government referencing the amendments they proposed at that time. The previous Liberal government proposed those amendments, not our government. Those amendments are exactly the same as the amendments that are before you on this issue. As you know, this bill also has the support of all parties in the House of Commons.
I quote from the release in 2003 because some people have suggested that there has not been adequate consultation. This consultation has been taking place for years. In 2003, the ministers at that time, John Manley, deputy Prime Minister and Minister of Finance, and Sheila Copps, Minister of Canadian Heritage, in their press release said:
Today's proposal results from ongoing consultations with all sectors of the film industry, which were undertaken by the Departments of Finance and Canadian Heritage. . . .
The last thing I would say about this issue is that in terms of my job as Minister of Finance, I am in a stewardship position with respect to how a taxpayer's money is spent. There are many demands in Canadian society and many needs to be addressed. One of them is not the financing of movies or videos depicting hate, extreme violence and pornography.
As Minister of Finance, I view as my duty, not to finance those types of products. For those who suggest that view is censorship, I suggest rather that view is the will of the people of Canada. We have a Charter of Rights and Freedoms and we have a Criminal Code, and if one is concerned about censorship, one must conclude that the individuals who would like to produce this type of material are being denied the right to produce it. Well, they are not. They can pay for it themselves and not ask the Canadian taxpayers to foot the bill for that kind of product depicting extreme violence, hate, pornography and the like.
The Chair: Senator, does that take care of your questions?
Senator Tkachuk: Yes.
Senator Goldstein: Thank you, minister, for coming here for the second time with respect to this bill. We appreciate the fact that you are a busy person, and that taking time out to speak to us yet again is a sacrifice on your part. We are grateful for your presence and for your presentation.
I have a number of observations. I am not sure I will be able to make all of them; I am not sure if I will be able to ask all the questions because other members of the committee will want to deal with some of the issues.
You said three things in the course of your observations that I find difficult to understand. Let me go in no particular order. You spoke of a divided industry, and I do not understand what you mean by that. Do you suggest that the movie and video production industry is divided on this issue?
Mr. Flaherty: I have heard differing views, yes.
Senator Goldstein: The reason why I ask the question is we have not heard any other views from the industry. We have heard other views from other people, but not from the industry.
Mr. Flaherty: I guess it depends how you define ``industry.'' People making movies and videos in Canada do not all agree in their opposition to this provision.
Senator Goldstein: I do not understand that to be the case because I have not heard anyone from the industry come before us and suggest anything different.
Mr. Flaherty: If you want to ask Canadians for their views, perhaps you could ask regular Canadians to come forward and tell you what they think of hate propaganda and pornography, and whether they think their taxes should be used to fund it.
Senator Goldstein: I am glad you asked the question that way. Let me try to phrase the question I was about to ask within the context of that question. We will agree, will we not, that pornography is already an item which is excluded from tax credits, and has been since 1972?
Mr. Flaherty: Yes.
Senator Goldstein: This particular provision, clause 120 and clause 121 of the bill, does not change any of that. People will never be able to produce pornography here and receive tax credits for it.
Let us talk about hate. Do you agree that hate is prohibited by the Criminal Code? Hate addressed to a particular identifiable segment of the Canadian population is prohibited by the code?
Mr. Flaherty: There is a specific provision of the Criminal Code.
Senator Goldstein: Thank you.
Mr. Flaherty: Just a moment, senator. You need to look at that provision. Do not be glib, with respect. That provision is a fairly complicated provision of the Criminal Code. I am a lawyer.
Senator Goldstein: So am I.
Mr. Flaherty: You will appreciate, then, senator, without being glib, that provision that is a specific, fairly precise offence in the Criminal Code of Canada.
Senator Goldstein: The provision nevertheless deals with the depiction or promotion of hatred. In any event, I think people will judge for themselves.
Mr. Flaherty: That provision also deals with hate literature.
Senator Goldstein: It does indeed, among other things.
Mr. Flaherty: Yes.
Senator Goldstein: You have indicated that people are not denied the right to produce, but if they want to produce something that does not fall within the guidelines, they must produce it themselves. You are aware, minister, are you not, that the industry depends on these tax credits to find financing. The testimony we have heard until now is that the industry would be de facto unable to find financing if they are not assured of the availability of those credits. When you say they can produce it themselves, is that not the same as saying that a Black who is refused service in a restaurant is not discriminated against because that person can go to another restaurant?
Mr. Flaherty: That is nonsense.
Senator Goldstein: Thank you.
Mr. Flaherty: What I am saying, senator, is precisely what I said. If someone wants to produce that kind of product, they can raise the money in some way or use their own resources to do it, but they cannot expect to use taxpayers' money.
Senator Goldstein: Minister, if that is your view, which I respect — you can have whatever views you choose; it is, fortunately, a free country — why have you not extended the use of the prohibition and the use of these guidelines to American productions? American productions can produce whatever they please in Canada, and they do not lose their tax credits. Canadian productions, on the other hand, if they produce these kinds of things in Canada, lose their tax credits. Will you explain to me why you have made that distinction and why you have taken that discriminatory approach?
Mr. Flaherty: Mr. Lalonde will deal with that matter.
Gérard Lalonde, Director, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: Senator, you will recall that a similar question was raised at the first appearance here, I think, when that issue came up. I, or one of the other officials who was here, explained that with the Film or Video Production Services Tax Credit, there are a couple of differences. The people from the Department of Heritage can speak for themselves.
Senator Dawson: Sorry to interrupt.
[Translation]
Mr. Chair, you know that the rules are very clear that any document tabled before a Senate Committee must be in both official languages, especially if tabled by a Canadian government official.
[English]
Yes, I can read the English, thank you very much, but there is a rule, and I want that rule to be respected. Either you tell me we will have a French version in a few minutes or I will say that, as far as I am concerned, we have not received any letter of comfort.
The Chair: Your point is noted, senator. Obviously, the rules are well known, not only to your chair but to all of us. This issue has been a matter of negotiation up until the last moment. The letter will be translated imminently, and the translated copies will be the official document. As you will have noted, it was I who asked Senator Tkachuk to push for the letter. I thought it would make the hearing more effective. The translation process is under way but not completed. If you want to adjourn, that is fine.
Senator Dawson: The nature of accepting a comfort letter is that this committee would feel a level of comfort.
The Chair: It is not that this committee would feel a level of comfort; it is that the stakeholders who came before us and made a big fuss, a valid fuss, have worked out a compromise solution with the government, as will be reflected not only in this letter from the minister but also in a letter from that stakeholder.
[Translation]
Senator Dawson: Mr. Chair, as a committee, we believe in the good faith of the minister and the industry until we get evidence to the contrary, but there is no letter before us — and you agree, there is no letter before us — and I do not see how we could still be talking about a letter of comfort that does not exist.
The Chair: It is as you wish, let us stop discussing it.
Senator Dawson: I do not want to be contrarian, Mr. Chair, but when you were vice-chair of the committee in November 2005, we had a letter from Ralph Goodale on the luxury tax — I do not know if you remember.
[English]
You were there. You were deputy chair at that time. We received a comfort letter from Mr. Goodale, whose government was defeated a few months later. That comfort letter was never brought to fruition because the incoming government — as was their right — did not believe that the comfort letter was in their best interests.
I am ill at ease with comfort letters to start with, but when I have not seen the letter — because officially we have not seen it — I am still uncomfortable. I want to be sure we have a process for having comfort. Minority governments, comfort letters, ministers of finance; we have been there, done that and seen the results. If we do not officially have in front of us a version of the letter with which we are comfortable, I do not want us to proceed quickly on this issue without having seen the letter.
The Chair: There is no problem. I think you have expressed the issue well, senator. The questioning is already now off that particular subject. I asked the clerk — against her advice, I might say — to circulate the letter so you would have full knowledge of the letter. When it comes time to consider the bill clause by clause, the letter will be here in the two official languages, as well as the stakeholders' letter, and we will observe the laws in due order.
For now, if you do not want to refer to it or have it there from a practical point of view, it is fine, because we have passed on to another aspect of the issues. Except for a few senators, all of us have been here for all the hearings. I believe, Senator Goldstein, you were here.
Senator Goldstein: I would have thought so.
Let me ask a question that you will not be able to qualify as either glib or nonsensical, minister — or maybe you will, if you choose to. That is your privilege.
The Chair: Let us go back. Mr. Lalonde, I believe you started to answer the previous question.
Mr. Lalonde: Yes, Senator Goldstein asked about the production services tax credit and why a public policy test does not appear in the legislation dealing with that credit. The production services tax credit is different in a couple of respects. As was explained by the Department of Canadian Heritage people the last time they were here, the Canadian tax credit is a cultural product. Accordingly, the department places a lot of emphasis on what is culture, and a public policy framework is important in that sort of cultural milieu.
There is also another major difference between the two credits. The production services tax credit is available only in respect of films, the cost of which is in excess of a certain floor. You see mainstream films in that context, not the sort of films that can potentially — and I say potentially because, as testimony has indicated already, this issue is not something that has been a recurring problem; this provision is intended to protect against the arrival of a problem. You do not see the non-mainstream films in the production services tax credit. You can see it, potentially, in the Canadian ones.
Senator Goldstein: I want to understand what you told us. You told us about the nature of differences between the two types of credits. My question was not whether the credits were identical. My question was whether American films that breach what will be considered or what can be considered the guidelines dealing with public policy will nevertheless receive tax credits, whereas Canadian films that breach the guidelines will not receive tax credits. It is truly that simple. Never mind what the reasons might be, that will be the result, will it not, Mr. Lalonde?
Mr. Lalonde: The practical result, as I tried to explain, in the design of the two tax credits was because of the high cost floor on the production services tax credit. The issue does not arise because you see only the mainstream films under that credit.
Senator Goldstein: Do you suggest that a high-cost Canadian pornographic film would not receive tax credits whereas a high cost American pornographic film would receive tax credits?
Mr. Lalonde: I suggest that where a film is produced with a high cost, someone is looking to recover costs and, as a result, is looking to the mass market. The kind of film you are talking about would not attract the mass market.
Senator Goldstein: That is your judgement. Do you have any particular expertise in matters cultural?
Mr. Lalonde: I do not work for the Department of Canadian Heritage but I have been involved in the design of both credits. I do not believe we have seen any situation where there has been a serious difficulty with the production services tax credit.
Senator Goldstein: Your colleague, Mr. Ernewein, tabled a letter and said that it has the support of the interveners. It is not translated, although it is dated April 2. The more recent letter of April 29 is not translated either, which I can understand. The result is that the Pension Investment Association of Canada has indicated that it has reached a general agreement with you about your approach and about this letter of April 2. However, we have a letter dated today from the Investment Council Association of Canada, which co-appeared with the Pension Investment Association of Canada. Do you have a copy of that letter?
Mr. Flaherty: No.
Senator Goldstein: The letter states, and I quote:
We are now fully prepared to support the enactment of Bill C-10 subject to the Department of Finance providing final written clarification of one outstanding issue.
Can you tell us what the outstanding issue is?
Mr. Flaherty: Would you be interested in sharing the letter with us?
Senator Goldstein: It is public and I thought you had a copy. I am perfectly happy to share it with you.
Mr. Ernewein: We had not seen this email dated April 30 but an email last evening at about 6:30 p.m. from Ms. Walmsley, President of the Investment Council Association of Canada, asked for clarification in respect of the application for unit trusts. We responded to that email this morning and I believe it resolves matters.
Senator Goldstein: I will continue asking questions of Mr. Lalonde because they will be fielded by him and he is not as prone to be insulting.
Mr. Flaherty: I am cool, senator.
Senator Goldstein: Yes, I am sure. The Federal Court of Appeal in the case of Canada v. Harris, with which I am sure you are extremely familiar, said, in paragraph 36:
Neither the Minister of National Revenue nor his employees have any discretion whatever in the way in which they must apply the Income Tax Act. They are required to follow it absolutely, just as taxpayers are also required to obey it as it stands. . . . it is not possible to judge their actions by varying and flexible criteria such as those required by the rules of natural justice. In determining whether their decisions are valid the question is not whether they exercised their powers properly or wrongfully, but whether they acted as the law governing them required them to act.
Longley v. Canada (Minister of National Revenue) — British Columbia Court of Appeal, confirmed the proposition that the minister is bound to follow the act absolutely.
Cohen v. The Queen said that any agreement whereby the minister would agree to assess income tax otherwise than in accordance with the law, would be an illegal agreement.
As you are aware, Mr. Lalonde, we are talking about promissory estoppel. The court has said consistently that undertakings on the part of the department, whether by the minister or anyone else within the department, to not tax exactly in accordance with the Income Tax Act are not enforceable.
Can you explain to us or give us some comfort that the comfort letter is enforceable when the courts have said it is not and the Income Tax Act is not enforceable when the Income Tax Act says that it is?
The next question is, if it needs amendment, why not amend it now? Are you expecting us to pass a law that we know requires amendment and not amend it?
Mr. Flaherty: The question has already been answered but we can go over it again for you, senator, if you did not follow it before.
Senator Goldstein: This response seems to be consistent behaviour on your part, minister.
Mr. Flaherty: If you are asking about film, then you want to go back to the film credit.
Senator Goldstein: No, I do not. I guess you did not understand the question. I did not ask that question.
Mr. Flaherty: We are going over the same ground we went over before but I am happy to do it again.
Senator Goldstein: We are not, with great respect. I think Mr. Ernewein understands my question.
Mr. Ernewein: Yes, as I mentioned earlier, it is true, as it should be, that Parliament reigns supreme and to give effect to the recommendations that we make requires an amendment to the law. Our understanding from the issue brought to our attention at the committee hearings before December was that you wanted us to try to achieve a solution with the affected taxpayers in relation to this matter. There is a process familiar to the tax and business communities for dealing with these matters, which we have tried to use in this case, and, we think successfully so. Yes, to give effect to the change we are recommending will require an amendment but it is consistent with what we have done in other cases. It can be done at a later time and it seems to achieve the satisfactory result.
The Chair: Perhaps I might help. I think Senator Goldstein postulated that, notwithstanding past practice followed and its apparent efficacy from your point of view, the process, in effect, has been ruled to be illegal and that, if a taxpayer was in a contretemps or an unresolved dispute with Her Majesty's government, the court would not enforce those letters. I think Senator Goldstein wants you to confirm or deny that you were aware that situation was the case.
Senator Goldstein: Also, why do you not amend that now?
Mr. Flaherty: As minister, I am satisfied that when we have an agreement with the relevant groups, as we have here, then it is satisfactory. This bill has all-party support in the House of Commons. The electorate has spoken to this bill in the House of Commons.
Senator Goldstein: Minister, you were in the House of Commons when at least two of the three parties said that they voted for this bill in error because they did not understand what was in it. Do you suggest they still support it?
Mr. Flaherty: You know, we who are elected in the House of Commons actually have an obligation to know what we are voting on. I hope that most members hold themselves to that standard.
Senator Goldstein: Nevertheless, they did say in your presence that they would not vote for it again.
I have one final observation because I want to give other people a chance. You observed, minister, that there is an anxiety to deal with this bill in an efficacious manner. We share that anxiety, but I think it is important that it be noted that on December 4 or 5, we asked for a comfort letter to be issued, or some undertaking for an amendment to be issued, and the response we received took five months although the letter is one page in English only.
To suggest we delayed something when your department took five months to issue a one-page letter is perhaps inappropriate, I am sure you will agree.
The Chair: Senator, I hope you will forgive me for saying this, but we did not ask for a comfort letter or anything else. We asked the parties to come together and try to resolve their differences. Do you agree?
Senator Goldstein: That is true.
The Chair: There was no mention of a comfort letter.
Senator Goldstein: The comfort letter was mentioned in between.
The Chair: I wanted to be open and fair.
Senator Goldstein: Correct. I do not think we are the ones that can be taxed. The Senate cannot be taxed, if you will pardon the use of that term, with the blame for the delay. I have no further questions.
The Chair: Are you expecting any more answers?
Senator Goldstein: No, I have not received any so far.
Senator Dawson: I want to be on the record for a few issues. First, the minister talked about a bill, and talked about 2003 and about three or four ministers before him who supported the bill. If it is a bad bill, whether it was written by a Liberal or a Conservative, five years later it is not a better bill. The reality is that even though a press release was sent out in 2003, if it was a bad bill at that time, it still is a bad bill.
Second, I want to make it clear that every person from the industry who appeared before this committee was opposed to this bill. There was no divided industry on this bill. Whatever the minister said — maybe meaning the people or meaning a few preachers that might have supported the bill — the reality is that the industry clearly has asked us, as parliamentarians that are mandated to study these bills, to try to amend it. They have even forwarded an amendment in English and French that they proposed to us, which I hope we will have an occasion to talk about. Even though I am not a regular member of this committee, I hope that I have the occasion to come back and talk about it.
The other issue is that here we have a Minister of Finance who clearly did not respect the letter of intention of the previous Minister of Finance, and he asks us to have comfort in the fact that the industry and his department have now arrived at an agreement. We are in a minority government situation and I want to help the industry, but I would feel more comfortable in doing so if we had an amendment.
Since the minister is so sure that the other House loves this bill, they could probably pass it quickly in the month of June and it would be over with.
The Chair: Maybe I misunderstood, but the letter of comfort relates to another part.
Senator Dawson: I understand that clearly. Since I have not seen it, I do not want to talk too much about it. However, the intent of a letter was to give us what they think should be a change in the bill that will come later. Since they have the wording, I would feel more comfortable, having had experience with this minister two years ago, that we amend the bill, send it back to the House and see if he is comfortable that the other place is so enlightened that they will see it as a better bill and pass it.
The Chair: Senator, your comments are noted. When we come to clause by clause consideration, which hopefully will be either next Wednesday or Thursday, you will make your points and they will be well addressed. Do you have questions for the minister?
Senator Dawson: I wanted to be on the record that the industry was not divided on this issue.
The Chair: That is your view.
Senator Dawson: Whether it is a Liberal bill or a Conservative bill, if it is a bad bill, it is a bad bill; and letters of intention have been known not to be respected by ministers, including the one we have in front of us today.
The Chair: Your points are noted. The record will speak for itself, including as to whether the industry is divided.
Senator Eyton: Picking up on a bad bill is a bad bill, that sentiment has been expressed over almost 10 years now. I expect that none of us will argue that the bill in its present form, even with the comfort letters, is a perfect document.
However, I gathered from the minister's opening remarks that it is time that Bill C-10 — this complex and large bill that has been worked on by many governments and many individuals over all that period of time — needs to be passed now. The risk, of course, is that if we do not pass it, it will be another year, two or three and the delay will simply compound the problem.
I know that is not a question, it is a comment, but I am sympathetic and I understand the situation perfectly.
Minister, you are aware of the position of the Canadian Heritage minister, who, in effect, supports the bill in its present form, but along with an offer on her part that she and her department will take what amounted to a 12-month hiatus. During that period, she will speak to the industry — and I suppose to other members of the public as well — to establish guidelines that are agreeable to all parties. Do you support that position, sir?
Mr. Flaherty: I support the position taken by the minister, yes.
Senator Eyton: Moving to another part of your earlier comments, you talked about tax fairness. Of course, that is why we are here, and you were right to remind us that today is the last day for filing our tax returns. The new rules are complex and we had many submissions from important players relating to the rules. There has been more discussion and examination; apparently there is a resolution with regard to some of the important points that were made expressing concern with the present bill.
Are you satisfied now that you have it right with respect to tax avoidance as it relates to non-resident trusts and business foreign entities? We have had lots of time to consider and debate. You have heard submissions from others. I want to hear from you that you think you have it right or almost right for a problem that presumably is significant because the effort has gone on for so long.
Mr. Flaherty: Governments sometimes are criticized for stonewalling, for not consulting in depth and trying to work out contentious issues. I give my officials full marks for the effort they have made. They work hard to arrive at a result that works for the major participants. I think that work is to their credit.
As you noted, this matter has been brought to what appears to be a good conclusion. I think this conclusion is a credit to the officials in the Department of Finance and the other people involved as stakeholders in working this issue out, rather than the government barging ahead with the proposed legislation.
In any event, I am confident that the discussions have gone well, because that is what has been reported to me, and that they have arrived at a consensus. I will let Mr. Ernewein fill you in on any concerns he might have now.
Mr. Ernewein: The bottom line is that we recommend the bill to our minister and to the government. I hope I am not saying anything surprising in saying that the tax legislation is not timeless. We have asked for changes to legislation regularly and we have our annual budgets, but we also have technical tax bills that we take forward to make adjustments. I do not think that this legislation, even today, is immune from that change in the future. However, do we think we have the right structure in addressing a serious problem? The answer is yes to both questions.
Senator Eyton: In my notes, there is a reference to a submission made by the Investment Funds Institute of Canada, who argued that the problem with the anti-avoidance rule under section 94.1 of the Income Tax Act was that it was limited in its application because it depended on the existence of a tax avoidance purpose.
It worried me a little, but their suggestion was that much of the problem could be solved if we left the test of ``anti- avoidance purpose'' and instead substituted ``anti-avoidance result.'' Then, after the fact, we could see if it had a certain effect. Does that suggestion have validity? It seemed arbitrary and worrisome to me, but they made that submission and we had some discussion about it.
Mr. Ernewein: I am trying to organize my thoughts to answer the question. The premise of the question is right, namely, that the existing rule in the Income Tax Act in relation to non-resident trusts and foreign investment entities depends in some respects on an anti-avoidance measure or motive. As originally proposed to be modified, that proposal was swept away, at least in relation to foreign investment entities. The question is: What is the result? Do they have something that looks like a foreign investment fund, according to our definition? If so, the income in that fund is taxable back in Canada. They can claim any foreign tax paid as a credit against Canadian tax but, in the result, any differential between the foreign taxes paid and the Canadian tax otherwise payable will be made up in terms of Canadian tax to achieve neutrality.
One issue that arose in terms of these consultations that we have had over several years is a question about the scope and the application of that rule to investments in public funds and a question as to whether, for example, Joe Canadian investing in a U.S. mutual fund would need to run through all the rules to see if the rule applies. In response to that question, the rules as currently put forward in this bill are modified somewhat. In relation to private foreign investments, they run a results test. However, in relation to investments listed in foreign stock exchanges and other public investments, they are exempt, subject to the investor having an avoidance motive.
One challenge and one criticism that we expressed in relation to the existing rules that ran off an avoidance test is that it is difficult for Revenue Canada to apply whether the motive exists. Taxpayers will not self-assess on the basis that they have an avoidance motive, so it must be uncovered. That determination is tough. In terms of our recommendations on this bill, we have brought that issue back into the avoidance concept in some respects. It is in the public situation where we think in general that they will not be caught by the rules. The one thing we have done differently by reverting in the public context to an avoidance test is to try to provide considerably more guidance on where an avoidance motive or purpose is found to exist and where it is not.
Senator Eyton: You are looking at the result as opposed to the purpose?
Mr. Ernewein: Again, it is clearly results and results only in the private investment. With public investment, it is more dependent on motive but we have provided more guidance on when that purpose or objective is found to exist and when it is not.
The Chair: I know you are pressed for time, minister. However, I have a couple more questioners.
Senator Goldstein: May I ask one question that was raised by Mr. Ernewein?
Mr. Flaherty: I said I would be here for one hour and I have now been here for more than one hour. I must be somewhere else. I will stay a few more minutes, but I have a time limit.
The Chair: Thank you, minister.
Senator Goldstein: You indicated that, from your perspective, you satisfied the pension investment people who appeared here. We received a letter, of which I think you received a copy, from the council of universities indicating that they found themselves potentially captured inadvertently by the same kind of language. Have you considered their position?
Mr. Ernewein: We are aware of it and we are aware of a couple of others who, presumably identifying the earlier comfort letter to the pension people, have said that they are tax exempt. On that basis, they propose to be included or added to the relief proposed in relation to pension funds.
Senator Goldstein: Would you propose to do that?
Mr. Ernewein: We have not made any recommendation on that score. Yes, we want to understand better whether the same case that the pension funds have applied in the case of universities. The pension fund argument was that by virtue of scale of investment, they are sometimes engaged in foreign investments that would not be easily accommodated by the commercial trust rules. It would be important for us to understand whether universities, for example — and others have brought forward the same proposition — are, in the context of foreign investments engaged in exotic investments such that the ordinary commercial trust exemption rules would not exempt them from the rule in any event.
Senator Goldstein: You have not had a chance to do that yet?
Mr. Ernewein: No.
Senator Ringuette: I have many questions, but I understand that you must leave so I have two short questions for you.
First, you said that you have heard from the industry people that agreed with Bill C-10. This committee has made a lot of effort to reach all Canadians who are concerned. I have received over 5,000 emails on the film tax credit. Minister, if you have any witnesses from the industry that you would like this committee to hear from, I am sure that every member of this committee would welcome them and wish to contact them to have their input. I think that is important.
There are two other issues, the most important one being the film tax credit. I do not know anyone who would agree with funding a film that would involve hate propaganda, extreme violence or pornography. That is the bulk of the issue with regard to the film tax credit, namely, no one wants ambiguity with regard to this issue. The industry does not want ambiguity on the issue and I think that most witnesses from whom we have heard do not want ambiguity on the issue. You have said that consultation has been taking place for years. Minister Verner was here and said she wanted to consult for another year. There is further ambiguity on this issue. I think that we all agree that it must be clear, but the issue with regard to Bill C-10 on the film tax credit is that, once again, it is not clear. I want your comments on that point.
Another thing that worried me when Minister Verner was here is that I asked her if an economic impact study had been done. The answer was no. We are now looking at a few years where there is ambiguity. Publicly, you have said that the economy is not on a sure footing. We are looking at thousands of jobs for Canadians in this industry. I believe it is our responsibility to ensure that things are clear and that we are not putting forth legislation that may cause further loss of worthwhile Canadian jobs as well as the good infrastructure that was created over the last decades in many major cities across Canada. I have those concerns, minister. I hope that you understand them with regard to the tax film credit.
If you have another minute, minister, I have another issue that you must understand with regard to the trust.
Mr. Ernewein, when you were first here with this bill, I distinctly remember the chair asking you if you had consulted with the groups involved. I understand that this bill is a complex one and that there are two or three large groups that are concerned about it. You told us that yes, you had consulted with them and they were in agreement. However, witnesses then appeared before us who said that they had not been consulted and that they had reservations.
That was in November. Then, in December, the department — and I cannot remember if it was you personally — came before us. We had an agreement that the department would go back and consult with the stakeholders and would return to us with agreements, amendments or whatever was needed to ensure that the issue was clear and there was no ambiguity. Now, it is five months later. I understand that you were working against the clock, but from our perspective, we have been waiting for five months. You can see that technically, we still do not have before us a letter.
The Chair: You are clear, senator, but let me point out to you and to Senator Goldstein that this is the first time the minister has appeared here on this bill. A parliamentary secretary was here for about 12 minutes on the bill, and that is all. Both of these gentlemen from the department have been here consistently, in briefings and so on. They are both fully aware of your comments.
Mr. Flaherty: I appreciate your concerns with respect to the provisions relating to productions. I also appreciate your concerns about the difficulty of the subject area. It is not easy. This area, with respect, is one over which there have been many debates over the years among people, in the law schools and in the industry. I remember the debates about tax credits, subject matter, depictions and so on when I was in the Government of Ontario.
I think you and I probably agree that this issue is a legitimate interest of public policy and that there is a public interest here. We are dealing with public money, and it is entirely the right of the people of Canada, when governments use their money, which they earn and then hand over in tax — this being April 30, a lot is being handed over today — that their money be used for proper public policy. Proper public policy, I think you and I agree, includes some restriction on the nature of productions that will be funded with public money.
Right now, there are no provisions in the Income Tax Act or in the regulations that exclude productions and that contain material that is illegal under the Criminal Code. This amendment in this bill will provide explicit authority to exclude those productions.
Senator Ringuette: Minister, you will agree with me, however, that the bill does not provide clarity. Lack of clarity is at the centre, I think, of the issue and the discussion. From what I have heard from the industry, that is the issue at hand. With regard to extreme violence, pornography and hate propaganda, I have not heard from anyone in industry who wants to have Canadian tax credits for those situations. Everyone is in agreement. People want something that is clear.
Mr. Flaherty: Is that not exactly what the Minister of Canadian Heritage, Minister Verner, proposes: that she will consult further for a year and try to work out guidelines with the industry? Is that not a reasonable thing to do, on the assumption, which I think we share, that there needs to be rules about the use of the public money, in the public interest?
Senator Banks: We are grateful you are here, minister, as all senators have said. I hope you understand that we are doing our constitutional duty. Sometimes matters that are decided upon in the House of Commons are not the final word, and that is the way the Constitution is for the moment, until someone changes the Constitution.
Minister, will you take a couple of minutes to explain to me, as you would to a guy going home on the five o'clock bus tonight, why, when you say at least two amendments need to be made to this bill that you would urge the Senate to pass a bill, which you say needs to be fixed, rather than the Senate fixing the bill and then sending it back to the House of Commons. Clearly, the fastest way to pass the bill into law is to amend it. The amendments are close to being in draft form in the letter from Mr. Ernewein today of April 2. How do we explain that approach to the average guy?
Mr. Flaherty: It is because the relevant parties have worked hard together over many months to come to an agreement, and they have come to an agreement.
Senator Banks: Is the agreement about what needs to be done to the bill?
Mr. Flaherty: They have come to an agreement about the matters that were of concern to them, and they have been satisfied, senator.
Senator Banks: Yes, and as Mr. Ernewein has said, to bring most things properly into force, the bill needs to be amended.
Mr. Flaherty: I have been the Minister of Finance for more than two years. An ongoing process here, as you may appreciate, is that issues are raised with the Department of Finance daily by taxpayers and different sections of our economy, sometimes single-issue matters, and positions are taken by the Department of Finance upon which taxpayers rely. This process is an ongoing one.
Senator Banks: These two are known now; right?
Mr. Flaherty: Other issues are also known; not in this bill but in other matters.
Senator Banks: These two are known now, and agreed to, and everyone knows they need to be made.
Mr. Flaherty: Yes; as the letters set out, senator, the parties have agreed on a process to be followed in the future to their mutual satisfaction. Frankly, respectfully, I do not know why you want to interfere with the will of the parties.
Senator Banks: I do not. I want to give effect to the will of the parties.
Mr. Flaherty: Then you should honour their agreement and pass the bill.
The Chair: Thank you for coming, minister. As usual, you were helpful. I ask your officials if they would be kind enough to stay in the room. I ask honourable senators if they would agree to the following, since it was not on the agenda. The lady and gentleman from the Investment Counsel Association of Canada, who have negotiated with and come to an agreement with the department on that important trillion-dollar pension issue, are here in the room. They are willing to come before us and confirm or deny that they have come to an agreement. You all agree with that? Thank you very much.
Mr. Ernewein or Mr. Lalonde, you will be in the area if we need you, we hope.
I have asked Katie Walmsley and her colleague, Tom Johnston, from the Investment Counsel Association of Canada to come from Toronto to confirm or deny what we have been told here today by representatives of the Department of Finance, including the minister.
Who will be the spokesperson?
Katie A. Walmsley, President, Investment Counsel Association of Canada: I will begin and Mr. Johnston will comment on some of the specifics.
The Chair: You will appreciate that the committee, for good and valid legal reasons, has no letters before it. If I may summarize what I understand is the logical progression, a letter is being prepared by the government and you know what the contents are. It will be of current date and it will be in both official languages, and you will prepare a letter saying more or less, yes, we acknowledge it and agree with it. In discussions, you have reached a meeting of the minds, I believe. Tell us about it, please.
Ms. Walmsley: Thank you for providing us with the opportunity to speak to you again. I want to backtrack for a second in terms of our presentation in December, and remind the committee the Investment Counsel Association of Canada supported the general spirit of Bill C-10 as it related to non-resident trusts, which was closing off offshore tax havens and achieving an objective of fairness in taxation for Canadians. We support those objectives.
Our comments and discussions with the Department of Finance specifically related to provisions that impacted the pensions and retirement savings of Canadians. We have worked hard the last few months, in terms of conference calls, emails and letters, with the Department of Finance.
In fairness to the Department of Finance and stakeholders involved, the bill is complex and our tax act is complex. It took many discussions, not so much to come to an agreement as to ensure all parties were clear, and that as we moved forward with this bill, the investment community had a clear, full understanding of how to interpret this bill and how to invest Canadians' retirement savings in a prudent manner.
That has been the spirit of the discussions. They have culminated in the last week with a response to a comfort letter that we received on April 2. We have been corresponding with them and ensuring that we had a full understanding of the letter and that we were comfortable that the majority of Canadians' retirement savings would not be negatively impacted by Bill C-10.
We received our latest confirmation this morning. I will respond to Senator Goldstein's earlier question that in my last correspondence with Senator Angus in which there was one outstanding issue requiring clarification, we received that clarification this morning. Our interpretation of the comfort letter was correct, so we are now satisfied with that letter. We feel confident in relying on the comfort letter issued by the Department of Finance to move forward with the investment community.
The Chair: Thank you very much. Mr. Johnston, do you wish to add something ?
Tom Johnston, Chair, Industry, Regulation and Tax Committee, Investment Counsel Association of Canada: I echo my colleague's comments and commend the process with the Department of Finance officials meeting not only with our group, but with the Pension Investment Association of Canada. I again emphasize that the view of the industry is that we will be able to rely on it, because we need to invest the funds.
It is also important to note that we are encouraged by the receptivity of the Department of Finance to work with us on one of the issues that is triggered by some of the separation now of Registered Pension Plan assets and taxable monies into separate trusts, which will bring the unit-holder accounts of the vehicles below a condition required to achieve mutual fund trust status. The Department of Finance has been receptive to working with us, so we are satisfied with the progress.
The Chair: If I understand well, this letter that, rightly or wrongly, I shared with my colleagues is a work in progress. You are aware of what the actual terms of the final letter will be and you have an agreement. We will wait for that letter, obviously, before we deal with the bill. I am sure we will have it tomorrow.
Senator Banks: Let us say, we have option A in which we had a letter from an official of the department in which the official said that two amendments were to be made, and that letter set out in more or less complete detail the nature of those two amendments. That official said the official will recommend to the minister that the minister consider introducing amendments. That same official said of course the official cannot guarantee that the amendments will be passed by the House of Commons.
Alternatively, option B is one of the two Houses of Parliament introducing and putting into place those amendments and sending them back to the House of Commons, who we have been told are receptive to the idea of this bill.
Bearing in mind that you are acting on one of those two choices to invest a lot of your client's money someplace, would you prefer to rely on a bill that has been amended and the amendments are in law or upon a letter that says a recommendation will be made and the amendments may be introduced?
Mr. Johnston: Senator Banks, obviously we would prefer the latter route. However, recognizing the need to be able to invest prudently — and we are talking now about in excess of a trillion dollars — with the history of the comfort letters, I think Mr. Ernewein noted that for the most part, they have always been acted upon. With the further proceedings today where they have been put on the record, and the fact that the industry will act on the comfort letter, I think we feel comfortable relying on the comfort letter.
Senator Banks: Are you at all concerned by the contention you may have heard earlier that the comfort letter and acting upon it would be, at least in the formal sense, illegal?
Mr. Johnston: The situation was raised with one previous comfort letter from the former Minister Goodale. The large pension plans and the advisory community managing the pension plans investing globally will continue to invest globally. The provisions that were in paragraph (h) of the exempt commercial trust were problematic because they did not cover a lot of U.S. equities, which is a big part of the market. They were problematic with private equity and infrastructure — also a big part of the market.
The industry will act on it. I think, with good faith, the Department of Finance has recognized that they are prepared to make the amendment and the minister has agreed. We prefer official legislation, but we will accept the comfort letter.
The Chair: If I understood well, given the discussions you have had, the industry is will go ahead and act on it now in any event.
Ms. Walmsley: I believe since the letter was issued April 2, investment managers are acting on the letter already. They have been assured by the Department of Finance that they may do so.
Senator Banks: I have had unhappy experiences in the past with a different government with letters of comfort about things that would be done in legislation and were not, which is the reason behind my question.
I do not understand anything about business that has seven zeros or eight zeros at the end of it. However, did you invest any of your clients' money in income trusts based upon a reliance from the now government that it would never tax them?
The Chair: Do not answer if you do not want to. I rule the question out of order.
Senator Goldstein: The letter exists. If you are comfortable with the letter and we amend in accordance with the letter, the letter will continue to exist. You will continue to have the comfort of the comfort letter if this committee chooses to suggest an amendment. You are not in any way adversely affected by an amendment if it were proposed by this committee. You would not be affected.
My clarification is directed to Ms. Walmsley. I am sorry, did I interrupt you?
Senator Tkachuk: I wanted to clarify that an amendment to the bill will not guarantee its passage.
Senator Goldstein: Of course not.
Senator Tkachuk: Then, there is no comfort letter.
Senator Goldstein: I do not think that follows.
The Chair: It is in lieu of an amendment.
Senator Goldstein: That is not what it says. In any event, it is worth what it is worth, and we know what the courts say it is worth.
As you see, we are wrestling with this issue and trying to do our job, without insulting anybody, I might add. In the course of your testimony, Ms. Walmsley, you said that the majority of Canadians' pension savings will now be protected. That statement implies that a minority of Canadians' pensions will not be protected. Can you clarify that point?
Ms. Walmsley: I will make a few comments and then I will ask Mr. Johnston to speak more specifically to the question.
As I mentioned earlier, the bill is complex and the rules around the investments of Canadians, whether in a pension plan, registered retirement savings plans, or other variation are complex.
In the course of our discussions, we attempted to clarify to ensure that retirement savings in general would not be negatively impacted. Based on the dialogue, the emails, et cetera, we believe that the large majority have been addressed. There are a few minor exceptions of unique circumstances that are not common. We believe that some of the tax implications in those circumstances can be completely avoided with awareness of these rules.
Mr. Johnston: To further elaborate on the exclusions, as my colleague has noted, the vast majority of pension plans and the acts created by statute, such as Canada Pension Plan or Case Depot are included. In a perfect world, everything would be included in the regime. Outside the regime are pension plans with fewer than 10 members and individual pension plans. Registered retirement savings plans, RRSPs and registered income funds, RIFs, have a different accommodation. Rather than the complete accommodation from the resident contributor or resident beneficiary rule, Finance Canada has offered a solution that we have indicated would be ultimately satisfactory. For the treatment of RRSPs, holders would be permitted to hold a non-resident trust provided that it follows the exemption in paragraph (h) with one of the provisions for the restricted property test being met. It is a Byzantine process and there are twists and turns. To the department's credit, it alleviates a fair amount of the issue.
Senator Goldstein: That is not in the letter that technically we have not seen yet.
Mr. Johnston: The April 2 letter makes some reference to RRSPs. In terms of the subsequent qualifications, we and representatives of the pension industry were seeking comfort that the reference to other similar provincial pension plans, because they mentioned that the Canada Pension Plan Investment Board, also included the Case Depot and the Public Sector Pension Investment Board, PSBIB. One of the other provisions was segregated funds, where their servicing defined contribution plans and unit trusts are covered because there was a reference to certain Canadian intermediaries. We think at this time that we have a fairly comprehensive —
Senator Goldstein: Except that the exemption is not an exemption and the observations, which you indicated to us insofar as RRSPs are concerned, are not contained anywhere in this letter or any other letter.
Mr. Johnston: We have had the conversation.
Senator Goldstein: You have had conversations, as you told us you did, but is there any letter or anything in writing that we can look at to try to understand?
Mr. Johnston: In the second-last paragraph of the April 2 letter, there is a reference. The problem is that it is technical but there is a reference to modify the provision of paragraph (h) of the definition. The basic rule is if an RRSP is held through a mutual fund trust, where all the members of that trust are either RRSPs or registered pension plans, RPPs, the members can invest in the non-resident trust through the rule. There is a provision with respect to RRSPs in that April 2 letter.
Senator Goldstein: That provision works only if the pool contains only RRSP people. If I were to invest a portion of my RIF in a pool that contains other kinds of people, then I will not be exempt.
Mr. Johnston: That is correct.
Senator Goldstein: That is a problem.
Mr. Johnston: I agree that it is a problem. That is why we are working with Finance Canada to address some of the consequences. The fund industry will need to separate all these co-mingled structures. The result will be 800 advisers creating new plans, new costs and not having the unit holder account to achieve mutual fund trust status. We propose that there be a look-through to the members of a pension plan, similar to the look-through accommodation for members of a group RRSP, to bring the number above the arbitrary 150.
Senator Banks: I do not understand any of these things but I want to ensure that the process you have described of advisers separating all those investments will increase employment. The letter will say that the exemption will not apply to a trust or a corporation if any of the activities of which is to administer, manage or invest the monies of a retirement compensation arrangement, RCA. Is that okay?
Mr. Johnston: To clarify that point, Finance Canada was not comfortable with extending RCAs under the umbrella of the exemption from the resident contributor or resident beneficiary. Both Pension Investment Association of Canada and the Investment Counsel Association of Canada were willing to recognize this situation as a positive compromise and a win.
Ms. Walmsley: There was recognition by both associations that there is an existing different tax treatment for retirement compensation arrangements. We were not about to go into that area and open up a can of worms.
Senator Banks: If an existing corporation or trust has that aspect to it, they will separate that out and create a new entity.
Mr. Johnston: Correct.
Senator Goldstein: I am not specifically worried about me because I do not invest in trusts, but I am worried about people who take their RRSP money and inadvertently find themselves captured by a Byzantine language, which causes their savings to be potentially taxed. I find that difficult to live with.
Mr. Johnston: If I can offer one clarification that probably comes to the department's defence, for the most part, an RRSP would not be able to invest in a non-resident trust directly.
Senator Goldstein: No, but it can invest in a pool.
Mr. Johnston: Yes.
Senator Goldstein: That is the point I make and that is the problem.
Ms. Walmsley: What we explored with the department in terms of the funds that are co-mingled with taxable and non-taxable investors, including the RRSPs, it was difficult to exempt the RRSP holders in co-mingled funds without providing special benefit to the taxable investors in that fund. The result was there was no easy solution to that situation. The solution to ensure tax fairness about the taxable investors and the RRSPs was that fund managers would separate the funds and ensure the RRSPs were protected.
Senator Goldstein: A woman who has an RRSP and uses some of that RRSP money to invest in a pool, which may find itself captured by the language, runs a risk.
Mr. Johnston: I agree, but a burden will fall on the investment fund industry to ensure that situation does not arise. I agree with you, senator, there are issues, though.
Senator Goldstein: You have done the best for the organization that you represent so that is fine.
The Chair: I have asked Mr. Ernewein to come to the table in view of the point that you have raised. He may or may not be able to assist you.
Would you like to comment on this?
Mr. Ernewein: Yes, hopefully, I can be of assistance. I think Mr. Johnston has spoken to the point already but I wish to emphasize that the reasoning in terms of borderline we propose to draw in the recommendation we have made is that it is all about exempt pension fund investment. Mr. Johnston has already said that RRSPs are constrained commercially in terms of their smaller size individually versus pension funds in where they invest in the exotic foreign investment any way. There are regulatory constraints on RRSPs that pension funds may not face as well. Practically and legally, that sort of direct investment will not occur.
The point raised in our discussions is whether it is possible, when RRSPs, being a form of retirement savings, are together with other retirement savings, or other RRSPs or pension funds are put together and, in that respect, will have the scale and, perhaps, the legal capacity to invest offshore as well. We think that situation can arise and the rules propose to accommodate that. The line we have drawn, which you talked about — and I know we have talked about with the Investment Counsel Association — is what to do with mutual funds comprised of taxable investors and retirement savings investments. The problem we have is that the taxable investors, according to the theory on which the rules are based, should be subject to the same level of tax whether they invest domestically or in foreign jurisdictions. The challenge is to try to do what we can for the tax exempt retirement savings vehicles, while trying to maintain the tax and the application of the tax rules, including these rules, to the taxable items. That challenge has led to a practical solution of saying that a pooled fund vehicle will qualify for this exemption, if it is comprised exclusively of retirement savings. If not, then we do not have the wherewithal within the scale and number of pages of the Income Tax Act to start deconstructing the mutual funds to find out how to tax or how to apply the rules to the taxable investors within it and how to apply different rules to the tax exempt retirement savings within it. We know from past experience that funds have been able to set up separate vehicles for the tax deferred investments — they have done that when the foreign property rules were in place. It is probably not ideal; they would probably like to achieve as much scale as possible by putting them together. However, it seems to us to be feasible for them to do this and to have us deliver a pure retirement investment vehicle, including a pooled fund, to provide that relief.
Senator Goldstein: Can you not achieve that situation by exempting RRSPs and RRIFs, period? If, after all, you seek to tax investors whose mutual fund invests elsewhere, and minimize the tax burden; and if you want to say to those who are taxable, sorry, you must pay the tax differential — which I understand and which is appropriate policy — can you not simply say that RRIFs and RRSPs, absence tax avoidance section 248, are exempt as you de facto did with Foreign Accrual Property Income, FAPI?
Mr. Ernewein: I understand the point. That question is a fair one, but it is not the particular investor — your RRSP or mine — that is subject to the rules; it is the fund and the characterization of the fund. It is a sort of binary answer. It is either subject to the rules or it is not. In determining whether or not it should be subject to the rules, we have said not in the case where it is retirement savings. Where there is some of each, then we have said, no, it still remains subject to the rules.
Senator Goldstein: If one third in value of the fund is not a tax exempt vehicle and two thirds are tax exempt vehicles, can you not say that, with respect to that particular mutual fund, the one third of the revenue and income resulting there from which is ascribable to the non-exempt fund is taxable and the two thirds are not?
Mr. Ernewein: It sounds simple and attractive for that reason. When you go into it deeper, as we have in the past, it rapidly becomes more complicated.
The Chair: That is helpful, Mr. Ernewein.
Senator Banks: Have you or have officials from your department talked to people from the Department of the Treasury about this? When representatives from Stikeman Elliott appeared here they suggested that it was the view of that U.S. department that this position was not consistent with the letter or with the spirit of Canada-U.S. tax agreements.
Mr. Ernewein: I think I was asked the question in December and at that time I said we had not. In terms of treasury — and I do separate them from the Internal Revenue Service — there had not been discussions with them. However, there had been communications between our Canada Revenue Agency and the Internal Revenue Service.
For the sake of completeness, I will say that we were in Washington a few weeks ago to work on a technical explanation to the Canada-U.S. treaty that the government signed last year. We were before the committee last year to consider it. In a brief discussion at that point, that was referenced but that was the only engagement of which I am aware.
Senator Banks: Were you at that discussion or did you hear about it afterwards? Did the U.S. folks express reservations or objections?
Mr. Ernewein: I am hesitant to know what we are supposed to reveal in terms of these discussions but I will put that aside for now. In this case, it largely amounted to something that we should talk about some time.
The Chair: If there are no further questions of these witnesses, I wish, first, to thank Ms. Walmsley and Mr. Johnston for coming here from Toronto. It is an important issue for you and your members and it is important for us as well. Mr. Ernewein and Mr. Lalonde, thank you for coming here. This subject has been a long haul but it is not over yet. We know where to reach you.
Tomorrow morning, the Governor of the Bank of Canada will appear before us at 11:45 a.m.
The committee adjourned.