Proceedings of the Standing Senate Committee on
National Finance
Issue 18 - Evidence - May 9, 2012 (afternoon meeting)
OTTAWA, Wednesday, May 9, 2012
The Standing Senate Committee on Finance met this day at 2 pm to review the subject matter of all of Bill C-38, an Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures, introduced in the House of Commons on April 26, 2012.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honorables senators, we begin today our review of the subject matter of all of Bill C-38, an Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.
[English]
Honourable senators, as you are aware, we have been given the order of reference by the Senate to study the subject matter of Bill C-38. This is the first of what we expect will be two budget implementation bills following the budget of March of this year. We probably will have the other budget implementation bill in the fall. This bill comprises 424 pages and it covers many different areas of the budget, as well as certain other measures, as is indicated in the title to the bill.
Honourable senators, we have been given a briefing binder. Everyone should have the binder. We will be asking government officials to go clause by clause, working through the bill. We have 24 witnesses today, who will be appearing in the next hour and a half. After there has been an explanation of the sections of the bill by one of our witnesses, we will look around to see if there are any questions requiring clarification; if not, we can proceed to the next section.
With 24 witnesses, I will not read out the names of each witness. To get started, we have Shawn Porter, Ted Cook and Sean Keenan from Department of Finance with respect to Part I of the Income Tax Act; and from Canada Revenue Agency, Mr. Brian McCauley is here as well.
We have a preliminary interjection requested by Senator Ringuette.
Senator Ringuette: Thank you, Mr. Chair. I just want to know whether the officials from the different departments here today for this meeting will be coming back for further questioning on the issue, or do we question as we go along because they will not be reappearing for this study?
The Chair: It was not steering committee's intention to bring them back again at this time. If you need some clarification or understanding, now is your time. We will be continuing with the study after we have been through the whole bill with the government officials. The intent of the sessions today and tomorrow is for us to gain an understanding of what is in the bill, and then we can determine what other witnesses we may wish to hear from to have a fuller understanding.
Seeing no other requests for interventions at this stage, we will start with Part I of the bill. Who would like to start us off with Part I of Bill C-38?
Ted Cook, Senior Legislative Chief, Tax Legislation Division, Department of Finance Canada: Mr. Chair, I will start. I am Ted Cook, Senior Legislative Chief with the Tax Legislation Division of the Department of Finance.
Just as a matter of how the committee would like to proceed, would you like me to proceed in order of the bill, just each clause by each clause, or to discuss the various measures?
The Chair: Mr. Cook, we are following the bill in front of us, and if you just give us general comments it is not very helpful. If you can give us general comments in relation to the bill itself, then we understand. Sometimes your comments may relate to one or two sections of the bill, and that is fine. We will be asked, in the next several weeks, to go through this on a clause-by-clause basis, so we would like you to go through it on a clause-by-clause basis and tell us what is there in order to help us understand that.
Mr. Cook: I am happy to do so.
Part 1, clause 2, is the first substantive clause in Bill C-38. This clause makes a couple of minor amendments consequential to the Marketing Freedom of Grain Farmers Act. This is not a budget measure. This is a consequential amendment that contemplates either the eventual dissolution or commercialization of the Canadian Wheat Board and simply takes out a reference to "Canadian Wheat Board" and provides that cash purchase tickets, which allow a tax deferral for farmers of certain listed grains who deliver them to licensed elevators, that deferral will be eligible for any farmers in Canada rather than just those in Western Canada, which had been the case previously. That is clause 2 of the bill.
The Chair: Is there a reason, under subclause 5 of the act, presumably, why "canola" and "Canada" are underlined?
Mr. Cook: Yes. Those are the additions. The underlining will indicate where a change in the wording of the Income Tax Act has been made. Canola was added to clarify the types of grains. Canola is sort of a modified version of rape seed. The original act had "rape seed," and we have added "canola" to be comprehensive. The word "Canada" replaces "area designated by the Canadian Wheat Board." Rather than just referring to a designated area, it now refers to all of Canada.
The Chair: No questions from anyone. Please proceed.
Mr. Cook: Clause 3 relates to the budget measure relating to the Governor General and the Governor General's salary. Currently under the Income Tax Act, any income from the Office of Governor General is exempt from taxation. What Budget 2012 proposes and what this bill does is provide that salary under the Governor General's Act will no longer benefit from the exemption and so will be taxable. We will see later in Part 1 that the bill will also adjust the Governor General's salary.
Senator Buth: I understand that in this clause this proposed amendment is intended to ensure that the overall net compensation remains unaffected by the tax change in Budget 2012 and that this adjustment is consistent with what has happened in other jurisdictions, such as Australia and New Zealand, when they moved to tax their Governor General's salary. Can you confirm that and then speak to what has occurred in those other countries?
Mr. Cook: Essentially, your points are correct. The thrust of the measure is to ensure that the Governor General is left in the same after-tax position. In 2001 and 2010, New Zealand and Australia implemented similar changes in their own legislation, and even looking at the salary levels in those countries, Part 1 would provide that the Governor General's salary starting in 2013 will be $270,602, and that is roughly in line with the salaries that were put in place in those other jurisdictions mentioned.
Senator Ringuette: I have looked at this issue in particular and this provides an after-tax income increase of 27 per cent to the Governor General. Can you tell us if it has been the same situation in regard to Australia and New Zealand? Especially at a time of budget restraint, why would we increase after tax the income of 27 per cent?
Sean Keenan, Director, Personal Income Tax, Department of Finance Canada: The calculation of the Governor General's salary was done so that there is no change in his after-tax salary. Our understanding is that this would not be the only taxable income that the Governor General has, such that all of this income would be taxed at the top marginal rates, and so on an after-tax basis he would be left in the same net position.
Senator Ringuette: I am sorry, but you can add an additional personal exemption and you can add additional income, but it still remains in the vicinity of 25 per cent. My question is, have Australia and New Zealand also increased the net income of their Governor General by 25 to 27 per cent?
You have indicated that you are certainly aware of what has happened in Australia and New Zealand, so your awareness should also indicate if that is the case or not.
Mr. Keenan: Australia and New Zealand have different traditions on how they set the Governor General's salary, but in terms of changing the taxation, when they moved from the salary being non-taxable to it being taxable, the intent of those changes was such that there was no net change in the Governor General's salary. They introduced that at a time when a new Governor General was being put in place and so they have differences to the current situation.
However, the intent of these changes to make the Governor General's salary taxable and then to set the salary level is that there is no change in his net after-tax income.
Senator Ringuette: The intent and the reality are two different things. The reality is that if you look at any kind of income tax calculation, both federal and provincial, you will see that this provides a net increase of 27 per cent in the Governor General's pay.
The Chair: Thank you, Senator Ringuette. You are getting into debate here. Your point has been made and we understand the intent.
Senator Peterson: It is along the same line. I think Mr. Cook mentioned that the Governor General is also getting a raise. Is that in this number here or in something else?
Mr. Cook: No, you are correct; it is in Part 1 as well. I will direct the committee to page 14 of the bill. It is clause 16.
Senator Peterson: How much is it?
Mr. Cook: The salary, beginning in January 1, 2013 will be $270,602, from approximately $138,000.
Senator Peterson: It is both then. It is the raise and the after-tax issue you are addressing together, is it?
Mr. Cook: In terms of the term "raise," the salary is going up. In terms of whether it is a raise for the Governor General, as we have indicated, it is designed to leave the Governor General in the same after-tax position.
The Chair: We know the intent and the rest is left to argument. We will turn to section 4.
Mr. Cook: Section 4 implements a change to what are called in the act "eligible dividends." Under the Income Tax Act, when dividends are paid by a corporation to an individual, they are usually eligible for a dividend tax credit. That dividend tax credit can be at two rates. One is an enhanced dividend tax credit, which is designed to reflect tax paid at the corporate level, at the general corporate tax rate, and a general dividend credit, which is designed to take into account income that was taxed at the small business rate, at the corporate level.
In order to get the enhanced dividend tax credit, the dividend paid to an individual has to be designated as an eligible dividend under the Income Tax Act. Currently there is no provision for making late elections, i.e., the corporation finds out later on that it did in fact have income tax data at the high corporate tax rate and there is no way to divide up an election. A dividend is either all eligible dividend or all ineligible dividend. What this measure would do is to allow corporations to designate a portion of a dividend to be an eligible dividend and the other portion would be not an eligible dividend. It also gives the Minister of National Revenue the flexibility to allow a late designation with respect to eligible dividends.
Senator Ringuette: Who would that affect? You say the Minister of National Revenue will decide who is eligible and who is not?
Mr. Cook: It would affect the shareholders of the corporation. If there are individuals who are shareholders of a corporation and the minister exercises the ability to allow a late eligible dividend designation, then those individuals would then be able to go back and get the enhanced dividend tax credit.
Senator Ringuette: What are the guidelines that must be followed by the minister in order to accept that?
Mr. Cook: The act provides that it is just and equitable in the circumstances. Our expectation, and it is in the explanatory notes, is that it would be primarily based on looking at the impact on the shareholders who would be affected by the eligible dividend designation. There might be some circumstances where for the shareholders it might not be in their interest to have this eligible dividend designation, and also whether or not the corporation had the income to support the designation.
The Chair: Thank you. Is there anything further on number 4? Seeing nothing, let us proceed to subsection (5).
Mr. Cook: Subsection (5), this measure is essentially an extension of a measure that was before the committee last year. This is the extension of the tax credit available to holders of flow-through share investments. This is the same credit that has been extended for the last number of years relating to investments in flow-through shares and this again extends the measure for one additional year in support of mineral exploration.
The Chair: Thank you. Clause 6. If I do not see any questions, we will just carry on.
Mr. Cook: Clause 6 is fairly lengthy, and it relates to a change to the Registered Disability Savings Plans. Normally an adult individual can open a Registered Disability Savings Plan for themselves and, in cases where the adult individual lacks contractual competence to enter into the agreement, if they have a legal representative appointed for them, then that representative can establish an RDSP for them. This measure addresses that grey area where there is some doubt by the issuer of the RDSP, the financial institution usually, as to the contractual competence of the individual to enter into the RDSP. In these cases, where there is some issue with respect to the competence but no legal representative has been appointed, this measure will allow qualifying family members, being spouses, common law partners or parents, to enter into an RDSP and be the holder of the RDSP on behalf of the beneficiary. This is meant to be a temporary measure for RDSPs entered into before 2017. Some provinces do have more streamlined processes that help people enter into RDSPs in these situations. The expectation is that the other provinces will move forward in the same fashion over the next few years.
The Chair: This section runs through to page 6 of the bill, halfway down the page. Is that correct?
Mr. Cook: That is correct.
Senator Buth: I believe you answered what was going to be my question. My understanding was that normally the provinces would be the facilitator in this or take care of this type of thing. I was wondering why we had federal legislation. You just confirmed that it is because some of the provinces do not have things in place.
Mr. Keenan: Yes. A number of provinces have streamlined mechanisms to allow for legal representation that does not go all the way to full legal guardianship. This measure is intended to address temporarily the situation where a parent wants to open a plan, but having the beneficiary declared contractually or legally incompetent would be a big change in their lifestyle. It allows the plan to be opened. The measure is temporary until such time as all provinces adopt a more streamlined process that does not have those effects on the individual.
Senator Buth: I would assume there are conversations with the provinces and that they have agreed to move forward so we do not have to continue this?
Mr. Keenan: The department is undertaking a consultation process such that we can assist the provinces in the way possible to develop a streamlined process that they could ideally then announce their intention to adopt, but not all provinces have yet announced that intention.
Senator Callbeck: I was reading in the Jobs, Growth and Long-term Prosperity Bill where it talked about improvements in the Registered Disability Savings Plan. Is this plan elsewhere in the bill, or is this the only place where a change is being made?
Mr. Keenan: The budget announced five or six changes to the RDSP, and a number of them are with respect to some of the mechanical details of the program, such as what kind of withdrawals can be made, and those changes take effect in 2014. However, they need to be legislated in another bill. This change takes effect upon Royal Assent. It is the only one of the changes proposed to the RDSP in the budget that is actually being legislated at this time.
Senator Callbeck: It is the only one. I read somewhere that it was a temporary measure. Is that the case?
Mr. Keenan: Yes, it is intended that plans would be allowed to be opened under this measure if they are open before 2017.
The Chair: Thank you. We can go on to clause 7, charitable purposes.
Mr. Cook: Clause 7 of the bill deals with a couple of measures. Since the first legislative change is to the definition of "charitable purposes" and refers to political purposes, I will spend a minute or two to explain the change being made in Part 1 of the bill with respect to political activities.
In respect to political activities, currently, under the Income Tax Act, there is a specific rule or a set of specific rules that allows registered charities to carry on political activities in certain circumstances. The requirements are that the charity must use substantially all of its resources for its charitable activities, so that is sort of a 90 per cent test, which indicates that charities can use up to 10 per cent of their resources for political activities. Any activities must be ancillary and incidental to the purposes of the charitable purposes of the charity. Finally, the political activities cannot be partisan in nature. When those conditions are satisfied, the political activities that the charity or the Canadian amateur athletic organization carries out are deemed to be used for their charitable purposes for purposes of the act.
The amendment being made in Bill C-38 is simply to provide that in those cases where a charity makes a gift to another qualified donee, that gift will be considered a political activity if a purpose of the gift can reasonably be considered to have the recipient of the gift engage in political activities themselves. It does not actually change the limit of political activities. It provides a look-through rule where a charity is making a gift to another qualified donee and the purpose of that gift is to have them engage in political activities.
The Chair: Several senators would like to explore this one more fully.
Senator Nancy Ruth: In the bit you have just explicated, who determines the political activity and who has to bear the cost of that? Is it the donor foundation, the receiving charity or CRA?
Mr. Cook: Ultimately, the administration of the act obviously is done by the Canada Revenue Agency. The rule applies to charities and Canadian amateur athletic associations. If they are reporting political activities themselves, then they would make a determination, but ultimately the enforcement of the Income Tax Act lies with the Canada Revenue Agency.
Senator Nancy Ruth: In paragraph 4(c), it says
... other than income disbursed by way of a gift the making of which is a political activity.
What does that mean?
Mr. Cook: Prior to this bill, the term "political activity" was not defined in the Income Tax Act. We have put a definition of "political activity" in the Income Tax Act. We have put in what we call an "includes definition" which says political activity includes the making of a gift to a qualified donee if it can reasonably be considered that a purpose of the gift is to support the political activities of the qualified donee.
The way I read that, it does not define in the ordinary sense of what is a political activity. It provides that if you were making a gift so that someone else will engage in political activities, then that will be a political activity of the maker of the gift.
Senator Nancy Ruth: I guess this has to be worked out and tested, because I am still kind of confused. I have been asked by a number of small charities whether it is now the responsibility of the donor foundation to say, in their letter of gift, when they send a cheque for $10,000, say, that this money is not to be used for political activity. Do the donors have to protect themselves from this paragraph? Is this now the prudent thing to do?
Brian McCauley, Assistant Commissioner, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency: I was going to say that it is probably prudent in any circumstance for a donor organization to provide as much specificity and clarity about the purpose and intent of a gift. If, because of all these changes, it would be helpful from their perspective, then that would be helpful for us as well in terms of reporting and looking at the circumstances. I think your suggestion is probably a wise one.
Senator Nancy Ruth: I want to ask a question about what I sort of think is double accounting. If a foundation makes a gift to another foundation — let us say this foundation is a hospital or a church; both of those are exempt from paying realty tax — the 10 per cent rule deals with all the charity's assets, correct? If they own a building, the value of the building could be part of that, as well as their entire endowment funds and any income they get, whereas a charity that does not own a building and is not exempt and is paying rent will have a much smaller contract on what is the 10 per cent. There is a change in what the 10 per cent for political activity is.
A donor gifts to a church $10,000. The church is involved with feeding the poor, trying to get City Hall to allow their grassland to be used for a city park. That would be considered lobbying because they are in contact with the municipal government, so the foundation declares it as a political activity. The church, then, must declare it also as a political activity.
When CRA gets the returns from both charities, different sorts of charities, the same $10,000 is tracked twice. Why is that so and why is that necessary?
Mr. Keenan: I think your analysis is correct in the sense that the recipient charity is allowed to expend up to 10 per cent of its total resources on political activities. To the extent the gift is included in its resources, then, yes, it can still only spend 10 per cent.
The maker of the gift, in your example, I think was the foundation.
Senator Nancy Ruth: Yes, because this does not apply to individuals.
Mr. Keenan: That is right. The foundation is able to spend 10 per cent of its resources on political activities. This is saying that to the extent that it gives a gift to another qualified donee for the purpose of conducting political activities, then that must be included in its own 10 per cent.
The intent is to say, yes, the spirit of the law is that charities should have to have charitable purposes. That is what they are supposed to be doing. They are supposed to be engaging in charitable activities. If they are able to spend more than 10 per cent of their resources on political activities by engaging on their own and making gifts to other qualified donees for the purposes of conducting political activities, then that is outside the spirit of the law.
Senator Nancy Ruth: Is there a policy purpose in this provision, though? Are you aware of a policy purpose for this provision now? Is CRA going to come out in five years' time, let us say hypothetically, and say: X number of dollars in Canada is given to political charities, and which you have double counted?
I suppose that is the fear behind my question. Have you thought it through that far?
Mr. McCauley: In terms of reporting, I would like to think that the information we would be providing would be able to distinguish between amounts that have been identified that have been given to and therefore would have been received by another organization, as opposed to those executed by the organizations themselves. That is part of the discussion we will have in the next few months, once the bill is passed, with the sector and with other charities, to sit down and say: Okay, how best do we do this in a way that is simple and clear for you, and simple and clear and transparent for Canadians when we post the information?
Again, it is a good caution for us to be aware of when we provide that information or statistics.
The Chair: Senator Nancy Ruth, it is good that you raised that issue. Unfortunately, you have a lot of other senators who are now more interested in following up.
Senator Mercer: Thank you for being here. I have been a professional fundraiser since 1978, so I am familiar with CRA's rules with respect to activities of charities in this country. However, I am having difficulty in trying to figure out who will define what "political activity" is. Obviously, if a charity were to give my political party money — or my colleagues across the way, their party's money — to a campaign, that is a political activity. However, my definition — and perhaps others' definition in the room — of what is political may be entirely different.
For example, when I became executive director of The Kidney Foundation many years ago, I was told — and I believe it and practice it — that the goal of The Kidney Foundation was to do three things: raise money for research into kidney disease and hopefully find a cure; second, to provide services for patients suffering from kidney disease; and third, public education, which meant being out there in the public, educating them on an ongoing basis. That took many forms, from the production of advertising, public service announcements, et cetera, to distribution of pamphlets in schools and homes, and indeed having people go door to door to help educate people.
Is that a political activity? Yes, depending on whose definition it is. I am trying to change public opinion to focus on the fact that kidney disease is an important problem that they need to be concerned about and indeed they need to give some of their money towards.
Also, when I visited with the provincial minister of transportation in Nova Scotia, I convinced him that it was a good idea to put organ donor cards on your driver's licences so we can retrieve those organs for organ transplant. Was that a political activity? Was I engaged in a political activity on behalf of The Kidney Foundation at that time?
Mr. McCauley: Again, without getting into details — and I certainly would not want to challenge someone who has been working in this sector since 1978 — I would not think anything you described would fall into our description of political activity. We do have written guidance on our website that has been there for a number of years, which is unchanged and would remain unchanged by the changes here. It typically speaks to things like a call to political action, to contact your MPs to try to change a bill or a law. It also talks to trying to change a policy or a direction, again, of government. Those will not change.
One of the things we do intend to do, again working with the sector, is to sit down, talk to them and provide more examples, more explicit descriptions of what is in and what is out, so that there is as little grey as possible. Examples like yours would be an excellent addition to what we already have on our website.
Senator Mercer: Let us fast-forward my career to the time I was executive director of the Canadian Diabetes Association, and let us combine that with later on when I became a senator. The Canadian Diabetes Association's objective was to get the government to make diabetes a priority. I do not want to give you the background and details as to why it should be a priority, and it should be.
They set about to try to change the government of the day's mind as to how they allocated funding for medical research. They did that in a direct way. They contacted ministers and MPs. In the room upstairs here they had a reception for all of us where they explained their message to us. That was trying to get the government of the day to change its mind. Indeed, at that time, the government did respond and gave a significant amount of money for diabetes research. There was an effect afterwards. Was that a political activity?
Mr. McCauley: Again, I do not want to make a definitive statement, but it is certainly getting a lot closer to what I think would be. The example you have given is probably a good example of where it is directly related to the purposes of your charity. Certainly, given the amount I would suspect — I forget if you were mentioning the kidney or the diabetes — it was very likely that that would very much fall into the acceptable activity and acceptable range. Again, it is acceptable and it is actually contemplated that that would be something that certain charities like that would undertake. Again, it would be another good example of what we would want to expand our materials to cover.
Senator Mercer: I am a huge supporter of CRA. I think you do a great job and administer the charities sector very well.
What about a donation from, say, the Koch brothers foundation in the United States to the Fraser Institute? Some report $373,721 were given to the Fraser Institute; the Huffington Post reports there may be up to $500,000 from the Koch foundation given to the Fraser Institute, directly related to the Fraser Institute's support of certain government policies. Is that a political activity?
Mr. McCauley: We are getting into specifics about organizations. I think I should not comment, in fairness. I do not know all of the details about the circumstances of both those organizations and their purposes.
The Chair: We accept that.
Senator Eaton: I do not think the Fraser Institute is a registered charity. I think it is an NGO.
The Chair: We will put that on the record. That is what Mr. McCauley was saying, that he does not have all the facts. It is hard to give an opinion when you do not have all the facts.
Senator Eaton: He is a wise man.
You said an interesting line, Mr. McCauley: "directly related to the purposes of your charity, political activity." That is a very important sentence.
Mr. McCauley: Yes.
Senator Eaton: In other words, to go back to Senator Nancy Ruth, if she gives $10,000 to her church, or if a foundation gives $10,000 to a church that feeds people but it also sends protestors off to the G20, sending protestors off to the G20 could be said, could it not, to be not directly related to church activity?
Senator Nancy Ruth: It seems you are asking me.
Senator Eaton: We are parsing this very carefully. I am asking Mr. McCauley.
The Chair: We seem to have a panel of lawyers here. Does anyone wish to answer that, or will we leave that as a comment?
Mr. Cook: To just emphasize, this measure does not change at the base level what constitutes a political activity, other than in the context of a deeming rule for particular gifts that are made. Whether a particular activity by an organization constitutes a political activity is not affected by the measure.
The Chair: That is a good point, Mr. Cook, to get us to focus on what this amendment is all about. There may be other aspects of the section that require a policy discussion, but that is not before us in this particular instance.
Senator Eaton: Thank you.
Senator Nancy Ruth: May I have a supplementary, chair?
The Chair: I will put you down on round two.
Senator Andreychuk: Just covering this whole area on political activity, the charitable act was set up for charities so they would not be taxable and we would have good benefits in the community. We understood that you could engage incidentally in political activity because in a free society you are going to advocate for the cause you started your charity for. I understand that. However, it is still a grey area. Over the years, your directives and statements have been helpful to charities in identifying how far they should go. I think to a great extent they have been very responsible. They do not really want to be involved in political activity; they really want to further the charity that they are involved in, the cause they are involved in. Sometimes that means advocating. We went from advocating to lobbying to political activity engaged incidentally in non-partisan political activities.
I think that is how we have grown in Canada, from it being a non-issue to a contentious issue. That grey area will stay.
Maybe we should look at the whole charities act in a different way. You are going to give to a foundation that has the same discretion as you have, that same grey area, and if they use it in a way that you did not intend, how will you be able to put all of those qualifiers in a letter when you hand the money over, except goodwill; that you have done due diligence to find out they are a good foundation, you trust them, and this is what you are giving them the money for?
Sometimes it is very hard to then be in a position of responsibility to track that they actually did that. Will that first group monitor the second group? Is that good public policy?
The Chair: The question of good public policy is really not for you to answer, but can you answer the first part of that?
Senator Andreychuk: They drafted it.
The Chair: Yes, under instructions.
Mr. McCauley: I was going to observe, as I mentioned earlier, that for both organizations, the degree to which they are forthright, honest and provide information both in terms of as they may exchange funds and direction related to that and minutes and other things, we have always taken a very balanced approach to looking at the facts of the circumstances. I would like to think that that will not change in these circumstances, either.
I do appreciate, again, it is the reasonable effort of the organization that is providing the funds that we would be looking to, along with the documentation and other things. As you say, many charitable organizations do not engage in this kind of activity, in any event. It is actually a small number of charities that might have to go to an additional degree of documentation or information.
Senator Andreychuk: The test of reasonableness I appreciate, but it is the question of due diligence and if you are going to engage that with the charities, to find out what is due diligence to ensure that the money you give is used for the purpose. That has been the oversight role of your agency, not the original charity.
Mr. McCauley: We do provide information on our site. I would think, once again, sitting down with the sector, we provide some examples of what is good due diligence, what are the practices and the things to put in place. Our intent is to be helpful. Charities self-assess and self-regulate. I can see ourselves having a bit of a checklist of good practices. Again, we developed these with Imagine Canada and other organizations. I think that would be our process, to try to provide as much guidance to the sector and to be helpful. As you say, there will always be a bit of grey, but if we can make that a little less grey, that is what we want to do.
Senator Andreychuk: We are still stuck with political activity not being defined, except through your directives and this negative qualifier now.
Mr. McCauley: It has always been described in our materials for a number of years now, and that has not changed. As I say, there are some extensive descriptions of it, but we are always open to provide more descriptions and more information if that will be helpful over the next couple of months. I will not tell you it is easy, but we have been asked to do it so we will be doing it.
Mr. Cook: If I may continue, I would emphasize that what is provided in the amendment in the law is that we are looking at the purpose of the gift. There is no specific legislative requirement that you track through and see what the funds you received as a gift are actually spent on. It is an objective analysis, and that is the words "reasonably be considered" of the purpose at the time the gift was made. I do not think it contemplates a full obligation to essentially monitor what the gift is used for.
Senator Peterson: Following up on that, on the so-called 10 per cent rule, I think you confirmed again that charities self-report on that? Is that the same? It stays in place?
Mr. McCauley: Yes.
Senator Peterson: If they report zero, then that would be zero. You would have no cause to pursue it any further. In their mind, they think they are not doing it. What triggers an audit from the CRA?
Mr. McCauley: Any number of things could trigger an audit. We do a number of audits on a random basis across all different kinds of charities just for general risk ranking and validation purposes.
I have to admit that information from the public and from other organizations is extremely valuable. The public is very vigilant about making sure that money is spent properly, and the information that we get from other organizations and charities is also a significant feature of our risk ranking.
Then there are a number of other areas where, for example, if the law has been unclear or in fact the sector itself has said there is a lot of uncertainty out there, sometimes we will do reviews and audits to determine the degree to which the law is well understood and we need to provide additional information.
As you know, we do close to 1,000 audits per year, and there are not a lot of revocations. Many times it is an education or a compliance agreement at the end. There are very few what I call intentional non-compliants out there. There are some and we do revoke for cause, but that gives you a general profile of how we approach audits.
Senator Peterson: If you do that and find out they declared zero political activity, and then you found out that, in your opinion, they had, are there restrictions? Are there penalties? Do they lose their status? What happens to them?
Mr. McCauley: One of the features that Mr. Cook will get to is this bill does propose a new sanction that will allow us to suspend receipting privileges if there was an overage on political activities. We think that is quite helpful, because right now the only hard sanction we have would be revocations. This bill introduces an intermediate sanction, which is a useful tool for us.
It very much depends on the circumstances and the facts. If it was a small amount and the charity did not understand, as determined by talking to the organization, then probably it will be a matter of us saying, "Here is how you need to do it going forward. Please keep this in mind. Let us move forward."
There are other cases where obviously it was wilful and there was intent, and then obviously we would be looking at a more significant consequence for the charity.
Senator Ringuette: My first question is to Mr. McCauley. You said earlier, and I quote you, that you have been asked to do it. You had been asked by whom to do it?
Mr. McCauley: By Parliament, when the bill is passed.
Senator Ringuette: It is here and the bill is not passed, so you have been asked by whom. Your particular minister or the Minister of Finance?
Mr. McCauley: My reference was to the bill. The bill is Parliament asking us. If I was not clear, that was certainly the intent of my remark. We were asked by Parliament.
Senator Ringuette: Did you participate in any way in the drafting of this legislation?
Mr. McCauley: Me personally, no.
Senator Ringuette: No, but your department?
Mr. McCauley: I am certainly not qualified.
Senator Ringuette: You indicated to us that, on a yearly basis, you do about 1,000 audits of charities?
Mr. McCauley: Yes, we try for around 1 per cent. Last year, it might be 750 or 850. It varies a bit, but we are in that zone, yes.
Senator Ringuette: For instance, in the last three years, how many charities that you audited brought to your attention some question with regard to political activity?
Mr. McCauley: I do not have the information on that here today.
Senator Ringuette: Could you provide that to the clerk? If there is a needed change in the legislation, then there must have been events to trigger that. I suppose that events to trigger that are the result of audits performed by your department.
Mr. McCauley: I will see if we have the information, but I would think there were a lot of other considerations that would have went in. That again is a policy discussion.
Senator Ringuette: Could you give us some examples of other considerations that would have triggered the changes in the legislation?
Mr. McCauley: There has been discussion around the clarity, for example, around political activity and the need to provide additional information. The bill does provide for information to be provided that can be made public and be put on the website. That was information —
Senator Ringuette: By whom? Questioned by whom? I am trying to identify why all of a sudden there is a change in policy and it is brought before Parliament. You need events to trigger an action. So far, you have indicated that, if there were some significant findings in your audits on a yearly basis, your department would have made a recommendation through the process to have the legislation changed. I am wondering what the triggers are for this. Is this really necessary to respond to the trigger, or is this just a political policy that has nothing to do with any administrative purpose at all?
Mr. Keenan: This particular provision that is in Bill C-38 is to say that where there is a transfer of funds, a gift from one charity or a registered Canadian amateur athletic organization to another qualified donee, a purpose for which is for the qualified donee to conduct political activities, then that should be included in what the maker of the gift's political activities are.
Senator Ringuette: Mr. Keenan, are you saying to us that you know of trigger events that have resulted in this change in the policy? Give us some examples of trigger events that justify these changes.
Mr. Keenan: I think the question you are asking is —
Senator Ringuette: Do not interpret my question. I am trying to interpret this legislation and the meaning of it and the consequences of it. I am trying to identify the administrative events that triggered these changes. If you have none to put before us, then my only conclusion is that we are looking at political events that have triggered this legislation, or political people who have triggered this legislation.
Mr. Keenan: The budget states that there have been concerns about the political activities that charities have been engaged in. There have been concerns expressed by parliamentarians in the media, certainly.
Senator Ringuette: Certain parliamentarians, yes.
Mr. Keenan: The government made a decision that Canadians want to be able to give with confidence to charities to know that they are using the donations that Canadians give them for their stated charitable purposes and not excessively for political activities.
The budget has a number of measures that provide additional resources for education purposes such that the awareness of political activities is out there and introduces this amendment such that the transfers of funds from one registered charity to another qualified donee for political purposes are considered to be part of that charity's political purposes such that they cannot get around the spirit of the 10 percent rule, as I said earlier, by making a gift to another qualified donee.
Senator Ringuette: You still do not have any trigger except that certain political people wanted this.
Mr. McCauley, when you do audits of these charities, and with regard to political contribution, do you look at Election Canada's contributions to the different political parties to see whether the charity organizations have directly made political donations?
Mr. McCauley: My understanding is that is prohibited, as your colleague just mentioned. If we were doing an audit and that was uncovered, either if we had the authority to act or the authority to share that information with another organization that had the authority to act, then we would do so.
Senator Buth: We seem to be talking a lot about the 10 per cent rule, the definitions, et cetera. Is it correct to say that the proposed changes to the legislation do not change any of that? My interpretation here is that we are talking about changes to a qualified donee and foreign organizations, that we are not changing what is already in place in terms of the 10 per cent rule and how CRA defines political activities.
Mr. Keenan: I think Mr. Cook explained earlier that the only change that is being made is that registered charities are only allowed to expend 10 per cent of their resources on political activities that are incidental, and that is not changing. The only change being proposed is that where they are making a gift to another qualified donee, a purpose of which is for that qualified donee to conduct political activities, that gift would now be included as their own political activities and there is no change to the 10 per cent limit.
Senator Buth: Right.
Mr. Keenan: The CRA's guidance is not changing.
Senator Buth: Really, it closes what some might consider to be a loophole. As a foundation, if I give $100,000 to the church and it is designated for political activities, normally that would not fall under my 10 per cent rule because I have given it to someone else, right? What I am catching is the fact that I have given a donation to someone else, so it is the qualified donee portion of it, is it not?
Mr. Keenan: Right now, a gift to another qualified donee would be considered to be your charitable activities. If the gift is for a political purpose, then the proposal is that that be considered part of your political activity.
Senator Buth: I wanted to clarify that, because I think there is some confusion in that we are changing some of the rules related to political activity, et cetera.
The Chair: Thank you, Senator Buth. That was helpful.
In round 2, I would ask that senators put one question to the panel so we can get on to other parts.
Senator Nancy Ruth: Given that comment, I wanted to put on the record that you have been kind enough, for registered charities that have less than $50,000 in annual income, that they can devote up to 20 per cent to political activities; those between $50,000 and $100,000 can devote 15 per cent; and those between $100,000 and $200,000 can devote 12 per cent. I think that is important for the world to know, and that was a great thing you did.
In subclause 7(1), you say "political activity will include the making of a gift to a qualified donee if it can reasonably be considered that, "a" — this is a question about the article "a" — a purpose of the gift is to support the political activities . . ." Why does the condition not read "the purpose"? Why "a"? Why is there no minimum test or exclusion here? If a foundation grants $100,000 to a university, church or hospital, and $100 of that grant could arguably be shown to be for political activity by the qualified donee, how do we calculate the mathematical allocation for what "a purpose" of the gift is, when "the purpose" of the gift is not political?
Mr. Cook: The measure was drafted with the article "a" rather than "the" in order to recognize the fact that a gift might have a multiplicity of purposes. There may be two or three different purposes, or perhaps even more. We felt that if you used the word "the," it would simply make it unworkable because, as you pointed out, if there is more than one purpose, the measure would simply not apply.
The word "a" was obviously chosen on purpose. There is a sense that there has to be a real purpose in order to fall within the definition of "political activity." "Purpose" is a term that is used a number of times in the Income Tax Act. What it is meant to do is convey the idea of the end intended, the object to be attained. Those are the kinds of definitions that are given by the case law. In your example, where you have a significant gift and only $100, I do not think that would meet the test of being a purpose of the gift. We think the use of "a" is appropriate.
To go on to the second part of your question, there will not be an allocation of the gift. If you say that the purpose is 50 per cent to be for political activities and 50 per cent not, the rule does not give an allocation. It does not say: If you give $100, half of it was meant to go to political and half of it was meant to go to something else. It is binary; either the gift will be considered to be a political activity or it will not.
Senator Nancy Ruth: Can the receiving charity, the active charity, bank some of those 10 per cents? I am thinking of perhaps a woman's health issue. There is no particular issue this year. There is no political activity. All of a sudden, a government does something that is of real concern to women, and those women's health charities get active. Can they pick up some of the non-political monies they have not used and use it in the year where there is a piece of legislation that is unfavourable to them?
Mr. McCauley: I do believe there is some guidance posted on our website that indicates that there is some tolerance.
The Chair: There is nothing in this act amending the legislation in relation to that?
Mr. McCauley: No.
Senator Mercer: First, I think it should be noted that, overall, Canadian charities adhere to the law as administered by the CRA, and the CRA has done a terrific job in the past 10 years of reaching out to meet with the charitable sector to help streamline how things are administered. Of course, charities do need to report annually to the CRA and give them the financial details of the income they receive and their disbursements. That would be a simple process. That reporting is there. CRA then, sometimes randomly and sometimes by trigger of a complaint, does audits.
Under the current act, CRA can lift the licence of a charity if they are in breach or determined to be in breach. This will now provide for the suspension of receipting privileges. My particular question is as to how that decision is made, who determines it and what the role of the minister is in making that decision.
Mr. McCauley: Again, we are well into administration, but I will give it a shot, and I say that in the sense that we want to have discussions with the sector on charitable organizations before we land hard on items.
The Chair: Is the question indirectly related to the amendments that appear here?
Senator Mercer: Yes, suspension of privileges.
The Chair: Then it is a proper question.
Mr. McCauley: We would certainly be looking for evidence, for example, that would fall short of a requirement to revoke but would be significant enough that would justify, for example, the suspension. That is the kind of information and guidance that we would, after talking to the sector, publish and say, "Here are some of the circumstances." We would draw a continuum and say, "These are the kinds of things that, to us, would meet the test." Those are not decisions taken by the minister. They are delegated down into the CRA and frankly never go near the minister. They are not decisions that are taken by the minister. They are decisions taken by us as we administer the act through delegated authorities.
Senator Mercer: Thank you. We all feel better about that.
The Chair: Senator Eaton made a statement with respect to the Fraser Institute. I had the Library of Parliament determine that it looks very much like they are a registered charity.
Senator Eaton: Thank you very much. I stand corrected.
The Chair: If you have any other new information, you can let us know.
Senator Eaton: I stand corrected. They must know. Gentlemen, I assume that the extra money you are asking for in the budget is really to give you the manpower to perhaps enforce the rules that are already in the charitable act?
Mr. McCauley: People power. As has been noted, a fair chunk of the money is actually to make the systems changes to capture the information that is going to be reported by charities so that it can be displayed on our websites so all Canadians can see. Transparency was a big part of the changes to provide that additional information. There is also a component where we are expected to provide more information, guidance and advice and to make sure that gets out there and to talk to the sector, and yes, there will be more monitoring and more reviews as well, as part of that package.
Senator Eaton: You mentioned the word "transparency." When you have a donor in California or Philadelphia and he gives some money to a Canadian registered charity anonymously, and it then is given to another Canadian charity, which happens frequently, are you going to be able to track the money all the way back? If you think of salmon fishing, when you catch a wild salmon, you tag it, and no matter how you clean it, that tag stays on until you cook the salmon. Otherwise, you can be accused of poaching. If I am a California donor and I decide I am against seal hunting, and if I give money to the Environmental Defense who gives money to Tides Canada who then gives it to somebody else in Canada to fight seal hunting, are you going to be able to track me all the way to California, or do you lose me? How far back are you going to be transparent?
Mr. Keenan: The budget seeks to increase transparency of foreign donations that are intended for political activities, so to the extent that a charity receives money from outside of Canada for the purpose of it conducting its political activity —
Senator Eaton: If it goes through several hoops, will you be able to trace it?
Mr. McCauley: We certainly try. The reporting obligation, as Mr. Keenan mentioned, is coming in from the outside, but also then, as has been discussed, if it is going from foundation to charity, they are to be reporting that information. Hopefully, when we go in to do books and records and audits, that information would be available.
The Chair: Senator Ringuette promised a short question on clarification.
Senator Ringuette: It is a question triggered by Senator Eaton and addresses both the Department of Finance and the Canada Revenue Agency. They are as follows. There are four questions. I do not expect you will have the answers, but please provide the answer in writing to the clerk.
How many employees in your department got a notice letter of lay-off, by province and by classification? How many of them were sent to EX and DMs? How many staffers in your department are not under the Public Service Employment Act and under what classification? What is the cost in your department for program management, i.e. what is the total salaries, expenses, bonuses, et cetera, for the management level of your department and programs? Thank you very much.
The Chair: Colleagues, I would remind all of us that we are dealing with a budget implementation act and specific amendments to the act. This is not a main estimate work like we are normally involved with. Let us try, in the future, to keep our questions restricted to the amendments that we are dealing with. However, if you could provide that information, it would be helpful to us.
Senator Ringuette: I did ask at the beginning of this if the people in front of us were going to be coming afterwards when we do further study, and you said not necessarily. That is why I am going to ask these questions if they are not going to reappear before us.
The Chair: Let us make this clear for everybody: We have not asked these witnesses to appear on our Main Estimates. If we do decide that we would like other government departments to appear on Main Estimates, then steering will determine that. What we are dealing with now is a 600-page document of amendments implementing the budget and certain other measures in Bill C-38. This is not a main estimates inquiry.
We have 15 minutes left in this session, and we are moving on to clauses 8 and 9, Mr. Cook.
Mr. Cook: Clause 7 has a second charities measure.
The Chair: Thank you for reminding me.
Mr. Cook: Under certain circumstances, currently, a foreign charitable organization can be registered as a qualified donee under the Income Tax Act. This measure amends the requirements for a foreign charitable organization becoming a qualified donee. Essentially, under the revised provision, it allows the Minister of National Revenue, in consultation with the Minister of Finance, to register a foreign charitable organization as a qualified donee if it has received a gift from the Government of Canada and meets one of three heads: Carrying on relief activities in response to a disaster, providing urgent humanitarian aid or carrying on activities in the national interests of Canada. That is in clause 7(6). Where a foreign organization is so registered, they will be a qualified donee for a period of 24 months from the date of registration.
The Chair: Does that remove the section about a charitable organization outside Canada to which Her Majesty in right of Canada has made a gift in the last 36 months? Is that disappearing?
Mr. Cook: That is exactly right. Currently, under the act, the only requirement is that the foreign charitable organization had received a gift from the Crown. The 36-month period is actually 12 months going back, 24 months going forward.
The Chair: Thank you.
Senator Ringuette: When you talk about carrying on an activity in the national interests of Canada, would that be political activity or lobbying activity? For instance, if a certain entity wants a certain natural resource development to happen and needs to lobby the European Union, would that be accepted as carrying on "activities in the national interests of Canada" and receive a tax receipt as a charity?
The Chair: Do you have a definition of "carrying on activities in the national interest"?
Mr. Cook: I will respond in two ways. First, the foreign organization would have to be a charitable organization itself, which means it would match the kind of test that we have talked about. Whether it is a charity would have to meet that.
"National interest" is meant to have some sort of connection with Canada. The kinds of things we have been envisioning is foreign hospitals that treat Canadian soldiers and that kind of thing, where there is an organization that develops —
Senator Ringuette: In no means would this include lobbying outside of the country and putting it as a headliner as in for national interests.
Mr. Cook: The way you described it, I am not sure. Setting aside the question of national interest is the issue of whether it would meet the heading of being a charitable organization in the first place.
The Chair: Are there any guidelines? Otherwise it is an argument that Senator Ringuette might wish to make at some appropriate place.
Mr. Cook: As we have talked about with this committee, the CRA provides a lot of guidance. When this was being drafted, we certainly recognized this would be an area that would require guidance, as well.
The Chair: Yet there is none now?
Mr. Cook: No. We are implementing it as a new concept for the Income Tax Act.
Senator Mercer: I want to follow-up on my colleague's question. Assuming this passes and is implemented, then future donations from an organization like the Koch Foundation — an American charitable organization, I assume — to the Fraser Institute, they have not received money from the Government of Canada — I assume they have not — and that future donations that they may make to the Fraser Institute or any other registered charity in Canada would then be deemed to be illegal, would they not?
Mr. Cook: Primarily, this is of interest to Canadians who are making donations to a foreign organization. It being a qualified donee, they are allowed to get a charitable —
Senator Mercer: I do not think that is the main interest at all. I think the main interest is concern by someone here of people donating money to Canadian charities from outside. However, people forget that you catch everybody when you cast your net.
Senator Buth: I would like a clarification here. Does this not apply specifically to foreign charities that are given a gift from the Canadian government?
The Chair: No, that is cancelled; that is what they are taking out.
Mr. Keenan: One of the requirements is that the foreign organization receives a gift from the Government of Canada.
Senator Buth: It receives a gift from the Government of Canada.
Mr. Keenan: It needs to be in receipt of a gift. It needs to be a charitable organization and it needs to be carrying on activities relating to disaster relief, humanitarian aid, or be in the national interests of Canada. As a qualified donee, that allows it to issue a tax receipt to Canadian donors who can then claim a credit against income tax. It allows it to receive a gift from a qualified donee.
Senator Buth: How many organizations will it affect?
Mr. Keenan: On the list right now of entities that are considered to be qualified donees under the current rules, there are nine entities.
Senator Buth: This would essentially add foreign organizations that are receiving a gift and that are involved in these activities.
Mr. Keenan: If they have received a gift, yes.
The Chair: Thank you for that clarification. I had asked earlier. I thought this was a subsection (5) substitution but it is a clarification and expansion of paragraph (5)(a) under qualified donee.
Mr. Cook: I am sorry if I misspoke. Under the existing rules, once there is a gift by the Government of Canada and it is a foreign charitable organization, that entity will be automatically registered by the CRA. There is no additional test. The real test is whether there has been a gift by the Government of Canada.
The amended rule keeps that in place and then it adds the criteria that we have discussed.
The Chair: Thank you for clarifying that.
Senator Mercer: You mentioned that nine entities would qualified. Was it nine? It might be helpful if you could table those names at some future date.
The Chair: Maybe you can provide that to us.
Mr. McCauley: They are posted on our website, so we will provide them.
Senator Callbeck: I would like to clarify something. It says here the Minister of National Revenue may set the beginning and end of the 24-month period. Did you say that can go back 12 months and ahead 12 months?
Mr. Cook: The existing 36-month rule has kind of a forward- and backward-looking aspect. The expectation when drafting this is that the minister can set the 24-month period. Our idea was that it could go back. For example, if there was a particular natural disaster, aid might start to flow before the requisite paperwork could be done. Therefore, at the time the gift is made and recognition that the entity is carrying on the disaster relief, they could go back to the point in time where the need arose and then it would be a qualified donee from that point.
Clearly it was drafted with the expectation that the 24 months can start at an earlier date.
Senator Callbeck: It could go back 20 months then. It is up to the minister.
Mr. Cook: Theoretically.
Senator Ringuette: Can we have some clarification on the word "gift"? Are you talking about a financial contribution or financial participation in an event? Do you have a definition of what this "gift" could be?
Mr. Cook: Historically, I believe they have been —
Senator Ringuette: It is financial only?
Mr. McCauley: It is more expansive than just financial, but again it is fully defined on our website. I will find it and get that to you.
The Chair: And it is not being amended by this act. Thank you. I will suggest that we are ready to go on to the next section. Thank you.
Mr. Cook: Clause 8 deals with the fact that the CRA has the authority to demand any person file an income tax return. Currently that demand to file a return must be served personally or done by registered mail. All this change does is take out the requirement that the demand be by registered mail or served personally. This will allow the CRA to do this by way of online notice or by regular mail.
Senator Callbeck: Could that not create a problem? Regular mail can go astray sometimes.
Mr. McCauley: We have other ways to try to contact people when we are trying to reach out. However, we have examined this issue and even registered mail, for example, does not actually have to be signed by the person it is being sent to; it can be signed by anybody showing up at the door. When we looked at it, it really is an issue where we are comfortable that we will be able to deliver the program, save several million dollars and go forward that way. That was the intent behind the measure.
Senator Callbeck: On the average, how many times would this happen in a year?
Mr. McCauley: We are estimating around 250,000.
Senator Ringuette: Registered letter?
Mr. McCauley: Yes. It is a significant measure for us in terms of efficiencies.
Senator Callbeck: Of the 250,000, what are the main reasons?
Mr. McCauley: It is almost exclusively that you should have been filing a return with us, either under the Excise Act, the Softwood Lumber Act, the Air Travellers Security Charge Act or the Income Tax Act. It is where you are in a non- filer situation and we are encouraging you to provide us with a return that should be filed with the CRA.
The Chair: Thank you. Can we go on to the next section?
Mr. Cook: The next section implements a new measure for commercial tax preparers.
The Chair: This is clause 9 at the bottom of page 8.
Mr. Cook: Yes. What it does is introduce a definition of a commercial tax preparer, someone who receives consideration in a year to prepare more than 10 personal or corporate income tax returns. Where a person is a commercial tax preparer, they are obligated to file those income tax returns by electronic filing, except that up to 10 returns, personal and corporate, can be filed by means of other than electronic filing.
There are certain exclusions where a person is not allowed by the CRA to file electronically and for certain types of returns that the CRA does not accept by electronic filing.
We will see a little later that the bill also imposes a penalty on commercial tax preparers who do not file electronically, and the penalty is $25 per personal income tax return and $100 per corporate return.
The Chair: Thank you. I do not see any questions. Everyone understands that. Let us move on to clause 10.
Mr. Cook: Clause 10 deals with waivers provided in respect of determinations for partnerships. Partnerships are not taxpayers who have their own liability under the Income Tax Act; it is the partners of the partnership that are actually subject to tax. However, the Income Tax Act allows the CRA to make determinations of income or loss in respect of partnerships.
Normally, those determinations have to be made within three years after the filing deadline for the partnership. However, in some cases, it may be to the benefit of both the CRA and the members of the partnership to give the CRA more time to conduct an audit. Currently under the Income Tax Act, where that is the case, the waiver or extension of the time to do an audit has to be given by all the members of the partnership, which can be a bit of a job for the partnership and the CRA to get all the appropriate waivers.
What this measure would do is allow a partnership to designate a single partner who would have authority to provide a waiver to the CRA. This measure is similar to exactly the same type of authority that can be granted to a member of a partnership with respect to making a notice of objection on behalf of the partnership.
The Chair: I see that clause 11 repeals a section of the act. Is that related in any way to what you have added under clause 10?
Mr. Cook: No, it is not.
The Chair: Can you tell us what you are repealing?
Mr. Cook: We are repealing an obsolete reference to participation certificates. Apparently at one time the Canadian Wheat Board issued these certificates. As far as we know, these have not been used in some time. When we were making the first amendment we discussed this afternoon, we came across this provision and we are just repealing an obsolete provision.
The Chair: Thank you. Clause 12.
Mr. Cook: The first part of clause 12 is a consequential amendment, consequential to the change with respect to sending demands. This is just a change to the wording to make it line up with the new ability of the CRA to send by mail or use online notice.
The second part of clause 12 is the penalty for commercial tax preparers that we discussed a few minutes ago.
Subsection 3 is a consequential amendment to allow the provision with the penalty to tax preparers to apply appropriately in the context of partnerships. It gives assessment and objection rights to partnerships.
The Chair: Thank you. Clause 13.
Mr. Cook: Clause 13 returns us to political activities. This is the measure that Mr. McCauley had mentioned earlier about introducing an intermediate sanction.
This measure takes an existing provision of the act that allows for a one-year suspension of a registered charity or registered Canadian amateur athletic association. Currently it applies where you do not meet an obligation under the act with respect to books and records, that kind of thing, and expands it to the political activities.
Senator Ringuette: I have a question on process. Mr. McCauley, you may be able to answer this.
There is a one-year suspension. What is the process for that charity to be removed? Is there a process for them to be removed from the suspension, or is it an automatic period-to-period suspension? What would be the following process with regard to this suspension?
Mr. McCauley: It would depend on the circumstances. It could be, for example, in circumstances where the suspension, along with the compliance agreement, is the entirety of the consequence of the action of the charity. Therefore, when the suspension has been served out, then the receipting privileges would be renewed and we would notify them. There would be something on our website so that people would know who is suspended and who is not.
If, however, the suspension were one where, as we went through the suspension period, there were other facts and more information, the suspension could also be a step towards revocation, depending on the seriousness of the file. That is something we do now as well. It depends on the circumstances and the facts of the file.
Senator Mercer: A suspension is a year, but it could be shorter. If you suspended their ability to issue receipts and they came into compliance with whatever they had not been doing, it could be shortened from a year to three months, or whatever time period it took for them to comply with whatever they were not doing before?
Mr. McCauley: Yes. I think the wording — and Mr. Cook will correct me — is up to a year. You are right.
Senator Nancy Ruth: It also says that other qualified donees are not permitted to provide them with gifts, not even gifts that are not receipted. Does it effectively close down the charity from operating for a year unless they have an endowment fund they can draw on?
Mr. McCauley: It closes off those two streams. Again, it would depend upon the circumstances of the charity to what degree and what impact that would have on their activities; you are right.
Senator Mercer: Senator Nancy Ruth brings up an interesting point. Many charities, of course, operate on gifts they receive annually, sometimes monthly or sometimes even weekly. Therefore, if you have suspended a charity's ability to receipt the money, would it be possible for them to continue to receive those gifts that have been pledged to them, and at some future date, when the CRA is satisfied that they are now in compliance, they could then say: Okay, we have received X number of dollars over the suspended period and deem it to have been given in the period after their ability to issue receipts has been restored?
Mr. McCauley: I would have to think about that one. Offhand, I would say it would not be much of a suspension if you could do that, because essentially you could go back and give receipts for what was supposed to be a period that you were not allowed to give receipts through. However, it raises the issue of where you have, as you say, a pledge of $100 per month that you have given as an individual, how you would manage? That is the kind of thing for which we would have to provide guidance.
Senator Mercer: I would encourage you to do so. The way to go today is automatic donation, and that affects a lot of people.
Mr. McCauley: It is an excellent example.
Senator Mercer: Thank you very much.
The Chair: I see some of the other subsections bring in registered Canadian amateur athletic associations. Is that bringing them in so they are treated as registered charities for suspension purposes?
Mr. Cook: That is correct.
The Chair: Thank you. Then there is an appeal provision set up to the Tax Court of Canada in subsection (4) if you do not like that suspension?
Mr. Cook: That is correct.
The Chair: Going on to clause 14.
Mr. Cook: Just before we move on —
The Chair: Before we suspend — and we are a little over time now — I am trying to get to the end of Part 1 so we can excuse you.
Mr. Cook: It is a separate measure, so I think I should clarify it to the committee.
The Chair: I appreciate that.
Mr. Cook: This has nothing to do with political activities but with respect to intermediate sanctions more generally. This provides that where information is to be provided and an annual information return and is not provided, CRA may suspend the registered charity or registered Canadian amateur athletic association until such time as it actually receives the information required.
The Chair: I see that in the latter part. It is lines 15 to 20.
Mr. Cook: That is correct.
The Chair: Thank you.
Mr. Cook: Clauses 14 and 15 implement three measures relating to tax shelters. The easiest way is probably to start with clause 15. Clause 14 is a consequential amendment to allow for an assessment of a penalty, which I will be describing under clause 15.
Clause 15(1) relates to the issuance of tax shelter identification numbers. Tax shelters have to register with the Canada Revenue Agency. When they sell the tax shelter, they have to use the appropriate identification number.
Currently, a tax shelter identification number is good forever, so all the tax shelter identification numbers that have been issued since 1989 are theoretically still out in the system. This has created some issues for CRA in the sense that when there has not been an annual report in respect of an identification number, it is not clear whether it is inactive, or whether there are sales of tax shelters, investments that should be reported and are not.
This measure would provide that tax shelter identification numbers are valid for one year. Our understanding is that a number of tax shelter promoters do this as a matter of course, anyway. They seek a new identification number each year.
That would be subclauses (1) and (2). Subclause (3) deals with an existing penalty for tax shelter promoters who sell an interest in a tax shelter that is not registered with the CRA or files false information in registering a tax shelter.
Currently, the penalty on the tax shelter promoter is the greater of $500 and 25 per cent of all the consideration received in respect of the tax shelter.
This measure provides that in the context of charitable donation tax shelters — which are essentially tax shelters that end up giving the participant the opportunity to make a gift to a qualified donee and obtain a charitable donation tax receipt — the penalty would be the greater of the penalty under the existing rules, and the greater of 25 per cent of the amount that the promoter asserts the person can give as a donation to a qualified donee.
This clause would also introduce a new penalty on tax shelter promoters. It introduces a penalty if the tax shelter promoter fails to comply with a demand to file an information return or does not provide, in an annual information return, the name, SIN or BIN of the donor or the amount paid by that person participating in the tax shelter. This will create a penalty of 25 per cent of the greater of all amounts received as consideration in respect of the tax shelter. In the case where it is a charitable donation tax shelter, the amount that was asserted that could be given to a qualified donee by way of donation.
The Chair: Subclauses (5), (6), (7) and (8) are all covered by those comments?
Mr. Cook: I can explain in more detail, but they are the coming into force rules as to when it will start to apply. For example, the tax shelter identification number will start to apply with respect to applications made on or after budget day. Existing tax shelter identification numbers are grandfathered for a period of about a year and a half. Existing tax shelter identification numbers are good until the end of 2013. With respect to the penalties, they generally apply as of Royal Assent.
The Chair: Thank you. We understand that. We have already dealt with clause 16 at the top of page 14. It is the Governor General's income, which we have discussed. The only other thing before we get to Part 2, where we will adjourn, is blood coagulation monitor. Are you adding something?
Mr. Cook: It adds to the list of expenses eligible for the medical expense tax credit. This allows blood coagulation monitors and their associated peripherals to be eligible expenses for purposes of the medical expense tax credit.
Senator Ringuette: With respect to the pay increase of the Governor General, in the briefing book, on page 18 you say:
This amount compensates for the income tax a Governor General would pay if his or her total income from all sources (e.g., pensions from previous employment) was taxed at the top marginal rate.
You are making an assumption. You are putting in legislation on particular issues regarding a person and not to the position per se.
I would like to go to clause 17 where you say "annual adjustment of salary." Could you please expand on that clause?
Mr. Keenan: Currently, the Governor General's annual salary grows at a rate that is in keeping with the growth of average industrial wage.
Senator Ringuette: Which is what on average?
Mr. Keenan: I could not say right now. It is the measure of indexation used for the yearly maximum pensionable earnings for the Canada Pension Plan, but is also the indexation factor for registered pension plan limits and RRSP limits. There is an indexation factor.
This clause essentially says that indexation factor will apply to the new salary level.
Senator Ringuette: If there is another freeze of public service salaries, would the provisions in clause 17 also include freezing the salary of the Governor General?
Mr. Keenan: I could not speculate on that.
Senator Ringuette: It is not an inclusive issue here. Thank you.
The Chair: Thank you for your understanding. We will now go on to Part 2, which we will start tomorrow at the same time. Thank you all very much for your patience and understanding.
(The committee adjourned.)