Proceedings of the Standing Senate Committee on
National Finance
Issue 1 - Evidence - November 19, 2013 (Morning meeting)
OTTAWA, Tuesday, November 19, 2013
The Standing Senate Committee on National Finance met this day at 9:31 a.m. to study the subject-matter of Bill C- 4, A second Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures.
Part 1 — Measures relating to Income Tax, Part 2 — Excise Tax Act
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this morning, we are beginning our study of the subject-matter of Bill C-4, A second Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures. And it is always those other measures that take time.
[English]
I can't resist that.
This bill is 308 pages in length and contains 472 clauses. Six other Senate committees have been separately authorized to examine the subject matter of certain portions of Bill C-4, but our committee has been given the ultimate responsibility for studying all of the bill and reporting the entire bill back to the Senate in due course. So we will monitor what is being done by each of the other committees and, as we have done in previous years with bills that are not unlike this one, we will take into consideration their work. And if we need to have them come and talk to us, then we will try to make arrangements for that.
This morning, we are very pleased to welcome officials who will guide us through the bill in detail, in a clause-by- clause manner, which we have done in the past. That will help prepare us for clause-by-clause consideration of the bill when it actually arrives.
Honourable senators, I would propose dealing with each clause as we go along. I will stop and see if there are any questions from anyone and, if not, then we will just move on to the next clause. Sometimes two or three clauses together encapsulate an idea, so we will ask our witnesses to deal with the concept that may be two or three clauses in a row. And then we will have questions and answers and comments at that time.
I'm pleased to welcome from the Department of Finance — and that's where we're starting, under the Income Tax Act and related regulations and amendments — Mr. Ted Cook, Senior Legislative Chief. Welcome. We also have Mr. Geoff Trueman, General Director (Analysis), Tax Policy Branch; and Mr. Sean Keenan, Director, Sales Tax Division.
We also have others in the audience who we will call forward if needed. They are from the Department of Finance and also from Human Resources and Skills Development Canada. We will introduce those witnesses if their appearances are necessary.
I remind everyone that we will be in this session for two hours, and then we will be continuing this afternoon. And I will ask our clerk to tell us where we are this afternoon at 2 p.m.
Jodi Turner, Clerk of the Committee: We will be in room 257, East Block.
The Chair: Watch our announcements closely; we are having difficulty getting the desirable room in Centre Block because of demands on the space. As many times as we can, we will be in the Aboriginal room, which is 160S. Today we couldn't, so we're at 257 East Block. Question?
[Translation]
Senator Hervieux-Payette: What happens with regard to our attendance in the Senate when we start right at 2 o'clock? Because when the Senate started at 1:30 p.m., we would go to committee at 2 p.m. But now the Senate is starting at 2 o'clock, and so are we.
The Chair: I believe the motion was adopted last week. We are starting at 1:30 p.m.
Senator Hervieux-Payette: Every day, even Tuesday?
The Chair: Except Tuesday.
Senator Hervieux-Payette: But it is Tuesday. That is why I am asking the question.
The Chair: Very well. So, on Tuesdays, we can start 10 minutes later.
Senator Hervieux-Payette: I think the senators would prefer that as it makes more sense.
The Chair: Great. So we will begin at 2:10 p.m. today and every Tuesday. Does that work for everyone?
Senator Hervieux-Payette: Excellent. You can all thank me.
The Chair: Thank you for that clarification. But, on the other days, we will meet from 2 p.m. to 4 p.m. because the Senate starts at 1:30 p.m.
[English]
Mr. Cook, you have the floor, sir. We got that administrative work done.
Ted Cook, Senior Legislative Chief, Department of Finance Canada: Thank you.
Part 1 contains a number of measures that were announced in Budget 2013. It also contains a number of previously announced technical amendments that were released for consultation in December 2012 and also in July 2012.
I propose to just go through clause by clause and when there's a new budget measure, we would pause and sort of speak more broadly about the particular measure. Then there may be a number of consequential amendments, and I will just sort of mention them at a high level. And then if you have specific questions, we can go into as much detail as the committee would like.
The Chair: That will work nicely. If you are dealing with something that had been mentioned other than in the budget but was mentioned and announced previously, just make mention of that so we can understand that.
Mr. Cook: Very well.
Clause 2 of Part 1 is an amendment to section 10 of the Income Tax Act, and it relates to a measure on trust tax attributes. Under the Income Tax Act, when a corporation has losses, it can use those losses three years into the past and 20 years into the future. And there are certain limitations imposed on their losses when someone else acquires control of that corporation; it is to prevent losses from being traded.
There are no rules — until this bill — that apply in the same way with respect to trusts, so Budget 2013 announced a measure with respect to the use of trust tax attributes, which introduces the concept of a loss restriction event. So if a majority interest in a trust is acquired, then there will be restrictions on the ability of the trust to use its losses going forward, very similar to the fashion to which they have existing restrictions on the use of losses by corporations. This is in response to specific instances of planning that we've seen in the private sector.
Senator Buth: I'm just wondering how common it would be for you see problems, currently?
Mr. Cook: It is not widespread in use. We have seen a couple of examples where, in total, losses in excess of $100 million were acquired and other people are attempting to use them. It is anecdotal in nature to the extent planning works over time and it expands.
Senator Buth: It could be quite substantial?
Mr. Cook: Individual plans. We see what we can, but individual transactions sometimes can result in very large amounts.
Senator Buth: Thank you, chair.
[Translation]
Senator Bellemare: That is an intriguing measure. It is clear that the phenomenon of corporations purchasing losses to bring down their profits is on the rise and that doing so sometimes allows corporations to restructure capital assets and companies.
If I understand correctly, you are doing this to plug a loophole for corporations. But did you carry out an impact study in connection with this measure?
[English]
Mr. Cook: I will answer that question in a general way first. The way we view the use of losses is they essentially relate to a particular taxpayer. While the losses can be used by the taxpayer and provide an asset which allows them to restructure, within the tax system we don't see losses as an asset that can be sold between companies.
Certainly, one of the other measures we will be talking about later is the specific measure relating to corporate loss trading. We have seen instances where a corporation has significant losses — in fact, the losses are the only asset essentially left in the corporation — and those losses are sold to another corporation.
It is not really about restructuring and reigniting the original corporation; it is about losses as a tax attribute that are purchased and used to offset income in another entity.
[Translation]
Senator Bellemare: You do not see this measure having any real consequences, only tax-related consequences?
[English]
Mr. Cook: I think that's right. These are intended just to deal with what we view largely as tax planning exercises.
I think that responds to the question.
Senator Callbeck: I'm just wondering how long this loophole has been there? How long have people been using it?
Mr. Cook: That's always a difficult question and with this one in particular, it is certainly planning. The use of trusts and equating the taxation of trusts to corporations is something that's a little further along the spectrum in terms of whether it is a real loophole.
I think we occasionally see it. It is not something that has been significantly on our radar for the last decade, I don't think. It has been raised in more recent years.
Senator Callbeck: I was just wondering why the government hadn't acted on this.
Mr. Cook: Well, certainly, as I'm sure the senator will appreciate, in the last three or four budgets there have been a number of measures and a renewed emphasis on these types of integrity measures.
The Chair: We have a briefing note that we're trying to follow at the same time and for some reason, which I think I have just discovered, the briefing note is under item G. That is trust tax attributes. That sort of explains what Mr. Cook has just been talking about. Is that correct?
Unfortunately, that's well into our briefing note as opposed to starting with an explanation. Nothing is made simple here, but the explanation would have been nice to correspond with the bill itself. It corresponds with the summary.
Mr. Cook: Correct.
The Chair: And so we will jump around here. If you are able to help us with the briefing note as well —
Mr. Cook: Yes, absolutely.
The Chair: That just helps us.
Mr. Cook: I can mention which part of the briefing note that you have that any particular measure relates to. I will try to remember that.
The Chair: We have three things to look at. Besides listening to you, we have the briefing note, the bill itself and the summary of the bill which appears at the front end. With those documents, we will proceed to the next clause. But we would like to follow the bill because that's how we have to handle it on a clause-by-clause basis.
Mr. Cook: The last thing I would mention before moving on to clause 3 is that because the existing rules applied to corporations only, and applied only on an acquisition of control, there will be a large number of consequential amendments in various parts of the act that are simply just changing the word "corporation" to "taxpayer" and are changing acquisition of control to loss restriction event, which is our general term that now applies to both corporations and trusts.
Maybe I will highlight those as we go through. I think we have talked about the measure, and if you want to stop anywhere —
The Chair: That would be fine. Thank you.
Mr. Cook: Clause 3 relates to a technical amendment, and it was released in December 2012. It just deletes an obsolete reference to section 34.2.
Clause 4 relates to what we call character conversion transactions, and these can be found at paragraph E of your briefing note.
Character conversion transactions are transactions entered into by taxpayers where they would like to earn a return equivalent to an amount that would be fully taxable as ordinary income if they had earned it directly, and instead they enter into a capital transaction. So rather than having the amount taxed as ordinary income, it is taxed as a capital gain.
These are used by certain investment funds and marketed to high net worth investors and retail investors. We are proposing that to the extent that these character conversion transactions are entered into, the appropriate income or loss is treated as being on income account as opposed to being on capital account. Section 12, which is in clause 4, simply provides an income inclusion in respect of these transactions.
[Translation]
Senator Hervieux-Payette: Changing a taxpayer's type of income to capital gain is certainly less expensive for that taxpayer. Pension plans are not taxable, whereas private funds, other types of funds that fall outside the pension plan category, are taxed. What fiscal cost does this have? Is it extremely high for this kind of transaction? In finance, as soon as one door closes, another opens. I get the sense they came knocking on the Department of Finance's door, and a door was opened because they lost benefits elsewhere. Why was this not in place before? Why change the type of income it is and make it so that it will no longer be taxed as taxable income but, instead, taxed as capital gain?
It is well and good to want to reduce the deficit, but this is taking from one to give to the other. For example, workers' funds are losing at the expense of other funds.
Did you assess how this will affect government revenues?
[English]
The Chair: Are you able to comment on that?
Mr. Cook: I will try. In terms of the basic question of the impact of this measure, the expectation is that it would raise approximately $55 million per year.
That's correct. What it does is, amounts that would otherwise be treated as capital gains — capital gains are only 50 per cent included in income — will be fully included in income.
[Translation]
Senator Hervieux-Payette: I thought it was doing the opposite. Now, everything will be taxed as regular income?
[English]
Mr. Cook: What will happen is the extent to which the income is attributable to one of these character conversion transactions, it will be treated as ordinary income.
The gain on sort of the related underlying property, if there is a gain relating to capital property, will continue to be on capital account. This is fairly widespread.
[Translation]
Senator Bellemare: We are indeed talking about federal tax law? Will provincial legislation be adjusted? Will there be two sets of rules? I am asking in relation to this specific measure, but there are other areas where the same would likely apply. Will this make our tax system more complicated? In general, do the provinces adjust to bring their laws in line with the federal system?
[English]
Mr. Cook: In general, where there's a tax collection agreement between the federal government and the provincial government, they undertake to maintain a tax base consistent with the federal government, and amounts that are included or deducted in income are generally consistent between the federal government and the tax collection agreement provinces and, for the most part, this should just flow through to the way the provinces run theirs.
With respect to Quebec, obviously Quebec has its own decision to make as to what they will do. In general, Quebec very often follows the federal changes.
[Translation]
The Chair: You said "in general," referring specifically to this paragraph. Were the provinces consulted before this bill was introduced and referred for study?
[English]
Mr. Cook: For these types of measures that relate generally to the computation of income, we consider that to be within our purview, and while provincial impacts are considered and the extent to which provinces may wish to deviate from federal measures, in general, in this measure, for example, it was done purely federally without any provincial input.
The Chair: Thank you.
Senator Callbeck: I am just wondering when this starts. Somebody invested, let's say, two years ago, and their returns were going to be in capital gains, are they going to be affected by this, or is this if you purchase from now on?
Mr. Cook: You have actually anticipated the legislation a bit. Pages 3 through 7 of the bill have a very detailed coming into force. We have had a number of representations from the private sector and the investment sector with respect to the potential impact of this measure, so there's a very detailed coming into force.
Even transactions that are entered into after it was announced in the budget may be eligible for grandfathering depending on the particular circumstances. Certainly there's been a fair bit of consultation and analysis with respect to the potential impact of this measure, and I think the last time grandfathering will apply is up to 2018.
Senator Callbeck: You mean that you can buy these investments that will give you capital gain up to 2018?
Mr. Cook: In general, these investments have a number of different structures. Some of these character conversion transactions are short-term arrangements. Some are short-term arrangements that operate on a rolling basis, so you will have a character conversion transaction that runs for 30 days and then the assets are taken at the end of that 30 days and put into another one, and so on and so forth.
The longest character conversion transactions that we have found are up to five years in length, and that is 2018. If you had entered into one of these that had a term of five years, if you had entered into it before budget, then you would be grandfathered. Anything after 2018 will be fully subject to the rule.
If you just go in and enter into a new transaction after budget, then you would be subject to the rules and then there are a number of variations.
Senator Callbeck: To come back to the question I asked: If they bought these investments two years ago and thought that the returns were going to come in capital gains, then those people will not be affected; they're going to be grandfathered.
Mr. Cook: There's the capital property itself, and then usually — well, there's always a separate agreement. If they had entered into that separate agreement at the time they bought the assets two years ago, then they would be grandfathered, most likely, absent other circumstances.
Senator Callbeck: So some may be and some may not be?
Mr. Cook: That's correct.
Senator Callbeck: Thank you.
The Chair: That gives lots of flexibility to investment advisers, the industry out there.
You made a point, Mr. Cook, about consultation with those potentially impacted by the proposed change. We were talking earlier about provinces not being consulted because this is in the realm of the federal government, but those who might be potentially impacted, is that consultation before this measure appeared in the budget or subsequent thereto?
Mr. Cook: It was subsequent to the budget and related more to the coming into force and how it would affect transactions that were either ongoing or contemplated.
With these kinds of integrity measures, obviously there may be an issue around the amount of information that is available, because people may not be sort of advertising what they're doing. Certainly with integrity measures, we make our best judgment and go forward based on that, and sometimes market participants will come to us after that and clarify our understanding of how the particular transactions are done in practice.
The Chair: I think the public watching this would be interested in knowing that those potentially impacted have some opportunity to react to this. That's why I am asking the question. You have explained the policy. The general policy statement comes in the budget document and then the implementation is worked out based on consultation subsequent thereto?
Mr. Cook: There may be informal consultation or even formal consultation. All the measures related to Budget 2013 that are included in this bill were actually released for comment in September as well, so there is that opportunity for taxpayers and their advisers to comment on the legislation.
The Chair: September of this year?
Mr. Cook: That's correct.
The Chair: Thank you. Are there any other questions? Okay, then we will go on to the next section. We are already at clause 5. This is moving right along.
Mr. Cook: Clause 5 starts on page 8. This relates to a measure that was not included in Budget 2013 but was released in draft for consultation in July 2012, and it relates to what are generally called stapled securities.
A stapled security is essentially two securities, perhaps a share in a debt, that are not freely tradable separately but instead have to be traded together. The stapled security measure relates to the specified investment flow-through entity rules. They're the SIFT rules that were introduced back in 2006, and the concern with stapled securities is that they could allow investors to essentially hollow out entity level tax by having a share in an entity as well as a debt instrument in the same entity.
Dividends are not deductible at the corporate level, while interest expense is. If you own both the debt and the share, you as a taxpayer may be indifferent to receiving interest or dividends. As a result, to protect the tax base, we've put in specific rules to deal with stapled securities. We'll see later that section 18.3 denies deductibility of interest and certain other expenses relating to where stapled securities are involved.
Subsection 12.6(2) is a rule to address situations where you had a stapled security, it ceased to be a stapled security, and later became a stapled security again. This will give you an income inclusion for the deductions you took while it was not a stapled security.
The Chair: Thank you. I appreciate that.
Senator Hervieux-Payette: I don't understand the word "stapled." I have never heard that. Maybe there is another word being used by the industry. I'd like to know the word that is commonly used when dealing with securities. Do you have another word?
Mr. Cook: I'm not sure if there's a different technical term, but what we're talking about are securities that are attached and cannot be traded separately. So you might have a debt instrument, a debt and a share, and by the terms of the share, whoever the shareholder is must hold the debt and can't sell it without selling the share.
Senator Hervieux-Payette: So they are attached.
Mr. Cook: They are attached.
Senator Hervieux-Payette: So you refer to them as "stapled." In French, it is agrafés. Anyway, I have not heard that term used in either English or French. I know you have two instruments that are traded, and you say only together.
Mr. Cook: That's correct.
Senator Buth: I was just curious as to what clauses this appears under in our briefing book.
Mr. Cook: Oh, sorry. It should be in your briefing book.
The Chair: I didn't find it.
Mr. Cook: It's just on the very last page, Part 1, "Other," legislative proposals released July 25, 2012. It's under the first bullet, taxation of specified investment flow-through entities, real estate trusts and publicly traded corporations.
Senator Callbeck: Where would I find it in the Library of Parliament document?
Sylvain Fleury, Analyst, Library of Parliament: Page 13.
[Translation]
Senator Hervieux-Payette: If our television viewers do not understand, they should not feel bad because the language is not clear.
[English]
Senator Buth: Now that I have some of the briefing material and I understand what a stapled security is, can you explain what the tax implications are again?
Mr. Cook: Certainly. In terms of the general tax implication, if you have a stapled security and the rules apply, then certain expenses will be denied for the payer of those expenses. In particular, the interest expense that I was talking about would be denied. If you have certain expenses that are paid to a real estate investment trust, they would also be denied. That's in section 18.3.
The clause under consideration is in 12.6, and it's a rule that contemplates the situation where something that might be a stapled security ceases to be a stapled security, perhaps for the purpose of paying certain expenses, and then later becomes a stapled security again. It takes those expenses that would have been denied under the other provision and requires an income inclusion in respect of them.
Senator Buth: Okay. Thank you.
[Translation]
Senator Bellemare: The question was asked earlier, but I am going to repeat it. What tax impact will this measure have? No doubt, you calculated what it would yield, did you not?
[English]
Mr. Cook: There is no specific fiscal impact. This is a measure that was prepared wherein we had observed a trend that was just starting. I would characterize it as us sort of nipping it in the bud. We don't expect that this will raise any particular revenue, but it does prevent taxpayers from engaging in these types of transactions.
The Chair: I've noticed that there are two page 4's in our briefing note, and this is on the second page 4. I'm sure this is all prepared to help us make our way through this in a diligent manner.
Senator Buth: I have a general question, and I thought I would leave it to the end but I'm not sure when the end is going to occur.
You talked earlier about the fact that this government has been wanting to close loopholes in looking at some of these issues, and I think you referred to them as integrity measures, where you're looking specifically at the integrity of the tax legislation. Maybe you can explain what you mean by "integrity measures" because I'm making assumptions.
Then you just made the comment that you saw this as a trend and you moved to close this loophole.
Can you explain how you find loopholes and the process that you go through on an annual basis looking for some of these changes?
Mr. Cook: I guess there are a couple of ways to respond to that. In terms of environmental sensing of what's going on, we work very closely with the Canada Revenue Agency, and they're a very important source of information for us. The Canada Revenue Agency does technical interpretations and advanced income tax rulings, and those are done generally in the context of live transactions. When they see things that may be of concern to us, then they will raise that with us specifically and we'll look at that.
With respect to the specific measure we're looking at now, this has been an area of interest for us for a number of years, and we try to stay on top of what's happening in the marketplace. We also do our own research and analysis as to what transactions are undertaken, and it relies on the various expertise of the different departmental officials.
Occasionally we get indications of what's happening in the private sector from private sector stakeholders, but generally it's from our relationship with the CRA and our own analysis.
Senator Buth: Thank you. What about integrity measures?
Mr. Cook: With respect to integrity measures, to speak broadly, they preserve the tax base and ensure that the tax rules are such that as they apply, people aren't able to enter into specific transactions that go against the basic policy of what's trying to be achieved.
Senator Seth: This is my first time at the Finance Committee. My name is Asha Seth.
Just to the point you are making — I haven't heard it fully — can you tell us something about limited partnerships? How does one get out? What are the implications? It is very complicated, how to get out of one. I'm sure most doctors did so some time ago, so what is the situation in that area? Could you explain that to me a little?
The Chair: Senator Seth, we have been going through the bill clause by clause. Does your question relate to a particular clause of the bill?
Senator Seth: I'm not sure. Since I saw the term "property," I thought this would be part of property investment.
The Chair: Well, let's ask Mr. Cook.
Mr. Cook: I don't think the clause we're looking at or any of the ones we've looked at deal with specific limited partnership issues. There is one technical measure later in the bill that has particular impact on limited partnerships in the context of alternative minimum tax.
The Chair: Perhaps when we get there, we could expand on that question at that time.
Senator Seth: Sure. Thank you.
The Chair: Thank you for your patience and understanding. Shall we move on?
Mr. Cook: Yes. That was clause 5.
Clause 6, on page 9, is one of those consequential amendments I had referred to earlier where we're changing "corporation" to "taxpayer" to implement the trust tax attributes measure. That's clause 6, paragraph 1.
Clause 6, paragraph 2, is a technical amendment to update the name of a guide that was just released in December 2012.
The Chair: When you say "technical," does that mean it doesn't have any financial implication for the public that we're trying to help out here; or what do you mean exactly by "technical?"
Mr. Cook: Occasionally a technical measure will have financial impact. Generally, though, technical measures are clearly within specific policy and are sort of more minor in nature. For example, this is just changing the name of a guide that Natural Resources Canada puts out; so it's updating the act. We'll see that we're fixing some typographical errors that exist in the act currently.
Also, in terms of technical, the Department of Finance issues comfort letters. Those are indications to taxpayers that a small change, if you will, could be made to the Income Tax Act to assist the taxpayer. Comfort letters are generally relieving in nature but still remain within the general policy of the affected provision. A comfort letter indicates that the Department of Finance will be making a recommendation to the Minister of Finance that an amendment be made to the Income Tax Act.
In terms of the previously announced measures that are included in this bill, there are some of these measures, some typographical measures, implementation of some comfort letters and smaller clarifying measures.
The main thing to distinguish them, obviously, is that budget measures are more substantive announcements with respect to tax and potential changes in tax policy made by the government while technical measures are seen as more housekeeping in nature.
Senator Callbeck: Mr. Chair, I'm wondering whether when Mr. Cook starts a section there's a way that we could get, from our Library of Parliament people, the page that it's on within your document. I think that would be very helpful.
The Chair: We'll try to do that. We've been trying.
There's a group of explanations for certain clauses that appears in our briefing book. This is not the Library of Parliament, but they followed the same A, B, C, D lettering as the first eight pages. Then you come over to clause-by- clause and, as I have discovered, it does what we're trying to do, except the explanation is sometimes not as full as we'd like; but it is there. I'm on page 7 of 154 pages under clause-by-clause that deals with clause 6. Does that confuse things more?
Senator Callbeck: Where is that in the Library of Parliament document?
The Chair: The letters in the library document follow that first group of explanations, which only seems to highlight certain clauses starting with clause 45, which we haven't gotten to yet. For some reason, the first explanation just deals with certain highlighted clauses. Then we go to clause-by-clause in the briefing book; and the Library of Parliament seems to have picked up on the first pile of explanations, all of which I think is not intended to make this easy for us.
Senator Callbeck: For the section we're dealing with right now . . .
The Chair: Clause 6, page 9.
Senator Callbeck: Right. Where is that in the Library of Parliament document?
The Chair: I've got two Library of Parliament people looking for that for you. I can tell you where it is in the briefing book: page 7 of 154.
Senator Bellemare: That is in English.
[Translation]
I could not say where it is in the French. Where is clause 6?
[English]
It's on depreciable property. We'll get this procedural thing sorted out.
[Translation]
Okay, here we go: page 6 of 141. Is that correct? There. But that does not answer Senator Callbeck's question. She asked about the Library of Parliament document.
[English]
They will try to find the spots for us; and they're looking now to do that.
We'll try to follow you. We thank you for your patience.
Mr. Cook: Pages 10 and 11 of the bill also relate to clause 6 and are just more consequential amendments to the trust measure that we've discussed.
The Chair: Okay.
Mr. Cook: Clause 7, on page 12, is another consequential amendment to the trust measure.
Clause 8, on page 12 and following, is a measure related to thin capitalization and can be found at paragraph Q of the summary notes.
The Chair: It can also be found at page 9 of 154. Those two explanations are different, but you go ahead.
Mr. Cook: In terms of the other document, I believe you're referring to the explanatory notes.
The Chair: Yes.
Mr. Cook: The Department of Finance also prepares them. They are meant to be a detailed change-by-change analysis and is more at a technical level. The briefing document, which I just referred to as paragraph Q, is meant to provide more of a high- level general overview of what the measure is intended to do.
The Chair: Our problem is the A, B, C, D through to Q, which I just found, is at page 6 of 8 of that document and doesn't deal with all of the clauses. If we're going through this on a clause-by-clause basis, it's easier to find it here. If you can refer back to the more fulsome explanation, it helps us. I'll just make a note of that so I can go back to it.
Mr. Cook: Would you like a reference to the explanatory notes as well?
The Chair: Yes, if you have it handy. Otherwise, we have the Library of Parliament people helping with that as well. Senator Callbeck is following that particular document and some of us are following the 154 pages of clause-by-clause explanation. We all should be following the bill because that's the most important thing.
Senator Hervieux-Payette: For the next meeting, it won't take long to at least relate to the clauses. It seems we have different approaches: We have paragraphs R and Q and G and so on, but we don't have the clauses in sequence — 1, 2, 3, 4, 5, and so on. Just put the clause in and we'll know what to look for. Otherwise we'll never be able to follow you if it's going to be like that all the time. I'm sorry that we need to clean up our agenda but it's true it's not in the same place and the same order. We have to have everything related to the clauses here and the clauses there. In that way, we will be able to decide which one we prefer.
The Chair: Maybe we should take some of that paper away from you.
Senator Hervieux-Payette: No. I don't think they have worked for nothing but if we spend half our time looking for the information, then it's useless.
[Translation]
Mr. Fleury: Our sections follow the same format that the Department of Finance uses in the budget summary, but each of our sections begins with a reference to the clause or clauses of Bill C-4 in question. So at the beginning of every section, A, B, C, all the way to R, we start by saying "clause 71 would amend this part."
Senator Hervieux-Payette: I understand, and I am looking at page 1. At the top of page 1, the section starts with "Clause 46. . .", and at the bottom of page 1, the section starts with "Clause 25. . .". To my mind, that does not necessarily present them in order. That is what we are telling you. We will never be able to follow because the clauses are not presented in order. We want to see the clauses in order.
[English]
The Chair: We'll try to make that easier, but you may want to follow the clause-by-clause in the briefing note.
Senator Hervieux-Payette: I will follow it in the book because with this we're losing our time. I think it's not difficult to rearrange it so the next meeting we will know. This is on computer so it's not long to put that in the same order.
The Chair: I agree. It's important for us to have the Library of Parliament's analysis that complements the government's analysis of this.
Right, now we're on thin capitalization.
Mr. Cook: That's correct.
The Chair: Clause 8.
Mr. Cook: Clause 8, page 12 of the bill and following, and what this measure would do is extend the existing thin capitalization rules, which just apply to corporations resident in Canada, to trusts that are resident in Canada and also the branch operations of non-resident corporations and trusts.
Just in terms of giving some context, the thin capitalization rules, what they are intended to do is prevent non- residents from extracting profits out of Canada inappropriately by way of excess interest deductions. As I had mentioned earlier, interest deductions are deductible in computing income for tax purposes, so there's an incentive to leverage up Canadian resident corporations that are owned by non-residents with debt and interest expense to reduce their taxable income in Canada and allow those profits to leave Canada.
The advisory panel on Canada's system of international taxation in 2008 recommended the extension of these rules to trusts and branches operated by non-resident corporations and trusts, and that's what clause 8 does.
The Chair: My recollection is we saw some other changes to thin capitalization in the last budget implementation bill. This is not a new term, but it's not one that I would have thought up by myself, so I read it somewhere in the past.
Mr. Cook: You're quite right. The advisory panel made a number of recommendations, and we've been working on them. The first recommendation that we implemented was to make sure the thin capitalization rules work properly through tiers of partnerships. There were some issues with respect to their application in the context of partnerships and, as well, the debt-to-equity ratio, the point at which interest expense starts to be denied was reduced from two to one to 1.5 to 1. Those were two changes made in a prior budget implementation act.
[Translation]
Senator Hervieux-Payette: What we have been seeing all along is an effort to ensure that trusts receive the same treatment that corporations do, to prevent trusts from simply serving as legal mechanisms to avoid taxes. It is clear to me that, by treating trusts the same way that other corporations or individuals are treated, all you are doing is levelling the playing field for all taxpaying entities, whether people, corporations or trusts. Overall, is that what you have done in this section here?
[English]
Mr. Cook: You're quite right that we've done it with respect to trusts in this particular section. I wouldn't say it's something we're trying to do throughout the act because, as you know, trusts operate at different levels. They can be used in terms of family trusts, or they can be large corporate trusts, which are used to hold business assets. But you're quite right in terms of the measures we've seen so far. We are trying to treat them as an equivalent to other taxpayers, in particular, corporations.
Senator Hervieux-Payette: How many kinds of trust are you talking about? Do you mean the family trusts are not included in that?
Mr. Cook: In terms of this particular measure, all trusts would be implicated in the measure. Our expectation, though, in terms of family trusts, is that the types of situations contemplated by this, that it's really more sort of in the regular commercial-type situation.
Senator Hervieux-Payette: Okay.
Senator Callbeck: Just one question: On this thin capitalization, is what's proposed here going to affect the ability of non-resident corporations or trusts to fund operations of expansion in Canada?
Mr. Cook: We don't think it will affect that. What happens is there is a debt-to-equity ratio, or, in the case of non- residents with branches in Canada, debt-to-asset ratio, and the rules only bite after a certain point. They don't affect all debt investments used in Canada. It's only after what we consider to be an excessive amount.
Senator Callbeck: So you don't think it's a factor?
Mr. Cook: No.
The Chair: I guess we're ready to go on to clause 9, unless you had something else to add to clause 8.
Mr. Cook: No. Clause 9 begins at page 22 of the bill.
The Chair: Do you have any (a), (b), (c), (d) clause that is related to that?
Mr. Cook: Clause 9 is just another of those consequential amendments for the trust measure.
Clause 10 is the second half of the stapled security measure that we discussed earlier.
The Chair: Oh, yes, that's section 18.3 of the Income Tax Act that you had referred to earlier.
Mr. Cook: That's correct.
The Chair: There are no new ideas in either clause 9 or 10 that we haven't heard you express to us.
Mr. Cook: No, I gave the overview with respect to them.
The next clause begins at page 27. That's clause 11, on page 27.
The Chair: The clause-by-clause analysis is at page 21 of 154 in English.
[Translation]
In English. I apologize; I do not know which page it is in the French. Page 20. Thank you.
[English]
Mr. Cook: This introduces a new measure. In the sort of brief summary, paragraph (m), leveraged life insurance arrangements.
The Chair: Paragraph (m) for "mother"?
Mr. Cook: That's correct. I'm not quite sure whether your pagination is the same. In terms of the bill, it starts at page 27 at the bottom.
The Chair: It's at page 5 of 8. Paragraph (m) is at page 5 of 8 of the brief summary, and on the Library of Parliament, it's page 9. You have an option of three different places to go to.
Mr. Cook: This measure relates to two leveraged life insurance arrangements which had been used for tax planning purposes, ones that are called "leveraged insured annuities," and also 10/8 arrangements. These are insurance arrangements entered into primarily to take advantage of unintended tax benefits by aggregating transactions within a life insurance arrangement and outside of the life insurance arrangement, and what this measure would do is just prevent those unintended tax benefits from accruing to taxpayers.
[Translation]
Senator Bellemare: Can you tell us whether this measure will affect all arrangements currently available to future retirees through their life insurance plans? And if so, have you calculated its impact? Will the measure change anything as regards retirement planning per se?
[English]
Mr. Cook: In terms of these particular measures, it would not impact on the basic variety of life insurance products that would be available to Canadians generally. This is a targeted measure to get at a particular type of tax planning that had evolved involving life insurance products. These measures had been fairly widespread in terms of the number of arrangements entered into with respect to these plans, but in terms of the expectation as to how it will affect Canadians generally, it will not affect normal life insurance plans offered across the country.
[Translation]
Senator Bellemare: These arrangements are fairly widespread, so the measures will have a monetary impact, a fiscal impact. Have you calculated what it will be?
[English]
Mr. Cook: In terms of the monetary impact of these two measures with respect to what we call the 10/8 arrangements, the ongoing impact will be $75 million per year; and with respect to what we call the leveraged life insurance arrangements, the ongoing impact will be $35 million per year.
Senator Callbeck: You talk about the 10/8 policy and the LIA policy. Could you explain the difference in those, please?
Mr. Cook: Certainly. In terms of a 10/8 policy, I guess probably they're called "10/8" because the industry standard is to use 10 per cent and 8 per cent. I'll just sort of walk through the kind of plan that takes place.
Imagine a taxpayer who's got $100. They could just go out and invest that $100 in an income-producing asset. Instead, what the taxpayer does is takes the $100, sets up a life insurance policy, and uses the $100 to make premium deposits. The premium deposits, the amount deposited in a life insurance policy, will earn 8 per cent. At the same time as they've put money in that's going to earn 8 per cent, they immediately borrow against the policy at an interest rate of 10 per cent from someone who is involved with setting up the arrangement. Then they take the $100 and invest that into an income-producing property.
What that does is it gives them deductible interest expense with respect to the 10 per cent. The interest income that they earn within the insurance policy, because it's in what we call an exempt policy, is not subject to tax. So they take the $100 that they could have invested directly and, by cycling it through a life insurance policy, they create a spread or a net tax benefit for themselves.
The leveraged life insurance arrangement is a little bit different in the sense that rather than just a straight borrowing in and out, what they do is they borrow money and invest it into an annuity; then they acquire an insurance policy; and then they use the annuity to fund the premiums for the life insurance policy and keep that spread.
As you can see, what it is doing is taking transactions that could have been done directly, but instead it is done through a life insurance policy, taking advantage of some of the tax benefits or tax attributes of life insurance to create a net benefit for the taxpayer.
The Chair: Universities are encouraging that kind of annuity life insurance to raise funds for the university. Is this going to impact on that particular scheme? They promote that quite extensively.
Geoff Trueman, General Director (Analysis), Tax Policy Branch, Department of Finance Canada: I'm not familiar with that.
The Chair: Your university hasn't caught you yet?
Mr. Trueman: They certainly have my address, but they haven't mailed that particular solicitation to me. I don't know enough about that scheme to comment on it; I'm sorry.
The Chair: This is for a good cause. Universities need funds, and they were looking for different schemes. Could you let us know, after you've had a chance to reflect on that? We'll be seeing you again, I'm sure, before this is out. If you could let us know if this particular section will impact. I think it has become quite standard university fundraising, where they encourage the donor to take out — in fact, they do it for you — life insurance and then buy annuities, all of which is to go to bringing funds into the university.
Mr. Trueman: Okay. We'll have a look at that.
The Chair: It just had a lot of the features of the university-type scheme.
Senator Hervieux-Payette: I like it when you call it a stratagem or scheme, because it looks like a scheme too. I was wondering what happens when the person who is taking it is dying. Is there a real policy that is being executed? Actually, this is during your lifetime. You have life insurance and you are alive, but what is the end result when you die?
Because it goes with my colleague's assumption that the universities are raising funds this way. I always thought it was a way for us to contribute to the university or alma mater, and at the end you leave a legacy to your university, maybe not in your will, but sort of.
Mr. Trueman: There is a real life insurance policy that is attached to these tax planning arrangements, yes.
Senator Hervieux-Payette: Who is benefiting?
Mr. Trueman: In the types of transactions that are targeted here, it would be the individual or a private corporation controlled by the individual.
Certainly they could buy that insurance directly without this type of tax planning arrangement. If there is a need to ensure against the financial risk associated with death, certainly that can be accomplished in a direct manner.
Senator Hervieux-Payette: Like when we go and ask for a loan for a house, they would ask you to have insurance. But in this case, it's life insurance for other purposes than buying a house.
Mr. Trueman: Absolutely. These plans and arrangements are targeted at picking up multiple and unintended tax benefits. That's the motivator for why they're entered into.
Senator Hervieux-Payette: I like it when you use the word "unintended." That means they were smarter than the Department of Finance by finding a way of making money. I think we get it.
[Translation]
Senator Chaput: How many companies and individual taxpayers will the bill's changes to life insurance plans affect? And what is reason for the changes? Is it simply to recover tax revenue?
[English]
Mr. Trueman: Certainly these are integrity measures that protect the tax base, and the government books revenues in that they're tax benefits that will not be realized by individuals on a go-forward basis. These products, as Mr. Cook mentioned, would be marketed to a relatively small niche of taxpayers. They would generally be targeted at high-net- worth individuals and perhaps individuals that control private corporations. The number of companies that would be involved, they are marketed certainly by a handful of life insurance companies. Not all were involved, but a handful of companies were involved.
Senator Chaput: "A handful" would mean how many?
Mr. Trueman: Certainly in the range of eight or ten companies.
[Translation]
Senator Chaput: And individual taxpayers?
[English]
Mr. Trueman: This would be hundreds or low thousands of individuals. This would not be a widespread tax planning arrangement. It would only appeal to a particular type of individual, again generally a high net worth.
[Translation]
Senator Chaput: So if the measures target a small number of taxpayers, how much tax revenue does the government expect to bring in, as a result?
[English]
Mr. Trueman: I believe the numbers, on a go-forward basis for the leveraged life insurance arrangements over the five fiscal years in the budget planning period, are $100 million. For the 10/8 arrangements over that same five-year period, it is $260 million.
The Chair: That is not insignificant. Thank you. I see no other questions for that one. Then we will go on to, I believe clause 12 was "Private Health Services Plan."
Mr. Cook: That's on page 30. This is one of the other consequential amendments, just in terms of the trust measure that we have talked about. We are just picking up improving the consistency between how we use terms. In how we use terms in the Income Tax Act, we're just adjusting "majority interest partner." It is just a spelling change, really.
The Chair: Okay.
[Translation]
Senator Bellemare: How is it that clauses 12 and 13 of the bill replace a subclause and subparagraph, respectively, in the English version of the act but not in the French version?
[English]
Mr. Cook: The French version was already correct.
Senator Bellemare: Wow. Thank you.
Mr. Cook: What you will see is —
[Translation]
The Chair: They had already caught it in the French version.
Senator Chaput: It was already taken care of.
[English]
Mr. Cook: If you see any place where there's the same amendment, either both in English or both in French, on both sides, it means the other language version was already correct, and we're just making a change to conform the two.
The Chair: Thank you for that question. It is good to have that clarified.
We will go on to clause 13 now, page 30 of the bill.
Mr. Cook: Clause 13 is a very small technical amendment that was released in December 2012, and it is just to update the language used in subparagraph 28-1(a)(ii).
The Chair: I understand in this particular area, the Library of Parliament has done an analysis at page 10, sub (n) — "farm losses," is that all part of the same?
Mr. Cook: That will be the next clause, clause 14.
The Chair: Good. Thank you. So that's under letter number (n).
Mr. Cook: With respect to "restricted farm losses," there are two changes that are made. One is to increase the monetary limit with respect to restricted farm losses.
The second change is to respond to the Supreme Court of Canada decision in Craig to return the law to what it was before the Supreme Court decision, essentially to the interpretation of the provision that was provided by Moldowan, in I believe it was the 1970s, which is another Supreme Court of Canada decision.
[Translation]
Senator Chaput: For example, if a taxpayer has income from a non-farming source and wants to start a farming business, will the proposed changes to section 31 of the act affect that person?
[English]
Mr. Cook: As I indicated, the intention of the amendment is to restore the law to what it was prior to the Craig decision. The law had been interpreted in accordance with the Supreme Court of Canada's decision in Moldowan since 1977. There's no intention to change the interpretation of the restricted farm losses other than to return the law to the state it was before the Supreme Court of Canada overruled itself in Craig.
In Craig, there was a taxpayer who was a high-paid professional and ran an operation on the side and incurred hundreds of thousands of dollars of farming losses from his horse racing operation, and applied those against his professional income. Certainly in that case, our view was that the taxpayer's main source of income was the professional activities rather than a combination of farming and the other activities.
Moldowan had recognized, obviously, the combination of farming with other sources of income, but the idea was that the other sources of income should be subordinate to the farming source itself. We have returned the law to that.
[Translation]
Senator Chaput: Is that not also true in other sectors? This change penalizes farming, does it not?
[English]
Mr. Cook: In terms of that, I guess there's two ways to answer that. I guess the first part is that farming, by its nature and the way it is treated under the Income Tax Act, is treated differently than other areas.
For example, farmers are allowed to use cash-base accounting, which means for accounting for tax purposes they don't use an accrual basis, they do it based on their receipts. The concern is when you mix that cash-based accounting that is available with farming with other sources of income for taxpayers, then that creates an opportunity to create losses and take inappropriate tax deductions.
As well, this is also just trying to get at the difficult question of the difference between running a business versus something that you do because you enjoy it as opposed to a business activity, which, under general principles, is not deductible under the act.
Senator Callbeck: I'm just wondering the amount you are doubling for the restricted farm loss, how long has it been at 8750?
Mr. Cook: It has actually been approximately 20 years.
Senator Callbeck: All right.
Mr. Cook: It a little bit more than makes up for inflation.
Senator Callbeck: Are you seeing an unusually high amount of farm losses lately?
Mr. Cook: Other than the concern as to if the Craig decision remains the law of the land, it would provide an opportunity for farm losses to be more actively planned for.
Senator Callbeck: Thank you.
The Chair: This legislation won't be retroactive. So there will be — at least I hope it won't be; maybe you can give me that comfort that it won't be. There will be a period of time between the Supreme Court decision and the time that you correct it with this law that there are going to be some farmers, professionals, who will be able to take advantage of this.
Mr. Cook: Generally, budget measures come into effect on budget day.
The Chair: When announced, yes.
Mr. Cook: When announced. The variations on that are transactions that occur on or after budget day, taxation years that begin on or after budget day or taxation years that end after budget day, depending on the nature of the provision.
These measures will all apply to taxation years that end after budget day.
The Chair: Thank you.
Senator Buth: Do you have a financial impact for this one?
Mr. Cook: The financial impact of this is $5 million. That's the cost to the government of doubling the restricted farm loss amount. There is no cost associated with returning the law to pre-Craig.
Senator Buth: Thank you.
The Chair: We are ready to go on to clause 15.
Mr. Cook: Clause 15 is a purely technical amendment that just deletes an obsolete provision.
The Chair: Deleting a provision from the Income Tax Act is something we are very pleased to be able to support.
Mr. Cook: I think we're doing two or three today.
The Chair: Good.
Mr. Cook: Although I don't think it will be net. It will be longer.
The Chair: No, I think you are right.
Clause 16, page 31.
Mr. Cook: Clause 16 relates to the corporate partnership deferral rules.
This clause goes from page 31 through to the start of page 36, and this is a technical amendment as opposed to a budget measure. What this relates to, if the committee may remember, I think it was in Budget 2011, we introduced rules to address the corporate partnership tax deferrals, and as a consequence of that, now that we've had a couple of years of experience with these rules, we're trying to provide some additional clarity.
The way the corporate partnership deferral rules work is if a corporation is a member of a partnership with a fiscal period year end before the end of its tax year, it has to make an estimate of the income that it will be receiving in respect of the rest of its taxation year. It makes an estimate. That's included in their income for the year, and then the next year they're allowed a deduction for that as things kind of true up.
What we have found is we would put in a very general rule addressing the character of the income and capital gains that would be included in a corporate partner's income and the CRA has had a little bit of difficulty administering it. Therefore we're clarifying in more detail how the income and capital gains inclusions in one year are included and then deducted in the following year. There's no change in terms of the operation of the provision, but it's making sure it operates as intended.
Senator Hervieux-Payette: Are we talking mainly about the law firm and accounting firm?
Mr. Cook: These are actually more general corporate partnerships than professional partnerships.
Senator Hervieux-Payette: Thank you.
The Chair: The next is clause 17, page 36.
Mr. Cook: This is another technical amendment to repeal section 36 of the Income Tax Act, which used to require railway companies to capitalize certain expenditures if they were required to capitalize them for rate-setting purposes. The approach to rate setting has changed and now they're just going to be using general accounting rules.
Sorry, that is clause 17 on page 36 of the bill.
The Chair: We go on to clause 18, which is also at page 36, scientific research and experimental development.
Mr. Cook: Clause 18 runs from page 36 through 38 and, again, these are just the same consequential amendments with respect to the trust measure that we had discussed earlier, changing a corporation to taxpayer, referring to loss restriction events and correcting a reference to majority interest partner.
The same is done in clause 19 with respect to section 40 of the act.
[Translation]
Senator Bellemare: While they may be consequential amendments, they affect major sectors such as scientific research and experimental development, nonetheless.
Was an impact study done? How will this affect those sectors, which we want to see grow in the future. Did you do any calculations?
[English]
Mr. Cook: As I indicated earlier, with respect to this particular measure we've just identified specific transactions so it's anecdotal in nature in terms of the amount of scientific research and experimental development that would be affected by a trust that goes through a change of control. I don't think that would be a very large group.
Senator Hervieux-Payette: What do you mean by "anecdotal," in a few more words than that?
Mr. Cook: In particular, through our own analysis in dealing with CRA, we've essentially identified two large transactions with respect to these trusts. Those trusts had traded losses together in excess of a $100 million, between $100 million to $120 million. That's the foundational experience that we're making the change based on.
Senator Hervieux-Payette: What will be the change for the $100-million transaction? How would it be treated with the new law?
Mr. Cook: Under the new law, the transactions that took place would have been before the new law. CRA may be challenging particular transactions based on existing law and also the general anti-avoidance rule, but absent extraordinary circumstances our usual approach is to go from the announcement of the change and not try to change prior transactions.
Senator Hervieux-Payette: My conclusion would be that there would be some savings for people trying to qualify, and with this you are just narrowing the people who would qualify?
Mr. Cook: In terms of who could take advantage of it going forward, yes.
The Chair: Thank you. Are we on clause 19 now?
[Translation]
Senator Hervieux-Payette: That is unbelievable, is it not?
The Chair: Yes, we are getting there.
[English]
Mr. Cook: Clause 19 also contains consequential amendments with respect to the trust measure, changing corporation to taxpayer, introducing the concept loss restriction event and majority interest partner. Clause 19 ends on page 40.
Clause 20 on page 40 has the same consequential amendment.
Clause 21 on page 40 is purely a technical amendment to delete an obsolete reference to a definition.
Senator Hervieux-Payette: I saw in more than one place that you put a hyphen between majority and interest. Does it make a big difference?
The Chair: Where are you referring?
Senator Hervieux-Payette: Well, it's in article 20, but I have seen that before.
Mr. Cook: The short answer is no, it does not make a big difference, but it makes the act consistent with how we've used majority interest for majority interest beneficiary as opposed to majority interest partner. You're quite right, it's not significant. It's just —
Senator Hervieux-Payette: Your style. Okay. I thought that it could have a different meaning when you put in a hyphen.
Mr. Cook: No, there is no intention to change the meaning.
Senator Hervieux-Payette: Okay, thank you.
Senator Callbeck: On clause 19, capital gains and losses, is that where you're increasing the lifetime capital gains exemption, or is that somewhere else?
Mr. Cook: That will be somewhere else, in section 110.6.
Senator Callbeck: All right.
The Chair: We were told this is just to bring trusts in under the already existing regime.
Mr. Cook: That's correct.
The Chair: Okay. You have done 20 and 21. Next is 22, page 40.
Mr. Cook: On pages 40 to 42, probably the change that is of most interest to the committee is we had previously talked about the character conversion transactions. This clause provides an adjustment with respect to the adjusted cost base of whatever the property that's subject to the character conversion is, to make sure there is no double taxation when the property is finally disposed of.
Those are in subclauses 22(3) and (6) on pages 41 and 42.
Senator Hervieux-Payette: Does it mean that in the past you were double taxing, or you are now making it more specific?
Mr. Cook: We were not double taxing before. Because of the new rules that we have put in with respect to character conversion, if we did not make an adjustment to cost base, it could potentially result in double taxation.
So we are not correcting a double taxation that was occurring before; it's just recognizing one of the implications for the new measure.
Senator Hervieux-Payette: Clarifying and giving more work to the fiscal adviser. That's good. Job creation.
The Chair: Seems like you have an understanding of that section.
Senator Hervieux-Payette: I can see that the fiscal lawyer and accountant will be happy to see the size of the bill. They have work for a few more years.
The Chair: Clause 23.
Mr. Cook: The second subclause in clause 23 just makes the same consequential amendments.
With respect to the —
The Chair: Regarding trusts or character conversion here?
Mr. Cook: It's regarding trusts.
The Chair: Thank you. You were going to go on, but I just wanted to clarify that point.
Mr. Cook: With respect to subclause 1, there's a deletion of a repealed provision. It relates to International Banking Centres, which was implemented in BIA1, but we were unable to delete this particular reference at the time because Bill C-48, the large technical bill, was still working its way through Parliament. And now we're just deleting a reference to section 33.1.
The Chair: Clause 24.
Mr. Cook: Clause 24 runs from pages 43 to 45. This clause is a series of technical amendments that were released for consultation in December 2012, relating to corporate transactions. These measures in this clause just implement comfort letters that had been issued by the Department of Finance.
Just to give a quick overview, subsection 55(2) is an anti-avoidance rule that deems certain deemed dividends received in the course of a corporation reorganization to be capital gains. It's to prevent corporate taxpayers from inappropriately reducing a capital gain that they would have had on the sale of another company by paying up tax free in corporate dividends.
There are two exceptions in subsection 55(3), just to make these fit transactions taxpayers were undertaking. We're still within the policy of this exemption. We had issued, I think, three comfort letters, and these just implement these comfort letters.
The Chair: And there was extensive consultation prior to this being implemented?
Mr. Cook: In terms of the consultation, the way comfort letters work is that we do them on an as-requested basis by taxpayers. So taxpayers who were undertaking a live transaction would have come into the Department of Finance and indicated, "Well, the transaction I'm undertaking technically falls within the ambit of the law, but it gives rise to an inappropriate result if you look at what the policy should be."
So the Department of Finance works with the taxpayer, and if we agree with them, we'll issue a comfort letter that we're going to make a recommendation to the Minister of Finance to amend the law.
These particular measures had been released in December 2012 for consultation — a 60-day consultation period. So both at the time of the issuing of the comfort letter there would have been consultation with specific taxpayers and then when they were released in draft in December 2012, there was another opportunity for taxpayers to come forward. Comfort letters, by their nature, tend to be relieving.
The Chair: Do they give comfort to the taxpayer that the scheme that they're proposing is okay until the law changes, so be uncomfortable that this is coming down the line?
Mr. Cook: Actually, it's the opposite. A taxpayer wants to enter into a transaction that might technically fall afoul of the law. Having seen the transaction and the fact that it fits within our conception of what the appropriate tax policy is, we will issue them a letter saying that we're going to make a recommendation to the Minister of Finance that this relieving change that would permit that transaction to take place as intended will be made and we'll recommend that it apply as of the date of the comfort letter.
In general, taxpayers and Canada Revenue Agency will both file; the taxpayer will file based on the comfort letter and CRA will generally administer based on the comfort letter.
The Chair: Very interesting.
Senator Hervieux-Payette: Does it mean that similar transactions in the future with these amendments — they won't need to go and ask for a comfort letter?
Mr. Cook: That is correct.
Senator Hervieux-Payette: That is saving you work. Fine.
Mr. Cook: That is correct.
Senator Hervieux-Payette: I thought that was, in the future, they should have the guidelines and just have to follow what's in the new rules.
Mr. Cook: And in fact, while the comfort letter is just issued to one particular taxpayer, other taxpayers who find themselves in similar situations will rely on it, as well.
Senator Hervieux-Payette: Okay. Thank you.
The Chair: Is there a different coming-into-force time for these particular provisions that relate to a comfort letter that might have been issued before the budget came out?
Mr. Cook: Well, you're quite right. They could. Normally when the comfort letter comes out, it will say, "We will recommend the change be effective as of a particular date," which is usually the date of the comfort letter.
The Chair: Notwithstanding the law and what Parliament might say —?
Mr. Cook: Well, I mean the comfort —
The Chair: Take comfort that we won't pursue it.
Mr. Cook: The comfort letter makes it clear that this is just department officials undertaking to make a recommendation to the minister that a particular change be made. And quite clearly, it's within Parliament's purview to either make the change or not, or to use a particular date.
In general, in terms of promoting the certainty of the tax system, taxpayers and CRA have chosen to rely on comfort letters as issued by the Department of Finance, and Parliament has chosen to pass law that generally conforms to the dates proposed in the comfort letter.
The Chair: Would it be possible for you to produce a sample of a comfort letter so we could see just what wording is there and what it looks like?
Mr. Cook: Absolutely.
The Chair: Good. Thank you.
Senator Hervieux-Payette: Are they public or just between you and the person asking for the comfort letter?
Mr. Cook: The comfort letters are generally actually published. If you've seen the commercial versions of the Income Tax Act, they'll be in grey boxes by the relevant section. They'll be redacted to take out the particular taxpayer-identifying information, but clearly the comfort letters are all subject to access to information and will be released to the public.
Senator Buth: Do you have an instance where the department or where comfort letters haven't been — the changes haven't been made due to a comfort letter?
Mr. Cook: There's sometimes debate as to whether there's one way back in the past that we didn't do. But as a matter of course, they are relied upon and end up being —
Senator Buth: — a lot of comfort. Thank you.
The Chair: That was an interesting diversion. Senator Callbeck?
Senator Callbeck: Senator Buth asked my question.
The Chair: Okay, then. We'll go on to clause 25.
Mr. Cook: Clause 25 relates to a Budget 2013 measure, which would be paragraph B of your brief overview, registered pension plans, correcting contribution errors. Currently when contribution errors are made either by an employee or an employer with respect to registered pension plans, if they wish to make a refund of the over contribution that's done by accident they will generally have to — assuming it's within the pension contribution limits — go to the CRA to get a one-off approval. This legislates the ability of pension plan administrators to correct reasonable errors. For example, someone goes off payroll and there's just one final pension contribution that goes in by accident after they finished up their last day.
So there are two parts to the amendment. One is the ability of the pension plan administrator to make the correction and then what we have here — which amends section 56 — relates to whether or not there is an income inclusion. Basically, if an employee had a deduction for the contribution in a prior year, they'd have an income inclusion. If they hadn't deducted the amount in any prior year, there would be no prior income inclusion.
The Chair: This is not an uncommon situation that has arisen in the past, I understand, so it's good that it's getting rectified.
Mr. Cook: It can happen.
[Translation]
Senator Bellemare: Along the same lines, do you have an idea of what those mistakes amount to, as far as those contributions and corrections go? Do you know approximately how much we are talking about here?
[English]
Mr. Cook: I'm afraid I don't have a particular amount in terms of the number of contributions that were made that would be eligible to take advantage of this.
Senator Callbeck: You use the term "reasonable error." How do you define that?
Mr. Cook: "Reasonable" is used many times in the Income Tax Act and obviously can vary in the eye of the beholder.
CRA, as the administrator of the Income Tax Act, would make the initial assessment as to what's reasonable or not. Obviously if there was significant divergence of opinion it could end up in court but we're trying to get at those things, if appropriated systems are in place and it's not being done in a systemic or wilful way to take advantage of the access to registered pension plans.
Senator Callbeck: Okay, so will this save Canada Revenue Agency? Will there be any cost savings in administration?
Mr. Cook: We think it will make things easier but it's not really meant to be a cost savings so much as just giving greater certainty to administrators with respect to the extent of their flexibility to manage their plans.
The Chair: We'll go on to clause 26 at page 46. It's a short one.
Mr. Cook: Clause 26 is a technical amendment and it relates to situations where a taxpayer has received a scholarship and for some reason has to repay it. If there is a repayment of the scholarship, the taxpayer is allowed a deduction in computing their income to the extent they had a prior year inclusion. This makes it clear that as well as prior year inclusions, you have an income inclusion for the year you're talking about. It's just a timing issue to make sure that if you received a scholarship amount that had to be included in income and then have to repay it for whatever reason, you will receive a deduction so you're not having an inappropriate income inclusion.
The Chair: Sounds like good sense.
Mr. Cook: Clause 27 is just repealing an obsolete provision.
We talked about making changes to a line in the French and English. Clause 28 is an example where it was less clear who the provision was applying to in French, so to coordinate with the English, we have added a reference to the appropriate person in French.
Clause 29 is a repeal of an obsolete section.
Clause 30 runs from pages 47 to 52, and again this is more of those consequential amendments with respect to the trust measure that we've been talking about.
The Chair: It's referred to in your explanation. Is that one of the trust matters?
Mr. Cook: This is G, trust tax attributes. That's the one that we discussed.
The Chair: Yes.
Mr. Cook: Clause 31 runs from pages 52 to 55. This measure relates to mining expenses, which are discussed in the summary at paragraph K.
Clause 31 —
The Chair: You're going to stay on that clause, are you?
Mr. Cook: I was just going to explain the measure that this clause addresses is pre-production mine development expenses. Pre-production mine development expenses are intangible expenses related to the development of a mine, such as removing overburden or sinking a mine shaft.
Currently they are treated at Canadian exploration expense. Canadian exploration expense is fully deductible in the year it's incurred. This measure would transition to treating these expenses as Canadian development expenses, which are deductible at 30 per cent per year on a declining balance basis. This change would be transitioned in between 2015 to 2017 and is consistent with prior changes that had been made with respect to oil sands development.
[Translation]
Senator Bellemare: Were any adjustments made or was there any cooperation with the provinces, Quebec, in particular, as regards this feature of the tax legislation? Is the legislation consistent with Quebec's?
[English]
Mr. Trueman: These changes affect the federal base. Certainly the mining industry is somewhere the provinces will sometimes offer incentives on their own, so this would be the federal change that would apply to companies as they operate across Canada. A province may have specific incentives or inducements for the mining sector in their own province and in the past I know Quebec has pursued some of that.
[Translation]
Senator Bellemare: In other words, the tax laws for Canadian mining companies and Quebec mining companies may differ given that two tax returns are filed.
[English]
Mr. Trueman: Well, the basic provisions will be the same in terms of this treatment of the exploration and the development expenditures. But in the past, Quebec has offered richer incentives in encouraging exploration, for example. And then also within provincial jurisdiction is the royalty structure. You may have noticed there have been changes in Quebec over recent years in that as well.
[Translation]
Senator Bellemare: The purpose of my question was to find out whether there was any commonality in the goals sought by the two levels of government as far as developing this specific industry goes. It is clear that Quebec wants to develop the mining industry. Taxation is a tool to do that, and these changes will have an impact. Are these changes in line with the economic development goals of the provinces?
[English]
Mr. Trueman: I think the federal government and the provinces certainly share an interest in the mining industry as mining activities take place in virtually all provinces and territories across Canada. These changes provide that sort of broad framework and the treatment for the exploration and development expenditures. They provide a more neutral tax system so that the rates of deduction and the tax system are more closely aligned with the economic and useful life of the assets. This is consistent with the government's general desire to have that more neutral tax system so that the investment decisions that are taken by the private sector are based on the fundamentals of the activities.
In the case of mining, for example, you want those fundamental decisions to be taken on the quality of the ore deposit, the availability of it, the cost to get it to market and those things, rather than on a specific tax inducement.
[Translation]
Senator Bellemare: If I understand correctly, then, what you are saying is the federal government's intent is basically to ensure neutrality and, if the provinces want specific incentives, they will offer them, but these changes do not necessarily coincide with provincial interests. Thank you.
[English]
Senator Mockler: My question is to follow up on Senator Bellemare's. Knowing that natural resources is a responsibility of provincial governments and that Canada is a world leader right now in asserting that we are looking at the EU agreement and other agreements to follow, my question is: Have you consulted with the provinces prior to doing what you are recommending to us?
Mr. Trueman: No direct consultation with the provinces on this. A change like this would be consistent with the federal responsibility for the tax base and with the agreements we have with the provinces in that respect. These changes certainly fall within the federal purview.
Senator Mockler: Therefore, what would be the mechanism available to provinces to have input into the changes that you are recommending?
Mr. Trueman: These changes would naturally follow in provinces that have a corporate tax collection agreement. Those that do not would have the opportunity to put in place similar changes.
Senator Mockler: Okay, thank you.
Senator Buth: Was there consultation conducted with the mining industry?
Mr. Trueman: Not specifically ahead of these changes. These changes with respect to mining mirror the provisions that were brought in in Budget 2007 and Budget 2011 regarding the oil sands treatment, so they are certainly equivalent changes. It is probably fair to say that the industry would be aware of those sorts of broad parameters and of the government's stated intention that it was looking at ways to enhance the neutrality of the tax system across industries.
Senator Buth: What would the financial impact to the industry and to the government be?
Mr. Trueman: Pre-production mine development expenses shows a total of $45 million over the five-year period. The accelerated capital cost allowance for mining shows a $10 million impact.
I would note that these provisions have both grandfathering and transition to minimize the impact on the industry and to allow them to have an orderly transition. Projects that were already underway would have the grandfathering, and the transition means that the measures would be phased in over a number of years, recognizing that capital expenditures are important in the mining industry.
The longer-term revenue pickup would be higher than those numbers there. Those numbers would not represent a fully phased-in number. We had this question at the House committee as well. The accelerated capital cost allowance for the mining assets will not be fully in place until 2021, so it makes it a little more difficult to predict the revenue gain at that time. It's also fair to say that, in an industry such as mining, the usage of that deduction would be variable from one year to another, depending on the number of mines being brought into play and whether or not a company was in a taxable position to claim it. With those caveats mentioned, the forecast at the time of Budget 2013 would be that the longer-term impact would be roughly $75 million per year when fully phased in.
Similarly for the second measure, pre-production mine development expenses, the ongoing cost associated with that, again projected further out, would be in the range of 40 to $45 million.
The Chair: Mr. Cook, you focused your comments on this section in relation to the pre-production mine development expenses aspect, but did we also all understand that the accelerated capital cost allowance for certain assets used in mining, either expansion or new start-ups, is also going to be phased out?
Mr. Cook: It's not in this particular clause. It's later on in the bill, but in terms of that, as well as what we've just been talking about — the pre-production mine development expenses — there currently is an accelerated capital cost allowance for certain assets acquired for use in a new mine or an eligible mine expansion, for example, plant facilities, airstrips, roads, those types of things. They are eligible for basic capital cost allowance of 25 per cent per year on a declining balance basis, and, under the accelerated capital cost allowance, taxpayers are allowed to take a deduction up to their income from the relevant mine or group of mines to the full cost of what they've acquired, with the result that, where this accelerated capital cost allowance is in place, taxpayers would not have any income subject to tax until they had deducted the full amount of their expenses.
This measure would phase that out over the period from 2017 to 2020 and leave in place just the basic capital cost allowance of 25 per cent on a declining balance basis.
[Translation]
Senator Chaput: How will the proposed changes impact small mining companies? Will the smaller mining companies be affected, and if so, how?
Mr. Trueman: Not at all. Generally speaking, the measures will affect the larger mining companies, not the smaller ones that tend to focus on exploration. The measures do not impact exploration.
Senator Chaput: Will remote regions be affected?
[English]
Mr. Trueman: Mining takes place in all parts of the country, and operating mines are often located in remote or rural communities. To the extent that the measure touches those senior companies, it could have an impact in various parts of Canada.
[Translation]
Senator Chaput: An impact in terms of what? Jobs?
[English]
Mr. Trueman: It is important to remember that there is the grandfathering for projects that are already underway so that these measures would not impact them, and there is also a long transitional period stretching out to 2020 or 2021. Conditions in the mining industry have been relatively strong over recent years. The commodity prices and markets are always variable, but, generally speaking, employment levels have been quite strong in mining over recent years.
Senator Callbeck: My question is along the lines of the question Senator Chaput has asked. You say the changes could have an impact. Have you done any forecasting, looking at that? I'm particularly thinking of jobs in the mining industry. It seems to me that these changes could be a real detriment to the mining industry.
Mr. Trueman: These changes certainly change the income tax treatment in that they remove longstanding preferences. At the same time, they put the industry on a more neutral footing vis-à-vis other industries in Canada in that the deductions they will have will be more closely linked to the useful life of their assets. Going forward, it will be primarily the economic drivers of price and quality of ore that drive those mining investment decisions in the long run.
Senator Callbeck: So you haven't really looked at how this might affect the future then?
Mr. Trueman: Not to the extent that I think you are looking for, no.
Senator Callbeck: Thank you.
The Chair: That's the end of our time for this particular session. We have to rush off to other things and let you rush off and have lunch and maybe find a couple of those points that we asked you to look into for us. Will we see you this afternoon in East Block at 14:10? Let's say 15 minutes after. Senators will check in, and then we will head over to East Block — 257 East Block — at 14:15 this afternoon.
If I adjourn, we can count the meeting this afternoon as a separate meeting? Meeting adjourned.
(The committee adjourned.)