Proceedings of the Standing Senate Committee on
National Finance
Issue 1 - Evidence - November 20, 2013 (Afternoon meeting)
OTTAWA, Wednesday, November 20, 2013
The Standing Senate Committee on National Finance met this day at 2 p.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.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable Senators, this afternoon we are going to resume 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.
[English]
This is the third meeting on the subject matter of Bill C-4. This afternoon, we will begin where we left off yesterday, with clause 73. Clause 73 can be found on page 102 of this over 300-page bill. We're somewhere around a third of the way there already, which is good news.
From the Department of Finance, we welcome back Mr. Ted Cook, Senior Legislative Chief; Mr. Geoff Trueman, General Director (Analysis), Tax Policy Branch; Mr. Sean Keenan, Director, Sales Tax Division; and Mr. Pierre Mercille, Senior Legislative Chief, GST Legislation.
From Employment and Social Development Canada, we welcome back as well Mr. Campion Carruthers, Director, Program Integrity, Temporary Foreign Workers, Skills and Employment Branch.
We'll proceed the way we did yesterday, by having Mr. Cook introduce a clause. If the concept can best be explained by talking about two clauses, then that's fine. Otherwise, we'll stop after the explanation of the clause and see if any senators require more clarification.
We have our briefing book that has been prepared by the department to help us, and we also have the briefing document from the Library of Parliament, with a table of concordance, that helps us to understand each of these clauses. We will be asked, as parliamentarians, to vote on each of these clauses in the near future. That's why we're trying to understand, before we're asked to vote, what we're voting on.
Mr. Cook, you have the floor, sir. Welcome back.
Ted Cook, Senior Legislative Chief, Department of Finance Canada: Thank you very much, Mr. Chair. By way of introduction, one question was left with us at the last meeting with respect to insured annuities and whether universities that use them as part of their donation programs might be affected by a particular measure. I believe Mr. Trueman has some comments on that.
Geoff Trueman, General Director (Analysis), Tax Policy Branch, Department of Finance Canada: Yes, absolutely. A general review of this would indicate that leveraged insured annuities, the kind of product addressed in the Budget 2013 proposal, are unlikely to be used as a donation structure to a university. Based on a general review of the planning and structures that universities do use, they tend to be more straightforward approaches. You may use a life insurance policy on its own to bequeath an amount to a charity or university on death. An annuity may be used separately also as a means of giving to universities. There are a number of possible arrangements that can be undertaken to make a donation to a university. This leveraged type of structure we're talking about in the budget would not likely be one of those.
The Chair: Thank you. That's helpful. That area is quite important to a number of universities, so thank you for looking into that.
We also had what you are pleased to describe as a comfort letter. Are we able to circulate one of those to each of the honourable senators?
Mr. Cook: We will be able to provide one shortly. Comfort letters, because they are provided to individual taxpayers rather than being published by the Department of Finance, are prepared in just one language, so we've chosen a comfort letter and are just finishing up the translation for it so that the committee will have it in both languages.
The Chair: Thank you. We'll proceed with clause 73.
Mr. Cook: Turning to clause 73, it relates to the Labour-Sponsored Venture Capital Corporations measure that we discussed yesterday. Clause 73 affects the portion of the measure that prevents the registration of Labour-Sponsored Venture Capital Corporations unless they applied for federal registration prior to March 21, 2013.
The Chair: When you say we discussed yesterday, there may be people watching this telecast who didn't tune in yesterday. They may go back, and, after the exciting view that they have today, they may want to go back tomorrow. However, maybe you could explain that, as I understand it, the Labour-Sponsored Venture Capital Corporations scheme or device is being phased out. Is that correct?
Mr. Cook: That is correct. Currently, when individuals invest in Labour-Sponsored Venture Capital Corporations, they're eligible for a federal tax credit of 15 per cent. This measure would phase out that tax credit. It would keep the credit at 15 per cent if it is claimed with respect to a taxation year before 2015. The credit will be 10 per cent for the year 2015, 5 per cent for the year 2016, and eliminated for 2017 and subsequent years. That is with respect to the basic credit itself. The other portion of the measure would end new federal registrations of LSVCCs. That's this particular clause. There will be no new registrations unless an application had been made prior to budget day, March 21, 2013. As well, prescription of provincial LSVCCs will also cease unless the application for prescription was received prior to March 21, 2013.
The Chair: Thank you. That gives us a good background and reminds us of what we learned yesterday.
Senator Callbeck: Yesterday you answered a lot of questions on this, mainly about how it will affect small business. How many shareholders or how many taxpayers take advantage of this? Do you know?
Sean Keenan, Director, Sales Tax Division, Department of Finance Canada: Based on the most recent tax data available, I think it's for 2010, about 300,000 taxpayers claimed the credit in that year.
Senator Callbeck: Okay. Thank you.
Mr. Cook: Turning to the next clauses, we can group clauses 74 to 79, essentially pages 103 to 116 of the bill. This is a series of technical amendments relating to the advantage and prohibited investment rules.
Again, these measures were released for consultation in December 2012; and I believe your briefing material will have a reference to other measures in Part 1. B is legislative proposals released December 21, 2012, and there's a reference to prohibited investment and advantage rules for registered plans.
As committee members may remember, Budget 2011 implemented a series of anti-avoidance rules that currently exist in the Tax-Free Savings Account context to also apply in the context of Registered Retirement Savings Plans and Registered Retirement Income Funds. These are special anti-avoidance rules that impose certain taxes if what we call prohibited investments or, speaking broadly, investments where rather than just being a portfolio investment for the RRSP or RRIF, represent a significant interest in a corporation. In those cases, additional taxes may be applied to the acquisition of the investment or the income arising from that investment.
Subsequent to the implementation of those measures, there's been an ongoing dialogue with various taxpayers and the Joint Committee of Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants. These clauses provide a series of clarifying and relieving changes that have been issued and commented on previously. We've dealt pretty closely with the Joint Committee of Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants.
The Chair: Were there comfort letters out in relation to any of this?
Mr. Cook: Yes, there were. One significant comfort letter was issued in June 2012. It was provided directly to the joint committee that I've just referred to and sets out the major framework of the amendments that are in these clauses.
To go through the kind of amendments that we technically make, there are various definitions in these prohibited investment and advantages rules. We try to better target those definitions to be more consistent with, in some cases, industry practice. The original rules were implemented after Budget 2011 provided a 10-year transition period. What happened was if a person held in their RRSP an investment that would be a prohibited investment, they could choose to make an election in respect of it and would have up to 10 years to dispose of that prohibited investment or otherwise withdraw it from their RRSP. During that 10-year period, they would have to take the income from that prohibited investment, withdraw it each year from the RRSP, and include it in their income. Based on consultations and some of the issues that arise for taxpayers in trying to withdraw funds from their RRSPs, the 10-year transition period is now permanent. That still effects the appropriate policy result because all the income in respect of those investments has to be withdrawn from the RRSP each year and included in the taxpayer's income.
As part of these clarifying amendments, we also have a new definition of ``excluded property,'' which excludes certain property from the definition of ``prohibited investment.'' It takes into account the fact that certain investment vehicles, mutual fund trusts, may be coming into existence or going out of existence, and it just makes the rules work appropriately during start-up and wind-down periods.
It also allows taxpayers to avoid the application of the rules in certain circumstances where the likelihood of them self-dealing is unlikely — the general circumstances in which they invest make it unlikely that there's inappropriate tax planning occurring.
A number of specific instances have been drawn to our attention, for example, the application of these rules in the context of marriage breakdown. When we initially drafted the rules, we didn't contemplate the potential that prohibited investments might be held by one spouse and then, as a consequence of marriage breakdown, have to be divided between the two spouses; so we contemplate that. As well, we contemplate certain corporate reorganizations and certain tax-free deferrals currently allowed under the Income Tax Act.
All of these are in a series of amendments. We could talk about them in specific detail, but in terms of what's happening at a general level, that is what is being affected by clauses 74 to 79.
The Chair: Could you remind us what instruments these all relate to or some of them relate to?
Mr. Cook: Sure. I'll give you an example of where these kinds of concerns might arise. What prompted these types of rules in the first place was taxpayers taking advantage of their RRSPs to do a couple of things; one is to try to channel business income into their RRSP. If all of a private corporation can be held within an RRSP, then business income from that corporation could be distributed into the RRSP. We found that some RRSPs had accumulations of assets far in excess of what one would expect a regular RRSP to hold. As well, certain debt-planning arrangements can be used to try to extract value out of an RRSP. You have assets in an RRSP and, of course, when you make a withdrawal out of the RRSP, it's included in income and subject to tax. If you can find other ways to extract the use of the property in the RRSP without its actually being a withdrawal from the RRSP, then that would allow a person to avoid an inclusion in income and subject to tax.
Probably the three main things are situations where taxpayers were trying to channel business income into an RRSP, which is supposed to be more of a passive investment; using various structures to try to withdraw the use of property or property itself out of an RRSP without having income inclusion; or trying to put money into an RRSP in excess of the contribution limits for RRSPs.
The Chair: That's helpful. Are there any further questions?
Senator Callbeck: Yes, I have a question. You talked about the RRSP, but I'd like to hear you give some examples on the Tax-Free Savings Account, because that's a pretty straightforward thing.
Mr. Cook: Sorry, in what terms?
Senator Callbeck: In terms of how this applies here or why you're bringing this in to cover the Tax-Free Savings Account.
Mr. Cook: These rules were already in place with respect to Tax-Free Savings Accounts. The Budget 2011 measure just extended them to RRSPs and RRIFs.
Senator Callbeck: Okay. My notes here have the Tax-Free Savings Account.
Mr. Cook: That was the first place where these kinds of rules already existed, and then Budget 2011 extended them to RRSPs and RRIFs.
Senator Callbeck: How many do you think will be affected here with the Tax-Free Savings Account, the RRSP and the RRIF?
Mr. Cook: For the most part, with respect to the kind of transitional rules that we're talking about, it's a very small group. These are people who are kind of caught in the transition period. I believe the best intelligence we have is in the low thousands.
The Chair: Thank you. Now I guess we'll go over to page 116, I believe you said?
Mr. Cook: That is correct, Mr. Chair.
The Chair: Are we starting at clause 80?
Mr. Cook: We can speak about clause 80 and 81 together; they both relate to the Labour-Sponsored Venture Capital Corporations tax credit that we've just been discussing.
Consequential to the amendments that were announced in the budget, this makes some follow-on amendments with respect to the penalties that apply in the context of LSVCCs. Certain penalties apply if a taxpayer does not hold their LSVCC shares for a sufficient length of time; the penalties basically claw back the credit that the taxpayer claimed in the first place.
Now, that credit, the way the act had been drafted, had been in contemplation of the basic 15 per cent credit that was the credit rate prior to Budget 2013. Obviously, we've got a scaling down of the credit to 10 per cent, 5 per cent, and then 0. This just makes sure that the penalty will apply at the rate that the individual claimed the credit in the first place.
The Chair: That sounds fair.
Mr. Cook: That's page 116. Page 117: Again, clause 82 is just one of these consequential amendments relating to the trust loss measure — the use of trust tax attributes that we discussed at some length yesterday. This is just making some terminology more consistent within the act.
Clause 83 is a technical change that was released on July 25, 2012. This amendment was made in response to a particular court case called Lewin. Under Part XIII of the Income Tax Act, a withholding tax is applied when certain payments are made to non-residents of Canada. One type of the payments that are subject to Part XIII withholding is distributions of income out of trust.
In the Lewin case, a trust made an amount payable to a non-resident; that is, it undertook that it would distribute income to that non-resident. And as a result of that amount being payable to the non-resident, the trust got a deduction for that amount in computing its Part I income tax. Now, before the trust actually paid the amount to the non-resident, the trust itself became non-resident; they changed who the trustees were and sort of moved out of Canada. Then the trust paid the amount to the non-resident. So, because it was a payment from one non-resident to another, no Part XIII tax applied.
So, in the Lewin case, a trust was able to take a deduction for an amount that was supposed be paid to a non- resident, but there was there was no Part XIII withholding tax on payments to non-residents because the trust itself became non-resident.
What this amendment would do is deem, essentially, the trust to have made the payment immediately before it becomes non-resident, so that we can levy the appropriate Part XIII tax rate.
The Chair: Well, well, well. It's amazing the steps you have to take, and now we're ``deeming.''
Mr. Cook: There is a certain cat-and-mouse aspect to it; no question.
The Chair: That's becoming apparent. Thank you.
Mr. Cook: That's clause 83.
Clause 84 is purely technical — just correcting two cross-references within the act.
Subclause 85(1) just introduces a new cross-reference to subsection 241(4). That is a new paragraph that we're putting into subsection 241(4), which is the rules in the act that tell under what circumstances an official may share taxpayer information. I think it would be better if we talked about this particular amendment in the context of section 241.
Then the second subclause is just a consequential amendment with respect to the electronic suppression of sales software. Basically, it is just providing that if there's a criminal offence penalty, then the administrative penalty will not apply in respect of the same contravention.
That leads to clause 86. Clause 86 goes from page 118 to 120. These are the criminal offence provisions for the electronic suppression of sales software. As we talked about yesterday, in response to dealing with electronic suppression of sales software, there are both administrative and criminal offences, and these are the criminal provisions.
The Chair: Could you look back to clause 85? My quick reading of subclause 85(3) suggests that if the administrative penalty had been charged prior to any criminal process, they both can exist. Am I reading that correctly?
Mr. Cook: I think we'll find that the criminal offences have the same coming-into-force provision as the administrative provisions. This amendment that you're referring to in the criminal has the same coming-into-force provision, which is the later of the day of Royal Assent and January 1, 2014. So, to the extent that they all apply from the same point in time going forward, I don't believe that it creates a gap where you might end up being subject to both.
The Chair: So it's the intent that one would not be subject to both?
Mr. Cook: That is correct.
The Chair: And if the administrative penalty were imposed and paid, would there be a reimbursement if one then had a criminal penalty to pay later on, or have we put any provisions in here yet to allow for that repayment?
Mr. Cook: I believe I'll allow Mr. Mercille to respond.
Pierre Mercille, Senior Legislative Chief, GST Legislation, Department of Finance Canada: Good afternoon. I believe the intent is that you not be charged the administrative penalty and the criminal offence for the same action. This clause is saying that if there are facts that led to the administrative penalty at some point in time, you cannot continue that administrative penalty if they are the same facts that lead to the criminal offence.
So you can have been assessed an administrative penalty because you failed to do something in reporting period 1. But in reporting period 3, if there are new facts and you continue to use the software, then they can basically lay criminal charges against you.
It's saying that you cannot have the administrative and the criminal penalty for the same offence.
The Chair: Thank you.
Senator Callbeck: When would the government decide to lay criminal charges rather than just have an administrative penalty?
Mr. Mercille: First, it is important to recognize the difference between administrative monetary penalties and criminal offences. The objective of the administrative monetary penalty is to encourage compliance with the act, and it can be assessed without the intervention of the court, so it's a more direct mechanism to impose a penalty.
Criminal offences have to be imposed by the court. They're not automatic. It's not just an assessment from the tax authority. The difference you will see is that in the amount for the criminal offences, the fines are higher than for the administrative monetary penalty because it's probably for situations that are more serious and there will be a discretion. When CRA does their investigations they can apply a penalty or if something more serious is going on, they will stop their audit and refer the case to a special investigation.
Senator Callbeck: So it's up to CRA.
Mr. Mercille: Basically, yes, but the prosecution would not be CRA itself. It would be the prosecutor of Canada.
Senator Callbeck: Thank you.
The Chair: Mr. Mercille, just for the record, could you explain what we're talking about here and the software that suppresses sales?
Mr. Mercille: This software can take many forms and it is used to selectively delete some sales from the book and records. There are two types. With phantom-ware, you have your cash register — which is basically a computer — and if the owner of the computer has that software, he can punch a particular key and another menu pops up. They can give directions to suppress every second sale, usually for cash transactions because there is less of a trail than one with a credit card. They can do all sorts of things to manipulate and falsify their records. It can also be found not in the software itself. It can be on a USB stick, on a CD or even on the Internet where, from their cash register, they have the option of accessing that other software that will selectively delete some sales from the books and records for the purpose of tax evasion.
The Chair: Amazing the things that go on.
Senator Callbeck: When did the government start seeing these programs?
Mr. Mercille: I believe it's a worldwide issue because the OECD recently released a report in 2013 and one of the recommendations was exactly that: to criminalize the possession, use and supply of that kind of software.
I believe in Quebec they found the first case around 1997. I think CRA, besides Revenu Québec and the rest of Canada, found the first one perhaps in 2006.
Senator Callbeck: Who the tracks that now and finds these situations?
Mr. Mercille: My understanding is that CRA has created a special team that is very qualified on the computer science side, and when an auditor sees there is an indicator of something suspicious, they can refer it to that group who will analyze the computer record more in detail. Don't ask me the details of how they do it, but there are techniques for trying to extract the fact that yes, there were sales that were deleted, and if it's done systematically, you can suspect software was used to do that.
Senator Callbeck: Thank you.
The Chair: Thank you, Mr. Mercille, for that explanation and background. I guess we will go on to clause 87.
Mr. Cook: Clause 87 has a couple of different changes, two of which are purely technical. I guess they are all sort of technical in nature, but I think the one that has been specifically referred to in your briefing is with respect to the Temporary Foreign Worker Program. That is subparagraph (x) of paragraph 241(4)(d) and it clarifies that information may be shared with an official of the Department of Employment and Social Development for activities relating to a program for temporary foreign workers for which administration and enforcement is the responsibility of the Minister of Employment and Social Development.
This relates to the Temporary Foreign Worker Program; in particular, when an employer makes an application to enter into that there is verification as to whether or not the employer is a legitimate employer. To do that, there is an interface with the CRA and CRA's payroll programs to verify that in fact the employer who is applying is a real employer.
Senator Eaton: So this measure was really put in place to ensure that employers are bona fide and not fraudulent.
Mr. Cook: I will let Mr. Carruthers respond to that.
Campion Carruthers, Director, Program Integrity, Temporary Foreign Workers, Employment and Social Development Canada: Thank you for the question. Yes, it is exactly that: to verify whether the employer who applied for the labour market opinion is in the business they say they are in and that the job they have asked a temporary foreign worker to do is in line with the business they are in. It is also to see that they are in business at all.
Senator Eaton: Does it affect the foreign worker's wages in any way? Do you care about what their wages are? Do they have to meet certain minimum labour codes, or that's not your business?
Mr. Carruthers: This provision is not intended to help the Temporary Foreign Worker Program look at wages paid to them. That's addressed under other provisions.
Senator Eaton: Thank you.
Senator Buth: Are there any other requirements in Bill C-4 with regard to the Temporary Foreign Worker Program? Are you aware of any other changes?
Mr. Carruthers: There are two other provisions that certainly relate to the Temporary Foreign Worker Program, but they relate to other Employment and Social Development Canada programs as well. One relates to the name change of the department, and the other relates to provisions that would allow us to accept electronic signatures and such.
But again, both of those would apply to much more than the Temporary Foreign Worker Program.
Senator Buth: This is the only piece on temporary foreign workers under the tax side of things; is that correct?
Mr. Carruthers: That's correct.
Senator Callbeck: On the disclosure of taxpayer information, what would be included in that?
Mr. Carruthers: The main things we would be looking for are the same types of information we get from a T4 or a T2 personal and corporate tax information, but also simple things like address. We also get an industry code that shows you what business they're in. I'm not really in a position to show you the whole list of things because we don't want to make it too easy for those who are actually interested in committing fraud on the program, but those are the kinds of things we look at.
Senator Callbeck: Thank you.
Senator Seth: It's the same thing; my question is like Senator Eaton's and Senator Buth's. Does this provision infringe on the privacy of temporary and foreign workers and their employers?
Mr. Carruthers: There is no new information that we would collect from CRA that we don't already have the authority to collect elsewhere under the Immigration and Refugee Protection Regulations and Act, so there is no new substantive piece of information that we're getting. This provision will allow us to efficiently get the information we need from CRA as opposed to, for example, asking an employer for paper copies. There is no extra substantive impact on the privacy rights of either temporary foreign workers or employers.
The Chair: Thank you. So we start with the principle that tax information is private to the taxing authority, and the reason for that is you want full and proper disclosure. If you start making it available to everybody, people will be less inclined to make that information available to the taxing authority. Now, you're putting a provision in here that certain information can be shared with other entities, and one of them is provinces. What kind of protocols would be in place to ensure that the information disclosed is protected?
Mr. Carruthers: I should underline that we take the privacy aspect of this program very seriously, and we worked closely with our privacy colleagues, both in the department and in the Office of the Privacy Commissioner, to ensure that we took every reasonable step to protect individual and business privacy.
We worked with those officials to ensure that we went through every authority that we had under the Immigration and Refugee Protection Regulations, and we were only collecting information that we were authorized to collect under those regulations. With respect to sharing information, not just with provinces but also with other federal departments, particularly Citizenship and Immigration Canada, we put in place memoranda of understanding that spelled out what information they get and how they get it. This has been reviewed not just by our own department but also by the Office of the Privacy Commissioner and by Department of Justice colleagues to make sure that we are doing exactly what we are supposed to be doing and no more.
The Chair: You anticipated my follow-up questions. The Privacy Commissioner has had a chance to look at this, and she approves of the protections that are in here?
Mr. Carruthers: This is actually right now with the Office of the Privacy Commissioner for review, but we have worked with her officials closely over the past few months. We're reasonably confident that we're in good stead with them. They certainly have not raised any issues with us.
The Chair: You're waiting for a clearance on this.
Mr. Carruthers: Yes.
The Chair: Okay, thank you.
Mr. Carruthers: I should add that I'm waiting for a clearance with respect to an amendment to the Immigration and Refugee Protection Regulations, which was pre-published in June and which we hope and expect might be approved by Treasury Board before the end of the year. It's not with respect to this provision here that we're waiting for clearance.
The Chair: Do those regulations relate to this particular clause in the bill?
Mr. Carruthers: They are related in the sense that we're not collecting any new kinds of information. Since 2011, we have been collecting the same kinds of information, and the new regulations, which I referred to, will allow us to use different tools to collect that kind of information and will give us more robust tools in general to deal with integrity and non-compliance. In that context, we wanted to make sure we stood in good stead with the Privacy Commissioner before we went to Treasury Board. Again, this provision that we're talking about here today doesn't add any new substantive provisions or items to be reviewed, and so we think that the Privacy Commissioner is reviewing our authorities and effectively covers the same ground as what you have before you here.
The Chair: Thank you. We can go on to the next clause.
Mr. Cook: Actually, Mr. Chair, I believe you might also have been referring to subclause (2), which refers to governments of a province.
The Chair: Yes. It's also referred to in the first paragraph.
Mr. Cook: With respect to information generally, you're quite right. Under section 241 of the Income Tax Act, taxpayer information is protected and can only be shared with particular officials for particular enumerated purposes. There are penalties for sharing outside that scope in 241. As well, there are obligations on the recipient officials to honour the purposes for which the information was provided in the first place, and I believe it's usually Canada Revenue Agency that will enter into memoranda, as Mr. Carruthers referred to. There are memoranda of understanding that are usually entered into. The legislation will provide sort of the general framework, and then the memorandum of understanding will be entered into to provide the appropriate protections with respect to the information.
The Chair: That's all being done?
Mr. Cook: For that particular measure, as Mr. Carruthers outlined.
The Chair: Thank you.
Mr. Cook: Clause 88 is a technical measure that implements a comfort letter. It relates to the transfer pricing rules in the Income Tax Act. Those are rules that apply where related taxpayers engage in transactions to ensure that appropriate prices are used for income tax purposes and that the way prices of goods and services are contracted for isn't used to try to extract profits out of Canada with the effect of avoiding income tax.
This comfort letter excludes from the transfer prices certain guarantees provided by a parent corporation with respect to the debt of a subsidiary, so it's a fairly technical measure.
Clause 89 begins on page 122, and these are amendments. It starts on page 122 and goes to page 126. This clause amends section 248(1) of the Income Tax Act.
Section 248(1) is the provision in the Income Tax Act where the main definitions that apply for the purposes of the whole act are kept, so, to the extent that there are definitions with respect to the measures that we have already talked about and that would apply across a number of provisions, those definitions are housed in section 248. They all relate to measures that we have already discussed at some length.
The Chair: Have we talked about derivative forward agreements?
Mr. Cook: ``Derivative forward agreements'' is a definition relevant to the character conversion transaction that we talked about.
The Chair: Oh, yes, I remember that.
Mr. Cook: That was where a taxpayer, as opposed to buying a property that produces income, would instead buy a property that, on sale, would generate a capital gain, and they would enter into an agreement. The kind of agreement they would enter into is a derivative forward agreement, so the derivative forward agreement is sort of the pricing mechanism to allow a taxpayer to receive what should have been on income account as a capital account.
Moving on to clauses 90 to 93, which are on pages 126 to — Actually, I will just talk about clauses 90 and 91. They are just consequential amendments to the trust tax attribute measure that we had talked about yesterday. Then, clause 92, which actually runs from page 127 through page 135, is the main operative provision for the trust tax attribute measure that we talked about. This is the new section in the Income Tax Act, 251.2, that creates a loss restriction event. In a case where there has been a change in the majority interest beneficiary, that is the beneficiary that has more than 50 per cent of the interest in a trust, then that would be a loss restriction event, with the result that the kind of loss rules that we've been talking about would apply to the trust. There are certain carve-outs or exceptions for transactions within affiliated groups, groups that have a certain relationship between them, and also a number of specific rules just to make sure that the loss restriction event applies in appropriate circumstances.
[Translation]
Senator Bellemare: Thank you, Mr. Chair. I have a question concerning this clause and the previous clause, wherein trusts are redefined by the inclusion of estates. I would like to know the impact of broadening that definition to everything that was just described.
And concerning estates — just a very hypothetical example — suppose an elderly person dies, and has losses, what happens to the heirs? What do they do with those losses? Does this have consequences on what they had, or does it not have much impact, as compared to how these assets were managed in the past? Does introducing estates into the definition of trusts have any repercussions? I do not know if that was clear.
[English]
Mr. Cook: I think I understand the question. With respect to a trust including an estate, you'll notice the definition refers to section 104 of the Income Tax Act. Section 104 already refers to an estate, and for most purposes it's very clear that a trust includes an estate, and the CRA position had been that the trust includes an estate. This measure is seen as clarifying in nature, so it shouldn't change how taxpayers are taxed, the amount of tax or the way an estate is managed after it comes into existence on the death of a taxpayer.
[Translation]
Senator Chaput: I have a follow-up question to that of Senator Bellemare. If, as you have just explained, it changes nothing, why did you add ``estate'' in the definition?
[English]
Mr. Cook: The main operative provisions operate off section 104 of the Income Tax Act, and that's already clear on the wording that — Sorry, I will back up. For the subdivision where most of these rules apply, it is clear that ``estate'' is already picked up. This provision applies more generally across the act. And it had been our view, given the way things follow through the subdivision into other parts of the Income Tax Act, that an estate would appropriately be picked up — when the meaning of ``estate'' and estate as a trust would apply where appropriate in the act. But some question had come up, so we are just clarifying that it would include the estate.
[Translation]
Senator Chaput: So it is a clarification. But what you are saying, if I understood correctly, is that there is no effect, that the fact of adding ``estate'' to the definition has no impact; there would then be no impact, positive or negative, I suppose, on the heirs? There would be no impact on the heirs?
[English]
Mr. Cook: I'm sorry. You were saying?
Senator Chaput: Go ahead.
Mr. Cook: There should not be an impact on inheritance.
The Chair: I suppose if there is, you'll be back here next year with a correction to the legislation. Thank you, and that's all on that clause.
Clause 93 is next? Page 135.
Mr. Cook: Clause 93 amends section 256 of the Income Tax Act. Again, consequential to the creation of loss restriction events and the application of certain rules with respect to acquisitions of control to trust, we've changed some cross-references because, now that we have a specific definition of ``loss restriction event,'' we can refer to that, and some of both rules that are tightening in the sense of deeming there to have been an acquisition of control of corporations below the level at which there is an acquisition of control — that will apply in trust. Also, there is a relieving change to provide that if you just change your trustees, there won't be any change in control of a corporation that is held by a trust.
Clause 94 goes from page 137 to 140, and it's the main operative rule for the corporate loss trading rule that we discussed yesterday. That addresses situations where more than 50 per cent of a corporation — well, actually more than 75 per cent of the economic value of a corporation — is acquired by someone but in circumstances where the acquirer does not acquire de jure control of more than 50 per cent of control of the corporation — legal control, voting control.
And in those cases where legal control is not acquired but you've acquired more than 75 per cent, then for the purpose of restrictions that apply in respect of losses, those restrictions will apply as if there had been an acquisition of control.
So those are pages 137 to 140.
The Chair: When you explained that yesterday, it was 50 per cent if it was legal control, but if they didn't have up to 50 per cent but still had 75 per cent of economic control — That is my recollection. So this relates to that same situation.
Mr. Cook: That is correct. You've expressed it correctly. Normally, if, irrespective of sort of your level of economic control, you acquire legal control, which we think of as more than 50 per cent of the voting shares or the ability to elect a majority of directors at a board of directors, then you will have acquired control, and certain restrictions with respect to the use of losses will kick in. In response to transactions where taxpayers have sought to avoid those rules, this rule will apply where you have acquired essentially 75 per cent of the value of the corporation without having acquired that legal control.
The Chair: Okay.
Mr. Cook: Clause 95 is on page 140. It is just a consequential amendment to the coming-into-force provision that originally was used with respect to the Budget 2011 measure for RRSPs and RRIFs that we have made some technical amendments to in clauses — I believe — 74 to 79. So this is just part of that package of amendments.
The Chair: What was the Keeping Canada's Economy and Jobs Growing Act? Will you refresh my memory?
Mr. Cook: That was one of the budget implementation acts for 2011.
The Chair: Funny how I forgot that name.
Mr. Cook: That, Mr. Chair, ends the amendments to the Income Tax Act proper. Then there are also some amendments to the Income Tax Regulations that are included in Part 1.
The Chair: Have you, Mr. Cook, talked yourself out of a job in passing this on, or will you do the regulations?
Mr. Cook: I will do the regulations as well.
The Chair: Okay.
Mr. Cook: Clauses 96 and 97 relate to the leveraged insured annuities that we have already talked about. Clause 96 just provides the circumstances under which an insurer has to provide certain information returns. This says that the insured does not have to provide a return if they didn't know, or it was not reasonable to prove, that they would know that the policy holder had a leveraged insured annuity policy.
Clause 97 provides that a leveraged insured annuity policy will not be an exempt policy. An exempt policy is one that is not subject to accrual taxation.
Clause 98 relates to a provision that indicates where the minister may be able to extend the time to file an election, and it provides a cross-reference to our trust tax attribute measures.
The Chair: Could you elaborate on that and just explain that again?
Mr. Cook: Sure. It's a fairly technical issue.
Section 600 of the Income Tax Regulations provides that the Minister of National Revenue may extend the time for making certain elections, and the provisions in respect of which the minister can provide the extension are set out in the provision. We're adding a cross-reference to the trust tax attribute measure. The trust tax attribute measure actually has a deeming rule that if there's a loss restriction event, it is deemed to occur at the start of the day. So if you have a loss restriction event that occurs midday, that's when the transaction closes. For tax purposes, that loss restriction event will be deemed not to have occurred midday but, rather, at the start of the day. It's just to make it easier for taxpayers so they can apply the rules on a day-by-day basis as opposed to doing it partway through the day.
That being said, a taxpayer could file an election to have the deeming rule not apply so that in fact the loss restriction event could occur at the time it did occur as opposed to the start of that day.
So this provision just allows the Minister of National Revenue to extend the time for filing this election.
The Chair: So you can elect not to have deeming apply?
Mr. Cook: That is correct.
The Chair: You're doing a fine job.
Mr. Cook: For clause 99, following on a restructuring of some definitions in section 212 of the Income Tax Act, we've just corrected a cross-reference because at the time the act was amended we did not make the appropriate cross- reference change in this regulation, and we're doing that here. That's clause 99.
Then clauses 100 to 103 actually run from pages 142 to 152. There's a lot of detailed ordering of rules and calculations, but this group of clauses implements the phase-out of the accelerated capital cost allowance in respect of mining expenses that we talked about yesterday. As part of the mining expense measures, the accelerated capital cost allowance for certain assets acquired for use in new mines or eligible mine expansions — plant facilities, roads, airstrips — the accelerated capital cost allowance is being phased out. Those assets are eligible for a capital cost allowance on 25 per cent on a declining balance basis, and then, with the accelerated capital cost allowance, taxpayers are allowed to deduct the cost of those allowances up to the income from the applicable mine or group of mines. The phase-out of this additional deduction would occur between the period of 2017 to 2020, and there are a number of amendments in the Income Tax Regulations that affect that.
Effectively, we've had to create a new class of property, and assets acquired after the relevant date go into this new class of property and that is phased out and the existing assets that are eligible for the grandfathering do not go into this new class.
The Chair: Are we talking in part about the accelerated capital cost allowance being done away with in respect of mining activity?
Mr. Cook: That is correct.
The Chair: Thank you.
Senator Callbeck: I see that these initiatives that are being phased out are called tax incentives. I can't see how they're an incentive for the mining industry. To my way of thinking, it's a cost on the mining industry and it will affect a lot of small mines, and certainly a lot of jobs in this country, so why are we using the word ``incentive''?
Mr. Trueman: I think it's fair to say that the ability to deduct up to the full amount of the cost in one taxation year is viewed as an incentive insofar as, for most assets, the usual rules in the tax system are that you writing those off in accordance with the anticipated useful economic life of the asset. So, the deduction of capital costs is taken over time rather than all at once in the year of acquisition.
Senator Callbeck: But as I understand it, we're phasing these things out. It will make it tougher for the mining industry.
Mr. Trueman: We're phasing out the acceleration of the capital cost allowance and we're returning it to the standard 25 per cent deductibility rate on a declining balance basis, so we're restoring the neutrality in respect of that. But yes, you are correct that from the perspective of someone operating a mine, they would certainly prefer to be able to write off all of their capital costs on a more rapid basis. That would be a preference vis-à-vis how other industries are treated subject to the capital cost allowance rules.
Senator Callbeck: It struck me as strange, the wording here as an incentive, because to me these things are anything but an incentive for the mining industry.
Mr. Trueman: The original measure as introduced in 1972 was considered an incentive in that it provided that accelerated writeoff compared to the 25 per cent and now we're returning to the 25 per cent.
Senator Buth: I just wanted to clarify that you're actually phasing out the incentive.
Mr. Trueman: Yes, that is correct, grandfathering for existing projects and then a phase-out over time.
[Translation]
Senator Bellemare: Have you done any studies on the impact of these measures on the decision to invest in mining companies? Neutrality is all well and good, it is a nice concept that is to be hoped for. But by the same token, most of the countries who opt for accelerated capital cost allowances do so to stimulate investment and create jobs during periods when employment is not growing at the same rate, and in regions that are particularly affected.
Did you consult the mining companies? Probably not, because they would refuse. I am always uncomfortable when we do not have studies on hand that show the impact of these measures.
[English]
Mr. Trueman: The department undertakes a significant amount of analysis in the lead up to these types of measures, and Canada remains overall an attractive country for mining investment. As you're aware, there have been tax reductions, removal of the capital tax, a measure that benefits the mining sector. These measures remove long-standing preferences and enhance neutrality. At the same time, there have been other initiatives that the government has put in place, such as the corporate income tax rate, reductions that benefit all companies, and mining companies included, and there have also been initiatives on the spending side as well in terms of regulatory review and geo-mapping.
I think overall it's fair to say that Canada does remain an attractive area for mining investment.
[Translation]
Senator Bellemare: That is a good answer. Thank you.
[English]
The Chair: We are ready to go on to the next section. You wanted to skip several pages. They're all related to the same issue.
Mr. Cook: That is correct. The next new measure actually begins on page 152 at subclauses 6 through 8.
This relates to the Budget 2013 measure announced with respect to accelerated capital cost allowance for clean energy generation equipment. I believe that's at paragraph I of your briefing materials.
The Chair: In a nutshell, what are we talking about?
Mr. Cook: Class 43.2 of Schedule II to the Income Tax Regulations provides for an accelerated capital cost allowance for certain clean energy generation equipment. The accelerated capital cost allowance is 50 per cent per year on a declining balance basis. What the budget proposed was to expand the biogas production equipment that's eligible for inclusion in Class 43.2 by providing that more types of eligible organic waste can be used in qualifying biogas production equipment. So eligible organic waste is to be expanded to include pulp and paper waste and waste water, beverage industry waste and waste water, and separated organics from municipal waste.
[Translation]
Senator Bellemare: If I understand correctly — unless I have misunderstood — these clauses increase the accelerated capital cost allowance rate, that is to say that different types of energy are included, are now entitled to these accelerated allowances that were brought in for manufacturers. Is that it? They are being eliminated for mining companies, but manufacturing companies and these biogas industries may avail themselves of accelerated capital cost allowance rates; did I understand correctly?
[English]
Mr. Trueman: Yes, it provides an accelerated capital cost allowance rate compared to what these assets would otherwise receive, and these assets and the production processes could be used in a range of industries.
The Chair: But not mining?
Mr. Trueman: Unlikely.
The Chair: We just looked at mining where that accelerated has been taken off or will be phased out, and now we're introducing other products where it will be coming in.
Mr. Trueman: Correct.
Senator Callbeck: I think it was in the last budget where we extended the changes to the green energy. I'm wondering why these particular areas weren't included then. Was it overlooked, or has the government seen a need for it since?
Mr. Trueman: Class 43.2 tends to incorporate a range of technologies as they emerge over time, and they may be brought to our attention by stakeholders or it may be through internal research that we do, but a lot of these technologies are nascent technologies that are beginning to emerge, and as new applications become available and industries are interested in them, then we're certainly receptive to those ideas and these additions.
I think we've made expansions to this class in most budgets over the past number of years as new technologies emerge and fall within the parameters of clean energy generation.
Senator Buth: Can you tell me when this was applied to the biogas area? When did the whole biogas area come into effect?
Mr. Trueman: I'm not sure, to be honest with you. Class 43.2 was introduced in 2005, but I'm not sure of the exact year when biogas was added.
Senator Buth: In terms of separated organics, then, you're taking a look at an eligible waste management facility or an eligible landfill site. I'm aware of some of the initiatives taking place in terms of the production of biogas from urban waste and some of the companies that are looking at this. This would expand, essentially, this incentive to companies like that? When you're talking about separated organics, it would be from landfill sites?
Mr. Trueman: That's correct.
Senator Buth: Do you have an impact number on this?
Mr. Trueman: A fiscal impact, yes. Over the five-year framework set out in the budget, the total impact is $5 million.
Senator Buth: That's the cost to run it?
Mr. Trueman: That's correct.
The Chair: Per year, did you say?
Mr. Trueman: No, that's the total over the five-year framework. I think it is $2 million over the last year.
Senator Buth: That is relatively small, likely relating to the fact that these are emerging industries.
Mr. Trueman: These are, and certainly the purpose of 43.2 and the capital cost allowance is to provide that financial incentive to help push them along.
Senator Eaton: Just to follow up on both Senator Callbeck's and Senator Buth's questions, as new green energy comes on stream, does the company apply to have its equipment? How does it happen? Do you just hear about it in the wind? Do I automatically get the right? How does it work?
Mr. Trueman: In terms of looking at new technologies, they may be brought to our attention by stakeholders that are aware of 43.2 and would like a new process or a new type of equipment to qualify.
Senator Eaton: You review it?
Mr. Trueman: We would, or it may be brought to the attention of the CRA, for example, who would liaise with us and then we would consider that from a tax policy perspective. We would also deal with Natural Resources Canada and Environment Canada in terms of assessing the environmental benefit associated with the process and whether there may also be unforeseen negatives associated with it. So we try to do a comprehensive look at the undertaking.
Senator Eaton: How long does that take?
Mr. Trueman: It could depend on the complexity of the process. Some are more straightforward than others.
Senator Eaton: Are we talking two months or two years? What are we talking?
Mr. Trueman: It could be somewhere in that range. Two years would certainly be a longer process. There may be technologies, for example, that we are uncertain about the environmental benefits of or whether they are well established. An industry stakeholder may have a different point of view than that and may think that the environmental benefits are more significant. In that case, there may be a little bit more back and forth in terms of the analysis. Others may be more straightforward to deal with.
Senator Chaput: How do you prioritize? This is brought to your attention by industry, I suppose, or private companies? How would you establish priorities if it happened that you had quite a few of them?
Mr. Trueman: We respond to all the work that is put in front of us. We're generally able to deal with these requests through the resources that we have available to us.
Senator Chaput: How many requests would you be getting in a year?
Mr. Trueman: In a given year, regarding Class 43.2 in particular, probably a handful of requests, anywhere from five to ten requests to look at technologies, that type of thing.
Senator Chaput: What would be the cost of each of them? It could vary?
Mr. Trueman: The cost associated with looking at those?
Senator Chaput: Or after, once you've looked at it and it's accepted.
Mr. Trueman: Certainly, the fiscal cost is something we would look at. It would be unique to each initiative that is identified. Generally, they tend to be emerging technologies and they may become more established over time.
Senator Chaput: What could be the range? I understand it's unique, but what could be the range of the cost?
Mr. Trueman: Most of the initiatives that have been introduced, I'd have to go back and consult the budget documents, but most have been in the range of zero to $5 million, that type of thing. It would be rare that there would be one with a more significant cost than that, I think.
Senator Callbeck: I thought you said the cost for this over the next five years was $5 million.
Mr. Trueman: Correct. I think the total cost set out in the framework is $5 million, yes.
Senator Callbeck: So how many businesses do you think will be affected by this or will benefit?
Mr. Trueman: For these technologies, I believe there would be a handful of businesses that would benefit at the current time, that have expressed an interest.
Senator Callbeck: So what's a handful?
Mr. Trueman: Probably for these, for the biogas examples we're aware of, it would probably be fewer than 10, for example. It would be open to companies to consider whether this is something that works for them. The inclusion of pulp and paper, waste and waste water then would open the provision up to pulp and paper companies to consider whether they'd like to adopt this technology or whether the financial incentive makes sense for them.
Senator Chaput: Are they all Canadian projects, or do some of them come from outside Canada?
Mr. Trueman: It would have to be a Canadian taxpayer who would be claiming the accelerated capital cost allowance. For the technology itself, some would originate in Canada; some could originate elsewhere.
Senator Callbeck: It was 2005 when this was first initiated. Because of it, how much additional investment have we had?
Mr. Trueman: I wouldn't be able to give you a number in response to that right now. I think certainly we've been able to provide an incentive to promote a range of clean technologies and we're aware that, yes, there's been uptake on that, that businesses do use these.
Senator Callbeck: So how do you know if that's the best way to spend the money, when you don't know how much actual additional investment this change made?
Mr. Trueman: Part of it in terms of a class like this, where there's an environmental objective and a desire to promote clean energy generation and conservation, is to look at the technology, to see if there's an expression of interest out there from industry, a sound basis for introducing the change, and then to leave it to business to decide whether or not they want to make that investment.
The Chair: Thank you. I think we are dealing at page 152 with subclauses (6) to (8). That leaves subclauses (9) and (10) of clause 103, and then on we go.
Mr. Cook: The next clause is 104. Clauses 104 and 105 relate to technical changes that are just updating statutory references. We had talked a bit earlier about provincial laws and the basis on which the CRA may provide taxpayer information. This updates the name of an applicable Quebec statute.
The Chair: I'm not sure — you make reference to a Quebec statute, from the point of view of getting information?
Mr. Cook: In terms of providing information, as we had talked about under 241 — and there's a new paragraph, (j.2), which indicates that information can be provided to a province for the purpose of administering a prescribed provincial law — originally, in Quebec, what was prescribed was an act respecting income support, employment assistance and social solidarity. That act has been replaced with the Individual and Family Assistance Act. What we're doing here is updating the reference to the appropriate Quebec legislation. In fact, I think there are two provisions that we've repealed as we've consolidated some of the rules around providing information, and they're now in 241. So that amendment that we saw in 241 actually had already existed in the act in section 122.64, I think it is. So CRA had the authority to provide information to Quebec for the purposes of this act, and we've updated the reference. We'll see there's one other spot where we add a reference to this act to tie it to section 241 of the act.
The Chair: Section 241 — this is part of the law — authorized the sharing of information with provinces. Now we're into a regulation, where you're being specific. You're not sharing it just with the province without any specific reference. This legislation restricts who in the province you share it with.
Mr. Cook: It's for the purpose of administering it. I'm just going to return to the specific reference. In 241, we'll see this is the way it applies in respect of it. Paragraph (j.2) that we've talked about refers to providing ``information obtained under section 122.62'' — that's regarding the administration of the Canada Child Tax Benefit — to an official of the government of a province solely for the purposes of the administration or enforcement of a prescribed law of the province.
So the act itself talks about a prescribed law. It doesn't specify which law. A prescribed law is just an indication that you have to go to the regulations to find out what the exact law is.
Clause 106 also relates to the accelerated capital cost allowance for mining assets. As I indicated earlier, it was necessary for us, in order to effect the phase-out of the accelerated capital cost allowance, to create a new class of property. Clause 106 adds references to that new class of property, which will be Class 41.2. Currently, the property that's eligible for the accelerated capital cost allowance is in Class 41 of the regulations.
On the next page, 154, clauses 107, 108 and 109 are just purely consequential to the prohibited investment and advantage rules, those RRSP rules that we talked about earlier. This is largely changing the title of a part of the regulations; deleting one part of the regulations, because we had moved the applicable law up into the act; and just reorganizing some existing language.
The Chair: Why would subclause 107(2) deem a heading to come into force March 23, 2011? Why would it be necessary to do that?
Mr. Cook: I take your point. I think it's quite right; the heading doesn't have substantive impact. If you look at the following clauses, which have more of an impact, we've just chosen to use the same coming into force for everything. But you're quite right; we could have just done the heading coming into force on Royal Assent.
Clause 110 is another consequential amendment with respect to the trust tax attribute measure. Again, we're just making a spelling change.
On page 155, we have clause 111. This amendment would implement essentially three comfort letters that have been issued by the Department of Finance.
Section 86.1 of the Income Tax Act allows shareholders to take advantage of tax-free rollovers in respect of certain non-Canadian corporate reorganization transactions.
The Income Tax Act has a number of rules with respect to corporate reorganizations, share transfers and exchanges, and where specific criteria are met, those transactions can occur on a tax-free basis.
Outside of the United States, we don't have a great deal of knowledge with respect to how foreign transactions specifically occur, so section 86.1 allows specific foreign transactions to come forward to the Department of Finance to allow the Department of Finance to review those particular transactions in conjunction with, obviously, the participating company and allow those transactions to occur on a tax-free basis. These are, essentially, foreign spinoffs of corporations.
This clause would prescribe three of these foreign spinoffs, one a distribution by Fiat, another transaction by Foster's Group of Australia and one by the Telecom Corporation of New Zealand.
The Chair: What impact does the retroactivity have here? What potential impact would there be on taxpayers to have retroactive regulations passed here in clause 111 and, as I mentioned, in clauses 108 and 109?
Mr. Cook: In terms of clause 111, this would all be beneficial to taxpayers in the sense that these are distributions that have taken place on a certain date, so what we have done is made the rules effective as of the date of the applicable corporate transaction.
The Chair: Did you have comfort letters out there to that effect?
Mr. Cook: That is correct. One comfort letter was issued for each of these.
The Chair: So you're just cleaning up what you told them you would do, then?
Mr. Cook: What we indicated we would recommend.
The Chair: Yes. I understand that. Thank you for that delicate change in wording. Is clause 108 the same thing?
Mr. Cook: Clause 108 does respond to comfort letters that have been issued as well. I think when we were talking about the prohibited investment and advantage rules, there was a comfort letter that was issued to the Joint Committee on Taxation of the Canadian Bar Association and the Institute of Chartered Accountants.
The Chair: Thank you. I think from the point of view of lawmakers, it's important for us, particularly when we're passing retroactive taxing legislation or taxing regulation, to understand that no adverse effect is likely to come from this.
Mr. Cook: In terms of the impact of this particular legislation, you've referred back to clauses 108 and 109, so what those would do is go back to when the initial legislation was announced in Budget 2011.
The Chair: And effective, subsequently, when passed.
Mr. Cook: Yes.
The Chair: Okay. Thank you.
Mr. Cook: Clause 112 again just refers to — I had taken the committee back to 241(4)(j.2). This is the actual regulation that provision is referring to. So again, these are just the prescribed laws of a province.
Clause 113 relates to Labour-Sponsored Venture Capital Corporations, and this is the provision that provides that provincially registered Labour-Sponsored Venture Capital Corporations will not be prescribed for federal tax purposes, unless the application for prescription had been received prior to March 21, 2013.
The Chair: That was the date of the announcement?
Mr. Cook: That's correct. That was Budget Day 2013.
Moving on to the next clause, clause 114, in one of the earlier technical amendments we discussed there was an addition of some language referring to a prescribed energy conservation property, and this just makes a cross-reference to that legislative provision so that the prescribed meaning applies for purposes of the appropriate provision in the act.
Clause 115 is another technical amendment, and it ensures that non-taxable income — because perhaps it's income earned by a prescribed international organization — is not included in computing a foreign tax credit for the recipient of that income.
The Chair: Senator Callbeck has a question on that.
Senator Callbeck: Yes. If we can go back to clause 114 for a minute, I see the amendment comes into force December 21, 2012. Why that date?
Mr. Cook: I will have to check that. That's just the date we announced it. Our package of technical amendments was released in draft for consultation on that date, December 12, 2012.
Senator Callbeck: All right.
Mr. Cook: Clauses 116 to 118 relate to the accelerated capital cost allowance for mining property. Clauses 116 and 117 introduce some cross-references, and clause 118 introduces our new Class 41.2, which is the property that won't be eligible for the accelerated capital cost allowance.
Clause 119 deals with part of the measure relating to accelerated capital cost allowance for clean energy generation equipment. This measure also expands eligibility under Class 43.2 by allowing all types of cleaning and upgrading equipment that can be used to treat eligible gases from waste to be included.
Currently, the eligibility for Class 43.2 varies depending on the type of gas that's being treated, and this will allow all types of gases from waste to be used, including biofuel gas, landfill gas and digester gas. That's clause 119.
Clause 120 is the final clause in Part 1, and it's a coordinating amendment. There is one provision with respect to section 37. There is an amendment being made in this bill, and it was also amended by one of the BIAs last year with future effect, so this is just a coordinating amendment to make sure that both amendments are able to take effect appropriately.
Senator Callbeck: What is the amendment?
Mr. Cook: I have to look it up.
The Chair: It's obviously something that didn't get much use over the last year or so. Are you prepared to say it never existed if this one gets passed now?
Mr. Cook: In general terms, some amendments were made to the Scientific Research and Experimental Development, SR&ED, tax credit. Some parts of that would apply only in respect of expenses or assets incurred in later years. As a result, we have a number of amendments that only come into force in 2014 and 2015. I'm afraid I neglected to bring my copy of that particular bill here. It is an amendment with respect to the ability of a taxpayer to use SR&ED expenses to generate credits after there has been a change in control and what to do with the prior expenses.
I do not know if that's responsive enough, but I could endeavour to provide a more fulsome explanation.
Senator Callbeck: Maybe you can provide that to the committee.
The Chair: Subsection 9(5) of the act of 2012, whatever that refers to, must also refer to something similar in this proposed legislation.
Mr. Cook: That's correct. I can point you to the provision that the coordinating amendment relates to. It's in clause 18 of this bill where we're amending 37(6).1, which relates to the ability of the taxpayers to use SR&ED expenses. In terms of the specific amendment that has been coordinated, I don't think I have that detail.
The Chair: That's helpful, but if you can give us anything more to clarify that, it would be good as well.
That would conclude Part 1, which is an exciting moment in our deliberations, especially since Part 2 was so short. We will be at Part 3 before we know it.
[Translation]
Mr. Mercille, are you available for Part 2?
[English]
The Chair: Mr. Cook, are you and Mr. Keenan remaining? Are you interested in learning about excise tax? Will you stay?
Mr. Cook: I'll stay.
The Chair: That's good. I will save my formal thank yous until Mr. Mercille helps us with excise tax amendments found at page 158 and following of the bill.
[Translation]
Mr. Mercille, you have the floor.
[English]
Mr. Mercille: Part 2 of the bill starts at clause 121 and implements two GST and HST measures proposed in the March 21, 2013, budget.
In respect of electronic suppression of sales software, the measures proposed under the GST legislation are the same as the ones proposed under Part 1 for the Income Tax Act. They can be found at clauses 121 to 123. These are the administrative monetary penalties and the criminal offences for the possession, use, supply and offer for sale of electronic suppression of sales software.
I will take this opportunity to correct an answer I gave previously in respect of your question on clause 85(2) about the Income Tax Act. The question dealt with whether there can be administrative monetary penalty and criminal law offences at the same time. Clause 85(2), reproduced also in the GST part, is the same wording. It's modelled on existing provisions in the both the Income Tax Act and the GST legislation.
The provision provides that both administrative monetary penalty and criminal offence can apply for the same offence. It is important to note that for that to happen, the straightforward monetary penalty must have been assessed before the charges are laid in respect of the criminal offence.
We just followed an existing model. I understand that the administrative monetary penalty and the criminal offence existing at the same time has been recognized by the courts.
The Chair: Thank you for that clarification. I appreciate that.
Mr. Mercille: The last measure included in Part 2 of this bill is found at clause 124 and is a clarifying amendment in respect of the supply of paid parking. Under GST and HST, supplies of paid parking are generally taxable whether provided by the private or public sector as supplying paid parking is a commercial activity.
To maintain the competitive equity between the private sector and the public sector, since the introduction of the GST, paid parking has been excluded from the general exempting provisions for supplies made by public sector bodies.
Currently, under the GST/HST legislation, there is a special simplification provision that exempts from GST/HST the supply of a particular property or service if all or substantially all of the supplies of that property are serviced, which in terms of GST/HST legislation usually means 90 per cent or more of those supplies are made for free. This provision is intended to simplify the application of GST/HST for public sector bodies by relieving them of the obligation to collect tax on occasional sales of goods and services they provide for free substantially all of the time. This is an existing provision in the legislation.
I can give an example of where this could apply: a public library that lends books for free. Occasionally, because they have to do interlibrary loans, they charge a nominal fee. Because they supply all or substantially all of the time their books for free, that nominal fee would not be subject to GST. That's the kind of situation that this provision is intended to target.
The measures included in this bill clarify that this special simplifying exempting provision does not apply to supplies of paid parking that are made by way of lease, licence or similar arrangement in the course of a business carried on by a public sector body. This clarification is intended to ensure that this legislation provides for the application of GST/ HST for paid parking provided in the course of a business as intended as generally understood by suppliers and taxpayers and as administered by the Canada Revenue Agency.
I will point out that this measure is effective from the date that the GST was enacted; so this is a retroactive amendment.
The Chair: We don't have the entire bill here but is it only blood and blood derivatives?
Mr. Mercille: I will explain why the blood is there. The blood is not an amendment as it's currently part of the provision. Blood and blood derivatives are excluded because we don't want those supplies to be exempt because they are zero-rated under another part of the act. As the committee may know, in the case of an exempt supply, no tax is charged by the supplier; but the supplier is not entitled to input tax credit in respect of their expense. In the case of a zero-rated supply, there is no tax charged by the supplier, but the supplier is entitled to get input tax credits. In this case, blood derivatives are excluded because they have a more favourable treatment elsewhere in the legislation.
Senator Buth: My question was on the blood and blood derivatives, but now I have a question on the supply of paid parking. Are we charging GST or not?
Mr. Mercille: Yes, the supply of paid parking is a commercial activity and tax should be charged.
The Chair: I'm back to blood derivatives here. The change seems to be the word ``if.'' If the underlined word in section 10 has been added — ``service if'' — was that just left out before? What has changed?
Mr. Mercille: I can explain the change to ``if.'' As you know, it's the Department of Finance that drafted the tax legislation, but we still have the support of the Department of Justice. And the Department of Justice for the ``globality'' of the federal legislation is the department that drafted the legislation and provides some guidelines on what kind of language should be used.
From time to time, they do reforms and they propose that older wording be changed to newer wording. The word that was there before was ``where.'' According to the Department of Justice, it's a better way of drafting — to replace the occurrence of ``where'' that means ``if'' by the word ``if.'' So this is not a substantial change; it is purely a drafting change.
The Chair: Thank you for that explanation.
Senator Callbeck: It says the sale of parking by a public sector body is currently subject to the GST/HST, except in cases where more than 90 per cent of the parking is free. Where did the 90 per cent come from?
Mr. Mercille: The 90 per cent test is referred to in all, or substantially all, of the GST legislation. This test is there in many places in the legislation, and this is what it is: Basically, it means that if all or substantially all of what you do is for free, while if you have a few occasional ones, the way the measure was there before and the way it continued to operate except for parking, is to say that —
This is a vast majority — 90 per cent or more — of the supply you make for free. If occasionally you charge a little fee for the same service, to simplify the administration of it, the legislation doesn't require you to collect tax on those occasional sales that are made for consideration.
Senator Callbeck: So, hospital parking — that's going to be taxed, period?
Mr. Mercille: I'm going to clarify something here because the economic action plan for 2013 proposes two GST/ HST measures that relate to parking. First is the one that I just described. There was a second measure that was proposed to clarify that the special GST/HST exemption for parking supplied by charities does not apply to supply of paid parking by a charity, set up or used by a municipality, university, public college, school, a hospital to operate a public parking.
So this second measure that was in the budget, for which we received comments from affected stakeholders, including some hospitals, is not included in this bill. The government continued to consult with all those involved about this technical measure and its intent.
So that other measure that is not included in the bill would have affected hospital parking. The measure that is proposed now is mainly targeted at municipal parking.
Senator Chaput: Just in regard to hospital parking, though it's not in here, if I understand correctly, does a hospital that contracts out the service of parking — they don't take care of it; there is a contract — do they pay GST on the parking — the contractor or whoever does it for the hospital?
Mr. Mercille: Are you talking about the private provider of hospitals?
Senator Chaput: It would be a private provider, yes.
Mr. Mercille: Then it depends on the facts of the situation. It depends who is the supplier. If the supplier is the hospital, the parking is taxable. If the hospital has the parking managed by a private company but is still the supplier of the parking, the parking is taxable. If the hospital leases all the land to a parking operator and the operator makes the supply, it is taxable.
Senator Chaput: So the only time it is not taxable is when 90 per cent of it is free.
Mr. Mercille: Yes.
Senator Chaput: Fair enough. Thank you.
The Chair: Or the hospital foundation that gives all its money to the hospital.
Mr. Mercille: That's the other measure that was proposed in the budget that is not included in this bill.
The Chair: That was my understanding, and we were pleased it wasn't. That doesn't mean it won't be in some other bill but it isn't now.
Could you tell me what impact this retroactivity here has? This is ``Subsection (1) is deemed to have come into force on December 17, 1990.'' Most of the us weren't even born then.
Mr. Mercille: I wasn't. This specific date is the date for which the GST legislation was first enacted.
The Chair: So you're going right back and saying it should have been way back then. What kind of retroactive collection will be going on?
Mr. Mercille: What's going on in this situation is that there have been appeals. It has been going on for a very long time from a number of municipalities. And they invoked this clause to justify that their parking metres and their public parking would be exempt. It has never been the position of the government. The document about the GST legislation, the technical document before the GST came in, was clear: A supply of paid parking by a public sector body was always intended to be taxable.
The Chair: So you go back 23 or 24 years to all the municipalities across Canada and say, ``Pay up the HST you didn't charge because you should have charged it''?
Mr. Mercille: The way I understand the appeals have been made is that the municipalities have complied with the legislation and have remitted the tax on their supply of paid parking. On the advice of some tax advisers, they say, ``Well, maybe there is a creative loophole here that we can invoke to try to get back the tax the people who parked their cars actually remitted to the municipalities.''
There have been a number of appeals going on that drag forever, and then this amendment is a clarifying amendment that the position of CRA has been clear. The position of the Department of Finance has always been clear. This has been understood by the municipalities. Basically, this is why the clarification amendment comes in — so basically those appeals can stop.
The Chair: It was good that from the federal government's point of view you were able to convince municipalities to pay this when they felt they didn't have to, but you got their money, so it's a lot easier to keep the money than go after the money 24 years later.
Mr. Mercille: This amendment is not intended to have more municipalities remit money from the past. The municipalities have made claims of what is called a ``tax paid in error'' under the GST legislation, and their intention is to get back some money that they already remitted to the government.
The Chair: What lever did you have to convince those municipalities to pay that money? Was it the threat of interest that they would have to pay if they lost this claim?
Mr. Mercille: No, because the fact that the supply of paid parking by the municipality was always clear and understood that it was taxable. But we're in a world where tax advisers come up with very creative arguments and go convince municipalities that there is some money to be made here, despite the clear intention of the government, there is maybe an argument to be made.
I just want to make clear that the government is not conceding that this argument is valid. It is just that those appeals have been going on for a very long time, and they never seem to proceed in front of a court.
The Chair: But this ends all of those appeals, or it will, assuming we pass this legislation.
Mr. Mercille: Yes.
The Chair: I guess that concludes things, unless you have something else for Part 2 that you would like to bring to our attention.
Mr. Mercille: No.
The Chair: I appreciate your keeping the Part 2 very brief. We had already understood and had an explanation on part of that already — the software to reduce sales information, which is something that we were not aware of.
I would like to thank you, Mr. Cook, Mr. Trueman and Mr. Keenan for being here — all from the Department of Finance — and helping us through this No. 2 budget implementation act, Bill C-4, Parts 1 and 2. Thank you very much for taking the time out over the last 10 hours or so and working our way through these clauses. It has been very helpful.
Colleagues, I will call this meeting to an end and we will have another meeting at 6:45 in room 2, Victoria Building.
Thank you very much, and we will carry on with Part 3 this evening.
(The committee adjourned.)