Proceedings of the Standing Senate Committee on
National Finance
Issue 20 - Evidence - November 4, 2014
OTTAWA, Tuesday, November 4, 2014
The Standing Senate Committee on National Finance met this day at 2:20 p.m. to examine the subject matter of Parts 1, 2, and 3 of Bill C-43, A second Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: Welcome to this meeting of the Standing Senate Committee on National Finance. We are just beginning to deal with Bill C-43, which is almost 500 pages in length, on the budget implementation. This committee is responsible for ultimately doing a clause-by-clause study of the entire bill, but at the front end we have certain clauses and parts that we will deal with. Other committees will deal with other parts, so our witnesses may well be called to go to other committees as well.
We will start with Part 1, ''Amendments to the Income Tax Act and a Related Text,'' which can be found at page 1 to page 261 of the bill.
I would like to welcome from Finance Canada, Alexandra MacLean, Director, Tax Legislation, Tax Policy Branch; Miodrag Jovanovic, Director, Personal Income Tax; Trevor McGowan, Senior Chief, International Inbound Investments; Geoffrey Coke, Tax Policy Officer, Business Income Tax Division; and Kevin Shoom, Senior Chief, International Taxation and Special Projects Division.
Ms. MacLean will get us started and can let us know who will handle each section. We will begin with Division 1 of Part 1.
Alexandra MacLean, Director, Tax Legislation, Tax Policy Branch, Finance Canada: Thank you and good afternoon.
The first clause of Part 1 is clause 2. It's a consequential change related to the proposed trusts graduated rates measure from Budget 2014. The trusts graduated rates measure proposes to reform the tax treatment of testamentary trusts and inter vivos trusts. Before this proposal, testamentary trusts qualified for the graduated rate structure that normal individuals can use in the personal income tax system, whereas other types of trusts were taxed at the top marginal rate of 29 per cent federally and the top provincial marginal rates. Under this proposal, all trusts will be subject to the top personal rate except for estates in their first 36 months — a trust for a deceased individual in the first 36 months.
There is also a special exception for trusts for persons eligible for the Disability Tax Credit. There are a number of amendments in this bill to achieve the changes to replace, for example, the term ''testamentary trust'' with the term ''graduated rate estate.'' That is clause 2.
The Chair: Has this been announced?
Ms. MacLean: Yes, it was first announced as a consultation project in Budget 2013 and subsequently proposed in Budget 2014.
The Chair: Thank you; that's helpful.
Ms. MacLean: Clause 3 relates to farming and fishing businesses. This is also a measure from Budget 2014. It's a fairly minor technical change. There are special tax rules: the life-time capital gains exception and an intergenerational rollover for farming businesses. The same rules are available for fishing businesses. There was no access to those special tax relief measures for businesses that were a combination of farming and fishing.
Not many tax payers are affected by this measure, but the thinking was that a combined farming and fishing measure should have access to the same treatment as a farming business or a fishing business. Clause 3 proposes changes to section 14 of the act related to eligible capital property, which is generally goodwill and farm quotas. There are changes throughout Part 1 of this bill to implement that small change to replace separate definitions of ''farming business'' and ''fishing business'' with a single definition of ''farming business'' or ''fishing business.''
The Chair: Honourable senators, we're just going clause by clause, so if anybody has a point of clarification or a comment to make, please let us know and I will stop our witness before we move on to the next clause.
Seeing no requests to intervene, we'll move on.
Ms. MacLean: Clause 4 proposes a technical amendment related to foreign affiliate dumping. Foreign affiliate dumping is a section of the Income Tax Act first announced in Budget 2012. It was a fairly significant tightening tax change to target structures where Canadian corporations that were owned by non-resident corporations acquired shares of other foreign companies and borrowed money to do so to create an interest deduction in Canada. The rules generally can create a deemed dividend to target this type of tax planning. Since their initial release in Budget 2012, stakeholders have had a number of comments on their impact, in particular on the mining sector. A number of relieving changes are in Part 1 of the bill in relation to the foreign affiliate dumping measures. Clause 4 is one of those changes.
These technical amendments have been released on a couple of occasions as well prior to being included in this bill.
The Chair: Am I reading correctly that it goes back to taxation years that end after March 28, 2012?
Ms. MacLean: Yes, that would be budget day 2012.
The Chair: The effect of this is from that date forward?
Ms. MacLean: That's right.
The Chair: That's at page 5 of the bill.
Ms. MacLean: Yes.
[Translation]
Senator Hervieux-Payette: I would just like to get an explanation about mines. What are the amendments? Because when you read clause 4 — unless you are a genius — you have no idea what it means. There are only a dozen or so lines, but it refers to all kinds of other things. Could you tell us specifically about the difference before and after the amendments?
[English]
Ms. MacLean: A description of the relieving changes that were requested particularly by the mining sector is as follows: The changes reduce the impediments to corporate acquisitions by limiting the application of the rules where a corporation resident in Canada makes an investment in a foreign affiliate before that corporation becomes controlled by a non-resident corporation.
These changes also eliminate the requirement that a corporation resident in Canada must distribute funds in order to obtain a reinstatement of its paid-up capital and extend the rule reinstating paid-up capital to situations where the corporation resident in Canada receives amounts as interest on or from the repayment or sale of certain debt obligations owed to the corporation resident in Canada by the foreign affiliate.
As well, these changes ease compliance requirements by making the application of the paid-up capital offset rule automatic. To stop on that for a second, the original proposals typically created a deemed dividend that would be subjected to withholding tax for affected taxpayers. Part of the relieving changes was to introduce a concept of a paid-up capital offset. So rather than have an actual deemed dividend, if a corporation had a lot of a tax attribute called ''paid-up capital,'' representing the capital that had been received from shareholders, they could instead reduce the amount of their paid-up capital. These amendments ease the compliance requirements with that paid-up capital offset mechanism, which is itself a relieving change.
These measures facilitate certain financing arrangements by amending the computation of the debt of a corporation resident in Canada for the purpose of determining the corporation's debt-to-equity ratio under the thin capitalization rules.
Finally, the amendments restrict the circumstances in which the paid-up capital of a corporation resident in Canada is reduced in lieu of a dividend being deemed to be paid under the rules.
[Translation]
Senator Hervieux-Payette: Let us say that I understand about 25 per cent of what you said, given that I have no experience in this area. Is this the only area affected and have the measures been in force since 2012? Have the changes resulted in payments by mining companies in the past and will they now result in a reduction of the tax they will have to pay? Or is this just a matter of now specifically spelling out rules that have never been enforced?
[English]
Ms. MacLean: The mining sector was not the only sector affected by these rules. The department has had a lot of commentary from tax practitioners representing various multinationals. The mining sector was particularly concerned because of the structure of their industry and their tendency to raise capital in Canada for foreign investments elsewhere.
Most of the changes apply from 2012, because that's the original date that the rules came into force. However, some of the refinements apply from the date of the first announcement, which was later in 2013 or 2014.
Senator Hervieux-Payette: It's more or less retroactive because now you —
Ms. MacLean: In general they are relieving changes so as to be effective from the beginning, when the proposal comes into force.
Senator Hervieux-Payette: Is there another sector that lobbied well enough and received some good benefits?
Ms. MacLean: The mining sector is the main sector of the economy that made specific representations. However, tax practitioners, who represented many different types of clients, also made representations.
Senator Hervieux-Payette: Which sector?
Ms. MacLean: All different types; any kind of multinational could be affected by these rules.
Senator Hervieux-Payette: What rules apply to them: The rules that mining is going to benefit from, or the rules that we're supposed to apply?
Ms. MacLean: We're satisfied that these are generally technical changes to improve the operation of the rules, rather than major relieving changes to change the policy intent.
Senator Hervieux-Payette: So mining is more important, but you have many other sectors that will benefit from this?
Ms. MacLean: The rules are not specific to the mining sector. That's true.
Senator Hervieux-Payette: Thank you, because it's not clear.
[Translation]
Senator Chaput: If the mining sector prefers this, because they will gain by it, perhaps it will mean a loss for the government. Are you in a position to determine whether there will be a cost for the federal government?
[English]
Ms. MacLean: The original 2012 Budget proposals did have a revenue benefit for the government in the vicinity of about $300 million per year and rising. These technical changes are not considered to have a revenue implication. They are quite technical. The relief is partly to ease compliance and make the rules work better.
The Chair: If there are no further questions, we can move along.
Ms. MacLean: Next is clause 5.
The Chair: This is on page 5 of the bill.
Ms. MacLean: These are technical amendments to section 17, which relates to shareholder loans, largely, for non-residents. These amendments were first released on July 12, 2013, as part of a technical package to make improvements to the operation of the Income Tax Act.
The Chair: Does it take that long, from July of 2013 to now, to get this in the form of legislation?
Ms. MacLean: Typically, our practice is to release draft proposals for consultation. From there, it's the same kind of people at the Department of Finance who work on federal budget legislation as well as on technical measures. Normally, we would like to have two to three months to allow time for feedback. Then we need to do an analysis of that feedback and consider the proposals. Sometimes there are delays in the process of getting the drafting done.
[Translation]
Senator Chaput: I would like some clarification. So will the company be considered to have received interest, even if the amount was due to them and has not been paid?
Ms. MacLean: I am sorry; I did not understand the question.
Senator Chaput: The company will be considered to have received interest on an amount that has not been paid to it.
[English]
Is that the case?
Ms. MacLean: Can I come back to that question? I'm sorry.
The Chair: Would you like to reflect on that?
Ms. MacLean: Yes, if that's okay.
The Chair: Absolutely. You make note of it and we'll make note of it. It's to deal with clause 5 and we will have some clarifications on that.
Ms. MacLean: My apologies.
The Chair: That's fine. Is there someone who can take us to clause 6, on page 8?
Ms. MacLean: Let me keep going on that and then we will come back to clause 5.
Clause 6 relates to a measure in Budget 2014 called the back-to-back loan measure. Clause 6 is amending section 18 of the Income Tax Act. Section 18 deals with the thin capitalization rules. They restrict the deductibility of interest in excess of a debt-to-equity ratio that's stipulated in the rules. Budget 2014 contained a tax-integrity measure, targeting structures where those rules were avoided by interposing an arm's-length non-resident into what would otherwise be a straight payment of interest to a related non-resident person. This would have been captured by the thin capitalization rules. Clause 6 is the key rule implementing that back-to-back loan rule, which targets those structures.
The Chair: It's a race between the accountants and the lawyers and who will find a way around it. Then you come forward with some changes. That's what this looks like.
Ms. MacLean: To a certain extent, that is the corporate income tax system business.
The Chair: I guess my observation was right.
Senator Wells: Is that where I see references that go back to 1998 or to previous years? You would try to catch those loopholes and have the corporations pay back taxes or pay back from loopholes that were legal at the time and are now illegal? How does that work?
Ms. MacLean: Measures that go back as far as 1998 would almost invariably be minor relieving tax changes that have been previously announced quite some time ago. Therefore, the changes related to the back-to-back loan rules are prospective and apply from Budget 2014.
Next is clause 7. Clause 7 is a consequential change relating to a Budget 2014 measure that expands a tax deferral measure for farmers. The measure relates to forced sales of livestock. Essentially, where there are conditions of drought, flood or excess moisture, sometimes farmers have to sell their livestock. This is because of the climatic conditions and they typically don't have enough hay or forage for the livestock. The basic tax-deferral measure, which has been in place for many years, allows farmers to defer recognition of the sale proceeds from the livestock until a later year, at which time they're usually replenishing their herd. Therefore, they have an expense that allows the farmers to match up the expense of replenishing their herd with the income of the original sale of livestock.
Budget 2014 expands the types of livestock available for this measure to include bees and all types of horses that are kept for breeding. Clause 7 is just a consequential change related to that rule change.
Clause 8 is another consequential change related to the trusts graduated rates measure that I described a few minutes ago.
Clause 9 relates to the estates donation measure from Budget 2014. This is a relieving tax change, but it is fairly technical as well. Before this proposal, charitable donations made by will were deemed to have been made by the deceased person, whereas donations made by the trustees of an estate were treated as being made by the estate. That could cause problems in cases where there was a lot of income either in the estate or in the hands of the deceased, but the charitable donation credit was only available on the wrong side of that divide, if you will.
The Budget 2014 measure for estates deems all donations of this type to have been made by the estate but gives the trustees of the estate the discretion to apply the tax credit back to the terminal return or the year before, or to recognize the credit in the estate.
Clause 9 is the first of a few provisions dealing with that measure. Clause 10 is another amendment dealing with the estate donations measure.
There are also amendments in clause 10 related to graduated rate taxation of trusts and estates.
[Translation]
Senator Hervieux-Payette: I would really like to understand the tax credit on donations. You are saying that the trust will be able to decide if this will be in the succession. What is the mechanism we are talking about? We are talking about a sum of money that comes back to us from our taxes. Are we talking about the normal tax credit on all donations that Revenue Canada has, which is in the order of a little more than 20 per cent. What is the usual percentage of the tax credit on gifts?
Ms. Maclean: The tax credit on donations?
Senator Hervieux-Payette: Yes.
[English]
Ms. MacLean: There are two components to the charitable donations tax credit. On the first $200 of the donation, federally it is a 15 per cent credit. For amounts above $200, it is a 29 per cent tax credit. So typically, for a donation by an estate or by will, you are talking about the 29 per cent amount.
Senator Hervieux-Payette: Which means what they should pay, they will deduct the tax credit?
Ms. MacLean: That's right.
The Chair: Number 11, page 16.
Ms. MacLean: Clause 11 is another consequential change related to the farming and fishing businesses initiative from Budget 2014. Also in clause 11 is another consequential change related to graduated rates, trusts and estates.
Clause 12 is a consequential change related to the estate donations measure.
Clauses 13, 14 and 15 all relate to farming and fishing businesses. Actually, clauses 13 and 14 are some of the key measures related to the farming and fishing businesses change.
Clause 16, again, is a consequential amendment related to graduated rates, trusts and estates.
The Chair: I'm having a hard time keeping up to you.
Ms. MacLean: Clause 17 is related to the bees and horses tax deferral measure for farmers.
Clause 18 relates to international shipping. Canada has a policy of essentially exempting international shipping companies from tax to the extent that the country in which the international shipping company resides offers the same treatment to Canadian companies. This is the international standard tax treatment for international shipping corporations. This clause is part of measures released in July 2013 to modernize these rules to better address structures involving partnership trusts and holding companies.
Clause 19 relates to foreign affiliates. Those are technical changes to section 87, which is a corporate reorganization rule. Those were previously released on July 12, 2013 as part of a package that, at Tax Policy Branch, we refer to as ''tech pack 4.''
For clause 20, Budget 2012 announced a small technical project to better accommodate certain bank transactions in the context of the foreign accrual property income rules. I might as well stop there for a second because we have a number of amendments to the foreign accrual property income rules.
Essentially, Canada has a policy of taxing Canadian residents on property income, passive income of various types, to the extent that it is earned in offshore jurisdictions. It can be distinguished from its policy related to active business income, which typically can be returned to Canada free of tax.
The foreign accrual property income rules measure income earned offshore by Canadian residents through foreign affiliate corporations.
The Chair: If a senator owned a place in Florida and he wasn't going to be going there this winter and rented it out, that would be income. Would that be caught up in this?
Ms. MacLean: Not in this, per se, but you are correct. In the general rules for individuals, Canadian residents are taxable on their worldwide income.
For corporations, it is relatively straightforward for a corporation to set up a subsidiary corporation in another jurisdiction, and without the foreign accrual property income rules, or FAPI rules, there might not necessarily be any income showing up in Canada. It would just be accumulating in the offshore jurisdiction.
The foreign accrual property income rules require the Canadian parent company to measure that income and include it in their income annually, even if they don't pay up any money from their foreign affiliate.
The Chair: And pay tax on that?
Ms. MacLean: They have to pay tax on that. It is a notional amount. I imagine some taxpayers pay up a dividend to match the amount they have to include in income in any case, but that's what the rules require effectively. The word ''accrual'' in the rules is a requirement to do that.
Senator Hervieux-Payette: I don't understand. You say we are worldwide taxable on the revenue outside of Canada. But if you pay income tax to the Americans, you are not totally taxable twice. What is the mechanism?
It is very nice to say we are taxable everywhere, but at the end of the day a tax credit is awarded for the taxes you are paying in the country where the revenue was earned.
Ms. MacLean: You are quite correct. The basic rule is that Canadians are taxable on worldwide income. However, that rule is altered by tax treaties. Canada has an extensive treaty network of about 90 or 92 treaties. If you are talking about a country like the United States, tax treaties divide up who has the first right to tax. If the income is sourced in the U.S., for example, typically the U.S. will have the first right to tax it. It is only the basic rule. It was relevant to the question because in the offshore jurisdictions where there typically is no tax treaty and no question of double tax, Canada reserves the right to tax that income.
Senator Hervieux-Payette: So we are talking about the Barbados or places like that?
Ms. MacLean: The Cayman Islands, that sort of thing, yes.
Senator Hervieux-Payette: And all the people who rent their apartments in Florida are taxable in the United States? That is the example you gave to the chair. When you rent a residence outside of your country, it's taxable in the country over there and of course reported here on the income tax form?
Ms. MacLean: Yes. We provide a foreign tax credit in that case.
Trevor McGowan, Senior Chief, International Inbound Investments, Finance Canada: Right. The general tax policy is that if you have, for example, income earned in the United States, the United States imposes tax on it. You can quite often get a foreign tax credit for individuals with income in the U.S. or another jurisdiction that imposes tax.
Also, through these foreign accrual property income rules that we're talking about in this clause, there's provision for foreign accrual tax. It is mostly targeted at the Cayman Islands and things like that that do not have tax and therefore would not support a foreign tax credit claimable in Canada to prevent double tax.
Senator Hervieux-Payette: My argument was: Is it only for limited items like renting, or any revenue, let's say for the United States, produced by other means?
Mr. McGowan: It is for specific types of income, yes.
Ms. MacLean: Are you asking about the provision of the bill or just in general?
Senator Hervieux-Payette: The bill will apply if we know to whom and which way. You say there is a tax credit. This is the extension of the bill, but I was asking: Does only specific revenue get the tax credit, or is it all revenue in the countries we have a tax treaty with?
Ms. MacLean: Foreign credits are item by item.
Mr. McGowan: That's right.
Ms. MacLean: However, typically there is a foreign tax credit available in Canada, to the extent that tax has been paid in another jurisdiction, to avoid double tax.
[Translation]
Senator Bellemare: I do not know if this question is appropriate, but I am going to ask it anyway. It is about part 1 of the bill. I would like to know the overall, combined effects of the clauses we are studying. The subject matter is very technical. Do these measures have an effect on the government's money or is the impact neutral? Is this positive or negative for the government? When we talk about any given clause, are you able to give us the economic impact of the changes?
[English]
Ms. MacLean: I have the revenue implications for each measure broadly, and perhaps I could stop now and summarize those.
The Chair: You have that on the sheet?
Ms. MacLean: It is right out of Budget 2014.
The Chair: We could all get it from Budget 2014?
Ms. MacLean: It is page 318 of the budget plan.
[Translation]
Senator Bellemare: Are they all detailed?
[English]
The Chair: The words that are used there are similar to the words you've been using this afternoon?
Ms. MacLean: Yes, they should be fairly clear. This is for measures from Budget 2014 as opposed to some of these technical measures that I've been describing. Certainly, farming and fishing businesses are there and are estimated to have no costs. The bees and horses measures for farmers are the same, so effectively they're all there. Graduated rate taxation of trusts and estates is expected to increase revenues by approximately $70 million to $75 million per year.
The Chair: You have been dealing with clause 20, or trying to.
Ms. MacLean: Yes.
The Chair: We're not letting you move along too quickly.
Ms. MacLean: We are a bit stuck on 20.
The Chair: That has been described in our briefing note as an upstream loan from an eligible bank affiliate. Is that the wording that would appear on the sheet in front of you? That is not the wording you've used here.
Ms. MacLean: It's true. It is not the wording and it would not appear on that sheet. It is a technical change, not estimated to have a revenue effect.
The Chair: I see. It is just the ones that are estimated to have revenue that are listed there?
Ms. MacLean: Yes.
My colleague Mr. Jovanovic has pointed out that page 318 of the budget does not have the fitness tax credit measure on it. When we get to the fitness tax credit, Mr. Jovanovic will remind me, and we can talk about the fiscal impact.
The Chair: Thank you. We can get page 318 ourselves. Each senator can get that, and that will become part of our record.
Clause 20.
Ms. MacLean: The foreign accrual property income rules provide a number of very technical rules that require Canadian corporations to include amounts in their foreign passive income to be subject to these rules. The department received submissions from the Canadian Bankers Association, and Budget 2012 announced a small technical project to provide relieving changes to certain of these rules that would clarify that the banks were not subject to the FAPI rules in relation to securities trading activities and in relation to excess liquidity transactions, where they're loaning money back up to the parent corporation in Canada.
Clause 20, to return to the clause-by-clause review, is one of these rules. It was released most recently on February 27, 2014, as a stand-alone package of technical measures.
Clause 21, also in the foreign affiliate rules, is a technical change relating to partnerships and base erosion.
Senator Chaput: When you say a technical change, can I assume that there are no costs and no revenues?
Ms. MacLean: Yes, typically that's the case. I'll stop if I have a revenue figure for you.
Senator Chaput: Okay.
Ms. MacLean: Clause 22 concerns technical changes related to foreign affiliates first released on July 12, 2013.
Also in clause 22 are changes to better accommodate Australian commercial trusts in the foreign accrual property income rules. Those changes effectively treat Australian commercial trusts as if they were corporations to make the foreign accrual property income rules work better for Canadian taxpayers who have investments in Australian commercial trusts.
Clauses 23 and 24 relate to a Budget 2014 tax integrity measure related to non-resident trusts. Consistent with the policy on FAPI rules, the non-resident trust rules effectively deem many non-resident trusts to reside in Canada if they have a strong connection to Canada, such as a Canadian-resident contributor or beneficiary. Essentially, the rules assume that if a trust is in an offshore jurisdiction but has a strong tie to Canada like that, it should be taxable in Canada.
There has been, for many years, an exception to the non-resident trust rules that was available to immigrants to Canada in their first 60 months of residence in Canada. Budget 2014 proposes to repeal that exception, so clauses 23 and 24 relate to the repeal of that measure. That is one that has a revenue benefit for the government, estimated at $25 million to $30 million per year.
Clause 25 is quite long and has a number of measures in it. I will start with subclauses (2) and (4) of clause 25. They relate to Canada's policy on exchange of tax information. In Budget 2007, Canada introduced a new policy of entering into tax information exchange agreements with countries with which we did not have a tax treaty. As part of that policy, there were carrots and sticks, incentives for countries to enter into a Tax Information Exchange Agreement with Canada. As well, there were disincentives for countries that took more than five years to sign a tax information exchange agreement with Canada after Canada extended an invitation to negotiate such an agreement.
British Virgin Islands entered into negotiations and did everything needed to enter into a Tax Information Exchange Agreement with Canada. However, the five-year deadline expired in the case of British Virgin Islands before the TIEA technically came into force. This proposed change is effectively to recognize that the British Virgin Islands took all the necessary steps and should not be subjected to the foreign accrual property income treatment on active business income, which was in fact a disincentive.
Another aspect of this change is to recognize that Canada is now party to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and, consequently, is able to exchange information with a much larger number of countries; so it has the same effect as if we had entered into a Tax Information Exchange Agreement with those countries.
This clause of Part 1 provides the same —
[Translation]
The Chair: Are we still on clause 25?
Senator Bellemare: On what page?
The Chair: Between page 46 and somewhere after page 67.
[English]
I'm still looking for the end of this section, but you're doing a fine job of explaining what is there.
Ms. MacLean: Thank you. The other measures aren't quite as long to explain as this one, but I'm almost finished with this one.
The Chair: It goes from page 46 to page 77 in the bill.
Ms. MacLean: Indeed.
[Translation]
The Chair: Right, it is the same in French. That is fine.
[English]
Ms. MacLean: The convention that Kevin reminded me the name of a minute ago effectively provides Canada with the same benefits as the Tax Information Exchange Agreement. Consequently, changes proposed in this bill prevent foreign accrual property income treatment for active business income, which is normally eligible to be returned to Canada as an exempt dividend, in circumstances where the other country is party to this same agreement as Canada so that we can get the same tax information exchange.
Subclause 25(10) relates to the captive insurance measure from Budget 2014. This measure is part of the foreign accrual property income rules. One of the categories of income treated as FAPI, or foreign accrual property income, is income from the insurance of Canadian risks. The structure that taxpayers came up with to avoid this rule involved dropping a portfolio of Canadian insurance into a foreign affiliate. If they stopped there, it would be caught by the FAPI rules as it says that income from the insurance of Canadian risks is still taxable in Canada. Therefore, they swapped that portfolio of insurance with another portfolio from a foreign reinsurance company, say a European reinsurance company, so the Canadian subsidiary would have foreign insurance and the foreign insurance company would have the Canadian policy. Then, because they were only doing this for tax purposes, the parties would have a make-whole agreement to ensure that if there were any mistake in the valuation or difference in the income earned between the two portfolios, they would make each other whole.
From an economic perspective, the Canadian parent company really was still earning the income from Canadian risks, but through a series of transactions, they had effectively transformed it so that it appeared to be income from a foreign source that would not be subject to the FAPI rules.
This measure in Budget 2014 targets those structures and treats that income as FAPI. This is actually a relatively important tax integrity measure that is estimated to increase government revenues by approximately $250 million a year over the planning horizon.
Another measure in clause 25 relates to offshore regulated banks. The policy of the FAPI rules is to tax income from property, even if it's earned off shore, but not active business income as it receives more favourable treatment. An exception in the FAPI rules accommodates banking activities carried on in non-resident jurisdictions. The exception was a bit too straightforward because it said essentially that income earned in a regulated foreign bank would be exempt from the FAPI rules.
Certain jurisdictions took advantage of that Canadian rule by creating a regulatory structure whereby a taxpayer could elect to be treated and regulated as a bank, even though it was just an investment holding company, to avoid the FAPI rules.
Budget 2014 has an offshore regulated banks measure that restricts access to this exception to foreign affiliates controlled by Canadian financial institutions, in effect. If you are in banking in Canada, the rule now assumes that you're likely also involved in banking in non-resident jurisdictions — banking, insurance and other financial institution activities. The associated revenue estimate is approximately $50 million per year.
The Chair: Is that in addition to the $250 million?
Ms. MacLean: Yes, it is.
The next measure in clause 25 is part of the relieving changes made in response to submissions from Canadian banks regarding the operation of the FAPI rules. This rule in particular better accommodates securities transactions by foreign affiliates of Canadian banks.
The next part of clause 25 is also part of the same package of measures that better accommodates Canadian banks with active business income.
Another measure in clause 25 is a technical change related to foreign affiliates that was first released on July 12, 2013.
Clause 26 is relatively long.
The Chair: It starts at page 77.
Ms. MacLean: It contains mainly changes exclusively related to graduated rates, trusts and estates, plus one change related to the estates donations measure.
Clauses 27 and 28 also relate to the graduated rates, trusts and estates proposal.
The Chair: Clause 27 is on page 84. Clause 28 is on page 85. We're back to qualified farm property and qualified fishing property in 28.
Ms. MacLean: Yes, we are at clause 30 on farming and fishing.
Clauses 30 and 31 relate to graduated rates, trusts and estates.
The Chair: Is there anything in respect of clauses 27, 28, and 29?
Ms. MacLean: Clauses 27 and 28 are graduated rates, trusts and estates measures.
The Chair: Clause 28 is about fishing and the second part is about trusts.
Ms. MacLean: Clause 29 is about estate donations.
The Chair: All of which we have touched on earlier.
Ms. MacLean: Section 110.6 of the act is about the lifetime capital gains exemption. Clause 30 is the farming and fishing businesses measure that we discussed previously.
Clause 31 also relates to graduated rates, trusts and estates.
The Chair: Clause 31 is on page 97?
Ms. MacLean: Yes.
Clause 32 is the Children's Fitness Tax Credit measure that was announced as a motion on October 9, 2014. That measure, for the 2014 taxation year, will increase the limit for calculating the Children's Fitness Tax Credit to $1,000 from $500, and for 2015 and subsequent years it will make the tax credit refundable for taxpayers who don't have sufficient tax payable.
Senator McIntyre: As I understand, Ms. MacLean, this clause is tied in with other clauses that will come later, such as clauses 55, 59 and 89.
Ms. MacLean: Let me check my chart.
The Chair: That's clause 32, senator?
Senator McIntyre: Yes, clauses 32 and 33.
Ms. MacLean: Yes, that's correct. I would say clause 32 is the key rule there.
Senator McIntyre: So the tax credit, which is currently $500, would be increased to $1,000 a year?
Ms. MacLean: That's correct.
Senator McIntyre: And it would come into force in the 2015 taxation year?
Ms. MacLean: The doubling of the credit amount comes into force for the 2014 taxation year.
Senator McIntyre: The increase would come into force.
Ms. MacLean: Yes, for the 2014 taxation year.
Senator McIntyre: In the 2015 taxation year?
Ms. MacLean: In the 2015 taxation year, the newly increased credit becomes refundable. There are two parts in the coming into force date.
Senator McIntyre: Do you have any idea what percentage of parents with children under the qualifying age of 16 receives the Children's Fitness Tax Credit?
Miodrag Jovanovic, Director, Personal Income Tax, Finance Canada: There are about 1.4 million families receiving it now.
Senator McIntyre: The reason I ask this question is because ever since the program came out there has been an increase in children's participation in sports activities. It's good news, I think, in a sense, but the percentage is low.
Mr. Jovanovic: There are 1.4 million families now benefiting from the credit. We expect that the improvements recently announced will benefit about 850,000 families.
The Chair: We're looking at 32, and I see B at page 98 and it says ''the lesser of $1,000 and the amount determined by the formula.'' Can you help us with the formula to determine whether it's $1,000 or something less?
Ms. MacLean: I think the formula merely sets out the actual amount of the expenses. If a particular family spends $650, then that's the most that can benefit from the credit.
The Chair: It depends on what they've spent.
Ms. MacLean: It's up to. It's not $1,000 regardless of what your costs are; it's a maximum of $1,000.
[Translation]
Senator Hervieux-Payette: You mentioned about a million children. What was spent last year? According to your projections, are we increasing the number of children or will the benefit go to those who are getting $500 now? What was the average amount claimed by parents?
Mr. Jovanovic: The annual cost to date is about $115 million and it goes to 1.4 million families. In the tax estimates associated with the recently announced improvements, the estimate is that the 2014-15 cost will be an additional $25 million and about $35 million in subsequent years. That cost does not take account of any possible effect on the behaviour of the families.
Senator Hervieux-Payette: What is the average amount per family?
Mr. Jovanovic: I do not have that figure with me, but, if you take the current cost and divide it by 1.4 million families, you will get the cost per family.
Senator Hervieux-Payette: It seems to me that it is not very much, in relation to the $500.
Mr. Jovanovic: The $500 amount is the maximum. So not all families will spend that amount. Some families do and they will benefit from the increase.
[English]
The Chair: Is this a tax credit or a reimbursement of the money spent, irrespective of your tax rate or if you pay any tax?
Mr. Jovanovic: It is a tax credit as of 2000 and until 2014, inclusive, a non-refundable federal tax credit of 15 per cent on the amount spent up to $1,000. The proposal is for 2014.
Effective 2015 it will become a refundable credit. It will be assessed on the same basis that it will be 15 per cent on the eligible amount spent up to $1,000. If you spend $1,000, you will get a credit valued at $150.
The Chair: Any other questions on that particular section? Seeing none, we will go on to clause 33.
Ms. MacLean: Clause 33 is another amendment related to the Children's Fitness Tax Credit.
Clause 34 relates to the estate donation measure that we've touched on.
Clause 35 relates to the tax treatment for Canada apprentice loans. The Canada Apprentice Loan program was announced in Budget 2014. It's a new program relatively similar to the Canada Student Loans Program, but it's for apprentices in Red Seal trades, I believe, to help apprentices with their costs.
The Chair: We're at clause 35, page 109, and Senator McIntyre has an intervention.
Senator McIntyre: As I understand it, those two clauses, 35 and 36, would expand the student loan interest tax credit to include interest paid on Canada apprentice loans.
Ms. MacLean: That's essentially correct.
Senator McIntyre: To date, have any loans be granted to apprentices?
Ms. MacLean: I am not sure what the effective date of the program launch is. I would have to follow up on that question.
Senator McIntyre: Do you have any idea as to the average cost of apprentice training?
Ms. MacLean: No, I would have to follow up on that as well.
The Chair: The coming into force clause is subclause 35(2) at page 110. Division 30 of Part 6 of the Economic Action Plan, that's the budget for this year. Subsection (1) comes into force.
Ms. MacLean: Yes, the provision — this is a little bit cute, frankly — is deemed to have come into force on the same day as the first budget implementation act. This rule is now in force, but it doesn't quite respond to the question of when the actual program will begin. I'll have to follow up on that. I'm not sure what the start date of the program is. Certainly no amounts would be repaid since the loans are just becoming available now. The taxpayers will have to go through their apprenticeship and then be working full time and repaying the loan amounts. That's when the tax credit becomes valuable, when the interest starts to be payable on the apprentice loan.
The Chair: We'll go on to 36.
Ms. MacLean: Clause 36 is a related rule for the Canada Apprentice Loan measure.
Clause 37 relates to a measure to extend the tax on split income. The tax on split income was introduced in Budget 1999, and it applies top rate taxation to income received by children under age 18 in certain circumstances. The measure in Budget 1999 targeted particular tax-planning structures that were popular at the time that allowed, typically, business income of parents to be recognized in the hands of children under 18. This measure extends that same policy, the same set of tax rules, to certain income earned through partnerships and trusts in which adults are actively engaged.
Clause 38 is related to graduated rates, trusts and estates. In particular, clause 38 relates to the exception for qualified disability trusts, that is, trusts for beneficiaries eligible for the Disability Tax Credit. Clause 38 would be preserving access for those trusts to the graduated rate structure.
Clause 39 is child fitness tax credit-related and, in fact, is the refundability portion of that measure.
Clause 40 relates to the technical changes to assist Canadian banks that were caught up in the FAPI rules in an unintended way. I discussed that one briefly earlier.
Clause 41 relates to the Canadian Film or Video Production Tax Credit. I should probably stop on that one. That was part of technical package five. Those are relatively longstanding tax proposals that were originally included in Bill C-10. They were first proposed in 2003, and the measures increase the labour expenditure that can be recognized under the credit and also limit expenses to Canadian residents or Canadian citizens.
[Translation]
Senator Bellemare: What does this measure cost?
[English]
Ms. MacLean: There is not a cost estimate for this measure. It's been administered since it was first proposed in 2003.
[Translation]
Senator Bellemare: Will the technical amendments you are making encourage people to increase movie production in Canada?
Ms. MacLean: They will.
Senator Bellemare: There is no cost attached to that?
[English]
Ms. MacLean: There is no cost because the measure was first proposed in 2003 and has been administered by the Canada Revenue Agency since that time, so the cost is already being incurred. I would have to get back to you, but there likely would have been a cost in 2003 for the change to increase the percentage of labour expenditures.
The Chair: Clause 42, page 128.
Ms. MacLean: Clauses 42 and 43 both relate to graduated rate taxation of trusts and estates.
Clause 44 relates to farming and fishing businesses.
Clauses 45 all the way through 49 are more consequential changes related to graduated rates, trusts and estates.
Clause 50 is a Budget 2014 measure related to amateur athlete trusts. The rules for amateur athlete trusts date back to the era when Olympic athletes were required to retain amateur status. It allows athletes to set aside income they earn from sponsorships and speaking engagements, and so forth, in a trust. They don't need to include the amounts earned in their income in the year, but, instead, it's sheltered inside the trust. The rules require the trust to be wound up within eight years of the end of the athlete's professional career.
This measure from Budget 2014 is a relatively small change to allow the athletes to recognize that income that they did earn in the year and put in the trust for RRSP contribution purposes. Now they can save for their retirement in relation to the earnings they received at the time that the income is first earned.
The Chair: Even though it hasn't been included as income.
Ms. MacLean: That's true.
Senator McIntyre: The amateur athlete trust I find rather interesting. As I understand it, clause 50 would amend subsection 146(1) of the Income Tax Act to permit income contributed to an amateur athlete's trust to be included in the definition of earned income for RRSP contribution limit purposes. Is that correct?
Ms. MacLean: That is correct.
Senator McIntyre: How many amateur athletes are there in Canada? Do you have an idea? How many of these athletes would take advantage of this?
Mr. Jovanovic: We don't have precise figures on that. We know that there are roughly 1,700, maybe 1,800 carded athletes in Canada. These are athletes receiving money from Sport Canada, from the Government of Canada, because they are either in the top 16 in the world in their discipline or have the potential to be. It gives you an area of magnitude there.
The income received by these athletes varies significantly. A fair number of them don't necessarily have significant sources of income. It would not necessarily benefit all of these people. It will benefit a subset of them.
Senator McIntyre: Do you have any idea what the federal fiscal cost of the proposed amendments would be?
Mr. Jovanovic: We are assuming this to be small.
[Translation]
Senator Hervieux-Payette: When you say that it is substantial, does it allow them to spread things out, as it does for other occupations? They can have good years and bad years. It is mostly about sponsorships. When athletes get a good income, now that they are able to do so, will it be possible to spread things out, given that their careers are somewhat limited by nature?
Mr. Jovanovic: Just to clarify the proposed changes, amateur athletes who are members of a registered amateur association and who compete internationally for Team Canada can and do currently contribute to a trust that allows them to not report their income for tax purposes. It is already possible for those athletes to spread out their income. Nothing in that will change. What we are changing, however, is that, when athletes used to decide to contribute to the trust, the money contributed did not count in calculating the space available for registered retirement savings plans. Now it will. That is the only distinction.
[English]
The Chair: I think we're at page 132, clause 51.
Ms. MacLean: Clause 51 relates, again, to graduated rates, trusts and estates.
The Chair: It was a long time ago that we looked at this. What's the definition of a graduated-rate estate?
Ms. MacLean: A graduated-rate estate is an estate — so the affairs of someone who has died — in its first 36 months. The policy rationale is that testamentary trusts had access to the graduated rates because that's the rate structure that applies to individuals. When someone dies, essentially their affairs continue for a period while assets are being distributed. So it's appropriate to treat the estate or trust as a continuation of the individual.
The issue that was encountered was that the rules for testamentary trusts were too broad. In their single will, taxpayers would set up multiple testamentary trusts so that they could multiply access to the graduated rate structure. The other sort of tax benefit that existed in the testamentary trust rules was that it was beneficial to leave these testamentary trusts running as long as possible. Therefore CRA would see trusts that were 30 or 40 years old that were benefiting from this graduated rate structure. There was no real reason for this to stay in existence, except for the tax benefits.
This measure limits that period to three years. Most estates are administered within that three-year period. Unfortunately for us here this afternoon, there are many consequential changes where the term ''testamentary trust'' is being replaced with ''graduated rate estate.''
The Chair: Thank you.
Ms. MacLean: Clause 52 contains amendments to section 148. Section 148 deals with life insurance policy holder taxation. The basic policy is that life insurance proceeds received on the death of an individual are generally tax exempt. In contrast, savings accounts for individuals, if they don't benefit from a special tax treatment like tax-free savings accounts or RRSPs, are taxable. The two things are quite different, yet it is possible to fund a life insurance policy in a manner that there's a large savings component and a much smaller insurance component.
Since the early 1980s, the tax rules have had a test called the exemption test that distinguishes between true life insurance and life insurance that has more of a savings account structure. In the insurance industry, embedded in these rules, they have a lot of actuarial assumptions, mortality tables, interest rate assumptions, and so forth. For some time, the insurance industry has been concerned that those rules were out of date in a way that was actually favourable to the insurance industry and they were too generous and provided too large an exemption in relation to life insurance policies.
On two occasions, the department has released for consultation measures to modernize the exemption tests, in particular to reflect increased life expectancies. This is to better measure the insurance component compared to the savings components. The rules are quite technical. We have had a lot of consultation with the industry. They're to apply to insurance policies issued after 2016, so the rules are purely prospective. They are tightening and they're generally supported by the industry.
[Translation]
Senator Bellemare: Were individuals consulted too, or was it just the business side?
[English]
Ms. MacLean: It was certainly a public consultation. The department website releases draft legislative proposals on its website with a press release. We review submissions from all stakeholders and not just strictly from the insurance industry.
[Translation]
Senator Bellemare: Is the impact on people a positive one? Is reviewing the rules an advantage or a disadvantage?
[English]
Ms. MacLean: The insurance industry will make sure that the life insurance policies that they offer to regular individuals comply with the new test, so most people will have no change; that is to say, their insurance proceeds will still be tax exempt.
[Translation]
Senator Chaput: The insurance policy as such will not change. Is it the savings component of life insurance that will be treated differently?
[English]
Ms. MacLean: Yes, that's correct. A typical life insurance policy would not be affected at all, especially a term life insurance policy. To the extent that there is a tightening of the exemption test, it will be for larger policies that are significantly prefunded. For example, in a given year, if an individual is putting aside $100,000 in the guise of life insurance, then the exemption test is getting at that, excluding the policies with a very large savings component and a more limited insurance aspect.
Senator McIntyre: I want to make sure that I understand this. We're modernizing the tax rules relating to the life insurance policy exemption test.
Ms. MacLean: Yes.
Senator McIntyre: When you are talking about tests, are you are talking about savings-oriented or protection-oriented?
Ms. MacLean: Yes, a protection-oriented policy would be a policy that's more of a pure insurance policy, whereas a savings-oriented policy would be something that more closely approximates a savings account.
Ms. MacLean: Clauses 53 and 54 relate to graduated rates, trusts and estates.
Clause 55 relates to the Children's Fitness Tax Credit. Clause 55 also has amendments related to graduated rates, trusts and estates.
Clause 56 relates to graduated rates, trusts and estates.
Clause 57 also relates to graduated rates, trusts and estates.
The Chair: You need all those sections to bring one concept into force.
Ms. MacLean: It is a good question. We don't currently have a drafting convention where we can simply say that all references in the Income Tax Act to testamentary trusts are replaced. Under current drafting conventions, it's not the way legislation is drafted. If the department of justice were to move to that standard, it would certainly save a lot of time. In some places, there are exceptions and wording changes that need to be made. It wouldn't necessarily be as simple as I describe.
The Chair: That is as good an answer as you can give me?
Ms. MacLean: That's right.
Clause 58 is still with the graduated rates, trusts and estates measures.
In clause 59 — Children's Fitness Tax Credit — there is a consequential change.
The Chair: Is that a percentage of how much is spent?
Ms. MacLean: That is up to $1,000 of spending on children's fitness activities.
Senator Eaton: You have different clauses, but why wouldn't all the child fitness clauses be put together?
Ms. MacLean: This is another drafting convention. The Income Tax Act has its existing structure. It has been around in its current structure since 1972. It has a certain order for different categories of income, different types of taxpayers. This is relatively logical. As changes have been made over the years, with new provisions added, it has become a little bit less coherently structured. Different topics come up in different places in the act. You may be relieved to hear that we're now into the administrative provisions, towards the back of the Income Tax Act. In the 150s and 160s, they're mostly rules about when CRA can re-assess a taxation year, when a taxpayer can object to an assessment, and rules of that nature. Those are all organized in one place. If a new credit is being introduced, you may need cross-references to make sure that all the rules apply for that credit.
Senator Eaton: Is there any movement afoot to review the way it is structured to make it more user friendly?
Ms. MacLean: ''Movement'' is perhaps a strong word. Before we got started, I was musing with Trevor about the possibility of grouping amendments in the bill by topic. For this format and for this venue, it would be more useful.
Senator Eaton: It would be for anybody.
Ms. MacLean: That is quite likely.
Clause 60 is graduated rates, trusts and estates. Clauses 61, 62 and 63 are also graduated rates, trusts and estates measures.
The Chair: I started to ask about clause 59 that the child fitness provisions are the same provisions as the equipment that we looked at earlier, 15 per cent of what is spent up to a maximum of $1,000.
Ms. MacLean: That is how the credit works. It is a 15 per cent credit calculated on amounts spent on children's fitness activities, up to a maximum of $1,000.
The Chair: It is basically the same. One is for equipment and one is for activities.
Ms. MacLean: I believe the Children's Fitness Tax Credit is fundamentally for activities.
Mr. Jovanovic: Yes.
Ms. MacLean: There's not an equipment component, per se.
The Chair: We looked at a fitness equipment component here, another section earlier on.
Ms. MacLean: Those measures also related to this plain vanilla Children's Fitness Tax Credit. It is about amounts that parents spend on —
The Chair: Not hockey equipment, for example.
Ms. MacLean: No, but hockey parents usually could use up the $1,000 on the program.
The Chair: Just registering for the program.
Ms. MacLean: I would think so.
The Chair: You are probably right.
Ms. MacLean: Clauses 61, 62 and 63, again, are graduated rates, trusts and estates measures.
Clause 64 relates to the back-to-back loan measure from Budget 2014. Very early on this afternoon, I touched on the amendments related to thin capitalization. It is essentially the same proposal, to target back-to-back loans that are avoiding rules that apply to direct interest payments. This is in the withholding tax context. So Canada applies withholding tax to certain cross-border interest payments to non-arm's-length non-residents. Certain taxpayers were interposing a foreign intermediary, typically a bank, to avoid those rules and reduce or eliminate withholding tax. The back-to-back loan measures in the budget target those structures.
Clauses 65 and 66 relate to foreign affiliate dumping. That's the Budget 2012 measure that we discussed earlier. These are technical changes to those rules in response to comments from taxpayers.
The Chair: Has anybody found a page yet?
Senator Chaput: It goes to 178. Why is clause 65 so long? .
The Chair: It's a long section.
Ms. MacLean: Section 212.3 of the act is very long.
I had read a relatively long description of those measures in response to a question from a senator earlier, so they are doing quite a lot. They are relatively involved changes in the corporate tax area.
Clause 67 relates to graduated rates, trusts and estates.
Clauses 68 and 69 also relate to foreign affiliate dumping.
Clause 70 relates to the Canadian Film or Video Production Tax Credit. It is an amendment to section 241 regarding taxpayer information.
Senator Chaput: Clause 70; in a nutshell, what does the amendment say? What changes does it make?
Ms. MacLean: Section 241 of the Income Tax Act is essentially a rule that limits the ability of a CRA official to share taxpayer information. That's an existing rule.
The amendment here allows the Minister of Canadian Heritage to communicate or otherwise make available to the public certain taxpayer information related to film or video production certificates. That includes the name of the production, the name of the taxpayer who received the certificate, the name of the producers, certain other individuals related to the production, and any revocation of the film or video production certificate.
[Translation]
Senator Chaput: Did I understand correctly that this amendment will henceforth make public certain information that was previously confidential?
[English]
Ms. MacLean: That would be correct, but I would note that this is part of the measures that were first proposed in 2003.
[Translation]
Senator Chaput: Who proposed these measures?
[English]
Ms. MacLean: By the previous government.
[Translation]
Senator Chaput: In 1983. Thank you.
The Chair: Okay?
[English]
Clause 71.
Ms. MacLean: Clause 71 is another graduated rate estates amendment.
The Chair: I'm going to be dreaming about those graduated rate estates.
Ms. MacLean: Subsection 248(1) of the Income Tax Act is effectively the definition section of the act. It is an enormously long section at this point, but essentially all defined terms are included in that section. Clause 71 also creates definitions related to international shipping, which we touched on before.
The Chair: And graduated rate estates?
Ms. MacLean: And graduated rate estates.
Another amendment in 248(1) in clause 71 relates to taxable Canadian property. The taxable Canadian property rules preserve Canada's right to tax gains on Canadian real estate and Canadian resource property. This change, which was a technical change proposed in July 2013, improves the operation of those rules in relation to partnerships.
Also in clause 71 is an amendment to subsection 248(29) related to farming and fishing businesses.
Clause 72 is another graduated rate estate measure, as is clause 73.
Clause 74 relates to the international shipping measures proposed on July 12, 2013.
Senator McIntyre: As I understand, clause 74 is tied in with clause 71 in the definition section. What we are doing here, as I understand, is that we're easing the tax rules that apply to international shipping corporations.
Ms. MacLean: Yes, essentially modernizing those rules to better accommodate current corporate and business structures that include partnerships, trusts and holding corporations.
Senator McIntyre: Do the amendments apply to certain corporations in particular?
Ms. MacLean: Yes. They're of general application. They're not limited to particular taxpayers. Perhaps I misunderstood the question.
Senator McIntyre: I was just wondering if these amendments apply to certain corporations in particular.
Ms. MacLean: They apply to corporations that operate in the business of international shipping.
Senator McIntyre: In that type of business.
Ms. MacLean: Yes.
Senator McIntyre: Why would those amendments apply to taxation years beginning after July 2013? Is there any reason for that?
Ms. MacLean: July 2013 is the date when the proposed legislation was first released for comment.
The Chair: Was industry looking for these amendments, or is this a change that government is making to obtain more revenue?
Ms. MacLean: No, this is in response to submissions from stakeholders, requests to modernize the rules.
Clause 75 relates to trust loss restriction events. These measures originally were introduced in Budget 2013. The longstanding tax rules that apply to corporations restrict access to losses of a corporation after an acquisition of control, so those rules were introduced essentially to prevent taxpayers from buying loss corporations to use to offset their tax payable in relatively artificial structures.
Budget 2013 extended the same policy to trusts. However, trusts don't have shareholders; they don't have acquisition of control-type events, so in the trust context the rules apply when there's a new majority interest beneficiary, which is a defined term.
The government heard from stakeholders in the investment sector that because of the way the rules operated, there could be frequent changes in the majority interest beneficiary, particularly during the start-up phase of a mutual fund or an investment fund trust. However, the rules were more targeting trusts that owned active businesses that were likely to generate large loss pools.
This measure in clause 75 creates an exception for certain investment trusts so they're not subject to these rules.
Clause 76 relates to graduated rates, trusts and estates.
Clause 77 contains technical changes related to functional currency reporting. Functional currency reporting allows any corporate taxpayer to elect to report their income in a currency other than Canada's. To my knowledge, it is only U.S. dollars that are ever chosen as the other currency. This measure includes technical changes to those rules that were first announced on July 12, 2013.
The Chair: We are now at page 198, clause 78, moving into regulations.
Ms. MacLean: Yes, we are.
Clause 78 is an amendment to regulation 102, which is a withholding tax rule for employment income, generally speaking. The proposed amendment exempts from the withholding tax requirement employment income for prescribed international organizations. It's organizations like the UN that have tax exempt salary as a long-standing part of the tax system. That was first proposed in July 2013 as well.
Clause 79 is a regulation change related to the life insurance policyholder exemption test.
Clause 80 is a regulation change related to graduated rate, trusts and estates.
Clauses 81 and 82 relate to life insurance policyholder exemption tests, as well as 83 and 84.
The Chair: You are starting to jump ahead. Clause 83 is at page 216, and 84 is at page 218. What are they doing for us? These are regulations, so they have a basis in the act somewhere.
Ms. MacLean: Up as far as clause 84, these are all regulations related to the policyholder exemption test. In point of fact, quite a lot of the policyholder rules are included in the Income Tax Regulations rather than the act. In order to keep the proposals as close together as possible, moving forward and being implemented contemporaneously, all those regulations are included with this package.
[Translation]
Senator Bellemare: Could you tell me again why we are putting regulations into the act?
[English]
Ms. MacLean: That is the basic reason. Where there's a given policy measure that has amendments to both the Income Tax Act and the Income Tax Regulations, it works better. It is more convenient for taxpayers, administrators and parliamentarians to have all the amendments in a single package before Parliament, which also has the prerogative to pass regulations.
[Translation]
Senator Bellemare: But we do not vote on regulations. I mean, they are in the act, but do we have to vote on them?
The Chair: Yes.
Senator Bellemare: Thank you.
Senator Chaput: When a bill that includes regulations has been passed, a regulation cannot be changed without amending the act, right?
Ms. MacLean: I am not sure I understood.
Senator Chaput: You are including regulations in the act; that is what you are doing. If one of the regulations needs to be changed, can it be done without amending the act?
Ms. MacLean: You are right.
[English]
In point of fact, if a regulation is amended by act of Parliament, it is necessary, as a technical matter, for a future amendment to the same regulation to be done by act of Parliament.
Senator Chaput: How often does it happen that regulations are included in the bill?
Ms. MacLean: I would say our current convention — most budget implementation acts of recent years, probably five or more years have included the regulations that relate to the measures.
The Chair: Relating to tax measures.
Ms. MacLean: Yes, I should —
The Chair: There are some things in budget implementation that have nothing to do with tax.
Ms. MacLean: I know. I do tend to forget that.
The Chair: I like to remind you periodically. Sometimes it might be regulations in relation to some of those things that we don't see here.
Ms. MacLean: We are on clause 85.
The Chair: Page 221.
Ms. MacLean: This relates to a Budget 2014 proposal to expand access to accelerated capital cost allowance for certain clean energy equipment. A relatively long-standing policy of the government has been to provide an incentive for renewable energy and energy conservation equipment in Class 43.2, in particular, of the regulations. That tax incentive is in the form of accelerated capital cost allowance so businesses can write off their capital costs more quickly than the economic life of those assets.
Budget 2014 contained modest expansion of those rules for water current energy equipment, as well as a broader range of equipment used to gasify eligible waste fuel. That is in regulation 1104.
Clauses 86 and 87 relate to life insurance policyholder exemption tests.
Clause 88 is a technical change to the regulations related to foreign affiliates, which is part of that package from July 2013.
The Chair: What page are you on with clause 88? Page 234.
Ms. MacLean: Those changes are relatively long, as well as part of the policyholder package.
The Chair: They relate to?
Ms. MacLean: The life insurance policyholder exemption test changes.
Clause 88 — I'm just getting caught up as well — is 234, so that's the foreign affiliates one; I mentioned that.
Clause 89 is a child fitness tax credit consequential amendment to the regulations.
The Chair: Clause 89 is at page 258, ''qualifying child.'' It looks like similar wording to what we saw earlier.
Senator McIntyre: With respect to clauses 87, 88 and 89, are those clauses related to offshore insurance swap transactions?
Ms. MacLean: No. Clauses 86 and 87, which relate to the life insurance policyholder exemption test —
Senator McIntyre: I'm talking about clauses 87, 88 and 89.
Ms. MacLean: Clause 87 relates to the life insurance policy holder exemption test, so that's that modernization project to better target the exemption for life insurance proceeds at true insurance policies. It's that measure, not the Budget 2014 measure dealing with captive insurance, offshore insurance swap structures.
Senator McIntyre: Clause 88 and 89?
Ms. MacLean: Clause 88 is a technical change to the foreign affiliate rules. It's part of the package released on July 12, 2013.
Clause 89 relates to the child fitness tax credit. They are consequential changes to the regulations to the fitness tax credit.
Clause 90 is the changes related to accelerated capital cost allowance for clean energy equipment. In fact, the main amendments to Class 43.1 are in clause 90.
Clause 85 that I mentioned earlier is a consequential change.
Clause 91 is our last clause of the day. It's a substantive provision in the bill changing the application of a rule in the act to extend the time for reassessment for certain relieving provisions in this bill related to foreign affiliates, functional currency reporting, the Australian commercial trust rules, as well as the change to regulation 102. It is essentially to facilitate taxpayers accessing the relief provided in those different rules. The assessment rules are changed to keep those taxation years open.
The Chair: Keep the taxation year open?
Ms. MacLean: What do we mean by ''open''? When a taxation year becomes statute barred, it can't be reassessed by CRA, and the taxpayers similarly often can't change the amount of income in the return. A tax year is said to be open when it's still subject to adjustment, whether that is by CRA or by the taxpayer. Some of these rules come into force for years past, so if they're to benefit the taxpayers, it has to be possible to reassess the year.
The Chair: Ms. MacLean, you have done a great job for us. You moved us through all of that in an hour and a half. We want to thank you and your whole team very much for being here and taking the time to help us understand some very complex material. We will review our transcripts.
There was one question outstanding, and if you want to answer that in writing that would be fine, but it related to clause 5.
Ms. MacLean: We could that answer that now. Trevor has had some time to review it.
The Chair: I think Senator Chaput had asked the question. Do you know what the question issue is?
Mr. McGowan: Yes, the question related to section 17, which operates to include the income of a Canadian company, imputed interest.
The question was, as I wrote it down and as I recall it, whether or not you can have an income inclusion when you have not gotten any interest, so you would be taxed on what some people might call ''phantom income.''
Yes, that's what the rule does, if it applies. It applies generally when you have a loan that has a longer term, more than a year outstanding, and the interest rate is less than a reasonable rate. Of course, it does come with an income inclusion, and so it can have taxpayer-unfriendly consequences.
What these amendments in the bill are doing, essentially, is clarifying and creating relieving changes for taxpayers. The changes came through the comfort letter process from taxpayers who identified technical flaws with the rules and wanted them corrected.
In particular, the main rule relates to a situation where you have an income inclusion already for the Canadian taxpayer that relates to FAPI, or foreign accrual property income, that Alex had mentioned earlier, and that is passive income earned in a foreign affiliate offshore. Where you have that included in the Canadian company's income already, the basic policy is that it shouldn't be included again under section 17. What these changes do in very general terms is ensure that where you have these FAPI inclusions, they're not picked up under section 17, so taxpayers are not in effect taxed twice.
Senator Chaput: If I understand correctly, it's income that was already included as income, even though it wasn't paid?
Mr. McGowan: That's right. If it was included as part of the foreign affiliate FAPI rules, it would not be appropriate to hit the same taxpayer twice for the same thing.
Senator Chaput: I understand. Thank you.
The Chair: Any other questions flowing from that line of questioning? Seeing none, on behalf of the Standing Senate Committee on National Finance, thank you all very much from Finance Canada, particularly Ms. MacLean, who did the heavy lifting on this particular one. You should all take her out for one libation at the end of the day.
We have the about 10 minutes left, and we have here witnesses from Finance Canada with respect to amendments to the Excise Tax Act, GST/HSH and related text.
Perhaps Mr. Pierre Mercille can tell us a little about Part 2, which goes from pages 262 to 279; it's a fairly short part. I'm not sure we'll get through it, but if you could get us thinking about it, then when we have you here tomorrow, we will be able to get through it more quickly.
Pierre Mercille is a senior legislative chief with Finance Canada, and he has a colleague with him, Mr. Adam Martin.
Pierre Mercille, Senior Legislative Chief, Finance Canada: I will talk about Part 2 for the GST/HST, and Mr. Martin will talk about Part 3 if we have time.
The Chair: I don't think we'll get to Part 3, but we will see him tomorrow.
Mr. Mercille: Part 2 of the bill starts at clause 92 and ends at clause 99. It includes technical amendments to the GST/HST legislation.
The amendments in this bill were not announced as part of Economic Action Plan 2014, but were announced in two news releases for consultation an April 8, 2014, and on August 29, 2014. That included the proposed draft legislation.
I'll start with clause 92, and it amends the main definition provision of the GST/HST legislation. First, the definition, ''participating employer'' of a pension plan, is amended in subclause 92(1) to refer to a participating employer of a pooled registered pension plan, in addition to referring, as is the case right now, to a participating employer of a registered pension plan. This is the first of a few amendments in this bill in respect of pooled registered pension plans that are necessary to accommodate, under the GST/HST legislation, the introduction of those plans.
These amendments ensure that pooled registered pension plans are subject to similar treatment under the GST/HST as registered pension plans by extending existing GST/HST rules for registered pension plan to apply to pooled registered pension plans.
Like I say, subsection 123(1) of the ETA in clause 92 has most of the definitions, so it goes from one subject to the other in order. Subclauses 92(2) and 92(3) are the first two of three technical amendments relating to the application of the GST/HST to real property included in this bill. Both amendments are related and modify the definition of ''substantial renovation'' and ''builder.'' These amendments are intended to correct an anomaly and provide for greater consistency in the GST/HST treatment of different types of housing. In particular, this amendment ensures that the substantial renovation of a residential condominium unit is treated like a substantial renovation of other types of housing, such as the substantial renovation of a house.
The Chair: These are the provisions that allow someone who has a pension plan or a pooled pension plan to use some of the funds in that for renovations to a home?
Mr. Mercille: No, they are totally separate. Subclause 92(1) deals with PRPP. Subclauses 92(2) and (3) don't deal with PRPP at all. They are real property amendments. There will be other PRPP amendments as I go along, but I will try to go in the order of the bill.
The Chair: They just appear together because this is really legislation to change HST and GST?
Mr. Mercille: The main definition provision in the GST legislation is subsection 123(1). In there the definitions are in alphabetical order.
The Chair: That's why all these different concepts are here together.
Mr. Mercille: Yes.
The Chair: That's fine.
Mr. Mercille: I was talking about the terms ''builder'' and ''substantial renovation,'' which are made to be more consistent with the substantial renovation of a condo unit and that it be more in line with a substantial renovation of a house.
The problem was that currently only the substantial renovation of the whole condominium complex in which a condominium unit is situated is treated like the substantial renovation of other types of housing, such as a house. Now it can be applied on a unit-per-unit basis.
The Chair: Clause 94 is at page 267.
Mr. Mercille: I think we are still at subclause 92(4). I don't have the exact page.
The Chair: Page 263.
Mr. Mercille: Again, these are amendments creating definitions for the amendment in respect of pooled registered pension plans that I will explain later. Essentially they introduce definitions. In this case, it defines a pension plan. Specifically, the definition of a registered pension plan is amended to make reference to a pooled registered pension plan. These are new plans, so we have to import them in all the current rules that we're used to dealing with on a registered pension plan, now we have to import the concept of pooled registered pension plan in those rules throughout the act.
The Chair: Understood.
Mr. Mercille: The next one is subclause 92(5), and again it's related. There are three new definitions here: pooled registered pension plan, PRPP; PRPP administrator; and a registered pension plan. It's not a new concept we're creating; they refer to existing concepts in the Excise Tax Act, or a concept that already exists in the Income Tax Act.
Subclauses 92(6) and (8) are basically the coming into the force of the amendment I just discussed. Throughout this bill, the PRPP amendments came into force on December 14, 2012. Why this date? Because this is the date the PRPP Act that establishes a federal pension standard framework for PRPP came into force.
The amendments related to the definition of ''substantial renovation'' and ''builder,'' they generally came into force on April 8, 2014. This is the date on which they were announced in the news release last spring. But they also apply to previous renovations by a builder if they actually accounted for tax the way the new rule provides that they should account for.
Clause 93 is another amendment relating to pooled registered pension plans, and it adds a trust governed by a pooled registered pension plan to the provision that defines what an investment plan is for the purpose of the GST/ HST. Currently this provision also includes a trust governed by a registered pension plan to subject PRPP to similar treatment as registered pension plans. That's another of those amendments.
Now, what are the consequences of this? Being an investment plan, PRPP with members resident in an HST province and members in at least one other province will become what we refer to as ''selected listed financial institutions.'' That means they will determine their liability for the provincial component of the HST, using a special attribution method that already exists, under which the provincial component of the HST is determined based on the province of residence of the plan members. Essentially, it's an apportionment. The PRPP trust, the entity subject to those rules, will is look at how much GST and federal component of the HST they're paying, and they will apportion it and gross it up by an appropriate HST rate as a function of the percentage of their members and their contribution that are in HST provinces. If half of the members are in Ontario and half of the members are in Manitoba and they have the same amount of contribution, the amount of GST will not be grossed up for Manitoba, but 50 per cent of it will be grossed up for Ontario.
It's the PRPP administrator. It would be a financial institution that will be responsible for complying with these rules. PRPP will also be subject to other rules that apply to an SLFI investment plan, including an election that would allow the PRPP administrator to report tax and claim a rebate on behalf of the PRPP trust.
Clause 94 is another PRPP amendment. It's fairly technical and makes an amendment to section 172.1 of the Excise Tax Act. Section 172.1 sets out the rules for determining when a participating employer of a pension plan is deemed to have made taxable supplies of property or services to the pension plan. This happens when a participating employer has a significant involvement in the administration of the pension plan and consumes or uses property or services in the course of pension activity of the pension plan.
Just to give a bit of explanation on this, these rules for a registered pension plan, you have a pension plan where you have one employer, one plan, and the employer is heavily involved in the administration of the plan. These rules will apply to PRPP, but in general the employer will not be involved in the administration of a PRPP since there will be a financial institution named to be the administrator and comply with all those rules.
The specific amendment here is to ensure that what the financial institution does as the administrator of the PRPP does not trigger deemed tax if that financial institution happens to be a participating employer of that PRPP. So it's very specific. It is just being done for completeness.
We're at clause 95. It's the last technical amendment relating to the application of the GST/HST to a real property. In this situation, a builder constructs or substantially renovates residential housing and then subsequently rents it out. Under the current rule, the builder is required to pay GST/HST as if the housing was sold and re-purchased by the builder. In the language of the GST, this is what we call a self-supply. This is done to level the playing field between someone who constructs residential housing with someone who doesn't construct it themselves but pays someone for completed, constructed residential housing.
This general rule applies when residential housing is being built. A special rule is used to determine the amount of GST to be paid on the self-supply, where the housing is government-funded — or subsidized housing— which is intended for certain targeted groups.
Why is there an amendment? Currently the special rules may result in anomalies in the amount of GST/HST that the builder is required to pay. For example, it deals with a situation where the housing inputs — like the building materials used in construction — are sourced from outside of the province where the housing is situated, or where there is a change in the rate of GST between the time that the building material was built and the time when the self-supply was to be completed. Essentially, the measures amend the rule so that the GST payable on housing input is based on the applicable GST rate at the time of self-supply in the province in which the housing is situated.
I'm going to point the CIF to this one. The CIF is for self-supply of subsidized housing that occurred on April 1, 2013. What is special about April 1, 2013, is that it's the date on which the province of B.C. de-harmonized from the HST. Prior to their de-harmonization, without this amendment, if a builder of subsidized housing had purchased input from the province of B.C., and the self-supply happened after that time, then the builder may have been forced to self-supply the 7 per cent provincial component of the HST. This anomaly existed and that is why the amendment was proposed.
The Chair: Unfortunately, we have just heard from the administrators that they need this room for another committee meeting. We won't be able to finish this today, but we will finish this tomorrow. Mr. Mercille, if you could be back at the same time, we will start with you. We will finish both of these fairly quickly tomorrow. We will be good, fresh and ready to ask questions.
Mr. Mercille: I think we're asked to go to the House of Commons at the same time.
The Chair: Can we work that out?
Mr. Mercille: My administrator says it's all right.
The Chair: You are of course at the senior house right now. We are the upper chamber, that's right.
Colleagues, we are doing well. We've moved along nicely and we are at page 270. What was the number we just finished?
Mr. Mercille: We finished clause 95. We're at clause 96.
The Chair: Tomorrow we'll pick up at clause 96 and proceed from there. Thank you very much.
(The committee adjourned.)