Proceedings of the Standing Senate Committee on
National Finance
Issue 32 - Evidence - May 26, 2015
OTTAWA, Tuesday, May 26, 2015
The Standing Senate Committee on National Finance met this day at 2:16 p.m., to study the subject matter of Bill C-49, an Act to implement certain provisions of the budget tabled in Parliament on April 21, 2015 and other measures. Topic: Part 1, clauses 2 to 34; Part 2, clauses 35 to 40; Part 3, clause 41; and Part 4, clauses 44 to 72.)
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this afternoon we are beginning our study of the subject matter of Bill C-59, An Act to implement certain provisions of the budget tabled in Parliament on April 21, 2015 and other measures.
[English]
We will start with Part 1, amendments to the Income Tax Act and related legislation. That relates to clauses 2 to 28, which can be found at page 1 of the bill and following.
We all have in front of us our bills and several other documents here, and we will try to follow our witnesses. We have quite a team here to help us through various portions of this bill. From the Tax Policy Branch at Finance Canada we have Alexandra MacLean, Director, Tax Legislation; Geoff Trueman, General Director, Analysis; James Green, Director, Business, Income Tax Division; Trevor McGowan, Senior Legislative Chief, Tax Legislation Division; and Miodrag Jovanovic, Director, Personal Income Tax Division.
We will see where we go with the first group, and then we'll hopefully move on to the others. The way we like to deal with this, at the end of this work, this committee has the responsibility to do a clause by clause, yes, no, yes, no, so we have to understand what's in the clauses. If clauses can be grouped together for a policy initiative, then that's fine. Just tell us the clauses and we'll make note of that.
Who would like to start with clause 2?
Trevor McGowan, Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Finance Canada: Clause 2 relates to the reduction of the Registered Retirement Income Fund withdrawal factors — that is, the amount that must be withdrawn annually from a Registered Retirement Income Fund; a variable benefit money purchase registered pension plan, also called a defined pension plan; or a pooled pension plan. The required amount that must be withdrawn annually is being reduced. That's primarily part of the measure and that's contained in clause 23. But there is a secondary part of the measure contained in clause 2, and in some of the other clauses we will discuss, that allows you, in 2015 — clause 2 only applies for 2015 — if you have withdrawn more than the new minimum amount, to recontribute that excess back into your Registered Retirement Income Fund so that at the end of the year you will have withdrawn only the new lower minimum amount, if that's what you choose.
Clause 2 allows you to do that and to undo the income inclusion that would ordinarily happen when you take money out of your RRIF. It lets you put the excess back.
The Chair: Colleagues, if you have any point of clarification or a question, rather than waiting to the end as we normally do, let me know before we go on to the next concept.
In this one, can you tell us what the existing law is and what this change is?
Mr. McGowan: Yes, of course. When you withdraw an amount under your Registered Retirement Income Fund, that is taxable in your hands, and you are required to withdraw a minimum amount every year. We'll see this later in clause 23, but the minimum amount that you must withdraw every year is being reduced. Currently, you have an income inclusion if you have taken $100 out of your Registered Retirement Income Fund. The new rule would say that because we have reduced the amount that you are required to withdraw so that you're only required to withdraw $80, let's say, you can put that extra $20 back into your Registered Retirement Income Fund without adverse tax consequences.
The current rule is that you are taxed on what you can take out and can't make contributions to your Registered Retirement Income Funds after age 71, but this will override that and let you put money back that you have taken out in excess of the new minimums.
The Chair: It's a percentage, is it then? Is that what you don't want to tell us? We have some people watching this on television, and they would be interested in knowing. This is an important issue for a lot of people, especially people getting to be our age.
Mr. McGowan: Yes, absolutely. I didn't want to spoil the surprise when we get to clause 23, but there are actually a number of percentages, starting at age 71 and going to 95 and older, that define how much you can take out. These are your factors.
My colleague can speak to the math underlying it, but, for example, if you're 71, then the existing factor is 7.38 per cent of the assets in the RRIF at the start of the year, and the new factor will be 5.28 per cent. Of course, 5.28 per cent is a bit more than a two percentage point reduction. Those would be contained in the chart in clause 23.
[Translation]
Senator Rivard: Thank you very much, Mr. Chair. I am among those who have reached retirement age. I asked the Minister of Finance, Mr. Oliver, to adjust that, because the 7.38 per cent goes as far back as 1989 or 1990, when life expectancy was about 10 years lower than it is today. Establishing such measures allows for staggering. Instead of starting at age 72 and using all of the money up by age 82, 8 or 9 years can be gained. It is a good measure. For my part, I had proposed — it wasn't accepted, because the measure was too expensive — that people be able continue contributing until age 73 and begin withdrawing at age 74, which would have allowed people to increase capital. The government loses in the short term, but it does get its money, because an RRSP is simply a tax deferral; the government still gets its return. However, the measure taken by Minister Oliver is still a step in the right direction. It should have been done earlier, but it is never too late to do the right thing.
The Chair: Thank you, senator.
[English]
Do we have an economic impact of this initiative?
Miodrag Jovanovic, Director, Personal Income Tax Division, Tax Policy Branch, Finance Canada: We have the fiscal cost of this initiative, which is around $140 million in 2015-16, and the total cost is $670 million over the five-year horizon.
The Chair: Thank you.
Geoff Trueman, General Director (Analysis), Tax Policy Branch, Finance Canada: In terms of responding to Senator Rivard's comment, it is important to note that this measure is being delivered within the context of the plan to return to balanced budgets, so the fiscal cost was taken into account in that respect.
The Chair: All I was asking for is what it is. I would never, for a moment, think that there's something in this bill that would knock the government off its objective to balance the budget.
We'll go on to the next section, shall we, clause 3. What page are we on?
Mr. McGowan: It should be on page 4.
The Chair: Page 4, at the bottom, clause 3.
Mr. McGowan: This measure provides that payments received on account of the new critical injury benefit and the family caregiver relief benefit under the Canadian Forces Members and Veterans Re-establishment and Compensation Act are exempt from income tax. Those amounts relate to the critical injury benefit — that is, significant injuries that are sustained by members of the military — and that's a sum that can be received. The family caregiver relief benefit relates to non-compensated or unpaid support for veterans provided quite frequently by a family member.
Those amounts to be paid under the new act I mentioned are going to be free from Canadian income tax.
The Chair: We were looking, believe or not, at Supplementary Estimates (A) this morning. Supplementary Estimates (A) is another responsibility of this committee. We saw where there is a request for funds under Supplementary Estimates (A). Does that relate to this initiative that we find in Bill C-59? It appears to do so, which is quite interesting because Bill C-59, which we're doing a pre-study on, hasn't come here yet; we are charged with reviewing Supplementary Estimates (A). It's possible that we will vote the money for an initiative that hasn't been documented by Parliament yet. That's sort of the underlying concern.
Alexandra MacLean, Director, Tax Legislation, Tax Policy Branch, Finance Canada: This measure only deals with the tax treatment of those amounts under that program.
The Chair: There is another place in Bill C-59 that deals with the initiative and the policy initiative which I think is going before Veterans Affairs.
Mr. McGowan: It's a number of sections past.
The Chair: All deal with that initiative. Will this have appeared in Bill C-58 before it was withdrawn and put into Bill C-59? Bill C-58 was a Veterans Affairs bill for this initiative, the policy side of it.
Mr. McGowan: It's possible; I don't recall that the tax amendments were in that.
The Chair: They would be here in this tax section, notwithstanding. Okay. I'm trying to get some background on it. Thank you.
Clause 4 is the reduction of the income tax rate on small business income. You go right ahead unless we stop you to ask a question.
Mr. McGowan: The small business deduction, the small business tax rate that applies to up to $50,000 of income of a Canadian-controlled private corporation, is being reduced. It's being phased in starting in 2016. It's currently at 11 per cent and will be reduced to 10.5 per cent in 2016, 10 per cent in 2017, 9.5 per cent in 2018 and then will finally go down to 9 per cent as of 2019. That main change — that is, to reduce the tax rate that applies to this qualifying small business deduction income — has two consequential changes relating to the dividend gross-up and tax credit mechanisms. Unfortunately, they're in three different clauses. That's why I mentioned the tax rate cut first.
To understand clause 4, you have to know the integration mechanism for taxable dividends under the tax act. The basic idea is that income earned through the corporation is taxed ideally the same as income earned directly. When you receive a dividend from a taxable Canadian corporation, you get credit for underlying tax that is presumed to have been paid by the corporation. How that works is you gross up, or if the corporation earns income it pays tax on that income. It pays a smaller amount of dividend than the income it earns, namely the income less the tax, to a shareholder. The shareholder includes a grossed-up amount of the dividend in computing their income and gets a credit that relates to the underlying corporate tax that it intended to compensate them for the corporate tax payable. That is the mechanism of how income is earned through a corporation.
As the small business deduction rate or the small business tax rate gets lowered, all the way to 2019, the amount of the gross-up goes through corresponding changes. We'll see as well later that the dividend tax credit will go through a staged decrease as well to reflect the fact that there will be less underlying corporation tax.
The Chair: You explained a complicated situation in fairly comprehensible terms. Thank you for that.
[Translation]
Senator Chaput: Could you remind me of your definition of a small business? There are small, medium-sized and large enterprises. How do you define a small enterprise within this bill?
The Chair: Senator Rivard, I did not understand your comment.
Senator Rivard: I wasn't trying to answer. I was adding to the question to ask what the sales threshold is to go from a small to a medium-sized enterprise. I will let you answer.
Senator Chaput: Excellent. Now, I would like the answer.
[English]
James Greene, Director, Business Income Tax Division, Tax Policy Branch, Finance Canada: Thank you, Mr. Chair. Small businesses, for purposes of the small business tax rate, are essentially defined by a measure of their assets. For that purpose, we use what is called taxable capital. The small business rate applies for eligible corporations on their first $500,000 per year of taxable income. For corporations that have taxable capital that is less than $10 million, they're entitled to the small business rate on $500,000 per year.
For corporations in the range of $10 million to $15 million of taxable capital, that $500,000 amount is gradually reduced so that by the time you get to a corporation that has $15 million of taxable capital, it's no longer eligible. It's fully available for corporations up to $10 million in capital. Between $10 million and $15 million it's gradually phased down. Above $15 million, the small business deduction is no longer available; they pay tax at the general corporate tax rate, which is 15 per cent.
[Translation]
Senator Chaput: Thank you very much.
The Chair: Do you have another comment, Senator Rivard?
Senator Rivard: I would once again like to expand on the question, from a tax perspective. For other organizations, such as Statistics Canada, among others, is the same sales revenue criterion used? Or is it sometimes the number of employees or the field of business?
I wanted to make myself a little cue card to remember the definition of a small, medium-sized and large enterprise. For tax purposes, you have just told me, but to your knowledge, in the case of other programs, whether labour, employment insurance, or something else, do you know if it is the same thing?
[English]
Mr. Greene: That's a good question. The fact is that there is not a unique definition of what constitutes a small business, but rather there are different definitions for different purposes. For example, for some statistical purposes, some data are gathered based on the number of employees of an enterprise. Often, we see a figure like fewer than 100 employees would be considered a small enterprise. The figures sometimes vary, and 100 to 300 or 100 to 500 might be considered medium-sized; 500 and more might be considered large.
The definition I've been speaking about is the definition that applies for income tax purposes, but different definitions are used for different purposes.
Senator Nancy Ruth: I wanted to inquire, hypothetically, if a corporation has $20 million in assets, of which there is an outstanding loan to shareholders of $11 million, leaving $9 million, under the $10-million cut only that bit is taxable capital because the other is returned to shareholders. On the other hand, since all the $20 million is earning, it may or may not be over the $500,000 that you're allowing, depending on investment policy. One would take advantage of the rule, perhaps.
Mr. Greene: Right.
Senator Nancy Ruth: Is that correct?
Mr. Greene: There are indeed two tests, as you've mentioned. There is the asset test, for which taxable capital is used; and then there is an annual income test.
As you say, the taxable capital test is essentially a measure of assets. In fact, it's actually a measure of liabilities. If you think of a balance sheet, it looks at the right-hand side of the balance sheet, essentially. It looks at contributed capital and retained earnings and most components of debt. However, being a balance sheet, that's equivalent to measuring the assets.
You look at the taxable capital and you decide whether you're under $10 million, and then you're entitled to the small business rate on the full $500,000 per year of income. If you fall into the phase-out range, the $10 million to $15 million range, then you're entitled to a reduced amount.
The Chair: Thank you. Seeing no other questions, we'll move along to clause 5.
Mr. McGowan: Clause 5 I think is on page 5. That relates to the increase in the lifetime capital gains exemption for qualified farm and fishing property. This is a consequential amendment. The main change is actually in clause 7.
This one is a special rule that allows where qualified farm or fishing property is held in a personal trust, the appropriate amount of any gains of the trust on qualified farm and fishing property can be allocated to its beneficiaries — not just for the 2015 taxation year, but to make sure that gains or dispositions in respect of a qualified farm and fishing property occurring after April 21, 2015, budget day, are the only ones included. It allows the character of gains in the trust to flow through to beneficiaries so that they have the same availability for the lifetime capital gains exemption enhancement as they would have had if they held the property directly.
The Chair: Thank you. That deals with clause 7 as well, or did you have something further to add and then we'll come back to clause 6?
Mr. McGowan: That's clause 5. The main rule is in clause 7, and clause 6 is unrelated; it deals with home accessibility.
The Chair: I understand. You have dealt with clauses 5 and 7 now. Do you have anything more to say on clauses 5 and 7 before we go to 6?
Mr. McGowan: For clause 7, the amount of the lifetime capital gains exemption for qualified farm and fishing property is being increased to $1 million. That $1 million amount is not indexed to inflation. Instead, it's the base threshold for the lifetime capital gains exemption that's currently around $814,000. As that increases with inflation, it will eventually catch up and surpass the $1-million level that's being set for qualified farm and fishing property, at which point the higher limit will apply for qualified farm and fishing properties. They get an enhanced limit right now of $1 million, and when the general limit catches up and becomes higher, they will get the higher limit. That's the second important part of that rule.
The Chair: The lifetime capital gains exemption is for farm and fishing properties here, but there is a lifetime capital gains exemption as well; you say somewhere around $800,000, indexed.
Mr. McGowan: For qualifying small business corporations.
The Chair: Okay. That's a good qualifier, "qualified small business."
Mr. McGowan: That's right.
The Chair: Not for individuals on capital gains they might have made.
Mr. McGowan: It is for individuals disposing of qualified small business corporations.
Senator Wallace: Mr. McGowan, the increase in the tax exemption applies to qualified farm and fishing properties. What's included within qualified farm and fishing properties? Does that include both personal and real property? What are qualified farm and fishing properties?
Mr. Jovanovic: It would be mainly the most common capital properties that the farm can have, including quotas, land, buildings, primarily capital properties.
Mr. McGowan: Importantly, as well, it includes shares of corporations that hold qualified farm and fishing property themselves.
Senator Wallace: In the case of fishing properties, it would cover licenses or leases over aquaculture sites?
Mr. McGowan: Yes.
The Chair: Under the marketing board scheme or supply management, the quotas that milking farmers have are a very substantial asset. With fishing as well, very substantial. That is part of the assets that would be included.
Mr. McGowan: That's right.
The Chair: If the entity was an incorporated entity, then the shares of that incorporated entity would be covered by this?
Mr. McGowan: That's correct.
The Chair: Very good. I think we skipped clause 6, did we?
Mr. McGowan: We did, but that's probably quite good because clauses 6 and 8 actually go together.
The Chair: Of course they do. You just do this to confuse us, do you? Who makes these up, and who decides what becomes 6 and what becomes 7?
Mr. McGowan: They're done based upon the order in which the provision being amended falls in the act.
The Chair: So it's the act that dictates.
Mr. McGowan: That's correct. We're in discussions to try to move away from that and figure out a way that we don't have to be jumping around all the time, but we haven't quite gotten there yet.
The Chair: You'll let us know, I'm sure, when you get there.
Mr. McGowan: You'll see a big smile on my face. I apologize; it is cumbersome to go through.
The Chair: No, that's fine. Why don't you help us with clauses 6 and 8, then? It looks like 9 is also covered by that same subject.
Mr. McGowan: That's right. So 6 is a consequential amendment following the new home accessibility tax credit. It is just a rule. Where you have a testamentary trust, the current law says that if you make a contribution to a testamentary trust, that can cause it to cease to qualify as a testamentary trust. It can become an inter vivos trust.
This amendment says that if you have a qualifying expenditure for the purposes of the home accessibility tax credit — and that's just an expenditure that qualifies for the credit — then that qualifying expenditure will not be a contribution to a testamentary trust, and it will not, by itself, cause a trust to cease to qualify as a testamentary trust. It protects the tax status of testamentary trusts where an individual has made a qualifying expenditure within the meaning of the home accessibility tax credit.
The Chair: Have you ever asked why the Income Tax Act is made so complicated? We love to pay our income tax, but now we have to pay auditors and accountants and lawyers to help us to understand all of these different sections and what they mean — inter vivos trusts and testamentary trusts.
Mr. McGowan: That's right. I have on my desk a copy of the 1917 Income War Tax Act. It's about this thin.
The Chair: And it's a temporary document.
Mr. McGowan: It is quite thin, but, as business and personal life is very complex and as new situations arise in which a general rule might not apply appropriately or might not apply as you would expect, more specific rules get added. If there are new tax incentives that are often delivered through the tax system, those get added and just keep adding to the complexity.
The other point on that is that it can get quite complex. I think it's up to probably about 2,500 pages now in my English version, but complexity often provides certainty. If you have some of the more general rules in our tax act, section 9 is a classic one that says your income from your business is your profit. There is a mountain of case law with people struggling to find out what that means. If you have some of the more detailed or specific provisions in the act, it takes a lot longer to go through them, but it can provide a little bit more certainty.
So there's the constant tension, I think, in drafting tax statutes, between adding predictability and specificity and, unfortunately, complexity, with, on the other hand, simplicity that has unfortunately along with it an inherent possibility for vagueness.
That's probably a long-winded and overly complicated way of explaining it, but it explains the number of things the tax statute is trying to do, as well as the complexity of modern affairs.
The Chair: Thank you for that. I got us off on a tangent here, but we were talking about the home accessibility tax credit, and then we got into inter vivos and testamentary trusts. I thought we were just talking about making a home accessible for someone who is disabled. Am I off on a tangent here, misreading this?
Mr. McGowan: No, that's exactly right. It's all about making a home more accessible or safer if you are a senior or disabled. What this rule in clause 6 provides is that if you make one of those expenditures, it's not going to cause problems for this other provision, namely the definition of testamentary trust. It's protecting taxpayers that way.
The Chair: Anything else you'd like to tell us about the home accessibility initiative? Does it come into force right away? How much does it cost the government? They are the things that we would be interested in knowing about these initiatives.
Mr. McGowan: Yes, of course. The main parts of the home accessibility tax credit are in clause 8. It is a 15 per cent non-refundable tax credit. It applies to expenditures made in 2016 and subsequent years. It's a non-refundable credit on up to $10,000 of eligible expenditures, and those are expenditures made to, as you noted, make a house safer or more accessible for a senior or a person with disabilities. It can be claimed either by the senior or by the person with disabilities or by what we call an eligible individual with respect of that person. That can be someone providing support — a parent, grandparent, child, grandchild, spouse, generally a family member.
The Chair: That's all you've got to say about that. Okay.
Mr. McGowan: I could go on.
Senator Nancy Ruth: Can I use this 15 per cent every year for a number of years? Is it unlimited?
Mr. McGowan: To the extent that every year you've got eligible expenditures, yes.
Senator Nancy Ruth: If I'm only getting 15 per cent, I might delay something for another year to take advantage. Correct?
Mr. Jovanovic: That's correct. You're allowed to claim up to $10,000 on an annual calendar year basis. You have a 15 per cent non-refundable credit at the federal level, which is $1,500, essentially. If you decided next year to spend another $10,000, you're going to continue to be eligible every year.
Senator Wallace: You say that the credit could apply to family members who do complete work on a home of their parents, for example, to make it safer, make it more accessible. Would the family member have to live in that home in order for that credit to apply, or could any person spend X number of dollars to make their parents' home more accessible and then get the tax credit?
Mr. Jovanovic: There are different scenarios. You could be in a situation where your mother lives in her own house, so she owns it. For her purpose, it's her principal residence, but you pay for these expenses. If you're someone who could have claimed her either as an eligible dependent or used a caregiver or could have done so if she hadn't enough income, then you would be considered as a supporting relative, and you can claim that even though it's her house.
The other situation could be a case where she actually doesn't own the house and she lives with you, so her residence is your principal residence. In this case as well, you can decide to undertake renovations on your home and claim that as well.
There are different scenarios like that that would be accommodated under that credit.
The Chair: On a point of clarification, Senator Nancy Ruth.
Senator Nancy Ruth: On your categories of those people who would be eligible to claim this, I am a single woman, and the category "friend" is never allowed. For instance, I cannot contribute to my godchildren's educational funds and get a tax benefit. Actually, there are a number of seniors that I help, but I could not claim this tax benefit if I was to help them; is that correct? And will you change it?
The Chair: These aren't the right people to ask about changing it.
Senator Nancy Ruth: They may not be the right people to ask, but it's an ongoing and continuing problem in the Income Tax Act.
The Chair: Let's understand the rule first. Then, if we see some gaps, we'll go somewhere else to advocate change.
Mr. Jovanovic: You're right. You would not be able to be a supporting individual. You would not be considered a supporting relative in this case.
The Chair: So you're right and there is a gap.
Now I'm at clause 9, I think.
Mr. McGowan: Clause 9 is another simple consequential amendment. In computing an individual's tax payable for a taxation year, the tax credits that they claim are actually allowed in a specific order, and that order is set out in section 118.92 of the act. This adds the home accessibility tax credit to that list in its proper place. It is just a purely consequential amendment.
Clause 10. We talked about this earlier with the small business deduction rate decreases. There were the two consequential amendments. One is the amount of the gross up, and then the other is the dividend tax credit that is intended to reflect the amount of underlying corporate tax that has been paid. Clause 10 is what changes the dividend tax credit following the phase-in of the small business deduction rate.
Reductions in clause 11, actually. The one thing to note if you're going through the legislation in clause 11 is that the rate goes from 11 per cent currently down to 9 per cent in 2019, but you will see the numbers in the legislation are 17 per cent going up to 19 per cent. The reason is that the numbers in the clause are actually deduction from the general corporate rate, 28 per cent. For instance, in 2015, you have 28 per cent minus 17 per cent, and that's what gets you to your 11 per cent rate, if that wasn't clear.
Since we've talked to that, I can go on to the Mineral Exploration Tax Credit, clause 12. It is being extended again for another year. It applies to agreements entered into after March 2015 until March 31, 2016. It allows what are called junior mining companies to enter into flow-through share agreements. The benefit of that is that they help provide them with additional tax-assisted capital in the sense that these junior mining companies incur what are called Canadian exploration expenses. They can renounce those expenses to their shareholders. So the company incurs $100 of expenses, and it doesn't need to deduct them right away. It can give them to their shareholders, who can deduct them against their taxable income.
In addition to that, you have the Mineral Exploration Tax Credit, which is an additional 15 per cent non-refundable tax credit in respect of certain surface or grassroots, they call it, mineral exploration. That is another enhancement that allows junior mining companies to raise capital more effectively, the theory being that if you're willing to pay $60 for a share that's just a plain common share, you might pay $100 for that share if it comes with $100 of tax deductions and a $15 tax credit. So that's being extended for another year, flow-through share agreements under which you announce these expenses incurred before March 31, 2016. That actually will promote exploration right to the end of 2017, because these companies have until the end of the following year, basically to —
The Chair: There are a number of us sitting around this table who have seen this extension year after year. Do you know how many years it's been extended now?
Mr. McGowan: I believe it was first introduced in 2000.
The Chair: Somebody must be talking about this and saying, "Why are we just doing this on a year-to-year basis?" Let's be logical about this. For planning purposes, surely it would be better for the entities that benefit from this to have a longer planning period than one year. But it just keeps getting extended for one year.
Mr. Greene: Mr. Chair, I think the one-year extensions provide the government an opportunity to assess the conditions and determine whether the government thinks that an extension is appropriate.
In terms of the extension, in terms of that effect on planning, one thing that is important to note is that flow-through shares, the regime under which they are issued actually allows for a multi-year exploration program in the sense that companies can issue flow-through shares in one year, for example, and investors who buy those shares are able to take a deduction in that year. The company can then undertake the spending of the funds raised through the flow-through shares essentially into the following taxation year, and this is a result of a rule called a look-back rule that was put in place at one point because of the concern that companies had to raise the money and sort of spend it right away before the fiscal year end. The program has been changed to take into that account.
The other thing that I think is relevant is that in this junior exploration sector, exploration projects are typically done on a phased basis in that companies will go to the markets, they'll raise equity for a particular phase of exploration, they'll take the money they've raised and they'll conduct that exploration and report back to shareholders on the results obtained. Shareholders then kind of get a second chance to decide, okay, do we like what we're seeing? Are we willing to put more money on the table again? In that sense, it seems to have worked reasonably well because there is kind of a natural cycle like that in the industry.
[Translation]
Senator Chaput: You mentioned that the one-year extension to the program was for small mining corporations. Are these new employers or new companies? How many were there last year, given that you extended the program, and how many do you expect to see this year?
[English]
Mr. Greene: The Mineral Exploration Tax Credit does not have a legislated requirement as to the size of the company benefiting. In principle, any size company could take advantage of this measure in issuing flow-through shares, but in practice, it is overwhelmingly small companies that issue flow-through shares. The reason is that large companies, when they're profitable, undertake exploration expenses. They can use the deductions to reduce their tax payable. Those deductions are valuable to them.
Flow-through shares were developed because of the situation in Canada where a lot of exploration is undertaken by small junior companies that raise equity, undertake exploration programs but have no revenues. They are simply spending money. It's very risky activity, obviously. They're simply spending revenues trying to find new resources and to establish the value of resources that they find to determine whether there is a viable mine there.
Because these companies aren't operating mines, they don't have revenues, so those expenses aren't usable as a tax deduction. Flow-through shares allow these companies to transfer the deduction that the company can't use to its investors, who are generally taxable individuals. For that reason the vehicle is used generally speaking by these small junior companies.
Senator Chaput: How many of them would there be?
Mr. Greene: I have the figures here. For 2013, over 250 companies issued flow-through shares eligible for the Mineral Exploration Tax Credit. The credit was claimed by more than 19,000 individual investors in these companies. In terms of what the number will be this year, obviously mining is a very cyclical enterprise, so it's difficult to know exactly. But that gives you a sense of the ballpark.
Going back to 2006, the credit has helped junior companies to raise over $5.5 billion in equity for exploration purposes.
Senator Chaput: Did I hear you right, sir, when you said that individual investors get the credit, so not the company?
Mr. Greene: That's correct. The company in a sense is the intended beneficiary. The company undertakes the exploration and transfers its deduction to the individual investor. In the example, we had $100 in exploration costs, so the individual could deduct that $100 expense and, in addition, can claim the credit on top of that. On an expense of $100, it's a $15 credit.
The purpose of the whole program is to enable the companies to issue equity more easily to attract capital to be able to carry out these risky exploration programs.
Senator Gerstein: I'm not sure why, but my antenna goes up every time I see the words "political contributions." I see, Mr. McGowan, that in clause 12 reference is made to political contributions. Could you enlighten me as to that reference?
The Chair: This is mining for votes, I guess.
Senator Gerstein: I'm looking at clause 12.
Ms. MacLean: That's an amendment to section 127.
Senator Gerstein: It may be a new source of revenue we're just discovering.
Mr. McGowan: I understand what that is. Those are just the opening words. It is an investment tax credit that falls under section 127 along with a number of other credits. I imagine we have a few other deductions listed that aren't at all relevant to this measure.
Senator Gerstein: I tried, Mr. Chair.
Mr. McGowan: Just given as examples of the types of things that are in section 127.
The Chair: Good that you noticed.
We're on to clause 13, and we'll need an explanation of patronage dividends.
Mr. McGowan: This is not new. The measure actually extends for five years to the end of 2020 — the tax deferral patronage dividend regime for shareholders of qualifying agricultural cooperatives. Similarly to the previous measure, that allows agricultural cooperatives to preserve more of their capital.
Previous to this rule that's being extended, where an agricultural cooperative pays out a patronage dividend to one of its members, that member would have to pay tax. There would be a withholding obligation on the dividend of 15 per cent, which imposes a real tax cost, much of which would have to be funded by the cooperative. This allows a deferral of the tax until the member of the cooperative that received the dividend disposes of the share that it receives as a patronage dividend. The cooperative pays a share of the dividend to its member, and the member can defer tax on that until disposition of the share.
The Chair: Patronage dividend is a dividend to a member of this qualified agricultural cooperative. Is that correct?
Ms. MacLean: That's correct. It's a dividend paid to a member of a cooperative. The treatment for tax purposes is somewhat different in that they're deductible by the cooperative and included, so they're not a dividend in the sense of the dividends that Mr. McGowan was talking about earlier.
[Translation]
Senator Chaput: I would like some clarification: clause 13 applies only to farming cooperatives and not any other type, is that right?
[English]
Mr. McGowan: Yes, that's correct.
The Chair: Clause 14.
Mr. McGowan: This is another consequential amendment relating to the small business deduction rate reduction. In general terms, credit unions can access this small business deduction if they're Canadian-controlled private corporations. The rules in section 137(4.3) refer to the old 17 per cent small business deduction rate. That is being changed to refer to the new rates. Instead of setting out year by year what the changing rate will be, the new subsection refers simply back to the existing rate. It will go down in lockstep with the small business rate reduction and follows what the base rule does.
Clause 15 relates all the way back to the first clause we discussed, Registered Retirement Income Fund withdrawal factors. As we discussed, they're being reduced, so the minimum amount you have to take out goes down. A special rule for 2015 says that for certain purposes, spousal attribution rules, some withholding tax purposes, you can use the older, higher rate. Those are situations where it is advantageous and can simplify things for financial statisticians or whoever has to administer these rules.
For example, a withholding tax can apply if you withdraw more than the minimum from your RRIF. Having the higher minimum uses the higher threshold before the withholding tax will apply. In particular, if you've withdrawn more before the budget, that can make a difference. This just protects taxpayers.
The Chair: They have a break for 2015 when they can take more out of their RRIF without a withholding tax.
Mr. McGowan: Yes, they can take out at the higher rate that they started the year with.
The Chair: Okay.
Senator Wallace: Mr. McGowan, the reduction in the minimum annual withdrawal, the first item you described, applies to RRSPs and the conversion to a RRIF. What about LIRAs? Does it apply to the withdrawal rate for Locked-in Retirement Accounts, LIRAs, and conversion to a Life Income Fund, LIF?
Ms. MacLean: Those are essentially provincial categories — for our purposes RRIFs. They're locked in. They reflect assets that originated in pension plans. Under provincial pension benefit standards, rules are locked in. So, yes, the changes will also apply in relation to those plans.
The Chair: Similar-type changes? Yes, okay, thank you.
Clause 16.
Mr. McGowan: This deals with Registered Disability Savings Plans. It extends until the end of 2018 a temporary measure introduced in Budget 2012 that permits a qualifying family member, which can be a parent, spouse or common-law partner, to become the plan holder of a Registered Disability Savings Plan for an adult beneficiary who may lack the capacity to enter into a contract.
That provides more flexibility in situations where it can be quite difficult under provincial law to have the adult certified as lacking the capacity or in situations where they don't have a parent, spouse or common-law partner who can help them with opening up an RDSP. So it is a good measure that helps these adults who may find it difficult to establish that they lack the capacity to enter into a contract.
But it's not a complete answer, so this temporary measure extends until the end of 2018. That is intended to give the provinces sufficient time to amend their provincial laws, because that's something that falls to them to address. A number of provinces already have laws that allow for the flexibility that is intended. I think Ontario and a number of others are continuing to look at it. This just gives a little more time for that.
Senator Gerstein: I'm interested in this, because, as you know, the RDSP was supported greatly by the late finance minister, James Flaherty. We did a study of it in the Senate Banking Committee. The question I have of you is a general one: Is it being used more? The problem was the degree of use it was being put to and whether individuals had knowledge of it.
Is there any indication that it is being more widely used than it was? It's a little off topic, but if I may, Mr. Chair.
The Chair: It's all helpful.
Mr. Jovanovic: There are still about 14,000 new plans opened every year, so it is significant.
Senator Gerstein: Do you know how many there are in total?
Mr. Jovanovic: I might have that information here.
Senator Gerstein: If not, perhaps you could get it. I'm just interested. There was an issue of education in terms of people becoming aware of the fact that it existed.
Mr. Jovanovic: I know I have some statistics here.
Senator Gerstein: At your convenience. Thank you, Mr. Chair.
The Chair: Nothing further? We go on to the next one then: clause 17.
Mr. McGowan: Clause 17 is at page 19. Again, this is a consequential amendment relating to the RRIF withdrawal factors. As we discussed earlier, for pooled registered pension plans, you're not generally allowed to make a contribution to those plans. This rule basically says that if you recontribute an excess that had been taken out, you're not going to run afoul of that rule, and the PRPP would not become a revocable plan.
It allows for the recontribution of excess; it's another rule allowing for the recontribution of excess withdrawals. When I say "excess," that's an excess over the new, lower minimum. If you've taken the old minimum out, and then now we've lowered it, this is another one that lets you recontribute the difference to your PRPP so that you're taking out the minimum, if that's what you want.
The Chair: If you took it out of a RRIF, can you put it back into a pooled — is that what you are saying? The amount you put back in doesn't have to go back into the same plan you took it out of?
Mr. Jovanovic: That's right.
The Chair: That's interesting. If you wanted to do that, you're saying you can do it.
Mr. McGowan: Again, this is a rule for 2015, and it only applies to the extent that you've taken out more than the new minimum and less than the old minimum. So it's limited in that respect. It is a 2015 transitional rule.
The Chair: Okay.
Clause 18.
Mr. McGowan: Clause 18 deals with gifts to foreign charitable foundations. Currently, foreign charitable organizations can become qualified donees for income tax purposes, and the benefit of qualified donee status is that you can issue tax receipts for Canadian donation credits and you can receive donations from Canadian charities; they will be permitted to transfer to a qualified donee.
Currently, foreign charitable organizations that have received a gift from the Government of Canada within the last 24 months and that are engaged in certain activities — providing activities related to disaster relief, urgent humanitarian aid or other activities in the national interest of Canada — and that are certificated with the consent of the Minister of Finance — can become qualified donees.
But that currently applies only to charitable organizations, and there are, broadly speaking, two types of charities: organizations and charitable foundations. The general identify, although it is very muddied, is that charitable organizations are the type of charities that go on and directly carry out charitable activities. The paradigm for charitable foundations is that they are the charities that fund other charities.
To make matters more complex, charitable organizations can fund other charities, and charitable foundations can carry on charitable activities directly. So the line between the two is not always completely clear. There are foreign charitable foundations that are engaging in these kinds of activities — the disaster relief, humanitarian aid or other activities — in the national interest of Canada.
This measure extends the rules currently available to foreign charitable organizations to foreign charitable foundations, assuming they have to meet the same conditions as currently applied to charitable organizations.
[Translation]
Senator Bellemare: Thank you. Would this mean then that foreign foundations and organizations would be eligible to receive donations from Canadian donors, or only from Canadian organizations?
[English]
Mr. McGowan: Both, if they are qualified donees.
[Translation]
Senator Bellemare: Must these organizations register with the Canada Revenue Agency? Will they have to fill out the same form as Canadian organizations, form T3010 or what have you? It is a specific form. Will they have to declare that form as well?
[English]
Mr. McGowan: There are differences.
Mr. Jovanovic: It's a different process. Essentially, it's an application that your organization has to do to the Canada Revenue Agency. The Canada Revenue Agency does its due diligence and looks at all the facts to determine whether this organization meets all the criteria. Then there is consultation with the Minister of Finance. Once there is an agreement — now it's the Minister of National Revenue that has the last word — there is a consultation process with the Minister of Finance. Then the decision is taken to have this organization as a qualified donee. Then that organization would be a qualified donee for a 24-month period, starting on the date at which the gift from Her Majesty in right of Canada was done.
That is a different process than the process for Canadian registered charities.
[Translation]
Senator Bellemare: From what I gather, that would mean that given they will be registered for 24 months, they perhaps will not need to fill out the yearly form.
Mr. Jovanovic: Indeed, they will not need to fill it out. However, if they are a foreign organization, they will.
Senator Bellemare: How much will this measure cost? Was it assessed according to specific hypotheses?
M. Jovanovic: We concluded that there are really no real costs associated with this measure.
Senator Bellemare: So there are no real costs, and people will give very little to these organizations.
Mr. Jovanovic: The measure adds flexibility, but we do not think it will have sudden impact.
[English]
The Chair: Next, we'll go to clause 19.
Mr. McGowan: Clause 19 is legislatively simple but an important measure. It increases the annual Tax Free Savings Account contribution limit to $10,000, and that limit is no longer indexed to inflation. That's starting in 2015.
The Chair: Previously, it was indexed to inflation, and it was $6,000 or $5,500? I've forgotten.
Mr. McGowan: It was $5,000 when it was introduced. The way it worked is that it increased in $500 increments with inflation, so it jumped up in, I believe, 2013 to 5$,500, where it was for 2013 and 2014. Then, for 2015, it's going to be $10,000, without any future indexation.
The Chair: Without that special indexing that was indexing but only increased in $500 lumps.
Mr. McGowan: Yes.
The Chair: Yes, I remember that.
[Translation]
Senator Rivard: I see the budget has not yet been adopted. This is a tax measure, and as a taxpayer, I could invest the sum of $10,000 in 2015, and regardless of a change in government or in policy, and the price of oil continuing to drop or another budget being adopted later in the year, that amount of $10,000 I invested would remain exempt. The basic goal of a TFSA is to make tax-exempt investments. That means that, the moment the budget implementation bill was tabled, we could invest $10,000 without having to wait for the budget to be adopted. Is that correct?
Mr. Jovanovic: Yes, on the basis of an administrative position taken by the Canada Revenue Agency. Canadians can now invest $10,000 based on that position, though the bill has yet to be adopted, of course.
Senator Rivard: But it currently does apply.
Mr. Jovanovic: It is accepted, in effect.
Senator Chaput: So it can be done tomorrow morning?
The Chair: The bill has not yet been adopted.
Senator Chaput: We need to know what now means. After the vote?
The Chair: After the vote.
Senator Chaput: It needs to be said. Thank you.
Senator Mockler: Given what you just explained, Mr. Jovanovic, Canadians that have already invested a sum of $5,000 have been in compliance with legislation, but you are saying that those same individuals have also been allowed to invest an additional sum of $5,000 since last week?
Mr. Jovanovic: Yes, absolutely. Since the budget was announced, according to the administrative position, people can contribute up to the new limit of $10,000. This is the approach that is normally recommended by the Canada Revenue Agency with regard to new taxation measures. That is to say that as soon as the budget is tabled in the house, the agency implements the new measure.
The Chair: But it has not yet been enacted as a law.
Mr. Jovanovic: No, it is not yet a law.
The Chair: I understand.
Senator Rivard: Mr. Chair, a point has just been brought to my attention.
On page 20 of Bill C-59, in clause 19, there seems to be a typo, or a striking error; this makes no sense. For the calendar years from 2009 to 2012, it talks about the sum of $5,000 in the English version, while in the French version, the years are 2008 to 2013.
Senator Bellemare: But I think that it is after.
The Chair: It is after 2008, so in 2009.
Senator Bellemare: The word "antérieure," before, makes this confusing.
The Chair: Yes, I think that is it.
Senator Rivard: I still find it a bit strange.
[English]
The Chair: Okay, on to the next one, clause 20.
Mr. McGowan: Number 20 introduces a new remittance category for the smallest new employers. That's for the remittance of income tax deductions, CPP and EI. That allows qualifying employers to start off remitting on a quarterly basis. Under the current rules, they would have to remit monthly until they've built up a year of compliance history, and then they could, if they qualify with a perfect compliance record, go to a quarterly remittance.
What this allows is, if you're a new employer — so you've never had any employees — and are sufficiently small, which is to say less than $1,000 of monthly remittances, then you can start on a quarterly remittance basis. That will continue, provided you maintain a perfect compliance record.
The Chair: Okay. Clause 21.
Mr. McGowan: This introduces what is essentially a new accelerated capital cost allowance for qualifying manufacturing and processing equipment. It's at a 50 per cent declining balance rate. There was a previous 50 per cent accelerated capital cost allowance rate that was set to expire, but it was on a straight line rate. So the speed at which you could take your depreciation or your capital cost allowance is different between the two. This is an essentially new accelerated capital cost allowance for M&P equipment. It's in clauses 21 and 22, actually.
Clause 21 says that for this new class — it's going to be in Class 53 — you have a 50 per cent CCA rate, capital cost allowance rate. All the rates for all of the different classes are listed in this provision, but the actual class will come in a later clause.
Another consequential amendment is in clause 22, and that simply says that consistent with the treatment of the previous 50 per cent accelerated capital cost allowance class for qualifying manufacturing and processing equipment, it's a qualified property. This is for the purposes of tax credit.
The Chair: I'm not sure that I understood your explanation of the change. The existing is 50 per cent of whatever the capital cost is. You can take 50 per cent of that for capital cost allowance. The next year, it's 50 per cent of whatever is left? Is that the way it goes now, and what is the change that is being made here?
Mr. McGowan: That's right. I think that's the main change, that it's switching. Both are 50 per cent rates, but the old one is a straight line basis. So it's 50 per cent and then another 50 per cent. I'm hesitating to go into the half-year rule because there are some, as we discussed.
The Chair: Never mind the half-year rule. Give us a bit of an overview. Maybe Mr. Greene is ready to help out here.
Mr. Greene: It's important to note that the baseline, regular CCA rate that applies to machinery and equipment in the manufacturing sector is a 30 per cent rate on a declining balance basis. The rate we've been speaking about, the rate that is in effect today, was a temporary measure, first introduced in 2007, which provided a 50 per cent straight-line rate, as it's called. It's a bit complicated, but essentially a straight-line rate means that you can fully depreciate the cost of the asset in three years. That was extended on a number of occasions, generally speaking on a two-year basis.
The government is proposing in the current budget to put in place a new accelerated allowance for a 10-year period, which is a very substantial period of time. So rather than the 30 per cent baseline rate, it's proposed that a 50 per cent rate be put in place. The 50 per cent rate essentially allows 90 per cent of eligible assets to be basically written off in a five-year period.
The Chair: As a declining balance, 50 per cent of whatever is left.
Mr. Greene: That's right, which is substantially faster than the 30 per cent rate.
The Chair: Substantially slower than the 50 per cent of a straight-line rate.
Mr. Greene: It is somewhat slower, though the fact of the proposed measure being in place for a 10-year period provides quite a different dynamic in the sense that the intent is to provide a considerable amount of certainty and planning stability for industry. They had argued that large capital investments may take several years to plan and to execute. The certainty of knowing that the measure will be in place in the future was particularly important to that.
The Chair: Okay. Thank you. Clause 23.
Mr. McGowan: Finally we get to the Registered Retirement Income Fund withdrawal factors on pages 22 to 24. These figures show the actual declining rates. You will see two charts. The one in subsection 7308(3) applies to RRIFs established before 1983. The chart in 7308(4) applies to RRIFs established after 1992. They set out the different factors and how much needs to be taken out in each year.
The Chair: In percentage terms.
Mr. McGowan: Yes. Sorry.
[Translation]
Senator Bellemare: Just out of curiosity, what are the hypotheses that underlie your factors? For example, is the interest rate related to your factors?
Mr. Jovanovic: Yes, the new factors are based on the assumption of nominal returns of 5 per cent per year and an increase in benefits of 2 per cent per year.
Senator Bellemare: So returns of 5 per cent?
Mr. Jovanovic: Yes.
Senator Bellemare: What is this based on?
Mr. Jovanovic: We looked at the most recent long-term returns of diversified portfolios over the last 20, 30 and 40 years, in order to determine what long-term returns.
Senator Bellemare: With this 5 per cent assumption, you can determine what the factor is where you can withdraw money and reach zero capital?
Mr. Jovanovic: Yes, the factor is calculated each year as a function of age.
Senator Bellemare: This 5 per cent rate is not mentioned in legislation. If the rate changes, would it be necessary to rejig the legislation?
Mr. Jovanovic: That would be another decision for the government to make, yes.
Senator Bellemare: Thank you very much.
The Chair: Let us move on to clause 24.
[English]
Mr. McGowan: This is the last of the Registered Retirement Income Fund withdrawal factor clauses. It allows you to recontribute amounts to defined contribution registered pension plans. Following the other sets of rules for RRIFs and PRPPs, if you take out more than the new minimum, you can recontribute that; so you've taken out the new minimum just for 2015.
The Chair: If you take out more than the minimum because you had a regime set up to do that and you didn't put it back into one of those programs, you would be subject to the withholding tax situation you would have if you took out more than you were entitled to?
Mr. McGowan: It's the individual's election or decision to make as to recontributing the amounts.
The Chair: Are you subject to withholding tax if you keep out more than the minimum?
Mr. Jovanovic: Well, I guess it depends initially on the decision made before the announcement. If the individual had withdrawn exactly the minimum at the time, then there would be no withholding. There's withholding tax on the excess.
The Chair: Yes.
Mr. Jovanovic: If the individual had withdrawn a bit more, that individual probably would have paid withholding tax on that excess. The individual can still recontribute a bit after, but withholding tax would have applied already. It doesn't change the amount that could be recontributed.
The Chair: The minimum is going down, so the amount you can take out with no withholding tax also goes down. Some people want to leave it in there anyway. Before the law changed, the minimum was here. That piece could be reinvested, but if not, then you would have to pay withholding tax on it.
Ms. MacLean: I'll return to clause 15 for a second and the rule that avoids that effect for RRIFs in general. Clause 24 is related to defined contribution pension plans. I'd have to check to see if the bill has that same effect, because it's sort of a smaller category, to see if the same adjustment is there for the minimum amount. I'll have to follow up.
Mr. McGowan: I'm not certain if the rules for withholding in that situation —
The Chair: In a defined contribution pension plan, the amount to be paid out each year is already defined.
Ms. MacLean: It can be. Defined contribution pension plans are often annuitized when the employee retires from the plan. So it's paid out like an ordinary pension, so not really affected here.
This rule deals with a variable benefit defined contribution arrangement, which is a flexible option that allows retired workers who participated in defined contribution plans to treat their pension more like a RRIF. It's those rules. This amendment allows for a recontribution in those circumstances. The part I'm not certain of is whether the adjustment on the minimum amount to do with withholding tax was picked up for those pension situations as well.
The Chair: If you have a quick answer, maybe you can send it to us. Not a lot turns on this. We understand the essence of this clause, which is the important thing.
That's the end of clause 24. Clause 25.
Mr. McGowan: Clause 25 relates to the accelerated capital cost allowance for M&P equipment.
As Mr. Greene mentioned, the base rate is a 30 per cent rate, and that's covering Class 43. But for this new enhanced 50 per cent rate in new Class 53, what clause 25 does is say that if any property described in Class 53 — so with the enhanced, the better rate — is going to be excluded from 43, which is the lower 30 per cent rate, it just ensures that taxpayers get the enhanced 50 per cent rate.
Clause 26 is the one that actually has Class 53, as we discussed; it's a 50 per cent CCA rate calculated on a declining rate basis. It applies for property that is machinery and equipment acquired after 2015 and before 2026, as we said 10 years, primarily for use in Canada for the manufacturing and processing of goods for sale or lease. So that is M&P equipment.
Clause 27 is a change to the Canada Pension Plan regulations relating to the new remitter category. As we noted, it deals with remittances of income tax, CPP and EI, and this changes the CPP regulations to refer back to this new category of small employers.
Clause 28 is the same thing, but for the Employment Insurance Regulations. It's just ensuring that in those regulations there is a cross-reference back to the new quarterly category of small employers.
[Translation]
Senator Bellemare: Will these changes in clauses 27 and 28 have a financial impact on companies?
[English]
Mr. McGowan: It's primarily a timing consideration. You're remitting every three months and it produces —
[Translation]
Senator Bellemare: In the past, it was on a yearly basis; now it will be on a quarterly basis. Is that correct?
[English]
Mr. McGowan: Initially, you would have started off on a monthly basis, and so 12 a year. Now if you're qualifying for this new category, then you can start on a quarterly basis.
[Translation]
Senator Bellemare: So that is a decrease in the financial burden. It looks like businesses will not have to do this every month, so they will have a little more time?
[English]
Mr. McGowan: That's right.
Mr. Greene: Just to be clear, the remittances measure changes the reporting frequency, but not the amounts payable.
[Translation]
Senator Bellemare: I understand. It is four times a year rather than twelve times a year?
[English]
Mr. Greene: That's right. So it's essentially what we might call a red tape reduction measure.
The Chair: What clause were we at? I've lost my place here. That was 28? So we're at the stage — yes — Part 2 is still income tax. Is it still the same team that deals with this or do you have some change? What we're looking at is clauses 29 to 34: income tax measures in regard to support for families — Part 2.
Mr. McGowan: So for Part 2, Division 1, it would be the same people. But for Division 2, we have others.
The Chair: Let's start with Division 1, page 29 of the bill, clause 29, Part 2, Division 1, support for families. Can you tell us all about clause 29?
Mr. McGowan: Clause 29 increases by $1,000 the child care deductions available for children eligible for the Disability Tax Credit, which increases to $11,000; for children under age 7 it increases to $8,000; for children ages 7 through 16, it increases to $5,000, and that's for the 2015 and subsequent taxation years.
The Chair: This relates to disability.
Mr. McGowan: The $11,000 amount does, but the $8,000 for children under 7 and the $5,000 for children 7 through 16 aren't related to the Disability Tax Credit.
The Chair: Okay. I think we'll be anxious to get that passed, won't we.
Mr. McGowan: It's for the 2015 year, yes, that's right.
Senator Wallace: Mr. McGowan, what is the anticipated cost of the change in the Child Care Expense Deduction on an annualized basis?
Mr. Jovanovic: In 2014-15, it's estimated at $15 million. It would go up to $65 million in 2015-16. Over the five-year period, that's $395 million.
Senator Wallace: So over six years, it would increase by how much?
Mr. Jovanovic: The total cost would be $395 million.
Senator Wallace: Is $395 million an increase, or is that the cost of the entire —
Mr. Jovanovic: That the total cost for the entire six years.
Senator Wallace: What is the incremental cost over five years? The way the program is today and what it would be —
Mr. Jovanovic: On an annual basis.
Senator Wallace: Yes. Give me a five-year figure. What is the cost of this provision estimated to be over five years of implementing this change?
Mr. Jovanovic: I have the cost of six years here.
Senator Wallace: Six years is fine.
Mr. Jovanovic: That's from 2014-15 to 2019-20; that's the period, and it's $395 million.
Senator Wallace: That's the incremental cost.
Mr. Jovanovic: That is the cost, yes.
The Chair: Over six years.
Mr. Jovanovic: Yes.
Senator Bellemare: And per year?
Mr. Jovanovic: The first full year, 2015-16, it is $65 million, and is it goes up gradually. In 2019-20, it is $90 million.
Senator Mockler: I don't know if it's premature, but I would like you, as the professionals, to give us an example of what impact it would have on a family with children who are under the age under of six and from six to 18, with two children in the family.
Mr. Jovanovic: If you take a couple with one kid, one toddler, one young kid, well, the increase is $1,000 regardless of the age. In that context, it doesn't really change with the age, but let's say that a family was spending more than the current limit. Before that measure, they could deduct only $7,000. Now they can deduct up to $8,000. It's a deduction, so it means that if they're taxed at a federal rate of 22 per cent, then basically that is $220.
Senator Mockler: We replicate as we go along depending on the number of children?
Mr. Jovanovic: Yes.
The Chair: That is clause 29. Clause 30.
Mr. McGowan: Clause 30 repeals the Child Tax Credit, which is a non-refundable tax credit based on a fixed amount per child until the age of 18 years. For example, in 2014, it was $2,225 times a 15 per cent credit, which amounted to $338 per child. That's just a numerical example, but clause 30, itself, repeals the Child Tax Credit for 2015 and subsequent taxation years.
The Chair: Did you say repeals?
Mr. McGowan: That's right.
The Chair: That's what I thought you said.
Mr. McGowan: That's in the context of the larger family tax package, and in particular, the enhancements to the Universal Child Care Benefit that will be discussed in Division 2.
The Chair: They're always holding something out for us a little bit later.
So clause 30 was a non-refundable tax credit, which means that the family had to have somebody who was paying tax. Are we doing away with the non-refundable tax credit under this new program, that concept?
Mr. Jovanovic: The Universal Child Care Benefit, which is now enhanced, is a benefit, so it's not a non-refundable credit. It is a benefit that is taxable in the hands of the lower-income spouse or, in the case of single parents, could be taxable in the hands of the dependent child.
The Chair: It's a taxable benefit, but it's still a benefit.
Mr. Jovanovic: It's a benefit, yes.
The Chair: If the person is not paying any tax, then they don't pay any tax on it.
[Translation]
Senator Bellemare: We talked about costs of $395 million over six years, from 2014 to 2020. That is a significant expense for the government, despite the elimination of certain tax credits. This is about the Income Tax Act. Is the Universal Child Care Benefit included here?
Mr. Jovanovic: I can provide you with some statistics, if you wish.
Senator Bellemare: Yes, absolutely.
Mr. Jovanovic: The elimination of the child tax credit will generate $435 million in 2014-15, which will go up to $1.75 billion in 2015-16.
Senator Bellemare: Because of eliminating the credit?
Mr. Jovanovic: Yes. Some of the numbers are in the budget. The complete information is in the October 30 statement.
Senator Bellemare: I looked for it.
Mr. Jovanovic: It is in the backgrounder from last October 30.
Senator Bellemare: Thank you.
[English]
The Chair: On to the next clause. Is that 31?
Mr. McGowan: Yes. Clauses 31 through 34 all deal with the Family Tax Cut credit. So we're finally able to bundle something at the end.
The Family Tax Cut credit is introduced in clause 32. It is a new non-refundable tax credit. It's capped at $2,000 for couples with children under the age of 18 years. How the credit is calculated is by determining the difference between what a couple — spouses or common-law partners — the combined amount of tax they actually pay, they currently pay for the Family Tax Cut, and then determining the difference between that and what they would be able to pay if they were able to notionally transfer up to $50,000 worth of income from the higher-income-earning partner to the lower.
When you look at the difference between those two amounts — the actual combined tax and then the notional after-transfer tax — that's the value of the credit, up to a maximum of $2,000, and it applies for the 2014 and subsequent taxation years.
[Translation]
Senator Bellemare: With regard to that, what will be the gross cost for the government?
Mr. Jovanovic: For that measure?
Senator Bellemare: Just for that measure. We know that in total, it amounts to $395 million, and about $65 million to $90 million per year. And what is the cost for one year?
Mr. Jovanovic: For a complete year, in 2015-16, it is $1.9 billion. You will notice that for 2014-15, it is $2.4 billion. There are five quarters that are included.
Senator Bellemare: Perfect, thank you very much.
[English]
The Chair: This is a non-refundable tax credit calculation again. There has to be some tax payable before you can take advantage of it. Could you take advantage of that in the taxes that were filed in April of this year for the taxation year that just passed?
Mr. McGowan: That's right, you could.
The Chair: That was my understanding. We haven't passed this yet, though.
Mr. McGowan: No.
The Chair: The government advertisements for this are "subject to approval by Parliament."
Moving on to the next one — that's all of them, is it, 34?
Mr. McGowan: That's right. There are consequential rules in clause 31 that put the Family Tax Cut credit in its appropriate order. Clause 33 deals with particular rules, how the rule applies when you go bankrupt in the year. Clause 34, again another consequential rule. Subsection 153(1.1) of the act gives the Minister of National Revenue the discretion to reduce the amount of tax required to be deducted or withheld where the minister is satisfied that it would cause undue hardship. What this rule says is that the existence or the expectation that you're going to get a Family Tax Cut credit isn't a sufficient reason to reduce the amount of those withholdings. So it's again a consequential change, and the main rule is in clause 32.
The Chair: Thank you very much. This is a convenient time for us to stop our session, because we've finished with this panel. Is there anything you wanted to add?
Mr. Greene: I'm sorry, Mr. Chairman. I wonder if I could correct the record on a response that I gave just a short while ago when we were on clause 21, dealing with the proposed accelerated capital cost allowance for manufacturers.
The budget proposal is the 50 per cent declining balance rate. Just doing some math, that would allow a taxpayer to write off 90 per cent of the cost of the asset in four years. I think I mistakenly said five years. That compares with, under the regular 30 per cent declining balance rate, it would take seven years to write off 90 per cent of the cost.
The Chair: Thank you. We would have all gone back to our offices and done that mathematics.
Mr. Jovanovic: I can add for the record in relation to the question raised before on the RDSP and the number of accounts open. The total number of registered plans opened as of January 31, 2015, was 101,000 accounts. The total amount invested in these accounts, including the Canada Disability Savings Bonds, the Canada Disability Saving Grants and private contributions, amounted to nearly $2 billion.
The Chair: Thank you. That's very helpful. I don't think we had any undertakings, did we? Ms. MacLean, did you have an undertaking?
Ms. MacLean: To get back to you on the variable benefit defined contribution pension plan RRIF minimum rules.
The Chair: Yes. We said not a lot turned on that. We understood the principle. But if you could, that would be good.
We are now at Division 2. This is page 36 of the English version of the bill, and the Universal Child Care Benefit Act is what we'll be dealing with at our next session. It won't be this panel. Are any of you coming back? Mr. Jovanovic. Thank you very much. We look forward to that.
Alexandra MacLean, Geoff Trueman, James Greene and Trevor McGowan, thank you all very much, all members of Finance Canada helping us with income tax matters.
Colleagues, we will now adjourn until tomorrow at 1:45, 15 minutes after the Senate goes in, in room 160. We'll pick up at page 36. We've made some good progress, thanks to our witnesses. This meeting is now concluded.
(The committee adjourned.)