Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 37 - Evidence - March 29, 2018
OTTAWA, Thursday, March 29, 2018
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. to study the present state of the domestic and international financial system.
Senator Douglas Black (Chair) in the chair.
[English]
The Chair: Good morning and welcome, colleagues and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce, either here in the room or listening via the web. My name is Doug Black I’m a senator from Alberta, and I have the privilege of chairing this committee.
I would like the senators to introduce themselves, please.
Senator Marwah: Senator Marwah from Ontario.
Senator Wallin: Pamela Wallin, Saskatchewan.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Tannas: Scott Tannas, Alberta.
[Translation]
Senator Dagenais: Jean-Guy Dagenais from Quebec.
[English]
Senator Stewart Olsen: Carolyn Stewart Olsen, New Brunswick.
The Chair: Of course, we are ably assisted by our clerk and our analysts.
I’m pleased to introduce the witnesses in our first panel. We have Gord Tait, Hutterite Business Advisor, MNP LLP, from Lethbridge and Calgary; John Waldner, Secretary Treasurer, Kings Lake Colony Farming; Michelle Janz, Hutterite Tax Leader, MNP LLP, also based in Calgary; and of great honour to this committee, the Honourable Dan Hays, P.C., former Speaker of the Senate.
I would like to add, and I’m sure people can assume this, that Senator Hays would also be certainly one of the leading citizens in Alberta. His contributions not only to the Senate but to our province, literally for decades, are significant. The committee is honoured, Senator Hays, that would be here to speak on this matter.
Welcome. I understand there is a presentation to give and each of you will take part. As a reminder, note that we have only have one hour for this portion of our meeting, which is also to include an important question and answer session. Therefore, as presenters I know you will be as crisp and concise as you always are. Thank you to Senator Tannas for facilitating this for us this morning.
Gord Tait, Hutterite Business Advisor, MNP LLP: Good morning Mr. Chairman, and thank you to you and your fellow senators for giving us the opportunity to appear. I’ve had the privilege of spending my entire professional career working for the Hutterian Brethren.
We are here today to ask for your help on the issue of tax fairness for Hutterites in Canada. My dad Logan was at the table in 1960 when the original rules regarding the income tax of farming profits of Hutterite colonies were developed. The problem is those rules have barely changed since then, and it leaves Hutterites disadvantaged because of their religion.
Senator Tannas described the situation best when he stated Hutterites are trapped in a time capsule when it comes to income tax. Over 90 per cent of the 40,000 Hutterites in Canada are clients of MNP. The leadership of the Hutterian Brethren Church have asked us to be here today to represent them all.
Hutterites came to Canada 100 years ago and the Hutterian Brethren Church was recognized by an act of Parliament in Canada in 1951. The misconception in society is that Hutterites pay no tax or significantly less tax than other Canadians. This is false. Hutterites are the only people taxed under section 143 of the Income Tax Act, and they pay significantly more tax than their non-Hutterian neighbours. All they want is to be subject to the same rules as other Canadians — no more, no less.
I’m going to ask John to share a few comments this morning, and then Michelle will explain the details of how Hutterites are taxed unfairly and give our simple and cost-effective suggestions, and then Senator Hays will be our final presenter.
John Waldner, Secretary Treasurer, Kings Lake Colony Farming Co. Ltd.: Mr. Chair and senators, Hutterites are asking to be taxed in the same way as all other Canadians, no better, no worse. For the past 21 years, I have been the manager at Kings Lake Hutterite Colony. Today I’m here to speak on behalf of 40,000 Hutterites and 350 colonies across the western Prairies. My story is a familiar one in Western Canada. I’m a farmer, and I’m a proud Canadian like all of you here.
We lead a simple life in line with our Christian faith. We own all things in common. We do not take vacations; we do not own TVs; we have no iPods and all that stuff a lot of people have. We make our own furniture and clothes right at the colony. We have seven vehicles for 21 families. We live together; we work together; we share everything.
The colony looks after all the members’ needs from the cradle to the grave. We have no unemployment. We care for our elderly and our infirm. We cherish our lives in Canada. Life on the colony is good.
We have farmed on the Prairies for more than 100 years and have been allowed to live in peace and harmony, for which we are thankful. I feel lucky to be able to live and work alongside my children, my grandchildren, my parents, my in-laws and my brothers and sisters.
However, I am troubled and upset when I’m told Hutterites pay significantly more income tax because of my belief. Kings Lake, like other colonies, is a great example of a family farm. We farm 18,500 acres, 21 families, 96 members. That works out to less than a thousand acres per family, which would be small compared to a lot of family farms on the Prairies and our neighbours. We have a dairy and an egg-laying operation, and we have a manufacturing business at the colony.
We get up every single day and go to work in the fields, the barns, the shops and our garden. I don’t understand all the technical details but we are told by Canada Revenue Agency that our income is not from farming and is not working income.
If it is not farming or working income, would somebody please tell me what it is, because I can guarantee you two things: We are farmers and we work very hard for our income.
Fixing this inequity is why I am here today. For too long, we have been treated unfairly by our tax system. As I said before, we are asking for no special treatment. Just treat us the same as every other Canadian.
Hutterites came to Canada in 1917 fleeing religious persecution. Our story of success is the story of a successful integration into this great country. We have been allowed to preserve our traditional way of life, again, which we are very thankful for, while at the same time playing a significant role in our local communities in the Canadian agriculture economy.
Never in our 500-year history have Hutterites enjoyed such a long period of freedom. Today, however, the tax code discriminates against us because of our religion.
We need your leadership and support to ensure this discrimination ends. Please, ask the federal government to fix this issue as a matter of tax fairness, so that my children, my grandchildren and my great-grandchildren can continue to farm in this great country.
At this time, I would also like to thank the leadership of the Hutterian Brethren Church for allowing me to share my story with you today. I would like to say thank you very much, senators, for your time.
Michelle will now explain how the tax laws discriminate against us. Thank you.
Michelle Janz, Hutterite Tax Leader, MNP LLP: Thank you. Mr. Chairman, senators, the intent for the taxation of Hutterites in Canada is very clear. It began in 1961 with the Carter commission and it determined that we needed to find a way to tax the income of Hutterites appropriately and fairly. The Senate of Canada stated in 1977 that to ensure they, Hutterites, be treated favourably but not more favourably than other taxpayers, and their Hutterites’ objective was to be treated and taxed in the same manner as their non-Hutterian neighbour.
Because individual members on the Hutterite colony do not receive income directly, this intent was achieved through the Income Tax Act by a means of creating a fictional or pretend trust.
That trust was used as a mechanism to calculate the total income for the colony and then allocate that income out and deem it to be taxed in the hands of the individual members.
Our first area of unfairness we are going to discuss is the source of income. Since day one, the Canada Revenue Agency has recognized that these deemed or fictional trusts from section 143 are a very different type of trust and they have treated them very differently. They have required Hutterites report their income as farming income on their personal tax returns. The CRA has said that this income is self-employment income.
At MNP, since 1961 we have filed approximately 500,000 tax returns for individual members over this 52-year period of time. Not once, not a single time, has the CRA challenged this or said we need to be doing something differently.
You can imagine our shock in 2014 when the CRA changed the form for calculating the working income tax benefit to specifically exclude Hutterites. So for this long period of time, no questions reported as farming income without any change to the Income Tax Act and no change to the law, the CRA changed the form.
However, at the same time the CRA continues to say that it is self-employment income for purposes of the Canada Pension Plan. On one hand, it’s self-employment income if they are having to pay into CPP; on the other hand, it is not because you are not going to get the working income tax benefit. This is illogical and contradictory. Suddenly these provisions developed to tax Hutterites fairly are now being used as an instrument of unfairness for Hutterites.
Non-Hutterite farms receive the working income tax benefit. Hutterite farmers don’t, even though they are doing exactly the same thing. Please help me to explain to John and the 40,000 other Hutterites who live in Canada as to why they have been specifically singled out and excluded from a tax benefit that is available to all other Canadians.
We have recommended a simple solution that will eliminate this confusion and this discrimination. The wording of section 143 of the act should say that for purposes of the Income Tax Act the income from a section 143 trust should retain its character so that farming income of the colony would be farming income to the individual member. A capital gain to the colony would be a capital gain to the individual member.
In addition, Hutterites now have four years of reassessments with approximately $30 million at risk because they are being told by the Canada Revenue Agency that their income is not working income, it is not farming income, and we are looking for your leadership to resolve this matter as well.
The second area of unfairness relates to a formula found in section 143 of the Income Tax Act and its restrictive nature. Hutterites are not allowed to receive a deduction by the Income Tax Act if they pay a salary or a wage to any member on the colony.
Secondly, it has only been since 1999 that a married woman on a Hutterite colony has been allowed by the Income Tax Act to prepare and file her own return and even now she is only entitled to a half share. This is from the Income Tax Act.
Third, only members who are 18 years of age or older are allowed to receive an allocation of this income, and fourth, the pure nature of having a formula determine how to allocate their income takes away all of their flexibility. As a result, Hutterites pay significantly more tax.
I have specialized in agricultural tax for over 20 years and non-Hutterite farmers and other businesses can pay out a salary or wage or allocate income and they are not restricted by age, gender, religion or the relationship between them and the employer. Their only restriction is that the amount they pay to the individual must be reasonable in the circumstances. The individual must be active in the business and it has to be reasonable.
All members of a colony are active in the business. To quote the Supreme Court of Canada:
The evidence is uncontradicted that not only the principal occupation but the sole occupation of all of its members is farming.
We recommend that the formula be removed from the Income Tax Act in section 143 and be replaced with a reasonableness test. What could be fairer than treating Hutterites in the exact same manner as every other Canadian taxpayer?
We have some examples in the binder in section 9 and I would be more than happy to go through them if anyone would like. As well, our final request is an amendment to the definition of congregation in section 143 simply to align it with the Constitution of the Hutterian Brethren Church, which has been used for the other definitions.
In summary, the intent of section 143 is very clear: it’s to tax Hutterites fairly. However, as significant changes have occurred to the rest of the Income Tax Act, section 143 has been neglected. The result is tax unfairness for Hutterites.
Hutterites find themselves paying significantly more tax simply because of their religion. The intent has been lost and we are asking for your leadership, senators, in resolving this religious and economic discrimination that exists today.
We are asking that you prepare a report that will require the Minister of Finance to address this injustice by amending section 143 of the act. That will help us going forward.
We are also asking you to support us in asking the CRA to change how they have assessed returns for the past four years and go back to the way in which they assessed the returns for 52 years.
We look forward to having a meaningful discussion and answering questions after hearing from the most honourable Senator Dan Hays.
Thank you.
Hon. Dan Hays, P.C., former Speaker of the Senate: Thank you, Mr. Chairman. I will be very brief.
I come today with the other witnesses in my own capacity as an individual and, more importantly, as a neighbour of a Hutterite colony that was very close to a farming operation that I and my father before me conducted for some 40 years.
In that time, I came to know the Hutterian brethren well and later, as a lawyer, represented them in 1977 before this very committee on this very same subject which, if you are interested, is quite instructive in terms of what was an issue then and what is an issue again today.
It has been well stated. We have a group of people who are farmers and they report as best they can in the way the Canada Revenue Agency wishes them to. The net effect of that wish is they are excluded from a number of things, and in particular, deductions for the contribution of under 18-year-olds that discriminate against them.
The only way one can rationalize that is because of their way of life. Their way of life is driven by a religious belief that to be saved — to go to heaven, which is important in the Christian faith, and, in fact, maybe the whole purpose of it — they must live separate and apart from the world. I won’t go into a lot of detail, but to do that they live in colonies separate and apart from the world. They interact to the degree they have to, to make the funds and living necessary to prosper.
They might have done other things, but farming is their chosen business and I just thought it would be important to put that on the record. That is why they do what they do, the net effect of which is when I was here last as a representative of the colony was 16 years ago or more. No, a lot more than that; 40 years ago. At a certain age your memory starts to do things that you don’t like.
In any event, on this same issue, we were successful in 1977. There has been a long period of accommodation to this important community that now number 40,000 and are a very important contributor to our economy. We have to re-examine that.
I don’t know what caused the CRA to change their assessment practice. They will explain that, I’m sure. I can’t think of any reason to do something that would discriminate against a group of people who are uniquely of one religious faith and who uniquely, because of that religious faith, live in colonies so as to meet, among other things, this religious objective of not being seduced by, or influenced by, or becoming part of the world in the biblical sense, which they consider to be a dangerous place to be in terms of their souls.
I think 20 minutes into our testimony, it’s best that I be quiet. I hope you have some good questions because this is a very important issue in terms of the Canadian value of fairness and the obligation we feel we all have of not discriminating against other Canadians because of their religious belief.
The Chair: Thank you very much, senator. We will move to questions. Starting with the deputy chair, Senator Stewart Olsen.
Senator Stewart Olsen: Thank you once again for being here. Let me just say at the outset our farming communities are precious to us. I’m probably not going to go to religious values but more as a rural economy and your request to be treated in the same way that everyone else in the rural economy is treated. I think that’s the real ask.
I have two questions: You’re told by Canada Revenue Agency that your income is not from farming and therefore not working income. The other statement that was made is that CRA changed the income tax form for the working income tax benefit to specifically exclude Hutterites.
For the benefit of people watching, can you explain those two questions that I have? Why is it not working income, according to them, and why do you think it specifically excludes Hutterites?
Ms. Janz: The working income tax benefit came into Canada in 2007. Actually, it’s one of the easier ones we can look at. The tests are simple. You need to have lived in Canada throughout the year, be 19 years of age or older and have working income which includes self-employment income, business income, farming income. The test is very simple.
As an MNP person, we filed our tax returns for Hutterites in the same manner as we have done since 1961. We report their income as farming income. From 2007 to 2013 inclusive, for seven years, Hutterites received the working income tax benefit and not once was it challenged. In 2014 someone at the CRA decided that a provision of the Income Tax Act — I’ll try not to make this complicated because it is not; it really comes down to simpleness. Section 108(5) is a provision in the Income Tax Act that didn’t come into being until 1982, 20 years after they started taxing Hutterite colonies. The purpose was actually an anti-avoidance provision. It was trying to prevent attribution rules with minor children. Hutterite colonies could not allocate any income to minor children because they could only allocate to someone 18 years of age or older. There is no possible way that provision could have ever been intended to apply to Hutterites, in addition to the fact that the result is unfair. However, that’s the provision that CRA is applying.
What happens is because it’s 108(5), it uses minor children in a trust. They are saying they are going to apply it to Hutterites. However, that provision takes income that could be farming or business income and it is now called “property income.” The CRA is saying this provision that could never have been intended to apply to Hutterites is now applying to Hutterites and they are saying, “You do not have working income any longer. It is property income.” They actually changed the form.
If you go to section 5, you can see what the 2013 form looked like. It was the same from 2007 to 2013. Where we’ve highlighted it, it says “Total self-employment income reported on lines,” et cetera, which includes where Hutterites report their income.
If you will now flip to schedule six, it is now the 2014 schedule 6 and it says “excluding income from a communal organization.” What if we changed that and said “excluding income if you are Catholic”; or, “excluding income if you are Mennonite.” You can put whatever word you would like in there. It’s that discriminatory against Hutterites. In fact, they take it a step further. If you go to section 7 of your binder and flip to page 2-42, when we file a return for a Hutterite colony, we have to check off a box that indicates their religion. No one else in Canada has to check off a box indicating their religion; Hutterites do. Once they do, this is how the CRA can catch Hutterites and deny them the working income tax benefit. If we read the error message, it says that “a claim was made at field 453 on page 4,” which is what you would do for claiming the working income tax benefit. Then you indicated your client is member a communal organization, at field 9905, the box that they have to check off to indicate their religion. Hence, you are not entitled to this claim. I repeat: not entitled. That’s how strong the wording is. It’s at 2-42 in tab 7.
Senator Stewart Olsen: One clarification: When you talk about the children, in your filing as you have been filing all along, have the children been filing as well? Are they filing and asking for a tax rebate on the communal funds?
Ms. Janz: Children are not allowed to file a return. There is no return that could be filed, nothing.
Senator Stewart Olsen: Okay; thank you.
Ms. Janz: They are the only Canadians who are not allowed to file a return.
Senator Wallin: Just indulge me if you will, because I would like to echo the words of Senator Hays, that two parts of my family are neighbours to Hutterite colonies, and they are generous, kind neighbours. I want to tell you one little story. My sister spent many years working with the mentally and physically handicapped. She ran five group homes and several businesses. At the end of growing season, when the Hutterites were finished their farming and putting their vegetables up for winter, bags of this food were brought to the group homes and left there at no cost and with no tax benefit, just as a gift to the community. I want to say thank you for being generous neighbours. I appreciate that as well.
I’m not sure, but they are treating you as a trust in which all children, all members of all ages, are allocated — no? So correct me there.
Ms. Janz: You are right. They create a fictional trust because most of our Hutterite clients — and we represent about 95 per cent of them in Canada — are legally incorporated. The Income Tax Act says that they are a fictional or a pretend trust. We can get over that part because they needed a mechanism to calculate the total income to be allocated out and taxed on all the individual returns. Take the total income, divide by the number of members who are 18 years of year or older and only 50 per cent for a woman, and then report it on their personal tax returns. We don’t have an issue with the trust. We have an issue with trying to apply a provision of the act that could never have been intended to apply to Hutterites. They have always been told to report their income as farming or as working income. What that section intended to do, they couldn’t allocate to children, so it couldn’t have been intended to apply to them. And if it did, why did they wait until 2014? Does it take seven years before the Canada Revenue Agency catches up with changes in what takes place in the act? I would hope not.
Senator Wallin: On the question of both the 50 per cent allowed allocation for women and the very specific wording on communal living, have you taken that to any human rights commission and was any rationale provided by CRA?
Ms. Janz: We’ve tried to address this through Department of Finance, through Canada Revenue and so on. We’ve talked to Charter of Rights and Freedoms lawyers. And this absolutely violates the charter 15-1. However, for us to tell Hutterite colonies to go through a Charter court case, maybe 10 years if we’re lucky. The amount of dollars that would be spent by Hutterites and the taxpayers doesn’t make sense when it seems to be so clear.
Senator Wallin: When you pointed this out, did they say that it’s okay for us to discriminate against women in this one case only? What was their argument?
Ms. Janz: We did hear from some individuals at the Department of Finance that if that’s what the Income Tax Act says — I said that I don’t think that’s what it says and can we agree the result is not a fair result? It can’t be a right result in Canada.
It all bothers me. But you’re telling me it wasn’t until 1999 that the Income Tax Act would actually recognize what a woman did on a Hutterite colony and even now limit it to 50 per cent? I struggle, but, Gord, I’m sure you have comments.
Mr. Tait: I would say don’t get us started. As you can tell, we’re very passionate.
Senator Wallin: Or maybe us.
Mr. Tait: The main spirit that was driven forward, and that Senator Hays has so well put, was to try to find a way to tax Hutterites fairly. Yes, they have unique beliefs. I think we can agree the system was intended to tax them fairly. What’s happened is the passing of time has left this section, as Senator Tannas said, sitting in a time capsule. We can look at the evolution and find out why we’re at where we’re at today, but where we’re at is clearly not fair.
Our main objective is to take this section 143, initially developed to respect and recognize the way of life and the unique religious beliefs of the Hutterite Brethren, but not to penalize them, it was meant to tax them fairly. It was born in good intent, this section, but it has just been neglected. There is unfortunately a lot of misunderstanding and misconceptions in Canada about Hutterites and what they do. It is a misunderstanding that many people believe they don’t pay tax. That couldn’t be further from the truth.
I think some of that misunderstanding has led to the resistance to have the rules changed. It’s time now to start the education and allow these people to live their life and pay their fair share of taxes and nothing more.
Senator Wallin: Thank you for putting that on the record that taxes have been paid.
Mr. Tait: Yes.
Senator Marwah: Good to see you all again. I don’t think there’s any doubt there’s an issue of unfairness in all of this. It would appear to me you are the victim of what I would call unintended consequences of changes in the Income Tax Act as they tighten the rules for the definition of working income to prohibit tax-related income. I can understand why they did that.
I think the problem is section 143 wasn’t modernized to keep up with those changes, and hence you’re prohibited from the fact you’re a trust and they banned all trust income.
Isn’t the solution to ask the CRA to modernize 143 and bring it on par with everybody else?
Ms. Janz: Absolutely.
Senator Marwah: That would be a solution?
Ms. Janz: Absolutely, Senator Marwah.
Senator Marwah: Wouldn’t that recognize the fairness, reasonableness and everything else?
Ms. Janz: Exactly. That is our ask, to put that in a report to the Department of Finance, exactly what you have just said. Update the act and make sure that the wording —
Senator Marwah: To make it on par with the changes of the Income Tax Act evolved over the past 40 years?
Ms. Janz: Exactly. There’s nothing that says they have to apply 108-5. They could take the interpretation as we do. We think it’s implicit in section 143 that for purposes of the act the income retains its character, but clearly they have taken a different interpretation. There’s nothing that would stop them from going back. After we file the 2017 returns then it will be four years.
Senator Marwah: Obviously you have to be reassessed for the four years you’ve been penalized. That’s a given.
Ms. Janz: But they can go back and change and drop those reassessments. That’s $30 million.
Senator Marwah: I think that’s fair. If they’re going to change the act, they’re going to reassess, going back for the years you were penalized.
Out of my own ignorance, why can’t you just opt out of 143 and file income tax like anybody else? You can still have aggregate income and allocate to farmers, to women and children. Why can’t you do that?
Mr. Tait: It’s a very good question. First and foremost, if we look back to the intent and start of section 143, it goes to the Carter commission and what was a memorandum of understanding, which was an agreement between Hutterites and at that time the Minister of National Revenue on how to tax their farming profits. That memorandum of understanding got codified into section 143 in 1977.
The definition of congregation that appears in section 143 is very tight and strong and limits that definition without ever using the word Hutterite. It limits that definition to people who are Hutterite. If you read section 143 and follow the Hutterian Brethren beliefs, you have to file under section 143. We don’t think it would be in any way, shape or form appropriate for us to ask our clients to challenge their religious beliefs and change their religious philosophy in order for an income tax benefit.
Senator Marwah: So it would be violating religious beliefs if you file outside of the —
Mr. Tait: It would be breaking the rules of section 143 and filing an incorrect tax return. We don’t want to question their commitment and faith. Fixing section 143 is the three recommendations we have made, they are very simple wording changes that could be made to just modernize section 143. I have been coming here for a number of years asking for that and it’s a common sense and simple answer.
Ms. Janz: To add to that, section 143 does use the fictional trust, but the memorandum of understanding does not discuss a trust. At the time, there is nothing wrong with using the trust, but the memorandum of understanding that was codified does not discuss a trust; it describes a mechanism, a way in which this income could be calculated.
The CRA, as we’ve said, have always treated this trust differently, from the start in 1977 when it was codified. The CRA has always treated it differently from every other trust because they recognized its uniqueness.
Senator Wetston: Thank you for being here today. I would like to understand how much notice and information you got. What was shared with you? It would seem to me it’s an exceptional situation that’s occurred. I suspect Ms. Janz, you would have been in communication with CRA, I would have thought at a minimum you would have received some notice, some discussion and information as to why this was occurring. Did that occur?
Ms. Janz: Thank you, senator. That’s a great question. In fact the way we found it out was simply, as a tax expert, I’m reading what’s happening all the time and looking at changes to forms. There was no notification provided to us by the CRA or Department of Finance. We actually tripped over it, if I can say that.
Once we found it and I read what the change was to schedule 6, we immediately thought it had to be a mistake. We got in contact with senior people at the trust division and we wrote a very technical memo saying why this obviously must be a mistake and this section 108-5 could not possibly intend to apply.
We got a one-word response back after spending a significant amount of time trying to figure it out. It was no.
Senator Wetston: As an expert in tax, obviously, how did the CRA go about doing this?
Ms. Janz: I can tell you exactly. MNP does 95 per cent of all the returns in Canada. There is one individual in BC who has two Hutterite colonies. He had never filed correctly. He filed as if the income was a trust and reported it as property income because he didn’t understand how section 143 worked. He got wind, because Hutterite colonies talk, that MNP had been claiming this working income tax benefit. He wrote a letter to the CRA saying, “I must have filed these incorrectly. Please reassess the returns and give the working income tax benefit to my clients.”
Someone at CRA who doesn’t understand section 143 and didn’t spend the time to look at it just said, “Oh, you’re a trust. You’re not entitled to it.” That’s where it came from. We have that letter and the communications that went back and forth between the CRA and this other accountant. So having two individuals who do not spend any time understanding the history or how these provisions worked. The MNP and Tait Management have worked with Hutterites since 1960. These other individuals, not very long and only have two.
Senator Wetston: It’s difficult to get into a discussion about whether or not these officials knew what they were doing and why they were doing it. That’s a challenging issue for you and this committee.
This is a bit of a difficult question and perhaps an unfair one, but do you think tax collection has any conscience whatsoever?
Ms. Janz: All I’ve done my entire career is tax, and what I can tell you is in the last number of years — whether it’s five or ten years — whenever we file notices of objections now, it’s always if the taxpayer wants to fight, they need to fight in court. It comes back with a no; it’s disallowed. Unfortunately, a lot of our clients can’t afford to go to court, because they’re talking about $3,400.
Senator Wetston: Many Canadians can’t afford to go to court, unfortunately.
Ms. Janz: Absolutely.
[Translation]
Senator Dagenais: I would like to thank our witnesses. I am surprised at what we are hearing his morning, because what we usually hear is that all Canadians should be treated fairly.
That being said, to your knowledge, are there other religious or social groups experiencing the same sort of situation concerning taxation?
[English]
Ms. Janz: Thank you. That’s a great response. There’s no one else taxed under this provision of the act. It’s only Hutterites. It’s exactly as Gord said: These rules were adopted from the memorandum of understanding, which was a specific agreement signed between Hutterites and the Minister of National Revenue at the time. There’s no one else who falls into this section of the act, which again is a reason why it’s easy to neglect it, forget it and not make changes.
Mr. Tait: I was going to add the one other element which I think is rather unique. I’m certainly not an expert in religious history, but there are very few groups of people who continue to live the life that the Hutterites do, sharing all things common. There are many religious groups, and we respect them all, but if you go back to the time of the Protestant Reformation, which is where the Hutterian Brethren Church was born in the 1500s, they chose to live their lives like Christ and the disciples and to share all things common. That is the fundamental tenet of their belief, and I don’t believe there are many other communities who share that religious belief here in Canada. There’s no one that we’re aware of.
We’ve asked many times of the department and Canada Revenue Agency if there’s anyone else who files under section 143, and we’ve never been told of any other filers.
[Translation]
Senator Dagenais: Overall, how much more a year does the Canada Revenue Agency collect since it began applying the changes to which you are referring?
[English]
Ms. Janz: Just from the denial of the working income tax benefit alone, it works out to be approximately $6 million to $7 million annually but on a per colony basis. Not every Hutterite colony receives the working income tax benefit, just like not every farmer receives the working income tax benefit. It’s income-tested, and once your income goes above approximately $20,000, it ends up getting clawed back. So about one third of all of our Hutterite colonies would receive the working income tax benefit, and it would be somewhere between approximately $35,000 to $50,000 for that colony that is feeding 20 families.
It’s significant on a per colony and per family basis. You will see in my example that there’s a difference on about $40,000 of total family income. The disadvantage to a Hutterite family is about $3,400. Annually they’re losing that. If you increase that amount to $80,000 of income, that disadvantage increases to $15,000 on that family. For being a Hutterite, it costs you $15,000 more. There’s a $15,000 tax penalty.
[Translation]
Senator Dagenais: This is tax time, a very difficult time for Canadians. Thank you for your answers.
[English]
Senator Tkachuk: With all this transparency — we’re shining a little light on your problem — if Revenue Canada said ,“Gee, we’re sorry, we didn’t mean it; we won’t do it again, and here’s your $30 million,” should we leave it at that, or do you still think we should change the act to reflect what you want in the act?
Ms. Janz: That’s a great question. Thank you, Senator Tkachuk.
If we don’t change the act — we might solve the problem right now, which we have to solve right now. Thirty million dollars, the burden it’s putting on John and his fellow Hutterian is terrible.
Senator Tkachuk: Are they charging you interest on that?
Ms. Janz: Absolutely. It’s like any other outstanding balance. There’s the interest and penalties for not having it paid.
Senator Tkachuk: How much are they charging you? Their usual usurious amount?
Ms. Janz: Yes. The prescribed amount plus.
We absolutely need that fixed. Our concern is if we don’t change the Income Tax Act, number one, this could happen in the future.
This is fantastic. We’re so appreciative to be here, but we would have to come back again to argue this all over if we don’t change the act. If we don’t get rid of the formula in the act, they will never have the ability to recognize what people under the age of 18 do on the colony.
Every other business in Canada can pay someone who is under the age of 18. The farmer down the road can pay the children who are active in the business, reasonable in the circumstances, but they’re not prohibited by the Income Tax Act from paying it. John is. If we don’t change the act, we will continue to have problems moving forward.
Senator Ringuette: I’m sorry I couldn’t be here at the start of your comments, but have you indicated or gone through what I see as a dispute mechanism, which is the tax tribunal?
Ms. Janz: Yes, we have been trying to do this. When the form first came out in 2014, our position at MNP was this was a mistake, that there was a wrong interpretation. We have continued to file the returns claiming the working income tax benefit, and we have been reassessed. There’s no longer a tribunal, so what we’re waiting for now is to go to tax court. We’re going on May 7. That’s going to be two and a half years.
Senator Ringuette: But that’s the normal process.
Ms. Janz: Exactly. It’s been extremely costly for Hutterites to pay to go to tax court, but we understand that’s the way it is. That’s why — to go back to what Senator Tkachuk said — we have to change the act going forward. It doesn’t make sense for tax dollars to be spent on this or Hutterites to be spending money on this. It’s a clear discrimination that can easily be eliminated.
The Chair: Thank you very much. I want to thank panel very much for your commitment to this issue and your clear knowledge of the complexities here. You’ve brought to our attention an issue that certainly should be brought to our attention.
We’re looking forward in the next panel to hearing from our friends at the Department of Finance and the CRA.
Let me introduce the witnesses on our second panel. First, thank you, gentlemen, for being here with us. From the Canada Revenue Agency, we have Randy Hewlett, Director General, Legislative Policy Directorate; and Stéphane Charette, Director, Financial Industries and Trusts Division, Income Tax Rulings. From the Department of Finance Canada, we have Pierre Leblanc, Director General, Personal Income Tax Division, Tax Policy Branch; and have Tobias Witteveen, Senior Tax Policy Officer, Tax Legislation Division, Tax Policy Branch.
We’re thankful that you’re here. We look forward to your presentation and then it’s my guess that senators will have some questions.
Randy Hewlett, Director General, Legislative Policy Directorate, Canada Revenue Agency: Thank you for the invitation to be here today to participate in the committee’s study on the taxation of communal organizations.
Our mandate at the Canada Revenue Agency is the legislative and regulatory process. In this regard, we are the principal liaison with the Department of Finance and we consider interpretive positions and application issues with respect to federal, provincial, territorial and international tax matters.
While the Department of Finance is responsible for the development of tax policy, as you know, in respect of tax law in Canada, the Canada Revenue Agency is responsible to administer the Income Tax Act.
We appreciate this opportunity to discuss the agency’s interpretation and administration of the existing provisions in the act that apply to communal organizations.
In my remarks, I will provide a brief overview of section 143 of the act, proceed with a brief description of the Working Income Tax Benefit and conclude with the agency’s position with respect to the administration of the provisions relating to communal organizations and the Working Income Tax Benefit.
The scheme for the taxation of communal organizations is found in section 143 of the act. This provision was introduced in 1977 to ensure the taxation of communal organizations was done in a manner that respects the communal nature of these organizations and their beliefs regarding individual property ownership and remuneration for individual work.
Section 143 deems a trust to exist and the property of the congregation to be property of the trust. The result of these and other deeming rules in section 143 is that the congregation’s farming or business operations and the income they generate belong to the trust.
The congregation’s members are deemed to be beneficiaries under the trust. The trust may elect to allocate its income to an adult member of each family in the community. If the trust does not elect to allocate its income to the congregation’s members, the income is taxed in the trust and is subject to tax at the highest personal tax rate. The allocation is calculated according to a formula found in section 143. When the trust makes the election to allocate income to the congregation’s members, the members listed in the election must include their calculated amount in income on their personal T1 income tax and benefit return.
The act contains a general rule in subsection 108(5) that deems an amount included in a beneficiary’s income to be income from property, the said property being an interest in a trust. The act also contains specific provisions that permit the flow through of certain types of income, such as taxable dividends and capital gains, from the trust to its beneficiaries so that the income retains its character for the beneficiaries. However, no such treatment exists in the Income Tax Act for business or farming income. Therefore, such income is characterized as income from property.
The Working Income Tax Benefit is a refundable tax credit available to certain individuals upon filing a personal tax return. This credit was enacted in 2007 and provides a tax credit up to a maximum of approximately $1,800.
It is designed to target low-income individuals who earn employment or business income under a specific amount. The concept of working income is central to an individual’s entitlement to the credit.
“Working income” is a defined term in the act, and it generally includes income from an office or employment or income from a business carried on by the individual.
As a definition, working income does not include income from property, which includes amounts allocated by a trust to a beneficiary. A communal organization’s members are not able to claim the working income tax benefit.
The CRA’s position is that the income of a communal organization can only retain its character for the congregation’s members where a specific provision of the Income Tax Act allows for that result.
The agency has published information about the tax provisions related to communal organizations in its information circular No. IC78-5R3 entitled “Communal Organizations.” This circular, which has been in place since 1978, has always reflected the view that where income of a congregation is allocated to its members, the income retains its character as business or farming income in only two specific cases, and they are by virtue of specific legislative provisions.
The Canada Pension Plan currently provides for this result, as did the Income Tax Act. However, the income tax provision was for a tax relief measure available to farmers before 1992. Currently, there is no provision in the act which allows for the allocated amounts from a communal organization to be treated as farming or business income and thus considered working income for purposes of the working income tax benefit.
Thank you, Mr. Chair. I now turn it over to Pierre Leblanc.
Pierre Leblanc, Director General, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada: Thank you, Mr. Chair, and thanks to the whole committee for taking the time to discuss this important topic. I also thank John from Kings Lake, Gord and Michelle from MNP, and certainly Senator Hays for their important contribution this morning. It’s important for us to hear contributions from everyone on how the tax system is functioning. The active participation of Canadians is important because making the tax system fair and effective is very much an ongoing process for us. So we certainly appreciate this.
I will be brief because a lot of points I’ll make will recap what Randy has just told us.
[Translation]
As my colleagues at the Canada Revenue Agency mentioned, section 143 of the Income Tax Act was adopted to settle the matter of taxing communal organizations such as the Hutterite colonies. These communal organizations are groups that satisfy certain conditions, in particular the conditions that stipulate that their members must live and work together and that they are not permitted to own property in their own right.
[English]
In the context of Canada’s individual-based tax system, the specific organization of these groups gives rise to certain questions or challenges since, as has been described earlier today, individual members aren’t paid wages and don’t have individual ownership of income-earning property.
As we have already heard, to address the challenges in terms of the Income Tax Act, the rules were introduced in 1977 to allow these communities, for tax purposes, to effectively allocate the income to the community members, to individual community members using a formula-based approach. So each community organization is treated for tax purposes as an inter vivos trust and may elect each year to make an allocation of its income to its members, and it is in those members’ hands that the income is taxed.
[Translation]
When the trust so elects, 80 per cent of the modified taxable income is allocated to the adult members of the congregation in specified proportions as defined in the Income Tax Act. The remainder may be allocated to the adult members of the community at the trustee’s discretion. These rules allow the community to be taxed at the same rate as its members rather than at the higher personal rate, because trusts generally pay the higher rate.
[English]
As we heard earlier, the last significant changes to the provisions that govern communal organizations were in the 1999 budget. The most significant change there, and there was some discussion of this, was the amount allocated to spouses. It’s related to the election. I would emphasize, in the act and in the budget itself, there is no mention of gender. If you have two spouses, they do receive different amounts, but gender is not mentioned.
With that, thank you very much. We look forward to your questions.
Senator Stewart Olsen: Thank you for being here.
It becomes very confusing when we speak with you. My general feeling is that section 143 needs to be updated.
I want to ask a couple of specific questions. Are there other communal groups who file under section 143?
The other question is to do with women. You say it is not gender. I have a feeling this particular portion of section 143 is discriminatory. I’m not sure why people are asked to file under “spouse” when it is equal work for equal value. Could you clarify that?
Mr. Leblanc: Thank you very much for those questions. They are good ones. I will deal with the second one first.
You raised the question earlier, and I think it is in terms of the formula, where there are two adult members of a couple, that one gets a full share and one gets a half share. It is certainly not the intent by any means to discriminate by gender. When you consider the policy, you can certainly have a debate and reflect on whether that’s the most appropriate treatment. As part of our ongoing review of tax policy, all measures, that’s certainly something we can think about.
I would present it in that light.
Mr. Hewlett: In terms of which other communal organizations might file under section 143, I don’t have that information. Perhaps it wouldn’t be something that I would be discussing in terms of disclosing what types of communal organizations file under that provision.
Senator Stewart Olsen: Why not? Wouldn’t that be a matter of public record?
Mr. Hewlett: It is certainly not a manner of public record that the agency would disclose. I’m aware that Hutterites, who are represented here today, to file under that particular provision. As to other communal organizations, I understand there are others, but I’m not at liberty to discuss which specific communal organizations avail of that provision.
Senator Stewart Olsen: Thank you.
On the whole issue of spouse and someone getting a half or whatever, even gender excluded, that doesn’t seem right to me. People are doing the work, and if you were dealing with this trust and people are allocated the income from the trust — and I’m being very simplistic — then why would you do partners in this? That doesn’t seem to be how the trust would function. Should it not be everyone who is covered by the trust and paid by the trust, not particularly family or sons or daughters or wives or husbands? Indeed, it’s under the trust. Should it be they get whatever they get paid and they should be able to claim equally?
Mr. Leblanc: Thank you for that question. In terms of amounts that are chosen to be allocated, I do not think I would add too much to what I said before. I thank you for your comment. It does give us something to reflect on.
Senator Wallin: Have any of you ever travelled to a Hutterite colony?
Mr. Hewlett: I have not.
Senator Wallin: I might suggest you do because it’s pretty clear it is a farming operation, that they live and work collectively and that all hands are on deck and contribute, so it might help you understand what issue is being presented.
Having listened to the testimony, as we all did here today, do you intend to fix this?
Mr. Leblanc: From a tax policy perspective, what I can say is we think about these issues on an ongoing basis. Input like that being discussed today is very important to what we think about. It’s a question of bringing that back. We advise our minister so these are the sorts of issues we think about and it’s a question for the government to make some decisions about what amendments if any it might propose to the Income Tax Act that would subsequently considered by Parliament, including you. That’s about what I can say.
Senator Wallin: Did you want to comment?
Mr. Hewlett: In terms of the tax policy, I would leave those comments up to my colleague from the Department of Finance. In terms of what happened between the years 2007 and 2013, the members of the communal organizations who claimed a working income tax benefit were entitled to that on the basis of a form that certainly did not reflect the intention of the legislation and when it was brought to the agency’s attention it changed the form and it issued a technical interpretation, but only in terms of how the law would apply on a go-forward basis. The position was a prospective basis.
I now understand there are a number of cases from 2014 onwards that are now before the courts and I wouldn’t want to comment further in terms of what will be the outcome of that case.
Senator Wallin: To be clear, you are talking about the two colonies that were not part of the larger group that had been filing — no? That’s not it?
This is not new. Obviously this is not the first time you’ve heard about this situation today because this battle has been going back and forth for four years. I’m trying to figure out where the buck stops. We know that yes, politicians come and make pronouncements and say they’re going to make this change in the budget, but usually that’s brought to their attention by senior members of the bureaucracy saying, “Here’s the problem we’ve discovered, can we fix it?”
I’ll ask it one more way: Do you intend to bring that forward to your respective ministers and say, “We need to fix this”?
Mr. Leblanc: Thank you for the question. I think what we can say is we — I can answer in a general way with all sorts of input when certain issues are —
The Chair: We would prefer if you answer in a specific way.
Mr. Leblanc: In a specific way, okay, so in a very specific way, when issues are brought just as a matter of course it’s something we think about. When issues are identified they come from a lot of different ways. They can come from us, people talk to our minister or minister’s office, they talk to other people in government, they hear from Senate committees. Usually things come from different directions.
The Chair: Mr. Leblanc, the question is not complicated. The question is: Is it your intention to recommend to your minister that section 143 should be reviewed? That is the question.
Mr. Leblanc: I think what I can say is we can say that we’ll continue to consider it.
The Chair: Thank you.
Senator Marwah: Wherever there is a dispute such as this I always go back to the intent of the legislation. Let me quote for you from the Third Session of the Thirtieth Parliament in November 1977: “The intent of taxation is clear. Hutterite colonies should be taxed in the same manner as their non-Hutterite neighbours and should be treated favourably but not more favourably than other taxpayers.” It’s very simple.
So the question to you is this: Do you believe we are adhering to this intent by the way you are administering tax policy today? And a yes or no would do.
Mr. Hewlett: Thank you, senator, for the question. The agency’s position on the matter is clear and we believe we have the interpretation of the act correct in that —
Senator Marwah: That’s not the question. The question is do you believe the Hutterites are being taxed in the same manner as their non-Hutterite neighbours? That’s the question.
Mr. Hewlett: I don’t have an opinion on that. All I can tell you is with respect to the legislation we administer, we feel we have the interpretation correct and it does reflect the policy intent of the legislation.
Senator Marwah: How about Finance?
Mr. Leblanc: Thank you for the question. The issues identified are certainly ones to be considered seriously and we will do that.
Senator Marwah: Okay, thank you.
Senator Tannas: Thank you, gentlemen, for being here. I appreciate it. There are a couple of things I want clarity on and make sure I understand. Mr. Hewlett, could you please provide confirmation to the committee that there are in fact or there are not in fact any other communal organizations paying tax under this section? We don’t need to know who they are, we just need to know that they are not Hutterites and that there are some. Whoever they are must have lousy accountants if they’re not here talking about the issue for them, but we’d like the truth on that.
That’s number one. Number two is on the spouse issue. Does this apply to all Canadians? Do the spouses of other farmers spouses get half or is this just Hutterite spouses who have this discount to their status?
Mr. Hewlett: Thank you, senator, for the question. I can confirm there are a number of communal organizations who do file under section 143 of the Income Tax Act. In terms of your second question, section 143 applies specifically to communal organizations.
Senator Tannas: Just the communal organization’s spouses have a discount; is that right?
Mr. Hewlett: It applies specifically to 143 and all members of that communal organization.
Senator Tannas: Thank you. You’re all involved in policy and Mr. Leblanc has spoken specifically about thinking about policy and we know this is something you specifically have been aware of for some period of time. I want to ask you a few questions as a policy person but also as a Canadian. Do you think what is going on is fair: Hutterites being taxed in a way that has to do with their religion and that if they were Canadian farmers, Canadian fishermen, or if they wanted to lie about their religion and say, “No, no I’m not a member of my religion,” if they wanted to go down that road they would be taxed in a different way? Do you think as a Canadian this is fair?
Mr. Leblanc: Thank you for the question. I think what I would say as a Canadian is I think that the underlying intent, if you think of what was set up in 1977 in the Income Tax Act — and I think others have said it well — the intent was for communal organizations, Hutterian colonies, to be taxed roughly on the same basis as other Canadians.
That’s the intent. If there are specific provisions or specific features where that intent is not being met then it’s something — I guess I’m speaking from both hats now — but it’s something we need to look at and think about.
Senator Tannas: I never thought this would be my job to bring this forward. I kind of thought maybe you, and however many people you have in your tax policy department, would have brought this forward and fixed it. Somebody should be ashamed of themselves. And I hope that you will enlist us as your soldiers if you need to in order to get this fixed.
Senator Ringuette: Gentlemen, I’m not a lawyer. There are some around this table, though. My question earlier to the witnesses was, is this going before the tribunal? And they answered that it was going before the tax court on May 2. Were you aware of that?
Mr. Hewlett: I am aware there is a tax case that’s going before the court dealing with this issue in May.
Senator Ringuette: Right now we are in a situation of litigation in regard to this particular case. Although I’m very sympathetic to the issue, first of all, I’m surprised, knowing this case is going before the tax court, that you are here in front of us.
Chair, I believe that now knowing this is before the court we are facing a case of litigation, and I don’t know how people around this table feel about this. I am sympathetic to the cause, but, however, we are looking at a litigation case here; so, therefore, I’m removing myself for the duration of this meeting from this committee.
[Translation]
Senator Dagenais: I would like to thank our witnesses. It’s always impressive to hear from officials at the Canada Revenue Agency and the Department of Finance.
I understand that, for many years, things were different. But can you tell me what triggered the review of this community’s status after so many years?
Stéphane Charette, Director, Financial Industries and Trusts Division, Income Tax Rulings Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency: Thank you for your question, Senator Dagenais. What happened is that, in 2007, the working income tax benefit was introduced. Therefore, individuals for whom an election was made produced a tax return and followed Canada Revenue Agency guidelines, including Information Circular 78, which, since its original release, indicates that the income allocated by a trust to a member of a congregation is considered either farming or business income, but only for the purposes of the Canada Pension Plan.
This is supported by the act governing the Canada Pension Plan and, as Mr. Hewlett mentioned in his opening remarks, before 1992, there was the special rule involving the five-year overall average, which was available to all Canadian farmers, but this rule is no longer in effect. Since then, since the first version of the information circular, it has always been specified that the income allocated to members of the congregation retains its character only for the purposes of the Canada Pension Plan.
In 2013, as the first group explained this morning, requests were made, and the Canada Revenue Agency was obliged to review its position. A technical interpretation was issued in 2014, and that is when the Canada Revenue Agency determined that the income attributed by a trust in this specific case is property income. Consequently, property income is not one of the types of income listed in the working income tax benefit, which is the centrepiece of the tax credit. The Canada Revenue Agency’s decision to consider income attributed by the trust to members property income is based on a statutory interpretation. In its mandate, the Canada Revenue Agency must interpret the act, and, in so doing, it follows the guidelines set by the Supreme Court. In the past, the Supreme Court has indicated that, when the wording is specific, clear and unambiguous, it prevails over the technical interpretation. That is how the agency determined that income attributed to members is property income.
Senator Dagenais: To follow up on Senator Tannas’ question, when you decide to change the rules for a single group of people, even if it might affect other groups, don’t you find that a little discriminatory since you are targeting a specific group?
Mr. Charette: I understand. The Canada Revenue Agency is obliged to interpret the act based on its text, context and purpose, which we did in this case.
Is it discriminatory? I would rather not comment on that personally but, in this case, the Canada Revenue Agency followed the rules of statutory interpretation.
Senator Dagenais: Have you ever changed one of your decisions without being forced to by a court, the government or the Department of Finance?
Mr. Charette: The Canada Revenue Agency has retracted its position on some issues, but this was based on facts that are different from the ones in question today.
In this situation, we looked at the two legislative texts and, as my colleague mentioned earlier in his opening remarks, we noted that the act stipulates that, when some types of income, including capital gains, dividends and foreign income, are attributed to a beneficiary of a trust, they retain their character. So, for example, in the case of a dividend, the beneficiary is entitled to the tax credit for dividends, and, in the case of a capital gain, the beneficiary could benefit from the capital gains deduction. The act does not extend this treatment to business or farming income. The agency’s position is that, since the act does not stipulate that they will retain their character when attributed to the beneficiary, these types of income are automatically considered property income under subsection 108(5).
Senator Dagenais: I understand the witnesses’ situation. They keep saying that these decisions are made by the minister, and it can be difficult for witnesses to answer these questions. But, if I could make a suggestion, as I did in another committee on another matter, it would be useful for our committee to invite either the Minister of Finance or the Minister of National Revenue to appear before us. They would surely be able to answer our questions.
Thank you.
[English]
The Chair: The steering committee will take that suggestion under advisement.
Senator Marwah: I have a supplemental to Mr. Charette. I fully understand the technical details under which you feel you are following the correct interpretation of the act. Let’s, for a minute, accept that. But when a dispute like this is brought to your attention, do you never go back and look at the intent of the legislation and say that we are following it correctly but this was never the intent, or do you disregard the intent and say that I’m following the rule and that’s someone else’s problem?
Mr. Charette: When we do the statutory interpretation, we do follow a contextual and purposive analysis. In this case, when we looked at subsection 108(5), we felt strongly that even though it was enacted after 1981, as was mentioned this morning, because of the interaction between subsection 108(5) and section 122.7, which deals with the income tax benefit, because of the interaction of the wording of these two we felt strongly that our position was good and the income that was allocated, first, because of the plain wording which will play a prevalent role in the interpretation, and also because these types of income were not excluded specifically by the act. For us it was a sign that the income allocated to the congregation member by the congregation trust was in fact property income.
Senator Marwah: You really believe the Hutterites are taxed the same way as their non-Hutterite neighbours? You believe that?
Mr. Charette: That’s not what I said. That’s not my belief.
Senator Marwah: That’s what the intent of the legislation is.
Mr. Charette: We are following the legislative provision applicable in this specific case. When we got to the end of the road and making the decision we felt our position was strong that it was property income because of the trust put there by section 143.
Senator Marwah: But I don’t see how you’re following the intent. The Hutterites are clearly being penalized compared to non-Hutterites. I don’t understand this. On one hand you’re saying you’re following but on the other hand it’s obvious to everybody the Hutterites are disadvantaged. It’s obvious. Somebody who doesn’t even know income tax very well can figure out it’s obvious. I don’t see how you’re following the intent of the legislation besides spinning me around in technical details of the act.
Senator Marshall: I wanted to talk about the issue that was raised regarding a married woman, although I understand it’s one person of a couple, to be given half a share, a 50 per cent share.
I’m reading the budget now, Budget 2018, and the title of the budget is “Equality and Growth” and that term, equality, is directed toward women.
In the budget book, I did notice Christine Lagarde, the managing director of the IMF, said that equal pay and better economic opportunities for women boost economic growth and the government saw fit to put that quote in their budget.
We do have a feminist Prime Minister.
So it would seem this 50 per cent rule actually contradicts government’s stated policy at the highest level.
My question is this: Is there any intent on the part of the government to now look at these rules to make sure they reflect the overall policy objectives of the government?
Mr. Leblanc: Thank you for the question, Senator Marshall. I would just repeat I think it’s similar to an answer I gave Senator Stewart Olsen. In Budget 1999, when it was introduced, it said — and before this there would have been just one amount given to a couple. It says:
In a typical communal organization, spouses contribute to income-generating farming activities. Therefore, to maintain a roughly equivalent level of taxation between communal organizations and other farming operations, the budget proposes to . . . .
And it’s the rules we talked about.
Whether that’s still fit for purposes, I think, is something for us to think about.
Senator Marshall: Are all these rules that are in place reviewed at periodic intervals to make sure they’re updated and in accordance with modern standards and the government’s overall policy objectives or do you just keep going along using the same rules until somebody notices? Is there a systemic review of the rules?
Mr. Leblanc: Yes. Thank you for the question. I’m just trying to think of how to describe systematic. We’re thinking about different tax policies and how they work on an ongoing basis. It can mean different things in different contexts.
In Budget 2017, the government conducted a comprehensive review of tax expenditures. That’s what you might call more systematic. We went through everything defined as a tax expenditure, as we defined it in the tax expenditure report, and evaluated those on the main criteria we use for tax policy.
I wouldn’t say it’s as systematic as that, but we try to think about different elements and whether they’re still fit for purpose.
People identifying, raising issues does have some effect, for sure. Some of it is internally driven. Some of it is people raising important points; citizens, stakeholders, different interveners.
Senator Marshall: Perhaps we could look at them in terms of policies that disadvantage women. I think that would be a good idea given the budget this year. Thank you.
Senator Wetston: Thank you. I certainly recognize the challenges you have in your work, for obvious reasons. I’m sensing here that something went wrong. I think that I don’t need to tell any of you or talk to you about statutory interpretation, whether it’s the literal approach or the golden approach or the purposive approach. You’re obviously very skilled in that area.
Something seems to have gone on between 2007 and 2013 when the form was provided, relied on and then there was a change in interpretation. Or you had the same interpretation throughout and you misapplied it.
There’s a malfeasance here or a misfeasance here or one of those things going on. I know you know this. What we’re hearing here is a certain sense of arbitrariness in the application of the statute. Do you agree or disagree with that?
Mr. Hewlett: I don’t have an opinion on whether it’s arbitrary or not. I do thank you for your question.
What happened between 2007 and 2013 is that the WITB was brought in in 2007 and the figure that was picked out for purposes of calculating the WITB was taken off a form that is used for purposes of calculating contributions to the Canada Pension Plan. That was unintended.
Once that was brought to our attention, we corrected the form and issued a technical interpretation explaining the issue. However, from 2007 to 2013, any member of a communal organization that claimed the Working Income Tax Benefit was not denied the benefit. Our position was applied on a prospective basis.
Senator Wetston: So it was applied after 2013?
Mr. Hewlett: That’s correct. For 2014 onwards.
Senator Wetston: Can I basically describe — we heard from Ms. Janz. Her interpretation is different than your interpretation. Why should we accept your interpretation?
Mr. Hewlett: With respect, I’ve taken note of her interpretation and we were well aware of it before we came to the committee hearing today. We do not agree. That often happens. The agency and taxpayers or representatives may not agree on a particular interpretation of the law. In this particular case, as I noted earlier, the issue is now going before the court and we think that’s where it will be properly decided.
Senator Wetston: Obviously you want an objective adjudication of the matter and it’s probably the right thing, despite the cost and the time.
I’m just going to leave this one thought with you. I think you don’t agree with my comment, which I respect, that something did not go wrong here. Something went wrong at CRA that resulted in reliance, from the Hutterite community, on an approach that was being taken and that changed without notice or any information provided to that community. Would you agree with that comment?
Mr. Hewlett: I certainly — and thank you for the question — take note of the point you raised. The agency is always looking at ways it can better inform individuals or communities of changes in interpretation or approaches. Could we have done a better job in this particular case? Perhaps we could have. At the time we thought the information circular we had out there, the change to the form and the issuance of the technical interpretation that was broadly disseminated to taxpayer representatives was sufficient.
Senator Wetston: One last question. I just want to leave with you this thought. You’ll talk to your lawyers about it and maybe some of you are.
Flowing from conduct, legislative or otherwise, is an important doctrine in Canadian law and it’s a doctrine of legitimate expectations. I know you’ve heard it and your lawyers are going to say it doesn’t apply in this case. Even if it doesn’t apply strictly I would like you to think about it, because I think there was an expectation here and I’m not sure it was legitimately achieved in the way you described it. I will just leave you with that thought.
Chair, would you permit me to leave one more thought with the panel?
The Chair: Of course.
Senator Wetston: It’s my favourite comment on statutory interpretation, which is when this provision was enacted, the statutory draftsperson and God knew what it meant. Now only God knows.
I’m sure you’re not going to comment on that.
The Chair: We have no further questions. I want to thank you for being here. I recognize it’s likely been a difficult hour and I appreciate that.
You are serving the country and we respect that as well.
Without judging what this committee will do, I think it’s appropriate I indicate my disappointment that the Senate of Canada, at the level of the Banking, Trade and Commerce Committee, has had to take two hours of its time. We don’t mind, but we have a busy agenda, whether it’s on cybersecurity or the competitive challenges facing Canada or pension challenges. For us to take two hours to hear a complaint of a taxpayer which has been made known to officials for years causes me to wonder whether we’re making best use of our time, and frankly you’re making best use of your time.
With that, not a very pleasant way to end, but we have to think of highest and best use of time and efficiency with respect and regard to the taxpayers and the people we serve.
Thank you for being here. The committee, in the fullness of time, will do what the committee will do.
Thank you very much, panel.
I want to put on the record that Senator Ringuette has made a point and excused herself from the committee. I want to make a point that the committee deals with policy. The courts deal with settled law. We are talking about whether the law of Canada should change to affect certain results. That is completely different challenge than the court will be facing when they are going to have a piece of legislation and a set of facts to apply them. I think it’s appropriate we continue on with our consideration of this matter.
(The committee adjourned.)