Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 37 - Evidence - June 11, 2013
OTTAWA, Tuesday, June 11, 2013
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-48, An Act to amend the Income tax Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the First Nations Goods and Services Tax Act, and related legislation, met this day, at 11 a.m., to give consideration to the bill.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good morning and welcome to the Standing Senate Committee on Banking, Trade and Commerce. This morning our committee will begin its study of Bill C-48, An Act to amend the Income Tax Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the First Nations Goods and Services Tax Act and related legislation.
Today we are pleased to welcome the Honourable Ted Menzies, P.C., M.P., Minister of State (Finance). He is accompanied by officials from the Department of Finance Canada: Ted Cook, Senior Legislative Chief; and Ed Short, Senior Chief, Business, Property and Personal Income. Joining us by video conference from Edmonton is Grant Nash, Senior Tax Policy Officer, Business Income Tax.
Can you hear us, Mr. Nash?
Grant Nash, Senior Tax Policy Officer, Business Income Tax, Department of Finance Canada: Yes, Mr. Chair. Good morning.
The Chair: With that, minister, the floor is yours.
Hon. Ted Menzies, P.C., M.P., Minister of State (Finance): Thank you for that kind welcome. I see the weather looks better in Edmonton than it is in Ottawa, but what can I say? That is Alberta.
It is always a pleasure to sit between two Edwards. Once again, as when I was here another day, we had three Edwards in a row. It is not always the case, but we will do our best to answer your questions, whichever Edward the question is addressed to.
Mr. Chair, I want to thank you and all of the members of the Standing Senate Committee on Banking, Trade and Commerce for beginning their study on Bill C-48, the Technical Tax Amendments Bill. I will begin with relatively brief remarks in order to provide the senators of this committee ample time to ask myself and our learned officials from the Department of Finance as many questions as possible about this legislation.
The technical tax act amendments, or the proposed technical tax amendments act as the title not so subtly implies, is an extremely technical piece of legislation. While technical, it is nevertheless of great importance to taxpayers as it has important implications for both individuals as well as businesses. In fact, Bill C-48 represents a clearing of a backlog of miscellaneous tax amendments that have left large swaths of Canada's tax system in limbo for over a decade. I am sure that the witnesses you will be hearing from will share those concerns that we have heard for some time.
This is a backlog that has, unfortunately, become an increasingly large and festering problem as successive parliaments from 2001 onward have failed to pass, for a myriad of different reasons, these technical tax pieces of legislation that are necessary. Indeed, the glut of technical tax amendments has grown to such a degree that even the Auditor General of Canada was compelled to release a detailed report on the situation and urged Parliament to move forward to address this situation. I quote at length from the Auditor General's report of 2009:
Taxpayers' ability to comply with tax legislation depends on their understanding of how the rules apply to their own circumstances. . . . Uncertainty about how the law should be applied can also add to the time taken and costs incurred by tax audits and tax administration.
I want to assure this committee and all Canadians that our government absolutely agrees with the sentiment of the Auditor General and took this report with the utmost urgency. Indeed, over past few years our government has been working to prepare this ambitious legislation and to clear this decade-long backlog. We have been working to prepare this legislation through repeated open and public consultations on these amendments from 2009 and 2011. This process allowed Canadians the opportunity to give their input in advance to ensure we could address their questions and concerns with the draft legislation before its formal introduction.
As a representative from Ernst & Young told the House of Commons Finance Committee during their study of Bill C-48:
. . . we commend the Department of Finance for its ongoing efforts to constructively consult with taxpayers and other professional and business organizations regarding these matters.
When that unprecedented and far-reaching consultation was completed, departmental officials took account of the feedback that they had received and began the next stage of what has been an extremely long journey preparing the legislation that is in front of this committee today.
As we witnessed in the House of Commons where all political parties worked cooperatively and supported this legislation, I sincerely believe that all parliamentarians recognize the imperative to work together to complete a timely study to finally end this backlog. To that end, I want to share with the committee what we heard from non-partisan and independent organizations at the House of Commons Finance Committee about the need to move forward with this legislation.
The Canadian Institute of Chartered Accountants said:
We support Bill C-48. The CICA understands how important it is for taxpayers to have greater certainty and a clearer understanding of Canada's federal income tax system. . . . Bill C-48 helps improve clarity and certainty, and it mitigates the negative effects of uncertainty identified by the Auditor General.
As well, the Certified General Accountants Association of Canada told the committee:
. . . we support the tabling of the bill and . . . we encourage you to move swiftly to pass this important piece of legislation. The bill deals with a massive backlog of unlegislated tax measures. Its passage would, in our opinion, bring greater clarity to the tax system and strengthen the integrity of our laws.
Finally, the Canadian Tax Foundation, an independent tax research organization, stated:
Bill C-48 . . . represents 10 years of repairs and maintenance in updating the Income Tax Act and the Excise Tax Act. Its passage is important to all Canadians. . . . Delays in the passage of tax legislation leave taxpayers and their advisers in a no man's land of uncertainty.
With that context in mind, let me briefly provide an overview of the legislation.
Part 1 of the bill proposes modifications to the Income Tax Act to better target and simplify rules relating to non- resident trusts. I should note that this portion of the bill took into account the extensive comments received as part of our government's consultations.
Parts 2 and 3 seek to create a more fair and equitable international tax system with amendments related to the taxation of Canadian multinational corporations in respect of their foreign affiliates.
Part 4, an extremely technical portion of the bill, simply seeks to make certain that the tax rules are harmonized under both common and civil law.
Part 5 looks to close a series of tax loopholes to ensure that all Canadians pay their fair share. For instance, we are closing tax loopholes relating to specified leasing property, preventing schemes designed to shelter tax by artificially increasing foreign tax credits, implementing tough information reporting rules for tax avoidance transactions, and many more. I am sure all senators would agree that fighting tax loopholes is absolutely vital to ensuring the continued integrity of the tax system and protecting law-abiding Canadians from having to pay for those tax cheats with their own higher taxes.
I would like to note that many provincial governments are looking at this very legislation to help guide their efforts in combatting tax loopholes. Indeed, Ontario's 2013 Budget specifically highlighted Bill C-48 in this place. I will read verbatim from page 266 of the Ontario budget document:
. . . the government will be proposing legislation to introduce new disclosure rules for aggressive tax avoidance transactions similar to the rules introduced by the federal government as part of Bill C-48 in November 2012. This new measure would require taxpayers to report aggressive tax avoidance transactions that attempt to avoid Ontario tax.
Before moving on, I will note that Part 5 also implements a minor but very important amendment related to the Fairness for the Self-Employed Act by providing a tax credit in respect of Employment Insurance premiums paid by self-employed individuals.
Part 6 implements technical amendments to the GST and HST, including relieving the GST and HST on the collection and distribution of the Copyright Act's levy on blank media.
Part 7 makes technical amendments to the Federal-Provincial Fiscal Arrangements Act and the First Nations Goods and Services Tax Act to provide more flexibility for tax administration agreements.
Finally, Part 8 merely consists of numerous standard coordinating amendments to ensure that tax amendments in Bill C-48 properly interact with other pieces of legislation.
I indicated at the beginning that I would attempt to keep my remarks brief, so I will conclude here. My officials and I are open to questions from the committee.
However, let me again stress why passage of this admittedly lengthy bill is of such importance. Putting it very simply, it provides certainty for taxpayers, it makes compliance easier and it improves tax fairness for all Canadians.
I will finish by quoting an op-ed written by Tim Wach, a respected tax professional with Gowling Lafleur Henderson LLP:
When taxpayers are uncertain about their obligations, their trust and faith in the system diminishes.
. . . parliamentarians can bring a higher degree of certainty to our tax laws by moving forward swiftly, in a non- partisan, non-politicized manner, to enact outstanding changes. Let's hope they do just that.
Thank you, Mr. Chair.
The Chair: Thank you, minister, for those opening remarks. I have two questions, just to lead off.
It is very clear from what you said that this is very much a technical bill, clearing up past situations that require clarification. Can I assume, then, from the other side of the coin that this does not really involve the reconsideration of tax policy?
Mr. Menzies: No. As I have said many times, this is clarification. These do go back a long ways — prior to even our government — to things that were never put into law, so that is what we are doing. As I say, there is no one party or government to blame here. It is an accumulation that should have been cleaned up a long time ago.
However, it is not changing. We have other things. We had to make some changes in this budget that passed the House of Commons, by the way, yesterday afternoon; we were happy to see that. The BIA 1 cleared the House of Commons yesterday afternoon. There are changes in there, but this is clearing up and clarifying things that have been done some time ago.
The Chair: You mentioned in your opening remarks that you have been cleaning up things dating back to around 2001. Recognizing that this bill is some 955 pages long, does this do the job? Is it now cleared up, or is there another one to come forward in another year to clear things up further? Does this get us all the way or are we part way there?
Mr. Menzies: It dates back to before the time I was elected to the House of Commons, so I would certainly hope it clears everything up. I would defer to one of our officials to reassure you, if he can.
Ted Cook, Senior Legislative Chief, Department of Finance Canada: In terms of where this stacks up with regard to the outstanding legislative amendments, I would refer to the 2009 Auditor General's report. At that time, the division and branch I worked in at the Department of Finance Canada was subject to an audit. At that time, the Auditor General noted that there were, by their count, approximately 400 outstanding technical amendments and approximately 250 comfort letters, in particular, that had to be legislated.
I think outstanding comfort letters is probably a good measure, because that is a measure of commitments that the Department of Finance Canada has made to taxpayers to make a recommendation to the Minister of Finance that a particular technical amendment be made.
As I say, the Auditor General found there were approximately 250 outstanding comfort letters. With this technical package, plus a smaller draft release in December 2012 for public comment, we have approximately 20 to 25 comfort letters to deal with out of those 250. In terms of us having substantially dealt with the group of comfort letters that were identified by the Auditor General and were outstanding in 2009, we have certainly done that.
It is an ongoing process; obviously we issue new comfort letters each year. Hopefully we will never get to this stage, but there certainly will be further technical amendments to be made.
The Chair: Thank you very much, Mr. Cook.
I will move first to the deputy chair of the committee.
[Translation]
Senator Hervieux-Payette: A particular issue is causing me great concern, and I have not found an answer to my questions in the document's 900 pages.
We are learning that Canadian citizens of U.S. origin, after decades, have to submit tax information to the U.S. authorities. Does a Canadian-born American who returns to the United States have the same problem? This issue is probably not covered in the bill. However, there are usually measures — and we see that in a number of provisions — that help us determine where the income was earned and where it is taxable.
How will the government treat those Canadian citizens who have incurred absolutely incredible obligations to the U.S. tax system?
[English]
Mr. Menzies: If I can just start off, we actually were debating a bill in the House of Commons yesterday on double taxation agreements or treaties with other countries. We have a number of those in place — correct me if I am wrong, but I believe it is at least 60 different treaties on double taxation — to ensure that if you pay taxes in one jurisdiction, you do not pay the same tax in another jurisdiction.
You are referring to FBAR; that is the acronym used. Minister Flaherty has been working with his counterparts in the United States. The officials will correct me if I am wrong, but it is the legal right of the United States. American citizens should have known that they at least have to report tax, even if it is not payable. It gets to be a real challenge.
I have constituents who have come to me and said, "I cannot believe my tax bill." They claim they did not know.
As to the reverse, I do not know. I would refer to one of my officials. You are asking more about the reverse, and I do not have an answer for you.
Senator Hervieux-Payette: Yes, how do we treat that here?
Mr. Cook: I can give some brief comments generally on how the Canadian tax system works in comparison to the U.S. tax system.
In terms of your specific question, there is nothing that I am aware of that specifically goes to the treatment of Canadian residents or U.S. citizens in terms of how their tax treatment in the U.S. is affected in any significant way by this bill.
However, as a general matter, Canada, like most countries, taxes on the basis of residence. Residence is a test as to where you make your habitual abode, where you live and where you carry on your activities. For those people, we tax them on their worldwide income. For people who are not residents of Canada, we just tax them on their Canadian- sourced income.
The actual question of citizenship does not directly come into play in terms of Canada asserting its tax to right. The U.S., on the other hand — and in contrast to just about all other major countries — has made the decision that it will continue to try to exert the right to tax over its citizens. It has created a number of tricky issues. In fact, there are a host of rules in the Canada-U.S. tax treaty to deal with various issues that arise where you have someone who might be a citizen in the U.S. but who is resident in Canada. The short answer is not directly dealt with in the bill; it is just as a result of the U.S. taxing on a different basis than we do.
Senator Hervieux-Payette: I would have been tempted to put a section in that bill just as a negotiation with the U.S. because our own people are being penalized, so if it has anything in exchange — I think that might not have been a bad thing.
What are we doing? Is there a section that will deal with Tim Hortons or Starbucks or all those multinational corporations? Are they all paying taxes in this country? Are we making sure? Do we have a section here that will cover that so that there is no billing in one place and revenue declared in the other place? Have we managed to correct the situation that happened in England and maybe in other countries?
Mr. Menzies: I was just at the OECD annual meetings. The OECD is working on what is referred to as "base erosion" and "profit shifting," which is exactly what you are talking about. All of the OECD countries are seized with this and very concerned about it. However, it is a matter of this country giving tax credits. Are they realistic credits or is it just an opportunity for a company to shift its profits? Everyone is very concerned.
The G8 has asked the OECD to do some analysis on this, and that will be later this year. I believe they are coming forward with a report to the G8 because it is certainly an issue, and it has been highlighted in the media recently.
It is not just Canada that is concerned about it; other countries are, too.
Senator Hervieux-Payette: No, but we have 900 pages. I thought we might have addressed this question before the others. I agree that other countries have to make their own decisions, but it is up to us. We are importing manpower and exporting profit. I have a little problem with that.
Mr. Cook: To build on the minister's remarks, at a general level, what you have been talking about is transfer pricing and profit allocation between different jurisdictions. That is one aspect of taxpayers seeking to take advantage of advantages through creative use of the tax system.
In terms of what is in this bill, it does contain a number of integrity measures designed to protect the Canadian tax base and in some cases to deal specifically with foreign tax planning.
To give you one example, the implementation of a measure first announced in Budget 2010 is a measure dealing with what we call "foreign tax credit generators." It is tax planning that was being used by Canadian taxpayers, primarily financial institutions, which would seek to set up a series of arrangements in another jurisdiction to artificially create income and tax in the foreign jurisdiction, which would create foreign tax credits in Canada. In a sense, that is the same kind of basic issue because they are trying to take advantage of differences between the Canadian tax system and the foreign tax credit generators we have seen, the U.S. tax system.
Senator Tkachuk: You mentioned in Parts 2 and 3, minister, our wish to have an equitable tax system on multinationals and their foreign holdings and how they are dealt with. Are these confirmations of existing tax laws that multinationals may not have understood properly or are they new taxes?
Mr. Menzies: My understanding is that these are taxes that were already in existence; we are not changing them. The amendments in respect of foreign affiliates, which are in Part 3, are to tighten it up. I will let the officials elaborate further on it. However, we put in a number of measures in Budget 2013. We put forward 75 different improvements to close loopholes, some of them within Canada itself.
Senator Tkachuk: They were not avoiding taxes.
Mr. Menzies: "Progressive tax planning" is how it is referred to.
Senator Tkachuk: We did not make our laws clear. My view is if the government does not ask for it, you should not have to pay for it. Maybe you could help me with this, Mr. Menzies, but it seems to me these are new taxes.
Mr. Cook: I would characterize the amendments in Parts 2 and 3 more as a technical response to tax planning that was being undertaken by taxpayers in the foreign affiliate context. Our foreign affiliate system seeks to manage the taxation of Canadian residents, in this case more particularly Canadian resident corporations, that earn income through foreign subsidiaries.
As I mentioned, we tax our residents on worldwide income, and we tax non-residents on the bases of Canadian revenue source income. That gives an incentive for Canadian taxpayers, including corporations, to establish foreign corporations that are non-resident in Canada to earn income offshore.
We have a particular regime that when income earned by these foreign affiliates is repatriated to Canada by way of dividend, those dividends are what we call "taxable surplus" and included in income and tax, or they can be paid out of exempt surplus of the foreign affiliate and not be subject to tax in Canada. Exempt surplus arises where the foreign subsidiary is carrying on genuine, active business activities in a foreign jurisdiction, earning business income; foreign jurisdiction is one with which we have a tax treaty, or a TIEA.
We were seeing specific tax planning by corporate groups to avoid appropriate taxation on dividends returned to Canada. To give you one example, instead of paying a dividend, the foreign subsidiary might just loan the money. If they had paid a dividend, it would have been subject to tax.
Senator Tkachuk: They were not breaking any law, were they?
Mr. Cook: No, they were not breaking any law.
Senator Tkachuk: This is a way to tax someone who has found a way not to pay tax legitimately, not illegitimately.
Senator Massicotte: It is market stuff.
Mr. Cook: In some ways it is the difference between tax evasion and tax avoidance. This is tax planning. When it is within policy, we will respond to the tax planning to ensure what we think is an appropriate policy result.
Senator Tkachuk: I always worry when the tax people say that it is tax fairness and when there is a tax loophole. All it means to me is more taxes.
Mr. Menzies: May I make a comment? This is only available to larger corporations that are multinational.
Senator Tkachuk: I understand that.
Mr. Menzies: I think more about the individual that receives a paycheque from an employer two times a month. Their taxes are deducted, and they do not have ways to avoid taxes aggressively. That is who I am more concerned about, senator.
Senator Tkachuk: They all go to accountants or they all are trying to take advantage of any tax credits or tax deductions they have. We should be assisting individual taxpayers to ensure that they are not paying too much tax, that they are taking advantage of every opportunity the law provides for them.
I am not saying we have different laws; I am just saying it should all be the same.
You talked about tax loopholes. Are tax loopholes simply a question of people not paying tax legitimately? They are not breaking the law or anything. They are not paying tax that the government is not requesting. Do not blame them. We should blame us, right? I do not blame them. They are playing by the rules. It is not a tax loophole. It is simply that you have not asked for the money.
Mr. Menzies: In some of the discussions that we have had around the Finance Department decision-making table, they certainly look like loopholes when you see how large they have become. Successive governments have all attempted to make taxes as fair as they can for all individuals.
Senator Tkachuk: I am with you there.
Mr. Menzies: That should be the premise and I think that is always the premise of any government that has managed this country. However, there are some smart accountants out there. That is not to discredit the accountants at all. That is what they are paid to do. However, they have found ways for certain clients to aggressively approach the tax system.
Senator Tkachuk: I have been on the Banking Committee off and on since 2006 and we have had these comfort letters dealt with by both governments from time to time when there was a particular amendment or some particular legislation that was passed. In order for us to deal with the budget, these comfort letters were to clarify something that was totally confusing. Of course, these comfort letters are sent to us.
The Chair: Senator Tkachuk, the question, please.
Senator Tkachuk: I need a little context. Is there any way we can pass a regulation that would require the Department of Finance, when a comfort letter is issued, that the following budget year that comfort letter of clarification is put in the Income Tax Act for clarification so we do not have this situation arising again? The comfort letters just simply lead to confusion.
Mr. Menzies: If I can quickly answer that, you used the term "us." I have never received a comfort letter, so I do not know exactly what they look like.
Senator Tkachuk: We have received them here. I have been here longer, maybe.
Mr. Menzies: That may be it. I have never requested one either.
Senator Tkachuk: I know we all have received them.
Mr. Menzies: That is certainly what our plan is, to keep current. It is uncertainty for those individuals.
If there is a change of government, is my comfort letter valid? That is a concern for taxpayers. Certainly, our attempt will be to keep it more current. Whether we can put it in the next budget bill, we are not sure.
Senator Ringuette: Could you clarify, please, the non-resident trust in this bill? What, practically, will be happening?
Mr. Menzies: I will defer to an official to explain that.
Mr. Cook: Partly it depends what you mean practically will be happening in the sense that, as draft legislation that has been released by the Department of Finance, we encourage the CRA and taxpayers to generally comply with the draft legislation that is in this bill. In that sense, the passage is obviously very important, but for most of the elements of this bill, they have been incorporated into the tax system already.
In terms of the non-resident trust measure itself, that is why we have Mr. Nash here from Edmonton. Maybe I will turn it over to him.
In response to that, the non-resident trust measures in this bill were in Bill C-10, which was before this committee back in 2007-08. At that time, the committee expressed a number of concerns with respect to that particular version of the non-resident trust rules. In response to the concerns raised by, I believe it was actually this committee back then, a significant amount of additional work went into those measures.
Senator Ringuette: You are listening to us.
Mr. Cook: Absolutely. The concerns raised with respect to Part 1 of Bill C-10 have been largely addressed in this bill. They were re-released for consultation in Budget 2010. That also proposed a separate consultation process. We had a group of senior practitioners come in and look at the legislation. It was released in draft again in August 2010. It has been through a fairly significant revamping since then.
I do not know if that is responsive to your question.
Senator Ringuette: Maybe Mr. Nash will want to add something.
Mr. Nash: Senators, are you interested in understanding a little more about the circumstances in which these rules apply to a non-resident trust?
Senator Ringuette: Yes. I think it would be very helpful if you could give us a few examples.
Mr. Nash: There is a current legislative regime in the Income Tax Act that responds to the use by Canadians of non- resident trusts in circumstances in which there is a risk that a current year's income requirement will be avoided. Those rules were subject to some of the types of tax planning that the committee has heard about this morning, people arguing that they are attempting to comply with the rules but perhaps stretching the boundaries of what that means, with the result that the current regime is not fully effective.
These proposals take the current regime and attempt to improve upon it, with the particular view of focusing on the question of whether the money that has found its way into the trust has been contributed by a Canadian resident. In those circumstances, these rules can come into play.
The extent of the impact of the rules in those circumstances will depend upon the terms of the trust. There are different outcomes, depending upon whether, broadly speaking, the trust is a commercial trust or not.
Senator Ringuette: That is quite a handful for the CRA to supervise and make sure it is implemented and that there is compliance.
A few months ago, in researching another bill, I did something incredible in that I read the tax agreements between Canada and the provinces. One thing that was a revelation to me was that the income tax changes we make here that have provincial implications also require, as you said earlier, minister, that the provinces also have to enact legislation so that there is an overall same standard or same definition if you are looking at tax issues. This is quite a bill. We are looking at GST issues, corporate income tax and trust issues.
Are the provinces onside with the changes in this legislation? My recollection of my reading is that there is not really a time frame for the provinces to enact similar legislation.
First, are the provinces onside with what is in the bill? Second, is there a time constraint so that everything is lined up to make sure that it happens and everyone is applying the same set of rules?
Mr. Menzies: It is a good question. Because of the comment from Ontario, I am familiar with that, but perhaps Mr. Cook can elaborate.
Senator Ringuette: You triggered my memory of reading that agreement between the provinces.
Mr. Cook: We are having another official come up who is actually our director of our intergovernmental division. Did you want to make some comments?
Kei Moray, Director, Intergovernmental Tax Policy, Evaluation and Research, Department of Finance Canada: You were referring to the tax collection agreement?
Senator Ringuette: Yes.
Ms. Moray: Provinces that have signed a tax collection agreement — and that is all provinces and territories except for Quebec, as well as Alberta on the corporate tax side — are required to have the same tax base as the federal government. When we make changes to our tax base, they are obligated to follow and do need to make changes to their own legislation. The federal government notifies them of the changes they need to make, and they go ahead and make the changes.
Senator Ringuette: That is my understanding of what I read. However, there is a section there that means that the provinces, if they do not agree, can refer that tax ruling to their superior court. Is there any possibility that, for what we have in front of us — 900-some pages — some provinces have already indicated that they do not agree and would put that ruling in front of their superior court?
Ms. Moray: No provinces or territories have made any negative comments about this bill. In the tax collection agreements, if there is a dispute, there is a provision in there for a dispute to go forward through courts. However, that dispute resolution mechanism has never been invoked.
Senator Oliver: My question is for Minister Menzies.
Thank you, minister, for coming. Your presentations are always clear and you help us a lot.
I would like to follow up on some of the questions on process raised by the chair at the beginning of the meeting. You said in your remarks that the AG said, "We would like Parliament to address this problem." You talked about the backlog since 2001, and you explained that it is a very serious thing, that all of the current problems are probably not even in this big bill and that there is more to come.
In the Senate we cannot, as parliamentarians, introduce a bill like this, and so I wonder what it means when organizations, groups and people say, "We would like Parliament to address this problem of the backlog," because if we cannot introduce legislation, what should be done?
Later on, I noticed that you also said that you have gone to a number of stakeholders and sought their input before this bill was tabled in Parliament. My other question is: Why can parliamentarians not be included as stakeholders to be given some advice and to be briefed a lot earlier? When you have a bill this big coming to you at the last moment, which has to be passed in a hurry, that makes it more difficult. In order to overcome this process problem, I am wondering if you engaged parliamentarians in advance, as you do chartered accounting firms and other stakeholders, that that might be one of the ways you could overcome the problem.
Finally, in terms of the REITs, I noticed that that was done because Part 5 of the technical amendments includes numerous proposals in relation to REITs. These particular amendments were the result of extensive, collaborative discussions and consultations between the government and the REIT sector, along with tax professionals and other Canadians but not parliamentarians.
Maybe some of the success you had in REITs could have even been improved in other sections if parliamentarians had been engaged earlier.
Mr. Menzies: Senator, we meant no disrespect, please believe me. I would refer to the officials to give you an overview of who we have consulted with. In follow-up to Ms. Moray's comment, our officials consult on a regular basis with their counterparts in the provinces, if I am not mistaken. They certainly do on other issues, so I would assume they do on tax issues as well.
We have signalled by this that we want to consult very broadly. I would refer to the officials to see if they can give you a better idea of what the consultation process is made up of.
Mr. Cook: With respect to this particular bill, the consultations that were undertaken would vary, depending on the particular measure you are talking about. As I indicated with respect to the non-resident trust and foreign investment entities, there was kind of a wide-ranging and very detailed consultation process that was undertaken with respect to the vast majority of these measures. They have been released on many occasions for comment.
You mentioned the REITs. They have had additional consultation.
With respect to this bill, in fact, Department of Finance officials provided a number of briefings outside of the usual framework of appearing before committee, so I guess we have been open to that in this particular bill and, recognizing the number of pages and the breadth of it, have tried to do our best to provide briefings to both parliamentarians and other officials, as needed.
Senator Oliver: When the Auditor General says that he would like Parliament to address this problem, what do you understand by that? It is the executive, really, not Parliament.
Mr. Cook: With respect to the Auditor General's report in 2009, the Auditor General actually made two recommendations. One is that we establish a database to better track, prioritize and deal with outstanding technical amendments. The Auditor General did recognize that ultimately the choice to pass legislation or not, or even to introduce legislation, goes beyond the purview of officials. What the Auditor General did recommend is that smaller packages of draft legislation be prepared for release on a more regular basis and that that would provide an opportunity for consultation.
We have very much taken that on board at the Department of Finance. In fact, we released a package of draft technical amendments in November 2010. We released one in November 2011. Both of those packages are contained in this bill. We released another package of draft technical amendments on December 21, 2012, and we continue to work on draft technical amendments for release.
In that sense, ultimately, the passage is out of our hands, but in terms of what the government can do at the departmental level, we have seriously taken the Auditor General's recommendations and have been acting on them since 2010.
Senator Moore: The bill contains 955 pages. Minister, you mentioned that things have been in consideration since 2001. However, I think Mr. Cook said that the Auditor General's report of 2009 really stimulated action here. What percentage of the bill is a result of the AG's report of 2009?
Mr. Menzies: What percentage of it? I do not know that I can answer that.
Senator Moore: There are almost a thousand pages. Has his report resulted in half of it or three quarters of it? How much is old and how much is really old here?
Mr. Menzies: I would say the overall fact is that it was put together and actually received the attention that was necessary. The Auditor General tends to make us, as parliamentarians and officials, focus on his reports, and the report said we should get this done. I do not know if Mr. Cook might be able to comment.
I do not know if you could portion out any amount of it as reaction to that. It was all there.
Mr. Cook: In terms of the makeup of this bill, we have talked briefly about Part 1, the non-resident trust and foreign investment entities. That was contained in Bill C-10 but has been significantly revamped. Parts 2 and 3, dealing with foreign affiliates, are newer measures that were not in Bill C-10.
In terms of responding to your question, I think Part 5 — about 300 pages, a third of the bill — is really bringing forward draft amendments that were brought before the committee as part of Bill C-10 in 2008. The other 100 or 200 pages deal with newer measures that were either announced in Budget 2010 or as part of our technical packages. If you want an estimate of those technical packages, probably 50 to 80 pages of the bill are proposed legislation. It is difficult to say how much is in response to the Auditor General in the sense that the Auditor General kind of promoted cleaning up everything.
Senator Moore: I understand that. How much is really old?
Mr. Cook: The really old would be the 300 pages in Part 5 that were before this committee in almost the exact same form in 2008.
Senator Moore: As you said, tax uncertainties to be avoided, the CRA issues advance rulings to taxpayers that they try to get out within 60 days. In 2004-05, it was 62 days; and in 2011-12, it was 106 days. Is the CRA being given the people and the budget it needs to meet what will probably come here by way of requests for rulings and to clean up the backlog? I do not see any official from the CRA on the witness list. Can you speak to that?
Mr. Cook: The advance tax ruling system, I would say, is distinct from the comfort letter system and what is dealt with in this bill. I guess there are not any CRA officials here because we are talking about legislative change. Advance income tax rulings are interpretations, if you will, that the CRA makes for a particular taxpayer in respect of a particular set of circumstances, usually to facilitate a particular business transaction. In that sense, advance income tax rulings do not deal with legislative change but are just interpretations of the existing law.
In terms of how it relates to our work, if the CRA is unable to come to a taxpayer's interpretation in an advance income tax ruling, the taxpayer might come to the Department of Finance and say, "What I am intending to do is clearly within the policy scope of what the provision should allow. Will you issue me a comfort letter?"
Senator Moore: When it is from your department, it is a comfort letter.
Mr. Cook: That is correct.
Senator Moore: In terms of the current apparent backlog and what may come as a result of this bill, has the CRA been considered and provided with the necessary resources to clean up that backlog?
Mr. Cook: Certainly, the CRA is consulted in developing technical amendments. By passing this bill, there will be greater certainty for the CRA in administering the Income Tax Act and dealing with taxpayers.
Senator Massicotte: Thank you, minister and officials, for being with us. Obviously, this is an important step. I read the bill last night, 955 pages, before I went to bed. It was good reading.
I missed the beginning of your very important speech, minister, so I may be duplicating. I assume the purpose of this amendment is simply to tie up some loose ends to make it consistent with the intent of the act as originally intended. I hate the word "loopholes" because it is the responsibility of everyone to minimize their tax.
Going back to the intent, some sections have been in discussion and dispute with many taxpayers for several years. Part of the provisions, section 95, goes back effective five years, I presume, because it has been debated for that long. Are all these stakeholders satisfied with the amendments? Is there any significant issue outstanding? Will someone tell us tomorrow or today that this is not the intent and that you guys are pulling a fast one? What is the dispute? What is the critical issue that we should be concerned about in trying to interpret the intent of these amendments?
Mr. Menzies: I agree with your comment, senator, and through you, Mr. Chair, that everyone wants to pay the least amount of tax that is legal. Our premise is to ensure that everyone pays their fair share of tax. Whether you call it loopholes or aggressive tax planning is open for interpretation. The changes we have proposed are simply to make it fairer for everyone.
Will everyone be happy? No, because those who have found a way to reduce their tax or to shift their profit to a lower tax jurisdiction will not be happy. Who may be happy is the ordinary taxpayer who has tax deducted from his or her paycheque every two weeks but still pays a fair share.
I completely understand when they look at a multinational company that shifts their tax to a lower tax jurisdiction and does not pay their fair share of tax in this country. I tend to put more credence in whether those people and their tax advisers are comfortable with this. The consultations have been very broad throughout this process.
Senator Massicotte: Everyone has a right to minimize tax, but I do not think anyone has much difficulty with the department clarifying the rules to make sure it is fair and consistent with the intent of taxation. However, is that all there is or is there something in these 955 pages that is a stretch or that one would say goes far beyond what would be fair and comparable to other countries?
Mr. Menzies: My answer to that would be, no. I have not seen anything that I would call "a stretch."
Senator Massicotte: What about the defined residency, where beneficiaries in excess of 10 per cent would have a pro rata? There has been a lot of debate in past years on that issue. Has that been largely satisfied? Did we come to a reasonable solution with taxpayers on that issue?
Mr. Cook: I will respond to the specific question. I believe you were asking about the critical thing to know about this bill: To the extent that you can ascribe a feeling to the tax community at large, the response to this is relief that hundreds of grey pages in the Income Tax Act that represent draft amendments will be clear, finally, and be law so that taxpayers and the CRA both understand completely where they are with respect to them. It creates issues for corporations that may file based on draft legislation but cannot use it in preparing their financial statements.
Senator Massicotte: You are saying that all the witnesses in the next couple of days will have accolades for the amendments.
Mr. Cook: I certainly hope so. Clearly, the House of Commons committee has had a number of hearings on it. Issues will always be raised but, in general, the response has been as I have indicated.
To deal with your technical issue on foreign investment entities, it was raised before the Senate that it was too complex for individuals to comply. Actually, we have moved away and dropped that aspect of the bill. In terms of the foreign investment entity rules, this bill contains a couple of small improvements to the existing rules.
Senator Massicotte: That will not come back via previous legislation. Is that for further study or will we get another bill six months from now?
Mr. Cook: One day we may consider it. There is nothing active at the Department of Finance on it.
The Chair: Minister, to you and your departmental officials, on behalf of all of the members of the Standing Senate Committee on Banking, Trade and Commerce, I express appreciation for your being here today.
(The committee adjourned.)