Proceedings of the Standing Senate Committee on
National Finance
Issue 39 - Evidence - May 7, 2013
OTTAWA, Tuesday, May 7, 2013
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to study the subject matter of Bill C- 60, an Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures, introduced in the House of Commons on April 29, 2013.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this morning we are going to begin our study of the subject matter of Bill C-60, an Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures.
[English]
Honourable senators, this is our first meeting on the subject matter of Bill C-60. The bill is 116 pages in length and is comprised of 233 clauses. It is our intention to try to prepare ourselves for clause-by-clause consideration of the bill. Sometimes a concept takes two or three clauses and so our witnesses may group a number of clauses together to explain a concept. Once that has been dealt with, before we go on to the next one, I will see if anyone needs any clarification on that particular clause or grouping of clauses. We will proceed in that direction. If there are no questions, we will just go on to the next one.
This morning we are pleased to welcome individuals from the Tax Policy Branch of Finance: Mr. Ted Cook, Senior Legislative Chief with the Tax Legislation Division; Mr. Sean Keenan, Director, Personal Income Tax; and Mr. Geoff Trueman, Director, Business Income Tax. From Justice, Ms. Sandra Phillips is the Associate Assistant Deputy Attorney General.
These officials will begin by explaining the bill in the manner in which I have just described, and we have a number of other experts standing by in case we get into some questions that require their expertise.
Mr. Cook, welcome all of you here this morning, and we look forward to learning all about Bill C-60, budget implementation.
Ted Cook, Senior Legislative Chief, Tax Legislation Division, Department of Finance Canada: Good morning, senators. As indicated, we will proceed clause by clause and stop at any particular clause and go into as much detail as the committee would like.
Part 1 begins with clause 2 and runs through clause 41. Clause 2 makes an amendment to subsection 18(1) of the Income Tax Act. This clause implements the Budget 2013 measure to deny the deductibility of amounts paid to a financial institution for use of a safety deposit box. This measure will apply to taxation years that begin after March 20, 2013.
The Chair: That is a policy decision, but is there anything behind this that we should be aware of?
Mr. Cook: It is a policy decision, simply recognition of the changing nature of the way individuals and corporations retain their records electronically rather than in paper, and as a result, the use of safety deposit boxes is more and more for personal use as opposed to an income-earning purpose.
Senator Buth: Do you have any idea of what the use of safety deposit boxes was under this section?
Mr. Cook: It has been difficult for the CRA to administer because of the way taxpayers file. It is included in investment and carrying charges as opposed to a discrete deduction in the income tax form. The analysis used by the Department of Finance in preparing this is based on aggregate outside data prepared by the large banks and different reporting agencies on the size of the safety deposit box industry, if you will.
I might note that the Province of Quebec introduced a similar measure in the late 1990s to deny the deductibility of amounts for safety deposit boxes of financial institutions used by individuals.
Senator Callbeck: Do you have any idea how much money we are talking about here?
Mr. Cook: I will answer that in two ways. The overall industry that we are talking about, the revenue associated with safety deposit box rental is on the order of $200 million. The actual amount we are talking about in terms of fiscal impact is provided in the budget. When fully phased in, it would be approximately $40 million per year.
The Chair: Thank you. I do not see any other questions or interventions, so we will go on to the next one.
Mr. Cook: Clause 3 provides an amendment to subsection 20(7) of the Income Tax Act. This relates to reserves for future services. Under the Income Tax Act, when a taxpayer will provide goods or services in a future period, they can take a reserve in their current taxation year to reduce their income by the amount of revenue they receive that relates to the services or goods to be provided in a subsequent year. That reserve is meant to apply to goods or services essentially provided to a customer of the taxpayer.
We have noticed in some cases that taxpayers have started to try to use this existing reserve in order to set aside funds to deal with reclamation costs. For example, a landfill or a waste disposal facility will have expenses that must be incurred once the waste disposal site ceases use for the relevant land to be reclaimed. That does not relate to services or goods provided to customers of the taxpayer. It is just an obligation that arises in the future with respect to the services provided. As well, the Income Tax Act already provides a specific regime to deal with these types of future obligations called the qualifying environmental trust rules, which I think we made some amendments to a couple of years ago, so the committee might remember that.
This amendment ensures that this existing reserve is not used for those reclamation costs and that, in fact, the relevant qualifying environmental trust rules are used instead by taxpayers.
Clause 4 would repeal section 33.1 of the Income Tax Act. Those are the rules that relate to international banking centres. The international banking centre rules were introduced in 1987 to facilitate the development of certain financial activity that would otherwise be carried on offshore. In Montreal and Vancouver, it allowed a financial institution to set up what we call an international banking centre business. The international banking centre business would essentially accept deposits from non-residents of Canada and make loans to non-residents of Canada. It was to facilitate that kind of international business.
Given the nature of changing international business, these international banking centre business rules are no longer being used. There is a specific exemption, and we know that no one has claimed this exemption since 2007, so we are trying to repeal what we view as obsolete rules.
The Chair: Basically cleaning up the Income Tax Act in this instance.
Mr. Cook: That is correct.
Senator Black: I find this very interesting because I remember when these rules were introduced, to much fanfare, particularly around Vancouver, which it was hoped would become a financial centre.
Would the repeal of that section in any way affect the operation of HSBC in Vancouver or Société Générale in Montreal?
Mr. Cook: I do not think we can speak to individual taxpayers, but I believe that it has always been fewer than five taxpayers who have used it, and no one has availed themselves of the exemption since 2007.
Senator Black: The institutions that would have, in theory, benefited have not made representations to you?
Mr. Cook: There have been no representations. There will be a couple of consequential amendments with respect to this measure, but this is the main clause dealing with international banking centres.
The Chair: When we get to those other clauses, you will remind us about clause 4.
Mr. Cook: That is correct.
The next clause relates to the dividend tax credit. There is a Budget 2013 measure on adjusting some factors relating to the dividend tax credit. It may be useful to pause and explain how the dividend tax credit works in the income tax system.
The dividend tax credit seeks, if the personal and corporate tax systems are fully integrated, to tax an individual who receives a dividend from a corporation at the same rate as if they had earned the income directly as the corporation had earned in order to pay the dividend. This is achieved through a two-step process. When a dividend is paid by a corporation and received by an individual, that dividend is what we call ``grossed-up.'' We try to add back the amount of tax that the dividend paid in order to get the income that the corporation earned in order to fund the dividend in the first place.
This grossed-up amount is what is included in the taxpayer's income, and then there is a dividend tax credit provided on the grossed-up amount, the dividend tax credit being the second part of the system, to recognize that tax has been paid by the corporation and to make an estimate of the notional tax that would have been paid by the corporation in order to earn the income in the first place.
The adjustment to the dividend tax credit to achieve better integration based on the actual corporate rates, or the actual federal rate and average provincial corporate tax rates, is in two parts. In clause 5 we are adjusting the gross-up amount. The gross-up amount currently in the Income Tax Act is 25 per cent of the dividend. That gross-up amount is being changed to 18 per cent of the dividend that has been paid.
This is in respect of what we say are dividends other than eligible ones. Eligible dividends are those that have been taxed at the full corporate tax rates, so these would be dividends that have been taxed at the lower corporate tax rate.
The Chair: Do we need to know about eligible versus non-eligible? You talked about eligible dividends.
Mr. Cook: There are two gross-up and dividend rates, one that applies to dividends that have been paid out of corporate income that has been taxed at the higher corporate rate, and this is dividends that have been paid out of the lower corporate rate, because we have two corporate tax rates.
[Translation]
Senator Chaput: How many small businesses will be affected by this change?
[English]
Sean Keenan, Director, Tax Policy Branch, Department of Finance Canada: Our estimate of the number of recipients of dividends is 750,000 in 2014.
[Translation]
Senator Chaput: Are you talking about businesses or people?
[English]
Mr. Keenan: Because the dividend tax credit works through the personal income tax system, I am speaking of the recipients of the dividend and then the individuals who would be claiming the dividend tax credit.
The Chair: Am I correct that because the gross-up is lower, 18 per cent from 25 per cent, the grossed-up amount to which the dividend tax credit is applied will be smaller and therefore the benefit to the individual will be less?
Mr. Keenan: The second part of the mechanism is the dividend tax credit itself, which is currently set at two thirds of the grossed-up amount, which works out to about 13.33 per cent, and then the dividend tax credit will be lowered to roughly 11 per cent. It is thirteen eighteenths.
The combination of the reduction in the gross-up and the reduction in the dividend tax credit would mean that the overall tax on dividend to income between the personal and the corporate would then reflect the amount of tax that an individual would pay if they had received that income as salary.
The Chair: I understand, and that is the theory now as well. You are just changing the gross-up amount and the tax credit amount. What is the impact?
Mr. Keenan: There will be a revenue increase.
The Chair: A revenue increase for the government?
Mr. Keenan: Yes.
Mr. Cook: The revenue amount will probably be between $570 million and $600 million per year.
Senator Bellemare: That is quite substantial.
Mr. Cook: Yes, it is.
Senator Buth: What is the rationale for going from 25 per cent to 18 per cent? Is it just to increase revenue for the government?
Mr. Cook: It reflects the existing tax rates better. The system will be better integrated after this change than it was before.
[Translation]
Senator Bellemare: Is the change from 25 to 18 to reflect the lower business taxes that have been put in place in recent years?
[English]
Mr. Keenan: It reflects the change in the tax rates that apply to these types of dividends. There have been changes at the federal level; and provincial rates also have changed. The gross-up amount is trying to reflect the average amount of tax paid by these businesses at both the federal and the provincial levels. There have been many changes at the provincial level. It does not reflect any single province; it is more an average.
[Translation]
Senator Bellemare: Can we say that this is a transfer of taxes between businesses and individuals, given that the individuals are paid a little more? Does this shift the tax burden between individuals and businesses, or does that have nothing to do with it?
[English]
Mr. Keenan: Not really, no.
[Translation]
Senator Chaput: In terms of income that comes from a company in the form of a dividend, the dividend is now taxed in the same way as other forms of earned income, is it not?
[English]
Mr. Keenan: As Mr. Cook explained, the dividend income that an individual receives comes out of the after-tax income of the corporation. That amount is grossed-up by the gross-up factor, and that grossed-up amount is included in the individual's income for tax purposes. It is included and taxed at the individual's marginal tax rate. It is included as other types of income in the system. If an individual were taxed at the top marginal rate, they would pay a rate of 29 per cent federal tax, plus the applicable provincial rate. After that calculation is done, the individual is able to claim the dividend tax credit to reflect the fact that the corporation has already paid tax on it.
[Translation]
Senator Chaput: I am a member of a credit union. I get dividends. Those dividends appear as income when I do my tax return. So are they taxable? Were they taxable beforehand or is this new?
[English]
Mr. Cook: I would be cautious when talking about a caisse populaire because the dividends received from a credit union or a caisse populaire receive different treatment under the Income Tax Act. As a general matter, the amount of the dividend was included in your income before and will continue to be included in your income.
Senator Chaput: There is no change.
Mr. Cook: There is no change on the inclusion of the dividend. We are talking about an add-on treatment to the dividend. I would note that this will apply to dividends received after 2013, as the measure is not in place yet.
Clause 6 is a consequential change with respect to international banking centres. Some rules under the Income Tax Act contemplate what happens if a corporation is wound up or amalgamated with another corporation to ensure the continuation and appropriate application of the rules. This is consequential to the international banking centre rules that I talked about previously.
Clause 7 relates to a change in the treatment of income received by members of the Canadian Forces or police officers deployed on operational missions. Currently under the Income Tax Act, when a police officer or member of the Canadian Forces is deployed on an operational mission that has a risk assessment of level 2, the mission can be prescribed, or specifically listed, in the regulations. When that is the case, the income earned in association with that mission is exempt from taxation.
In order to streamline the process for providing relief to members of the Canadian Forces and police officers on these missions, the budget proposes that when a mission is assessed with a risk assessment score of between 2.00 and 2.49, the Minister of Finance, on the recommendation of the Minister of National Defence or the Minister of Public Safety, may designate that mission and note when the designation will be effective. The income associated with that mission will be exempt from taxation.
Senator Callbeck: The income will be exempt from taxation as far as the federal government goes, but could the provinces still apply tax?
Mr. Keenan: The exemption would affect the definition of income for the purposes of the provinces that are parties to the tax collection agreements — all provinces except Quebec. The exemption applies automatically to provincial tax in those provinces. I can endeavour to get back to you on the Quebec treatment, but I am almost certain that it is the same and is exempt.
[Translation]
Senator Maltais: Right, let us talk about Quebec. I think there is an exemption from the Department of Revenue when the federal government indicates a certain level of danger for soldiers or police officers serving outside the country. I think that they provide the same tax deduction as the federal government. I will not swear to that, but I think it is the same.
Who establishes that level of danger at the moment?
[English]
Mr. Keenan: My understanding is that there is an interdepartmental committee made up of officials from the departments of National Defence and, I believe, Public Safety. I want to say Foreign Affairs also but I am not certain. These officials have a committee and a commanding officer on the ground or someone else who makes an assessment of the danger based on various criteria. I believe there are three or four main factors they look at. They bring that information back to the committee. Based on the assessment of the conditions in which members of the Canadian Forces or police forces are deployed, they determine where on the rating scale of risk the mission lies.
[Translation]
Senator Maltais: In terms of the tax deduction, am I correct in saying that Quebec follows the recommendation of the federal department of revenue?
[English]
Mr. Keenan: A risk-assessment score applies to each mission. There is a four-point risk scale from 0.00 up to 4.0. Missions are rated level 1, 2, 3 or 4. A mission that is 3.50 and higher is rated level 4. Missions assessed at level 3 and level 4 have an exemption automatically from income, which would then flow through to the Income Tax Act. Based on your comments that Quebec follows, and, as I said, I am almost certain they do, it would automatically apply. To the extent that the measure in question is about level 2, or moderate-risk, not high-risk, the same rules would apply.
Senator Black: Have the risk assessments contemplated here in clause 7 been raised or lowered, so individuals can take advantage or get an advantage from the task they are doing?
Mr. Cook: What do you mean by ``raised or lowered''?
Senator Black: Is the risk level you have defined here — risk level 3 or higher and then you go between a risk of 1.99 and 2.50 — higher or lower than would have been in an earlier draft? Those numbers are amendments; is that correct?
Mr. Cook: That is correct.
Senator Black: I am wondering whether those numbers are higher or lower.
Mr. Keenan: The current legislation allows a mission to be prescribed if it is at level 2. Currently, level 2 essentially runs from 1.50 to 2.49. The figures are rounded to the 2. That part of the bill is intended to essentially allow the government to extend the tax relief to missions that are similar to the risk type in level 3 and level 4, where the risk is high.
This proposal will expedite the process of providing tax relief to the Canadian Forces members on these missions and will acknowledge that the missions that are rated 2.00 to 2.49 are the type of missions that are eligible for this type of relief because they are more akin to level 3.
The Chair: I am thinking of the Armed Forces personnel or the police officer who is on exchange in Afghanistan, sitting down in April writing his income tax form out and thinking about this 2.99 to 6.45. Why is this so complicated? You have levels 1, 2, 3 and 4, which are easy for everyone to understand, and then you have to convert that to these other numbers, 2.49 to 5.68. Is this because Finance has its own levels of risk and National Defence and Public Safety have another schedule of risk factors? It seems much more complicated than it needs to be.
Mr. Keenan: The risk factors that are used for the tax exemption are the same risk factors that are used by the Department of National Defence and Public Safety to assess the risk of an international mission. When we talk about the levels, the mission is given a risk, for example, 3.17.
The Chair: Is that a National Defence code?
Mr. Keenan: Yes. That would be considered a level 3 mission. For simplicity's sake, they rank them level 4, level 3, level 2, level 1, and there is a risk pay associated with that. My understanding is that the soldiers receive a risk pay and, from the income tax point of view, the question is will the income they receive while on mission be exempt from income tax. The scale is the same; it is just that we are using the levels and not the exact rating in general discussion.
In this proposal, we are saying that only missions that have a risk score between 2.0 and 2.49 would be able to be designated by the Minister of Finance, upon the recommendation of the Minister of National Defence or the Minister of Public Safety, under this part. That would then expedite the process of providing tax relief because it has not been very quick in the last few years.
[Translation]
Senator Chaput: You mention an effective date, the designation, meaning the date that determines when it will come into effect.
I read here:
A mission may be designated retroactively.
[English]
How will you work that out?
[Translation]
How far back will it go?
[English]
Mr. Cook: There is a presumption in legislative drafting that if you say ``designation'' or something, unless you say something else to clarify it there is a question as to whether it just applies on a go-forward basis. The reason we have this in the law is to make it clear that the minister, based on the risk assessment, can go back to the start of the mission or the start of the time at which the mission was at the appropriate level. It is just to clarify. Obviously, there will have to be an assessment process and then a designation process by the minister. It is just to make sure that it goes back to the appropriate starting point.
[Translation]
Senator Maltais: I would like to go back to your last question.
I am putting myself in the shoes of a soldier in Afghanistan who has to go out on patrol and try not to get killed or wounded as best he can, as do his comrades. When your tax form arrives with the 10 or 12 equivalency factors that you just given us, I am not sure that he is going to understand it all.
Could the Canada Revenue Agency not go and provide some support for our soldiers in unique places like Afghanistan by helping them to do their tax returns and sorting out all these equivalency factors for them?
I am sure that everyone around this table is learning a lot about this today. It is your profession and your responsibility. But if you were to provide more help to the soldiers, it would be less complicated for them. And if officials from the agency were to go to the places where the soldiers have to go, perhaps the equivalency factor would go up a little more.
[English]
Mr. Cook: We are talking about complexity and equivalency factors. We are talking about a risk assessment currently being carried out by the Department of National Defence, and we are just using that for an income tax purpose. What currently happens with respect to the prescription in regulation is that there is not additional complexity. What we do is prescribe a mission. Instead of prescribing a mission, that mission will be designated. It will be the name of the mission. All the individual will have to know is the mission. That designation will be posted on the Department of Finance website. The change is not going to be more complex for the member of the forces or the police officer on the ground. This will speed up the ability of the individual to get the tax relief to which they are entitled.
Under the current system it requires the promulgation of a regulation, which sometimes can be several years after the particular year that is relevant for tax purposes, so the individual has to go back and file amended returns and things like that. What we will do is allow a designation.
[Translation]
Senator Maltais: What you are telling us is all well and good, but when people with submachine guns are shooting at you, I do not know if you have the time to visit the Canada Revenue Agency website.
I want to make sure that you are giving our soldiers currently fighting in Afghanistan every possible opportunity to file their taxes and receive all the refunds they are entitled to because of the factors that you are establishing. But do not tell me that they have the time to go and look at the Canada Revenue Agency website, because I am not buying that. That is not on. Listen, when you are sitting in a tank, firing in all directions, you do not have your little device to check whether the situation you are in is a category 3, 4 or 5. I am sorry, but give me something else as an explanation.
[English]
Mr. Keenan: For the missions that are level 3 or level 4, there is no question about their tax-exempt status. I do not pretend to know the level of risk, but let us say, for example, that a soldier who is in a war zone is on a pretty high-risk mission. I think we understand that. Those soldiers will get a T4 receipt from the Department of National Defence when it comes to filling out their income tax form. Because there is no doubt that that income is tax exempt, then there would be no tax withheld. Information would be provided to the soldier, on their T4, that they were on this mission and that this income was exempt.
It is the level 2 moderate-risk missions that have taken so much time because of the prescription process and because there is a lack of knowledge. This proposal, which will allow the minister to designate the missions of a certain type, will speed up that process such that, as we foresee it, we could do it every year, sometime in the fall, and say, ``What missions need to be prescribed?'' When it comes to tax filing time, the soldiers who receive their T4s will know that they were on this mission, that it was a level 2 and that it has been designated for the exemption. The appropriate amount of information would then be provided to the soldier, so they do not have to go back two or three years later. No, they would not have to check the website. However, the CRA would have the information to know that that mission was designated.
[Translation]
Senator Maltais: Could you tell me how it works in the United States or England, the countries that are going on more or less the same missions as Canada?
[English]
Mr. Keenan: I do not know how the system works in the United States. Sorry. I could endeavour to find out.
The Chair: I am encouraging you to try to simplify this. If it is complicated for us, it would be complicated for those whom it is intended to benefit.
Senator Buth: Just to clarify, this does not affect the assessment of risk. That is done by this interdepartmental committee, and that just continues to go on. There is no change in terms of how the assessment of the risk of a mission is determined. Is that correct?
Mr. Keenan: Correct.
Senator Buth: Were missions that were scored between 2 and 2.49 exempt before?
Mr. Keenan: Those are level 2 missions. That is the designation. Under the current rules, they could be prescribed.
Senator Buth: Could be.
Mr. Keenan: Could be prescribed. They would have to be brought forward to the cabinet for a decision on prescription.
Senator Buth: Then that would take the process through regulation, and that is what the delay was?
Mr. Keenan: Exactly.
Senator Buth: By making this change here, you are giving the Minister of Finance the ability to prescribe those missions as exempt and then —
Mr. Keenan: To designate them.
Senator Buth: To designate them as exempt. Then, it speeds up the process so that the person in the field can get the benefits sooner. Is that correct?
Mr. Keenan: That is the intent, yes. The designation can be made such that when the soldiers are filing their income taxes, they will know with some certainty that the income is exempt.
Senator Buth: Good. Thank you very much.
The Chair: Thank you. That is helpful.
Senator McInnis: That was going to be my point. It will be clearer as you go forward, after this amendment is put in place. Correct? You will know how to operate in the future?
Mr. Keenan: We certainly think it will be faster. It will provide the tax exemption on an expedited basis to those soldiers who are affected.
Senator McInnis: This became an issue in the media, three or four months ago, when troops were left behind to train Afghan security. Whether they would be exempt was questionable. I always understood — because of this committee now — that CRA will tell them the category they are in. Is that correct as you go forward? You are not in the decision making with respect to the level of the mission?
Mr. Keenan: No. The risk level of the mission is assessed by the committee. That is right.
The Chair: Is this revenue-neutral over time, or is there a likelihood of less revenue coming to the public purse and more saving for the Armed Forces personnel as a result of this?
Mr. Keenan: This is more of a process type of change, and so we do not anticipate that it will have a revenue impact.
The Chair: We can go on to the next clause. I see no other desire to intervene.
Mr. Cook: Clause 8 introduces a measure with respect to the taxation of non-residents employed as aircraft pilots in Canada. It responds to a Tax Court of Canada decision called Price, which alluded to the complexity associated with taxing non-resident pilots earning income in Canada. With respect to non-residents, as I am sure the committee knows, we tax residents of Canada on their worldwide income, and we tax non-residents based on their income earned in Canada. That presents specific challenges in the context of non-resident pilots, particularly those employed by airlines resident in Canada. As you probably know, flight paths are not direct. You might have a flight path from Toronto to Vancouver, which might be partly over the U.S. and partly over Canada. That has led to a number of disputes between taxpayers and the Canada Revenue Agency.
In order to clarify and simplify the taxation of these non-resident pilots, this measure would provide that, if a flight departs and lands in Canada, all the income associated with that flight will be considered to be Canadian-source income. If it either takes off or lands in Canada and the other end of the flight is outside Canada, then it will be 50 per cent Canadian-source income. If a flight takes off and lands outside of Canada, that will not be Canadian-source income.
The Chair: You say there were court cases on this?
Mr. Cook: There have been two main court cases in this area, one called Sutcliffe going back to 2006, I think. Price was a Tax Court of Canada decision in 2011 and a Federal Court of Appeal decision in 2012. In that, the Tax Court noted that the way the rules currently work allows a lot of manoeuvring between taxpayers and the Canada Revenue Agency, and it suggested that it might be helpful to have a more simplified, legislated scheme.
Turning to what I believe should be the next page for you, clause 9 deals with the Adoption Expense Tax Credit. The Adoption Expense Tax Credit provides a non-refundable tax credit for certain expenses incurred associated with the adoption of a child. The expenses that are eligible are those certain expenses incurred during what is known as the adoption period. Currently, the adoption period starts with the time that the adoptive parents are matched with the child. It has been recognized that there are certain expenses that must be incurred prior to being matched with a child. For example, costs associated with a home study might be required. This measure would potentially make the adoption period start earlier, at the time an application for registration with a provincial ministry or adoption agency is made.
Senator Buth: What is the financial impact of this?
Mr. Cook: The impact of this, I think we have got down as not significant. That would be probably less than $1 million. The group of taxpayers who are actually impacted by this is fairly small. I think we estimate there will be fewer than 2,000 taxpayers.
Senator Buth: Clearly a benefit to those?
Mr. Cook: Yes, absolutely.
[Translation]
Senator Bellemare: My question has been answered.
[English]
The Chair: We will move on to the first-time donor credit.
Mr. Cook: Clause 10 relates to the first-time donor super-credit. What this credit will allow is where a taxpayer and their spouse have not made any donations prior to 2008. That is sort of our definition of what a first-time donor is. If they make a donation during the period between the end of 2012 and before 2018, as well as the charitable donation tax credit if it is a gift of cash of up to $1,000, there will be an additional credit of 25 per cent of the donation amount.
The Chair: For that one time?
Mr. Cook: It will be a one-time credit that can be claimed by either spouse for one taxation year.
[Translation]
Senator Hervieux-Payette: I am curious. As I understand it, someone making a first-time donation after having not done so for 40 years will get this credit. Is there an age limit for the credit? Is it for young people? I do not see it in the wording. I do not see why this would apply to adults who have been in the workforce for more than ten years.
Did you not think about an age limit? I feel we want to encourage people to get into that habit. We do not want to start encouraging them when they are 40, but rather when they are younger.
Is there a limit to the amount that people can give? When you read the clause, you cannot tell if it is $1,000, $10,000, or $100,000. What amount does this clause involve?
[English]
Mr. Cook: I can address the technical point, and perhaps Mr. Keenan can talk a little more generally about the policy and the age limit.
The way it is drafted, it will be $1,000. The way that is in the law, your additional credit is the lesser of $250 and 25 per cent of the amount donated. You get 25 per cent of whatever you donate up to $1,000, and then at that point your maximum credit is $250. That is where the additional credit stops.
[Translation]
Senator Hervieux-Payette: Will anyone have access to this first-time donor credit, regardless of age? Is it not just for young people?
[English]
Mr. Keenan: The provision does apply to anyone who has not donated since the 2007 tax year. In essence, the provision is intended to encourage all Canadians to give to charity, particularly for young people, so they would then promote a culture of giving in the country. Canada has very generous tax incentives for charitable donations. For the vast majority of people if you donate above $200 a year to a charity, you do not pay any tax on the income you used to make that donation. In fact, a lot of people who are taxed at the top marginal rate would receive a tax credit worth more than the tax they paid because it applies to the top marginal rate, 29 per cent. This measure is intended to encourage people to give, if they have not given the first time or in a while, five years, to essentially allow people to know from their own personal records, have I given, have I claimed the charitable donation tax credit, such that they could then decide, yes, I will make a donation to charity and the charitable sector would be able to foster a relationship with that donor so they could encourage on an ongoing basis a continued relationship.
[Translation]
Senator Hervieux-Payette: Can I find out who asked for this? Revenue Canada surely does not spend every day wondering whether it should give a tax credit or a tax benefit to people who donate to a charitable organization. Were there groups that made representations to your department or to your minister?
This seems to be coming out of fantasyland to some degree. I do not see the point in rewarding someone who has not been all that generous in recent years. At the end of the day, people who did give for all that time are not benefitting, but those who did not give are. What is the logic behind that? Did some group ask for that?
[English]
Mr. Keenan: The House of Commons Finance Committee undertook a study on charitable donations and tax incentives for charitable donations. The report was released in February. They made a number of recommendations, a number of which related to the tax system; others related to transparency, and so on.
One of the main messages that the committee heard was a need to promote a culture of giving. A number of proposals were made to change the tax incentives. The government felt this measure would respond to that call to encourage people to donate to charity. Other proposals were made, but this measure, building on the already existing very generous incentives that exist for charitable donations, was a one-time, temporary measure to encourage people to essentially get into the game of donating to charity, and then letting the charitable sector build on those relationships once they have been developed.
[Translation]
Senator Hervieux-Payette: The other recommendations are not in the budget.
[English]
Senator Black: As an individual who, before I came here, was very involved in raising money for various organizations, I want to commend you and your colleagues for this move. I think this is fabulous. What I have seen is that young people have not developed the culture of giving. Anything we can do to encourage that as a concept is good for Canada. I want to go on record as saying I think this is very good. Thank you.
Senator Callbeck: You are projecting it will cost $25 million per year for this first-time donor program. How many people do you feel will take advantage of this? What are your projections on that?
Mr. Keenan: I am just trying to remember. We figure there will be about $110 million worth of donations that would be essentially eligible for the credit of donors. The average donation of a first-time donor is about $185. Those are the figures that I have in my head right now. That is 50,000. Let me run the numbers here. I do not have that figure right here, but in that range.
Senator Callbeck: You can come back to the committee later or send it to the clerk, please.
Senator Buth: Thank you, chair. My question has been answered.
The Chair: We will let Mr. Keenan do his math down there. Somewhere around 100,000 people will take advantage of that. I think, Mr. Cook, we can proceed.
Mr. Cook: Clause 11 relates to the dividend tax credit. As I explained earlier, the dividend tax credit mechanism is composed of two parts, the gross-up and the actual dividend tax credit itself.
The Chair: As well as the rate itself?
Mr. Cook: As well as the rate itself, and clause 11 provides the rate.
The Chair: Which goes down?
Mr. Cook: The rate goes down from two thirds of the gross-up amount to thirteen eighteenths of the gross-up amount.
The Chair: I think we understood that previously. Thank you.
Mr. Cook: Clause 12 relates to a consequential amendment relating to the measure regarding credit unions. It is just changing a cross-reference in the Income Tax Act, so if it is okay with the committee, I would like to leave the discussion of that until we are actually at the main provision.
The Chair: We will be talking about credit unions later on.
Mr. Cook: That is correct. Clause 13 is a consequential amendment relating to the international banking centre measure. It prevented foreign tax credits from being claimed on income that was exempt from tax in Canada. As I had indicated, the IBC, the international banking centre, exempted certain income from taxation in Canada, so this was just a consequential foreign tax credit rule.
Clause 14 relates to the Mineral Exploration Tax Credit. This is a credit relating to flow-through share expenses, which are flowed through to shareholders. This measure has been extended annually for a few years now, and Budget 2013 extended this measure one more time.
The Chair: For one year?
Mr. Cook: For one year, that is correct.
Clause 15 is a measure to phase out the additional deduction relating to credit unions. Currently, as the committee may know, there is a small business deduction, which allows certain corporations, Canadian-controlled private corporations, to be taxed at a lower rate on the first $500,000 of their income, as long as their taxable capital is less than $15 million.
One exception to that is found for credit unions. Credit unions are given access to an additional deduction, subject to certain conditions, which can effectively allow them to be taxed at that lower tax rate on all of their income. Budget 2013 proposes to phase out that additional deduction for credit unions through the 2016 year at the rate of 20 percentage points per year.
There is some restructuring that goes on, but really all this measure does is introduce a phase-out without changing the calculation of the additional deduction.
[Translation]
Senator Hervieux-Payette: In fact, to me, that practically seems like a direct attack on Quebec's economic model. We have a lot of credit unions in Quebec. To my mind, there does not seem to be a difference between large and small credit unions. When you belong to a credit union and the credit union offers benefits, a dividend goes to the members, and those members are already taxed, so it is taxable income. I am trying to see what your objective is.
In any case, there is a big difference between a Royal Bank shareholder and a member of a small local credit union in the Laurentians, for example. The credit union member is contributing to his or her local economy and does not belong to a credit union making $3 billion in profits every quarter. Credit unions cannot even use the same funding model as the banks. These are two distinct institutions.
This model brings the two institutions closer from a financial standpoint but not in terms of their objectives. I see a certain dichotomy in how you or your minister is approaching things. I would like to know the thinking behind this approach. Why make a change when this funding method is entirely worthwhile, especially in rural communities? Where did the idea come from? Are there other countries that tax banks and credit unions in the exact same way?
[English]
The Chair: Mr. Trueman, would that be in your domain?
Geoff Trueman, Director, Business Income Tax, Department of Finance Canada: I would be happy to provide some comments with respect to those remarks.
This measure is designed to enhance the neutrality of the tax system and to put credit unions and caisses populaires on an equivalent footing with other businesses and other financial institutions.
The additional deduction is a unique feature of the tax system originally introduced in the 1970s that gave credit unions and caisses populaires extended access to the small business deduction that was suitable at the time, but since then we have seen some significant changes in the structure of the small business deduction.
It originally allowed a corporation access to the small business tax rate based on their cumulative taxable income. At the time, credit unions argued that they did not have the same access to that deduction given that while a corporation could pay out dividends and regenerate access to that limit, credit unions and caisses populaires at that time were limited in their ability to pay out dividends due to certain provincial restrictions and regulations.
The cumulative limit was brought in for credit unions based on member shares and deposits, and it was designed to provide credit unions with equivalent access to the small business tax rate, not to provide a special or unique preference.
Since that time, the structure of the small business deduction has changed. The cumulative income limit was abolished in the mid-1980s in favour of an annual income limit, and in the 1990s, a taxable capital threshold was brought in that applies so that the size of a corporation then became important in accessing the small business tax rate.
The additional deduction, however, did not change at those times. The preference to a credit union is that they are able to shelter, in some cases, more than the $500,000 of annual income that other corporations are subject to, and credit unions or caisses populaires are not subject to that same taxable limit. What this change is designed to do is to put credit unions and caisses populaires on an equivalent footing as other businesses in Canada. They will still retain access to the small business tax rate and the small business deduction so that those rural credit unions, for example, which tend to be the small credit unions, will continue to have access to the small business deduction. They are the credit unions that were least likely to benefit from the additional deduction given their small size. Most of those small credit unions should see no change whatsoever in their taxable status.
The large credit unions that have grown over time will see the removal of the additional deduction wherein those large credit unions will then pay tax at the general corporate income tax rate, as a general rule.
[Translation]
Senator Hervieux-Payette: Your answer does not acknowledge the fact that the business models are not the same. Most cities in Quebec have credit unions, and the big banks do not have a presence there; all of them fled. What that means is when there are not big profits to be made, the banks get out of town. What remain are local people who support organizations you are now going after. I was given an estimate of around $75 million. When something works well, there is a delightful expression: if it ain't broke, don't fix it. If something is working well, why introduce changes to go after a small amount like $75 million, when there are over $200 billion in profits? At the end of the day, that money is benefitting local economies.
There are some 600 cities in Quebec. Of those, about 450 are not home to a single bank branch, only a credit union. And you are going to tax those people. The very fact that they came together under a federation reflects their desire to meet the specific needs of every region and to help one another. But you are treating these institutions like the big banks. The mentality, philosophy and mission of a bank are completely different than those of a credit union.
I do not understand why the government is interfering with the operations of credit unions, but to go after a ridiculously small sum; these are institutions that have a much stronger presence in my province than in the rest of the country,.
[English]
Mr. Trueman: One of the interesting points to note is that we are removing the additional deduction at the federal level. Provinces have the choice as well of whether to provide access at the provincial level to provide a similar structure for credit unions. Quebec is one of the provinces that removed its preferential tax rates for credit unions, so back in 2003 Quebec did move to tax the caisses populaires at the same rate as other financial institutions and corporations.
[Translation]
Senator Hervieux-Payette: That argument is no more convincing.
Senator Bellemare: I am going to continue along the same lines. The budget included the revenues generated by this measure. Could you please tell us what they are and indicate what exactly the regional impact will be? The impact is said to be stronger in Quebec, for instance. Was a specific amount calculated, and if so, what was it?
[English]
Mr. Trueman: The revenue estimates presented in the budget are at the federal level. We do not break those out on a regional or provincial basis.
[Translation]
Senator Bellemare: Was it that $75 million?
[English]
Mr. Trueman: It is a measure that, if it is phased in over five years, in the fifth year it is $75 million when the measure is fully implemented.
[Translation]
Senator Bellemare: Would three quarters be a good percentage?
[English]
Mr. Trueman: It is difficult to have a rule of thumb given that the impact of a particular industry may vary from one region to another.
Senator Buth: What is the limit for a business to be considered a small business?
Mr. Trueman: The taxable capital threshold is $15 million.
Senator Buth: How many credit unions or companies do you think this will affect?
Mr. Trueman: The number of credit unions is subject to change. Over recent years, it is probably less than 1,000 credit unions in Canada. More than half of them did not claim any amount for the additional deduction over recent years, which would mean they were small enough that they were simply able to use the small business deduction, and, conversely, slightly fewer than half of them would have been claiming the additional deduction.
Senator Buth: Therefore, it is approximately 500 businesses.
Mr. Trueman: That is an average over recent years, and the number is subject to change.
Senator Buth: We have seen, of course, in Manitoba the increase in terms of amalgamations as credit unions have faced a lot of issues and have seen benefits in terms of getting larger and larger. How would you compare the largest credit union in Canada to maybe one of the smallest banks in Canada? Have credit unions reached the size of banks?
Mr. Trueman: Certainly not of the big six banks, however, credit unions play an important role in some particular areas. Credit unions would have at least 15 per cent of personal deposits and mortgages in Canada. They are an important player particularly in some of those retail areas. As you know from the consolidation in the sector, credit unions do offer a broad range of financial services to their members as well.
[Translation]
Senator Chaput: Most of my questions were answered, but I, too, do not understand the reason behind your decision to treat caisses populaires and credit unions the same as banks.
Have you heard from any credit unions or caisses populaires in response to this measure? First of all, do they know about it? Second of all, how did they react?
[English]
Mr. Trueman: Certainly, credit unions are aware of this measure, and I have had representations from the credit union sector. Generally, following the budget, we will hear from stakeholders on virtually all of the measures within our area of responsibility.
[Translation]
Senator Chaput: But they were not consulted before you came up with this. They were told after the fact.
Mr. Trueman: After the fact.
[English]
The Chair: Senator Chaput raises a question, and it is a good time for me to intervene. If there are any issues as we continue, make note of them, honourable senators, and let steering know you might like to have a witness on that issue. We have already heard from the caisses populaires and credit unions that they would like to be heard by us. Once we finish understanding the bill on a clause-by-clause basis, then we will have witnesses.
[Translation]
Senator Maltais: I want to pick up on an answer you gave Senator Bellemare regarding the measure that will be implemented over five years. You cannot tell us exactly what the effects will be. Did the Canada Revenue Agency do any analyses? When we amend a bill, we have to be able to see what the consequences will be in the short, medium and long terms.
So far, you have not answered Senator Bellemare's question, and it troubles me that you do not know what will happen in two, three, four or five years' time. I cannot wrap my head around that.
Normally, when lawmakers draft a bill, an analysis of the short-, medium- and long-term effects is done. You have yet to answer my colleague's question on that.
I would like you to think very hard. If you do not have the answer today, you can always send it to the chair or clerk. But we have to know what the results were and what impact this measure will have. I cannot wrap my head around the idea that you are here, discussing this measure, and neither you nor anyone else studied the effects. Someone should have done that.
In the private sector, when a board of directors issues an order, it makes sure it knows what effects that decision will have in the short, medium and long terms. When those considerations are not examined, the company fires the people who should have done it.
I am waiting for your answer on that. It is important, not just for small credit unions, but also for Canada's economy.
[English]
Mr. Trueman: I would be happy to try to respond to that. In preparing this measure for the budget, there was an analysis of the impact on credit unions. This measure will generate revenues for the government and have a cost to credit unions. At the same time, this measure will affect primarily the largest credit unions in Canada, the credit unions that have grown large over the years and that compete in the financial mainstream. In that respect, there is a five-year transition as well to provide a period of time for the measure to come into place over a number of years.
The Chair: I have no other questioners, so I guess we understand the clause.
Mr. Cook: The next clause is clause 16, and that provides a technical amendment relating to registered disability savings plans.
As you may recall, there was a measure in last year's budget relating to beneficiaries of registered disability savings plans, RDSPs, where there was concern about the ability or competence of the beneficiary to enter into the RDSP. A measure was introduced to allow qualifying family members, a spouse or parent, to enter into the RDSP. This is a technical amendment to ensure that the provision operates as intended. There was sort of a technical issue. It was clear that the individual, namely, the qualifying family member, could enter into the RDSP, and this measure clarifies the ongoing ability of the family member to continue to hold the RDSP on behalf of the beneficiary.
The Chair: Can we assume that the legislation we approved last year had some unintended consequences, some things that needed to be clarified?
Mr. Cook: I think ``clarify'' is the right word. The RDSPs are largely written or established by large financial institutions, and they have their team of lawyers go through them and provide legal opinions that the conditions of the RDSPs meet the requirement of the legislation. A technical issue was raised by one of the financial institutions, not all of them, just one, as to how a court would determine the law to apply. I think that this change is more in the nature of prudence to forestall any question of how it operates.
The Chair: It is interesting to know how your process works and evolves.
Mr. Cook: Clause 17 is next. It relates to taxes in dispute and charitable donation tax shelters. Under the Income Tax Act, as a general rule the CRA cannot take collection action or taxpayers are not obligated to pay tax until they have exhausted all their rights to object or appeal a particular tax assessment.
Let us say you owe $100. If you file a notice of objection and then appeal to the Tax Court, CRA is precluded generally from taking any collection action until such time as you have gone through the full appeal process.
There is one exception to that, and it applies with respect to large corporations. The CRA is allowed to collect up to half of the tax and hold on to it pending the final resolution of the tax matter.
This measure implements the same kind of rule with respect to taxes owed in respect of charitable donation tax shelters. They are a particular issue. Sometimes even in the face of existing jurisprudence people persist on dragging out the process, if you will, to final resolution. This measure would allow the CRA to either retain or collect up to half the tax owing in respect of this very limited case of charitable donation tax shelters.
The Chair: It is only with respect to the charitable tax shelters.
Mr. Cook: That is correct.
The Chair: The rule still applies otherwise?
Mr. Cook: The general rule as it applies to taxpayers writ large is undisturbed.
Senator Black: If I am a large corporation and I have a dispute, CRA can get 50 per cent until the dispute is resolved. If I am an individual and there is a dispute, no money is paid until the dispute is resolved. If I am captured by this clause here, CRA wants to take 50 per cent pending resolution. Is that accurate?
Mr. Cook: That is accurate. The only thing I would note is that if you are an individual and decide that you do not want to pay the amount, at the end there will be interest calculated back to the time of your initial assessment.
Senator Black: That dovetails nicely to my question. If I have to pay 50 per cent and I am right and the CRA is wrong, do they pay me interest?
Mr. Cook: I believe there is interest on the refund.
Senator Black: Thank you.
Mr. Cook: The rate is not the same.
Senator McInnis: It is 10 per cent you pay. It is 2 per cent they pay.
The Chair: That means you pay less tax on the 2 per cent.
[Translation]
Senator Bellemare: I am curious as to how a tax shelter is identified or how charitable donations can be tax shelters. How is that fact established? According to you, people are choosing that avenue as a tax shelter. You said the money is hidden in a charity. Perhaps I misunderstood.
[English]
Mr. Cook: If it is a tax shelter, there is an obligation to register the tax shelter in the first place, so the promoter of the tax shelter may register. CRA can also make a determination that a tax shelter exists. There is a definition of tax shelter in the Income Tax Act. As it would most likely apply in this situation, you are talking about a charitable donation or a deduction for a corporation, and there is limited recourse debt or additional deductions in excess of the actual gift.
[Translation]
Senator Bellemare: The term tax shelter suggests that it is different from obtaining a deduction for a charitable donation, but we are actually talking about charitable organizations that, nevertheless, carry out charitable activities.
[English]
Mr. Cook: We are not talking about just your average garden variety donation to a charity. What we are talking about is a specific tax shelter. Many of these are specific plans that take advantage of a gifting arrangement to generate significant tax benefits for the people who participate.
As I indicated, for a tax shelter there are specific obligations to file with respect to the tax shelter itself.
Senator Buth: Is there a financial impact associated with this?
Mr. Cook: I will just see whether we have one.
We do not put down any fiscal impact for this one.
Senator Buth: Essentially, what you are doing is allowing the collection up to 50 per cent and then the case gets resolved one way or the other.
Mr. Cook: It actually does sort of wash out, if you will.
Senator Buth: Is this a large issue? Are there a lot of charitable donation tax shelters?
Mr. Cook: It is a large issue. There are tens of thousands of assessments. It will apply to assessments after 2012, but certainly the outstanding cohort of assessments relating to charitable donation tax shelters is quite large.
Senator Buth: Can you give a ballpark?
Mr. Cook: It would be in the tens of thousands for sure.
Senator Buth: That is in terms of organizations.
Mr. Cook: It is in terms of individuals participating in them.
The Chair: This provision results in quite a bit of extra revenue in the hands of the government as time goes on while this gets resolved.
Mr. Cook: The main hope is that this will facilitate the resolution of these cases, one way or another, as opposed to while the meter may be running. If there is no upfront cash, some people have taken the position that they will try to manage the process to delay final resolution and collection as long as possible.
Senator McInnis: On that point, there are a number of Canadians who have got some tremendous deductions as a result of these charitable donations. I know of several of them. This will not be retroactive.
Mr. Cook: That is correct.
Senator McInnis: It will be from here on in. Many of the cases are probably on their way to the Supreme Court of Canada. You are saying that you will be able to get at least 50 per cent because at the moment you do not get anything.
Mr. Cook: They may choose to accept the penalty of the interest running.
Senator McInnis: Many do.
Mr. Cook: That is correct.
Senator McInnis: Many do, and they hold town hall meetings to explain their actions and how they are doing it, with all these people who have received this credit.
Anyway, good luck to you. I did not participate.
Senator Callbeck: Would you give us some specific examples of these tax shelters for charitable donations?
Mr. Cook: There are a number of varieties. Just looking at the definition of tax shelter in the Income Tax Act, some of them use what we call limited recourse debt. What you might do is put up cash of $2,000; someone will lend you $8,000 or $10,000, and there will be an amount donated to a charity or donations made, in which you can get a charitable donation. Then perhaps a series of transactions or events will transpire that will mean limited recourse debt, that is debt you may or may not have to repay, depending on subsequent circumstances; so you may have a cash cost of $2,000, but if the donation is made well in excess of your cash cost, then as subsequent events turn out you are not obligated to repay those borrowed funds that were used to make the donation.
Senator Callbeck: I do not understand why you would not be, if you get the lend of $8,000. Can you explain it to me? I do not understand this concept.
Mr. Cook: If you never have to repay the $8,000 —
Senator Callbeck: Why would you not?
Mr. Cook: These transactions are set up so that you do not have to repay the $8,000. The whole point of it is to create a tax benefit for the participant in excess of their cash cost to participate. There have been a few cases, and the CRA has been quite successful in court to date. It is all a question of when we close one thing down, the ingenuity of taxpayers is turned to another area. I am sure some of the people around here will remember the art donation schemes, where you would buy works of art for one price. Those works of art would then be donated to a charity and there would be an evaluation of those artworks far in excess of what you paid, so you would claim a charitable donation based on the fair market value of the valuation of the artwork as opposed to what you paid for it.
Senator Callbeck: To me, the artwork example is very different than if you put up $2,000 cash and you get the loan of $8,000 from someone. Obviously, you get a receipt for $10,000, but I cannot understand how that $8,000 does not have to be paid to someone.
Mr. Cook: I do not have the specifics of particular transactions in front of me, but you can provide whatever terms you want in a loan document that sets out the terms on which the loan has to be repaid or not repaid. You could set out the condition such that effectively the individual does not have to repay the amount.
Senator Callbeck: I will not pursue it anymore, but I still do not understand the whole concept.
Senator Hervieux-Payette: Like you, I am a little bit in the dark. Who is selling that? What type of charitable organization would go with that? Would it be a church so it would be seen as a very laudable cause? I would like to know who is using that, how they are using it. Is it sold by a broker? This is a scheme, obviously, but I want to know — I was not aware of it; I do not work at CRA — so that we can also advise people that this is a scheme. Perhaps the people who are buying it are innocent, thinking it is another fancy thing the fiscal system is providing us, the generosity of our government. Who issues these things and who markets them? If Senator Callbeck does not know in P.E.I. and I do not know in Quebec, maybe some of you do not know anywhere else. I was not aware of such a scheme.
Mr. Cook: There are certainly groups of people who promote these transactions. It is a business for them and they take a portion of the proceeds and develop the series of transactions that are used.
Senator Hervieux-Payette: Are they regulated by the provincial regulators? You cannot sell some sort of financial product out of nowhere. It is illegal. There is consumer legislation. Who is preventing people from selling that? I may be of good faith and I think it is a smart move.
[Translation]
When you invest in a stock savings plan, you receive a tax advantage. But in this case, who is selling this to people who are, quote unquote, innocent? The people selling them are the guilty ones, but here, you are targeting the people who are buying them. Why not go after the sellers instead of the buyers, who are basically acting in good faith? You also said you will be able to get 50 per cent, but I do not think you will find people who earn a living taking advantage of the tax system.
[English]
The Chair: We have a rather restrictive piece of legislation here that deals with 50 per cent during an appeal as opposed to whether the vehicle itself is legal or illegal. I have let the questions go on at some length so you can understand what the vehicle is, but if you could put something in writing to us, give us an abstract of how one of these things might work, that could be helpful to us. Keep in mind, honourable senators, that clause 17 is not to say whether the vehicle is or is not a desirable scheme. Charitable tax shelters do exist under the existing law and if we want to convince the government otherwise in that regard, it would be through another vehicle.
Senator McInnis: I presume that privilege for senators carries to this committee and not just in the Senate.
The Chair: Yes.
Senator McInnis: I will not name companies, but I am familiar with this. What Senator Hervieux-Payette is saying is true. If the litigation proceeds and these companies lose and CRA wins, there will ultimately be a lot of innocent people who will be paying the 10 per cent and paying the money back, the taxes.
The Chair: If they lose the court case.
Senator McInnis: If the case is lost, yes. It sounds very credible. They are well promoted and they name some very worthwhile charities that we probably all participate in. You are picking up 50 per cent. If they are successful, you may have to pay the 50 per cent back, but we will wait and see.
The Chair: If they are not, at least you have 50 per cent.
Senator McInnis: Exactly. The individuals will have to pay the tax plus the 10 per cent on top of it.
The Chair: This has been a helpful discussion. If there is anything you can give us in writing that explains this a little bit more, it would be appreciated. I think we should now go on to clause 18.
Mr. Cook: This bill also contains a number of amendments relating to the Tax Court of Canada. These amendments do three things. I will mention them largely now and then we can talk about them as they apply to particular clauses.
First, the amendments update the monetary limits, the threshold at which you can decide whether a case will be held under the informal procedure or general procedure, the Tax Court of Canada. Informal procedure obviously requires less in the way of representation and it is easier for taxpayers to access.
Second, it will allow the Tax Court of Canada to separate an appeal and address some issues while leaving other issues for a separate case.
Third, it will allow, on application, the Tax Court to hear questions of identical or substantially similar transactions all at once.
Clause 18 amends the Income Tax Act to allow the Tax Court of Canada, where there is consent of both parties, to separate issues and deal with them separately. You might have one issue that is purely a question of law and another issue which is a complex question of fact. The two parties might decide it would be in both their interests — the CRA's and the taxpayer's — to first deal separately with the question of law and deal with the question of fact separately because it will take longer and have a separate process. I would point out that it will require the consent of both parties, so it would apply only where it is advantageous to both the Canada Revenue Agency and the taxpayer.
The Chair: That process, although it may be new to the Tax Court, is not new to superior courts and the federal court?
Mr. Cook: That is correct.
The Chair: Is this something that the Tax Court of Canada has indicated would be nice and therefore it found its way into this legislation?
Mr. Cook: On that question, I will ask Ms. Phillips.
Sandra Phillips, Associate Assistant Deputy Attorney General, Assistant Deputy Attorney General's Office, Justice Canada: This is a provision that has been discussed by the Tax Court Bench and Bar Committee over the last several years. The Tax Court Bench and Bar Committee is in favour of this amendment.
Mr. Cook: Clause 19 also amends the Income Tax Act in respect to the Tax Court of Canada and provides that on the application of the Minister of National Revenue, the Tax Court can hear together questions that are based on identical or substantially similar transactions.
Currently, the Tax Court can hear multiple appeals together but only where they flow out of an identical transaction. For example, where the characterization of a support payment is relevant both to the payer and the payee, the Tax Court can deal with both at the same time. This will allow a number of cases all relating to substantially similar transactions to be heard at once. For example, if a number of taxpayers all participate in exactly the same sort of tax planning opportunity or set of transactions, then this will give the opportunity for the Tax Court to address all those at once, as opposed to potentially each taxpayer just waiting in line for their own case.
It does already occur in the sense that often there will be a lead case and the taxpayers will hold their appeals in abeyance and agree to be bound by the lead case. This would allow a sort of a grouping, as opposed to just taxpayers deciding on an individual basis whether they wished their appeal to be held in abeyance.
The Chair: Ms. Phillips, is this a similar rule that the Federal Court is desirous of having?
Ms. Phillips: It is the Tax Court of Canada, and it has indicated that they are in agreement with the rule that is being proposed; it gives another tool to the minister to group cases together to prevent repeated litigation of the same issues.
The Chair: Thank you. We are on number 20.
Mr. Cook: Clause 20 is an amendment to subsection 225.1 of the Income Tax Act. This is just a second half of the measure we had already been discussing with respect to tax in dispute and charitable donation tax shelters. There are prohibitions on the CRA from taking collection action where there is a valid notice of objection or appeal outstanding. This part of the measure removes those collection restrictions or collection limits on the CRA in cases where, again, we are talking about taxes in dispute in respect of a charitable donation tax shelter, and it will allow the collection of up to one half of the amount.
The Chair: Is this consequential to what we already talked about?
Mr. Cook: That is correct.
The Chair: It does not impact other disputes in the notice of objection filed, does it?
Mr. Cook: That is correct.
Senator Chaput: To clarify: Is this the second half of 17?
Mr. Cook: That is correct.
[Translation]
Senator Hervieux-Payette: I want to pick up on our discussion of schemes. How do you take away an advantage or determine that an organization is not a non-profit corporation with the objective of receiving? Is there not a penalty for making false representations?
Ultimately, these financial instruments involve money that is being collected for a cause, but there can be some complicity with the cause in question. Is there not a way to deter people by penalizing them for doing business with those who sell this type of financial instrument? Would it not be possible to take away their charitable cause advantage? Earlier, we were talking about asking for at least 50 per cent from the person who benefits from the tax advantage, but the penalty imposed on the organization that is complicit is simply a loss of their status.
When you send us the documentation on this, I would like it to address all aspects of the issue: the person who receives the money, the person who receives the money in good faith and the organization that sells such faulty financial instruments. If we know how each party will be treated, if the law is being followed, this does not go far enough.
[English]
Mr. Keenan: I guess you are suggesting via your question that more information can be provided. I think it would be important in our response to note that a number of actions have been taken over the years to put rules around the tax shelter business. I would note that the charities that are involved in improper receipting would be subject to the ultimate penalty of losing their registration as a registered charity.
That is a step along the way — sort of the last step — but there are other sanctions that can be imposed. We certainly have taken note of your comments.
[Translation]
Senator Hervieux-Payette: So addressing the three parties: the one receiving the donation, the one making the donation and the one selling this instrument. There are three parties involved, and I would like to know how each will be treated.
[English]
Senator Callbeck: Have any charities lost their status because of this?
Mr. Keenan: I will take note of that question, as well.
Mr. Cook: Clause 21 relates to a named persons requirement. Under the Income Tax Act, the Canada Revenue Agency has the ability to ask for information relating to taxpayers in order to enforce and administer the Income Tax Act. When it is asking for information about what we call ``unnamed persons,'' and you are asking from a third party, like a bank, currently under the Income Tax Act the CRA must first obtain a court order. In that court order, the court will decide whether the third party has to provide the information required.
Currently, the act contemplates that those court orders are sought on an ex parte basis, which means without knowledge or notification to the third party.
The Chair: Or representation?
Mr. Cook: That is correct. Due to this, it is open to the third party to seek judicial review of the decision to issue a court order.
As a matter of practice, the CRA does, in most if not all cases, provide notification to the third party. However, sometimes the third party will decide to not make any representations at the court order level in order to preserve their right to seek future judicial review.
The amendment takes out the ex parte part of the application process so that the third party will receive notice of the application for a court order, and the third party will have an opportunity at that point to make any representations they wish to make with respect to the court order. The idea is to streamline the process.
[Translation]
Senator Hervieux-Payette: I would like a more detailed explanation. I would like to know what an unnamed person or group is. Clearly, you do not go combing through the entire database or the bank's complete registry. What is the logic? Can the judge go looking in the database for unnamed persons or groups?
[English]
Mr. Cook: The unnamed person is a taxpayer about whom they do not have specific information. We do not know that it is John Smith, and it is not simply with respect to banks. This is broader. It applies whenever you are demanding information from a third party.
The Tax Court judge will determine whether the person or group is ascertainable. Are you looking for specific information with respect to a defined group, maybe a particular group of persons entered into a specific type of transaction or a specific transaction with a taxpayer? Second, it is done to ensure that the person or group is in compliance with the legislation.
It circumscribes that you are looking for an ascertainable group or person and that you are not on a fishing expedition.
Senator Hervieux-Payette: How do you identify an unnamed person?
Mr. Cook: I hate to go back there, but if people are making charitable donations through a particular transaction, you will know that you are interested in the people involved in that particular plan and you can ask for a list of the participants and particulars in respect of that.
Senator Hervieux-Payette: Does it go with the other clause?
Mr. Cook: This is a general provision in the act that has been in existence for many years. We are adding to an existing provision in the act that notice has to be provided to the third party.
The Chair: There are already provisions in the act allowing for this to happen.
Mr. Cook: That is correct.
The Chair: When we repeal (4) to (6), what protection to the third party is being taken away?
Mr. Cook: If I recall correctly, subsections (4) to (6) relate to subsequent applications that are consequential to the nature of the ex parte application in the first place. Now the third party will be given direct notice about the initial application and can make whatever representations they choose at the time of the application. I believe that (4) through (6) are appeal-type provisions that provide for further applications.
The Chair: There will no longer be any ex parte-type applications?
Mr. Cook: No. They will have to give notice to the third party.
Clauses 22 through 31 are a group of amendments relating to the Tax Court of Canada Act. We can work through this clause by clause, but in order to implement three main things there is a host of consequential amendments.
Currently under the Tax Court of Canada Act, taxpayers can avail themselves of the informal procedure if the amount of tax at issue is under $12,000 or if the loss at issue, where it is a loss, is $24,000. Those limits, in terms of accessing the informal procedure, have been in place since 1993 and are increased to $25,000 for the amount of tax in issue and $50,000 with respect to the amount of loss in issue.
This group of amendments also introduces a dollar limit for the informal procedure with respect to GST/HST appeals. That monetary limit for informal procedure is set at $50,000.
The Chair: Again, Ms. Phillips, these are rules that were developed in consultation with the court and the practising bar?
Ms. Phillips: Yes, they are. The court has been in favour of these amendments for quite some time, and I believe that the bar is also in favour.
Senator Buth: At the beginning of your comments you said that these clauses do three things, but I heard only two.
Mr. Cook: I was thinking of the informal limits for income taxes, too; one for the basic appeal tax in question and one for the losses, and then to introduce an informal appeal limit for GST/HST cases.
The Chair: Clause 29, Customs Act and Excise Tax Act — that does not sound like Federal Court.
Mr. Cook: Paragraph (c) of clause 29(1) is where we are implementing the informal appeal limit of $50,000 for GST/ HST.
You may be referring to sections 18.30011 and 18.30012. They provide that when there is a judgment under the informal procedure, that judgment is deemed to include a statement that the amount of tax, if you will, in question under the judgment is set at the informal appeal limit.
In order to be in the informal procedure, the amount of tax is supposed to be less than $50,000, and the judgment is deemed to include a statement that the amount in dispute is not more than $50,000. When a court makes a decision on an issue, it will sometimes then refer it back to reassessment. To ensure that when it is reassessed it stays within the informal appeal amounts, the judgment is limited.
The Chair: If it turns out, on reassessment, that it is more than $50,000, the informal is still okay?
Mr. Cook: It is limited to $50,000.
The Chair: The collection is limited to $50,000?
Mr. Cook: The amount in dispute. Normally taxpayers appeal their reassessment. If the revenue authority wins, then the tax assessment is undisturbed. We are most likely talking about if the taxpayer is going to get a refund of tax paid, and that would be limited to the informal procedure amount of $50,000.
The Chair: If it turns out that the ruling results in the taxpayer deserving to receive more than $50,000, does he have to go back?
Mr. Cook: The taxpayer has elected to proceed by way of informal procedure. One of the decisions the taxpayer makes in their calculus is whether they —
The Chair: Spend it on lawyers or something else?
Thank you. I understand that.
We have finished with the Tax Court of Canada Act amendments and, up to clause 31, have talked about the Excise Act and that threshold.
We are at the end of our allocated time, and honourable senators have other commitments, as I am sure our witnesses do as well. I propose that we begin tomorrow evening at clause 32.
Thank you very much for Income Tax Act 101. We will carry on tomorrow.
(The committee adjourned.)