Proceedings of the Standing Senate Committee on
National Finance
Issue 10 - Evidence - April 29, 2014
OTTAWA, Tuesday, April 29, 2014
The Standing Senate Committee on National Finance met this day at 2:30 p.m. to examine the subject matter of Bill C-31, An Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures (topics: Part 1, clauses 2 to 39; and Part 5, clauses 99 to 101).
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I call this meeting of the Senate Standing Committee on National Finance to order. There will be senators coming and going because the Senate is also sitting, but we have an order of the Senate authorizing us to sit on this committee while the chamber is sitting to begin the pre-study of Bill C-31.
[Translation]
Honourable senators, this afternoon, we will begin our study on the subject-matter of Bill C-31, An Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.
[English]
This bill, in its entirety, contains 486 clauses. Five other Senate committees have separately been authorized to examine the subject matter of particular elements of Bill C-31, but our committee has the ultimate responsibility for studying all of the bill.
We have a considerable amount of work ahead of us, but what we will do in the first phase is go through the bill for those portions that are exclusively for our committee, and then we will have a report done on that particular aspect. Then we will wait for the other committees to report, and we will ask them to come to our committee and tell us about their particular sections. Hopefully, from that, we will have an understanding of the entire bill, which will allow us then to deal with the bill on a clause-by-clause basis when it arrives in its final form from the House of Commons.
This afternoon, we are pleased to welcome officials who will guide us through the front part of the bill in detail. We will begin at Part 1, clause 1. I was going to say page 1, but I had better check the pages. It's probably not page 1, but it is at the front of the bill, in any event.
We welcome back Ted Cook, Senior Legislative Chief, Tax Legislation, Department of Finance Canada; and Miodrag Jovanovic, Director, Personal Income Tax, Tax Policy Branch, Department of Finance Canada.
Who would like to start with the front end of this bill? You know our desire is to understand the policy that's trying to be initiated by the particular section. If there's more than one section that relates to that same concept, then just refer us to the grouping of sections. After the witnesses have made a presentation on a particular concept or idea, I will ask if there are any questions from any honourable senators, and if not, we will move to the next section.
[Translation]
Mr. Cook, you can start us off. The floor is yours.
[English]
Ted Cook, Senior Legislative Chief, Tax Legislation, Department of Finance Canada: Thank you very much. As indicated by the chair, I will try to group clauses together and provide sort of a policy overview and a technical explanation of what happens in those particular clauses. Then we would be happy to deal with whatever questions the committee may have.
To begin with, we will start with clauses 2 and 3. There are other amendments relating to this same measure in clauses 22 and 23, but I will just flag them when we get there.
Clauses 2 and 3 relate to the Offshore Tax Informant Program. This program was originally announced in Economic Action Plan 2013, and what it will do is allow the CRA to enter into contracts with individuals where they will provide information relating to international tax non-compliance. The person who has entered into the contract with the CRA will be eligible for a payment of between 5 per cent and 15 per cent of the federal taxes collected, excluding interest and penalties. The program is available where the taxes to be collected are in excess of $100,000. The amount will be paid to the person providing the information once all taxes have been collected and all appeal rights have been exhausted by the taxpayer involved.
As well, I would note that the amendments that we will be looking at relate primarily to the income tax treatment of the amounts paid under the contract. Clauses 2 and 3 relate to the inclusion and income of amounts paid under the contract to an individual. If an informant receives a payment under the contract, then the amendment in clause 2 ensures that that amount is included in the taxpayer's income. Clause 3 is just if the amount subsequently has to be repaid to the CRA for some reason, then they get a deduction for an equivalent amount. Later amendments will provide that if an amount is paid to a non-resident of Canada, the appropriate Part 13 tax will be applicable.
I note that the program is being set up and the amendments are being made so that the amounts will not be deemed assessed for certain purposes until the tax is actually collected. That is, revenues will only be shared with the provinces once an amount has actually been collected rather than just on an assessed basis.
Finally, the measure allows for limited information sharing with the person who has entered into the contract with the CRA. Basically, even the payment of an amount under a contract to an informant could potentially constitute taxpayer information, so we had to make an amendment to allow that and to just allow the CRA to tell the person whether their file is open or closed. That's a brief overview of this measure.
The Chair: That is an interesting initiative. Mr. Cook, is this the first time that you have had this type of bounty-hunter provision in the Income Tax Act?
Mr. Cook: In terms of similar provisions, obviously law enforcement authorities will have things like Crime Stoppers. For income tax purposes, those are generally considered windfall so wouldn't be included in income.
The Canada Border Services Agency has a program that I believe is called Border Watch, under which amounts can be paid for information provided to the Canada Border Services Agency. As well, the U.S. has an established program going back for at least 10 years, and there are any number of countries that will pay for information provided to tax authorities.
The Chair: The amount that is payable under the contract for the information that is given, is that payable only after Revenue Canada collects the funds, or is it payable before that?
Mr. Cook: Exactly right. It is only after the amount has been collected, and it is only after all appeal rights have been exhausted. Essentially, they have sort of perfected their collection of the amount before anything is paid to the informant under the program.
The Chair: Thank you.
[Translation]
The Chair: Senator Bellemare from Quebec.
Senator Bellemare: Where are we right now, Mr. Chair?
The Chair: On pages 2 and 3.
Senator Bellemare: So on pages 1 and 2. These little clauses involve all this?
The Chair: Exactly.
Senator Bellemare: Thank you very much. That is not very clear.
The Chair: No, it is not clear, but that is because the text is incomplete. That is why we asked Mr. Cook to come explain the policy behind these provisions.
[English]
Senator Callbeck: Thank you very much for coming today and for your explanations.
This was announced in Budget 2013. It was launched in January of this year. Do you know if the CRA has received any tips already?
Mr. Cook: Certainly they have received inquiries from individuals who are interested in providing information. There is a contract that has to be entered into with the individual and whatnot, but certainly as soon as the program was launched, they did receive indications of interest from people who want to provide information.
Based on the U.S. experience, these seem to be sort of lengthy processes because there's the setting up of the contract, there's the provision of the information, the amounts have to be assessed and then ultimately collected.
Senator Callbeck: So it was launched. Was there a big promotion, and is there a campaign on right now to let the public know? How will the public become aware it is available?
Mr. Cook: In terms of how widely this is being marketed, if you will, I'm not entirely sure, but certainly there were an announcement and news releases and whatnot at the time of the release, as I think you had indicated, in January. As well, on the CRA website, fairly comprehensive information is available to individuals who are interested as to what kind of information is being sought and what the requirements are and what kind of information they need to provide and what the criteria are for the various levels of payment.
If I might, I think I may have mentioned it, but I wanted to make sure I had. This relates to international tax non-compliance. There has to be an international component to it. It could be Canadian income that has been subsequently moved offshore, or it could be foreign-earned income, but at least in its present state, the program does require an international component for an individual to be eligible to participate.
The Chair: It could be undeclared funds held in an offshore account?
Mr. Cook: Exactly right.
Senator Callbeck: What about other countries? Are they using a similar program, and how successful is it?
Mr. Cook: Probably the closest comparator is the United States. They have had a couple of programs, and at least going back to 2006. It is kind of hard to get a strong sense, because it will be sort of hit and miss. I think the U.S., under one of their programs, has got on average between $93 million and $258 million in evaded penalties and taxes since 2006 and has paid out between $7 million and $25 million annually to informants.
Under their other program, they generate approximately 330 leads per year. Those are some of the metrics in the U.S.
In terms of the other countries, the advanced countries, the U.K. has a program. Japan has one, and the Netherlands, Portugal, Germany, Denmark.
Senator Callbeck: You mentioned that rewards can be between 5 and 15 per cent. Who determines what the percentage is?
Mr. Cook: The percentage levels will either be 5 per cent, 7.5 per cent, 10 per cent, 12.5 per cent, or 15 per cent. CRA has established a grid where they will look at the detail of the information provided, the level of cooperation provided by the informant and how useful it is to the CRA. There's a metric, and then where you are on the grid will determine the level of payment.
Senator Callbeck: Thank you.
[Translation]
Senator Chaput: Is this program considered to be a source of revenue?
[English]
Mr. Cook: Probably the best way to think of it is as a program to enhance the overall integrity of the tax system.
I don't think there's a way to predict how much revenue will be generated in any particular year, and certainly we don't have any estimates. It is just recognizing there's a tool that has been used with some success in other jurisdictions. Obviously, there's been a greater sensitivity to international tax evasion and avoidance, and this is another tool available to the CRA.
[Translation]
Senator Chaput: Once revenue has been generated, will it be covered in the budget at some point, in the estimates? Where will the money go?
[English]
Mr. Cook: To be honest, a complete answer to that is beyond my expertise other than it will flow into the tax revenues that are collected by CRA. However reassessments and tax collections get dealt with, then it will flow into that.
Once the CRA has received the leads, then it just flows into the CRA's general audit programs and will be treated like any other tax revenue. It's at the front end where it receives particular treatment.
Senator Enverga: Assuming that you have found somebody who is putting some money in other countries, have we gone through the motion of privacy laws and the effects? Do we have any action about that, any privacy issues that we're going to be dealing with on this one?
Mr. Cook: There are a couple of ways to deal with that. One of the privacy issues I alluded to is when an informant is providing information on someone else, then they're providing taxpayer information relating to that person, and there's sensitivity around the information that can be provided back to the informant about the assessment or amount of tax collected.
We made an amendment to section 241 of the act to actually provide the amount to be paid to the informant and to allow the status of the case to be divulged to the informant.
More largely, what I was talking about with respect to audit work generally flows in more broadly to answer your question in the sense that when we talk about privacy, once a lead has been given, then the CRA is in its usual audit mode, tax compliance mode, with respect to taxation avoidance or evasion, and whatever protections are available to taxpayers generally are available.
In terms of the CRA's ability to obtain information under our tax information exchange agreements and under our treaties, the CRA has the ability to go to other jurisdictions and ask them to provide information on particular cases to assist with their tax compliance activities.
The Chair: Seeing no other senators, thank you, Mr. Cook. We will go to the next clause.
Mr. Cook: The next clause, clause 4. I would note on page 2 of your print, clause 4 and clause 7 — and there will be a couple of other clauses that relate to it as well — all relate to the Search and Rescue Volunteers Tax Credit that was announced in Economic Action Plan 2014.
Under this measure, volunteers who participate in search and rescue volunteer activities for at least 200 hours per year will be eligible for a credit very similar to the one that is available in respect of volunteer firefighting. I believe that was discussed before this committee in 2012.
I would note that when an individual has hours that would count for both the Volunteer Firefighters Tax Credit and the Search and Rescue Volunteers Tax Credit, the individual will be able to choose to claim one or the other but not both of those credits. An individual will be eligible for one credit maximum. Even if they had 400 or 600 hours doing both volunteer firefighting and volunteer search and rescue, they would still get only one credit.
As well, section 81(4) of the act provides an exemption from inclusion of income for up to $1,000 in honoraria paid in respect of volunteer activities of ambulance technician, volunteer firefighter, search or rescue and other emergency responders. If a person claims either the Search and Rescue Volunteers Tax Credit or the Volunteer Firefighters Tax Credit, they will not be eligible for the exemption on the $1,000. The credit is non-refundable and is based on an amount of $3,000. The effective tax relief, where it is full use to the taxpayer, is worth about $450 per year.
The Chair: So if you were making a choice between not including $1,000 or taking a tax credit for $450, the choice is pretty straightforward.
Mr. Cook: Maybe my colleague can speak a little bit on that. It does depend on your personal circumstances. For some taxpayers, they may be better off claiming the $1,000 exemption, and other taxpayers may be better off claiming their credit.
The Chair: We're always trying to avoid complication in the Income Tax Act and the amendments that we make to it. The simpler it can be so that individuals can fill out their own income tax forms and file them, the better, from our point of view.
You are convinced this is a straightforward, non-complicated choice that we're presenting to the taxpayer?
Mr. Cook: Certainly, the design of the new credit is modelled almost exactly on the existing credit for volunteer firefighting services, other than the nature of the services involved. If you just do volunteer firefighting, you have your existing credit. If you happen to do both, you have a choice between the two. To the extent there is any complexity, it does benefit more taxpayers in the sense that if a person did not have enough hours performing one or the other types of activities, they can apply the hours to either one.
The Chair: That's 200 hours per year?
Mr. Cook: That's correct, in total.
The Chair: In total, yes.
[Translation]
Senator Boisvenu: Thank you, Mr. Chair. It is a pleasure for me to participate for the first time in a meeting of the Standing Senate Committee on National Finance. I hope to be able to do this again in the future.
I want to thank the witnesses for joining us today. I am especially interested in this clause, and I have a few small questions, if that is okay with you. Does this tax deduction apply only to volunteer firefighters or does it also apply to anyone involved in search and rescue activities?
Miodrag Jovanovic, Director, Personal Income Tax, Tax Policy Branch, Department of Finance Canada: It applies to all those who belong to qualifying organizations — so any organizations that provide search and rescue services. Those organizations can be members of national associations, or be recognized by a provincial or municipal authority.
Senator Boisvenu: Do the people who apply for this deduction have to be full members of a recognized organization?
Mr. Jovanovic: The individual must be active, and their hours must be recorded by the organization.
Senator Boisvenu: In Quebec, we have an organization that specializes in searching for missing individuals: Recherche et sauvetage Québec. You probably know that I have a special interest in this. Are individuals who conduct those types of searches eligible for that deduction? When someone goes missing in a forest or a criminal abduction takes place, people sometimes spend weeks searching.
Mr. Jovanovic: I cannot comment on that. The organization would have to determine whether they meet the eligibility criteria.
Senator Boisvenu: Does that deduction also apply to search and rescue activities conducted outside the country? For instance, a Quebecker goes missing in Jamaica, and criminal involvement is suspected. Could a Quebec organization participating in the related search efforts benefit from that tax deduction, or does the activity absolutely have to occur in Canada?
Mr. Jovanovic: I am not sure if the legislation specifies where the activities must take place.
[English]
Mr. Cook: On the legislation itself, there is no limit that the search and rescue activities take place within the geographic boundaries of Canada. Assuming all the criteria are met, it refers to search and rescue writ large as opposed to within the bounds of Canada or a particular province.
Senator Boisvenu: As long as the formal organization does that kind of search?
Mr. Cook: That's right. There are a few listings. There are search and rescue organizations that are members of the Search and Rescue Volunteer Association of Canada, the Civil Air Search and Rescue Association or the Canadian Coast Guard Auxiliary or an organization whose status is a search and rescue organization and is recognized by provincial, municipal or public authority. It is a general reference.
Senator Callbeck: Thank you. It has to be 200 hours of service, so that it must be 200 as a firefighter or 200 as a search and rescue. You can't have 100 as a firefighter and 100 as search and rescue.
Mr. Cook: Actually, you can.
Senator Callbeck: You can?
Mr. Cook: As long as they add up in total to 200, you can mix and match the hours and choose from either credit.
Senator Callbeck: The total of both of these tax savings you say is up to $450. They're basically the same?
Mr. Cook: They're exactly the same.
Senator Callbeck: Were refundable tax credits considered? It seems to me that you would have a lot of people that can't take part in this. This credit isn't any good if people don't pay income tax; therefore, they can't take advantage of the credit that you are announcing.
Mr. Jovanovic: Refundable tax credits are used in very limited circumstances in the income tax system, generally when there's a clear rationale to do so — for instance, with the Working Income Tax Benefit, which is there to create an incentive for low-income individuals to enter or stay in the labour force. It makes clear policy sense to have that one refundable.
Generally speaking, credits are there with the intention to recognize expenses or to recognize a taxpayer's particular circumstance or situation. These credits are generally non-refundable.
Senator Callbeck: Well, with all due respect, it certainly makes sense to me to have refundable tax credits. Year after year, we come in here with tax credits that aren't refundable. Therefore, the people that really need to take advantage of them the most are not even able to apply. I can't see the logic of that at all.
Mr. Jovanovic: I would highlight that your comment, I would say, refers, generally speaking, to the system. Moving from non-refundable tax credits to a system where these credits are refundable would be extremely costly for the government.
Senator Callbeck: That's basically the reason that people in the low-income bracket are denied these tax credits or can't take advantage of them, simply because it's going to cost the government.
Mr. Jovanovic: It goes beyond just cost. As I said initially, there's a policy rationale to it as well. If there's no clear rationale to make it refundable — for instance, if it's to recognize a reduced ability to pay tax, clearly there is no rationale to make it refundable.
Senator Callbeck: Why is it rational for somebody in the middle-income bracket to be able to take advantage of this credit and somebody at the low end not be able to take advantage?
Mr. Jovanovic: As I said, the rationale in a way is that this credit is not targeted or designed to provide income support. It is recognition through the tax system of a particular situation and thereby reduces a liability.
Senator Callbeck: It's recognition, so do not the people at the low end of the income bracket deserve the same recognition?
Mr. Jovanovic: The situation is that their tax liability is already reduced to zero.
Senator Callbeck: Pardon?
Mr. Jovanovic: Their tax liability is already reduced to zero, so that's the rationale.
Senator Callbeck: I've made my point, so thank you.
The Chair: Thank you. Those are all of the honourable senators who wish to have clarification on that particular section, so we will go on to the next one.
Mr. Cook: It is clause 5. I will speak about clauses 5 and 9 at the same time. They both relate to donations to ecologically sensitive land.
Currently under the Income Tax Act, when a donation of ecologically sensitive land is made, the amount of that donation can be carried forward and used in computing tax for up to five years. Economic Action Plan 2014 announced a change to increase that to 10 years, double the period for which donation amounts can be carried forward. Part of the rationale for that is that when we're talking about donations of land, they are very often sort of lumpy in nature, and it may be difficult for a taxpayer to take full advantage of the credit or the deduction, if it's a corporation.
Depending on personal circumstances — perhaps it's someone at the end of a farming career who is making a donation and may have lower income at that time — giving them that extra period over which to avail themselves of the tax assistance may serve to help induce a donation to be made. That's clause 5.
[Translation]
Senator Chaput: May I ask why the decision was made to extend that period from five to ten years? Did individuals or companies call for that change?
Mr. Jovanovic: That was one of the recommendations in the Finance Committee's report on tax incentives for charitable giving.
[English]
The Chair: This applies to individuals as well as corporations?
Mr. Cook: That's exactly right.
The Chair: And it doesn't have to be a transfer in fee simple? It can be a transfer of an easement as well?
Mr. Cook: That's a very good point. It can be an easement or other right associated with property. For example, a farmer may continue to own the property but will put an easement on a wetland area on their farm so it will continue to be available for fowl and other wildlife to use.
[Translation]
Senator Bellemare: I was looking at the cost of this measure. It is listed as zero in the budget. Does that mean the cost is in the thousands? That is provided in the schedule.
Mr. Jovanovic: Yes, unless I am mistaken, that generally happens when the cost is low — under $500,000 a year.
Senator Bellemare: So in that case, the amount is not indicated.
Mr. Jovanovic: No.
[English]
The Chair: Thank you. We will go on to the next clause.
Mr. Cook: Clause 6 relates to the Adoption Expense Tax Credit. Economic Action Plan 2014 announced an increase in the maximum amount of expenses eligible for the Adoption Expense Tax Credit. In the absence of the amendment, the total maximum expenses available would have been approximately $11,800. Instead, the maximum has increased to $15,000 and will be indexed to inflation after 2014, which was the case with the credit before.
The Chair: We're talking about adoption?
Mr. Cook: Expenses related to adoption, such as court fees, reasonable travel expenses.
The Chair: It might be airfare to China and back?
Mr. Cook: Mandatory provincial expenses, in-home assessments, those kinds of expenses.
Senator Callbeck: I think it's a great idea. Roughly how many Canadians use this tax credit?
Mr. Cook: The total number of claimants in 2011 was approximately 2,500 people.
Senator Callbeck: In 2011?
Mr. Cook: That's correct. It fluctuates around there. It has been fairly stable.
Senator Callbeck: Thank you.
The Chair: Thank you. Please go on to the next clause.
Mr. Cook: We've actually already talked about clauses 7 and 8. They're about the Search and Rescue Volunteers Tax Credit that we've referred to. Clause 9, as I just discussed, is part of the donations of ecologically sensitive land.
Moving on to clause 10, it relates to the Medical Expense Tax Credit. It should be on page 5 of your printout of the bill.
There are two changes. One relates to what they call diabetes dogs. These are dogs that can sense changes in blood sugar levels in people, and the cost of these animals and their maintenance and upkeep will be eligible expenses for the Medical Expense Tax Credit. We expect there to be probably about 10 of these dogs in Canada in 2014.
The second change to the Medical Expense Tax Credit is to allow the tax credit to apply in respect to individualized therapy plans. Currently, there are situations where the therapy undertaken under one of these plans — perhaps a therapy dealing with applied behavioural assistance for autism — the therapy itself would be eligible for the Medical Expense Tax Credit but the preparation of the plan, which might be required by a provincial authority in some cases, might not be eligible for the tax credit. So we're expanding the Medical Expense Tax Credit to allow the cost of individualized therapy plans to be eligible as well.
The Chair: The expansion of the dog portion of this relates to severe diabetes only?
Mr. Cook: That's correct.
The Chair: That's the change?
Mr. Cook: That is the change.
The Chair: Do you know from a policy point of view whether there is any discussion with respect to people with post-traumatic stress disorder?
Mr. Jovanovic: Well, we understand that service dogs for psychiatric conditions are a relatively new type of assistance animal. We understand that work is currently under way by the Minister of Veterans Affairs to assess the effectiveness of psychiatric service animals, so we are monitoring progress, and the list of Medical Expense Tax Credit eligible expenses is looked at every year.
The Chair: I'm encouraged by that. I know we meet a lot of veterans who tell us how important these companions are to them and how helpful they are. So if you could take that back and put that into the mix, we'll look forward to having you here next year with that amendment.
[Translation]
Senator Chaput: How will you define severe diabetes? Do you have any criteria?
Mr. Jovanovic: I just want to clarify that eligible expenditures for the therapy are already part of the system. The measure recognizes as eligible spending the portion of fees related to the preliminary steps in therapy development. If those preliminary steps are necessary to access provincial funding or if a treatment is prescribed by a doctor, there are also other conditions to be met. For instance, the individual must be eligible for the Disability Tax Credit. If that condition is satisfied, the related expenses are eligible.
[English]
The Chair: Senator Chaput raises a good question. There are adjectives here, and if I'm looking at 10(1)(l), it's "profoundly deaf," "severe diabetes" and "prolonged impairment," those words. Are you leaving it up to a doctor to meet those criteria?
Mr. Cook: When we're talking about severe diabetes, usually the kind of situation we're talking about and where these dogs are applied, I think it's called type 1 diabetes where people have hypoglycemia unawareness. They can't monitor their own levels or be aware of the changes of their own blood sugar levels. But in terms of how these are applied, medical people make the determinations, and CRA accepts or not.
For example, with respect to prolonged impairment and what qualifies for the Disability Tax Credit, that does end up sometimes going to court or an arbitrator as to what qualifies for that or not.
The Chair: But someone has to make that determination other than someone at Canada Revenue Agency.
Mr. Cook: That's right. This does kind of rely on the medical profession to determine appropriate treatment for their patients.
I would note with respect to this and how it's likely to play out with respect to the particular amendment we're talking about, these animals, at least at the present time, are extraordinarily expensive. There is a small group of them. They're approximately $25,000 per dog. I think the first three have only arrived in Canada. We're talking about another seven coming in.
I believe it's the Lions that have been involved with establishing this program to bring these dogs into Canada. As well, there may be training by the patient for dealing with their service animal.
If you're worried about the ambit of "severe diabetes," I think our view is just the nature of the animal that will be used will, in fact, police the provision. It's unlikely that someone will get a $25,000 dog in circumstances where it's not reasonable that they require it.
The Chair: I hope you're right.
Senator Chaput: Is it true that those dogs are bought from the United States, are trained in the U.S., and whoever needs this kind of dog has to travel to the U.S. to be able to get training with the dog so that the two can connect?
Mr. Jovanovic: It is possible, yes. These expenses, to the extent that they are reasonable, would be eligible. Travel, training, care, maintenance expenses would be eligible.
As Ted mentioned, there are a handful of dogs, let's say, that are being trained. It's the Lions Foundation of Canada in Oakville, so there could be an increased number going forward trained in Canada, but it's true that most of them are probably from the United States.
The Chair: We're ready to go on to the next clause, then.
Mr. Cook: I would just note for clauses 11 through 16, those are all what we would consider consequential amendments relating to the introduction of this Search and Rescue Volunteers Tax Credit. There are a number of rules in the act that relate to the ordering of the application of credits, and the amendments made through clauses 11 through 16 generally relate to those. One is about the availability of the credit to non-residents, but I would consider all the assets in clauses 11 through 16, up to page 9, as just being consequential to the credit we've already discussed.
The Chair: I'm looking at the heading in my briefing book. Clause 11 — credit for mental or physical impairment.
Mr. Cook: To give you an example of what I mean by "consequential amendments," clause 11 relates to the entitlement of a supporting person to claim a disabled person's unused Disability Tax Credit. In order to tell how much of the unused Disability Tax Credit can be passed on to someone else, you have to do a calculation looking at the application of other credits before it. What this amendment does is say, "Well, pretend you've computed tax payable and that you have deducted from that tax payable certain other tax credits, one of them being the Search and Rescue Volunteers Tax Credit, and then use the remaining tax payable to determine what the unused credit is that can be passed on to someone else."
The Chair: That's interesting. Then the unused tuition in clause 12 — textbook. That's the same kind of thing?
Mr. Cook: If you look at the wording in those clauses, you'll see they're almost identical. There is a parenthetical:
(other than an amount deductible under this section and any of . . .)
And we've added a reference to 118.07, which is the section where the Search and Rescue Volunteers Tax Credit can be found.
The Chair: Thank you. That's clauses 11 to 16 we've just dealt with.
Mr. Cook: That's correct. So clause 17 should be on page 9.
The Chair: I have it.
Mr. Cook: This amendment relates to the GST/HST credit. As I'm sure all the senators know, on the front of your income tax return there is a little box you tick to see if you want to apply for the GST credit, and as a streamlining administrative efficiency measure, it's proposed to amend the act so that people don't have to apply for the GST credit. The CRA will just calculate everyone's eligibility for the GST credit and apply it to the appropriate people.
Surprisingly, the administrative saving here is because approximately 2 million people each year apply for the GST credit who are not eligible for it, and as a result, the CRA has to send them notices of determination saying, "You're not eligible for the credit."
All this will do is allow the CRA to not send notices to those 2 million people. In cases where a person disagrees with the fact that they're not eligible, they can ask for a notice of determination and that will protect all their appeal rights.
The Chair: Good. So there won't be the little box inviting them to apply for it on the front of the form in future years.
Mr. Cook: Not after this year.
Clause 18 relates to the extension of the Mineral Exploration Tax Credit for flow-through share investors. This credit was extended last year and the year before and is extended again for this year.
Briefly, what the credit does is allow a 15 per cent credit to individuals who have entered into a flow-through share agreement with a resource company. Expenses are flowed up to the individual, and then they're allowed a 15 per cent tax credit on top of that, and that helps junior mining companies access funds for exploration.
The Chair: The extension is basically same percentage as in previous years?
Mr. Cook: It's exactly the same.
Again, clauses 19 and 20 are both consequential amendments relating to the Search and Rescue Volunteers Tax Credit.
Clause 21 is a measure relating to state supporters of terrorism, and this measure was announced in Economic Action Plan 2014. It will allow the Minister of National Revenue to revoke the registration of a registered charity or a registered Canadian amateur athletic association if it has accepted a gift from a state listed in the list provided under section 6.2 of the State Immunity Act. These states are the Islamic Republic of Iran and the Syrian Arab Republic. As well, the Minister of National Revenue will have the authority to refuse to register charities or Canadian amateur athletic associations that have accepted gifts from these states, and this measure will apply to gifts accepted after February 10, 2014, budget day, I believe.
The Chair: Revenue Canada had the opportunity to remove the charitable designation or status previously. Is this just adding another basis upon which the status can be removed?
Mr. Jovanovic: Yes. There is already a robust anti-terrorism framework and robust legislation governing charities. Given the complexity of terrorism and the fact that it's a multi-faceted issue, this framework currently includes several pieces of legislation with different objectives, and they are interconnected. This adds to that basket in a way, so it creates another tool for the Minister of National Revenue in that context.
The Chair: That basket is what we see here, gifts from foreign nations and entities.
Mr. Jovanovic: When I refer to the basket of legislation, it includes the Criminal Code, the Special Economic Measures Act and others, in addition to the Income Tax Act, so that is another body of legislation added to these tools.
Mr. Cook: Clause 22 has two amendments, one relating to the GST credit we spoke about. This allows the individual to request a notice of determination from the Minister of National Revenue. Regarding subclause (2), I had indicated that under the Offshore Tax Informant Program, amounts wouldn't be considered to be assessed for purposes of sharing with the provinces until the amounts had actually been collected, and that's what the amendment in subclause (2) of clause 22 would do.
The Chair: Could you explain that one more time?
Mr. Cook: I'll back up. Generally, under the Income Tax Act, obviously, the CRA and the federal government collect income tax for a number of provinces, and normally, amounts are shared with the provinces on an assessed basis, so once an assessment is made, that tax is then shared appropriately with the provinces, irrespective of whether it actually gets collected at the end of the day or not because the collection risk is fairly stable.
But with respect to this Offshore Tax Informant Program, obviously, there is a much greater risk that amounts might be assessed but never collected because, by definition, we're talking about amounts that have a connection offshore and are likely located offshore, so collection will be very difficult. So in this particular case, it makes more sense to only share the revenues once they have actually been collected as opposed to just on an assessment basis.
The Chair: I understand. Thank you.
Mr. Cook: Clause 23 again relates to the Offshore Tax Informant Program and allows the establishment of regulations so that amounts can be withheld on account of tax. When an amount is paid to an informant, there will be a withholding of that in security of the tax liability of that informant.
The Chair: That's withholding from the contract of the informant.
Mr. Cook: That's correct.
Clauses 24 and 25 relate to labour-sponsored venture capital corporations. As I'm sure the committee knows, changes were announced in Economic Action Plan 2013 with respect to the phase-out of the credit, and that was contained in last year's legislation.
As well, there was consultation on transitional rules for the phase-out of the credit and to provide rules for corporations that wished to exit the program. The amendments to effect these transitional rules are found largely in clauses 24 and 25, and they take existing rules in the Income Tax Act which were available on the ending of a provincial program and just allow federally registered labour-sponsored venture capital corporations to have the same rules apply, and clause 25 provides a technical rule to determine the status of corporations upon an amalgamation or a merger.
The Chair: Why wouldn't these amendments have accompanied the legislation in the amendments last year?
Mr. Cook: We did the legislation on the basic phase-out, and there was some concern at the Department of Finance that perhaps there might be more to be done in terms of transitional rules, so there was kind of a consultation on the transitional rules. In response to that, there weren't a lot of substantive submissions on the transitional elements. So we released draft legislation for comment in the fall on these transitional rules, and now they're contained in this bill.
The Chair: But the program has already been done away with.
Mr. Cook: Well, the amendments in last year's legislation related to the phase-out of the credit, the actual amount of the credit, and this deals with the more technical aspect regarding the corporations that were involved and what the rules are for them exiting the program.
[Translation]
Senator Bellemare: I have a question about last year, when all this was studied in the fall of 2013. The Department of Finance held some consultations over the Internet. To that effect, the briefs submitted when we carried out the study were not made available for consultation. I even remember asking about this. I was told that, yes, the briefs were submitted, but they had not yet been analyzed.
I obtained and read some of the briefs that were submitted. I found them thanks to the Internet and some Quebec organizations, including the FTQ and the CSN, which were asking the government to review some of the rules as part of the transition, or to at least review the changes that would have a less negative impact on them. Can we now obtain all the briefs or the analyses of the briefs carried out by the Department of Finance? Do these changes take into account the analyses of those briefs?
Mr. Jovanovic: We received some 50 briefs. They were all obviously analyzed, so that we could issue the final recommendations and draft the proposed legislation. So yes, everything was taken into consideration. As for your question about whether you can have access to them, those briefs were given to the Department of Finance in confidentiality, but they would be accessible under an access to information request. If an access to information request was made, the Department of Finance would consult the organization in question to see whether or not it would consent to share the report. That is how some documents can be consulted.
Senator Bellemare: So those amendments to clauses 23 and 24 do not ultimately change anything when it comes to adopting last year's provisions on termination and tax credit?
Mr. Jovanovic: No, the goal of those consultations was really to obtain information from the sector and other stakeholders to properly establish transitional rules and facilitate the withdrawal of participating funds that wish to opt out of the program.
Senator Bellemare: There are not many funds in Canada outside Quebec, as far as I understand. There are some in other provinces, but they are small compared with the two major funds — the CSN and the FTQ. I think they will keep going, as they are still soliciting. Thank you very much.
[English]
Senator Callbeck: Talking about rules, were two sets published for public comment or just one? I know rules were published in November.
Mr. Cook: These are the rules that were published in November.
Senator Callbeck: This is it?
Mr. Cook: Yes.
Senator Callbeck: You didn't get too many comments?
Mr. Cook: No, we did not get very many comments on that.
Senator Callbeck: They were generally positive, the ones you did get?
Mr. Cook: They were very minor. To be honest, the purely federally registered LSVC is a small population.
[Translation]
Senator Chaput: How long will the phase-out take?
Mr. Jovanovic: The tax credit will be phased out by 2017.
Senator Chaput: Did the web comments on that change concern the phase-out?
Mr. Jovanovic: I cannot really comment on that. The consultations had a specific objective. Of course, we may have received some comments that did not relate to transitional rules and that consequently became irrelevant to the consultation and its objective.
Senator Chaput: If I understand correctly, the consultations did not include the phase-out. You did not hold consultations on that, since the decision had already been made.
Mr. Jovanovic: Yes.
Senator Chaput: Thank you.
[English]
The Chair: Those are all the senators who have questions on this particular matter, so we will go to the next one. Are we at clause 26 now?
Mr. Cook: Yes, we are. Clause 26 is an amendment relating to the Offshore Tax Informant Program, and it just allows Part 13 withholding tax or non-resident withholding tax to be applied to payments made to informants who are outside Canada. The CRA could receive information from a person who is not a resident of Canada, and this will ensure that appropriate withholding tax applies on payments to that person.
Clause 27 has amendments to section 238 of the Income Tax Act. The two amendments relate to electronic funds transfer and also the legislation implementing the intergovernmental agreement for FATCA. This amendment allows an existing provision in the act that relates to a summary conviction offence for failure to provide a return or failure to maintain appropriate records to apply in these two contexts.
With respect to implementing FATCA and the related intergovernmental agreement, that's probably a discussion that should be deferred to Part 5 with the appropriate officials.
With respect to electronic funds transfer, just past section 241, we have a number of pages on electronic funds transfer, so perhaps I can discuss that measure there, if that would be convenient to the committee.
The Chair: That would be quite convenient.
Mr. Cook: Clause 28 amends section 241 of the Income Tax Act. Section 241 of the Income Tax Act generally governs the use of taxpayer information and the extent to which it can be used by officials or provided to other persons or entities for specific purposes. There are a few amendments in this, so I will just kind of work through them for the committee.
The first one in subclause (1) relates to the Canada Revenue Agency providing feedback to the Financial Transactions and Reports Analysis Centre of Canada, or FINTRAC. Under appropriate legislation, FINTRAC can make disclosures to CRA in order to aid CRA in tracking down tax evasion, in particular.
Currently, though, there's no real ability for the CRA to provide feedback on the information they have received from FINTRAC for two things: to allow FINTRAC to develop its own management metrics to better understand how their information is to be used, and also to improve the quality of the information provided to the CRA.
In Part 6, I think it is Division 19, a number of amendments are also being made to FINTRAC's legislation.
In the second subclause, paragraph (r) would make an amendment in respect of the Offshore Tax Informant Program. As I've indicated a couple of times, in order to even pay amounts to an informant, that's arguably a disclosure of taxpayer information because if the informant got $10,000, they would know the tax collected on another taxpayer was $100,000. So that's taxpayer information.
As well, it will allow the CRA to just let the person know whether the file is still open or not.
The second amendment in subclause (2) is in paragraph (s), and it would allow the CRA to provide general information relating to its electronic funds transfer compliance regime to FINTRAC in order to help it ensure compliance with its act. I would note, though, that this specifically excludes information that would directly or indirectly reveal the identity of a client. It is not meant to be at a client level to develop leads but the administration and the reporting by the financial entities that have to report to the CRA.
Subclause (3) is another amendment that would allow an official to provide to a law enforcement officer from an appropriate organization taxpayer information if the official has reasonable grounds to believe that the information affords evidence of an act or omission in or out of Canada that is one of a specified list of offences. These are the more serious crimes, such as bribery; fraud on government; bribery of a foreign official; bribery of a municipal official; secret commissions; criminal harassment; or the making, distribution, possession and accessing of child pornography.
The purpose of this amendment is to allow the CRA, when they come across evidence of serious crimes in the ordinary course of their audit activities, to be able to provide that information to the appropriate law enforcement authorities. Currently, if the CRA comes across evidence of a crime, child pornography is the one that occurs most often. CRA is impeded from providing that information to law enforcement authorities.
Those are all the amendments that are being made to section 241.
The Chair: Pretty complicated series of amendments there.
Mr. Cook: Clause 29 implements a new part to the Income Tax Act, Part XV.1.
Economic Action Plan 2013 announced a new reporting requirement to the CRA for international electronic funds transfers of more than $10,000. Financial institutions already report these transactions to FINTRAC, and under certain circumstances, FINTRAC can provide that information to the CRA.
This amendment would require financial intermediaries to report the same things that they report to FINTRAC to the CRA. The idea is to make it seamless for taxpayers so when they report to FINTRAC they can also report to Canada Revenue Agency at the same time. This would give Canada Revenue Agency the full database with respect to electronic funds transfers and electronic funds transfers that are international and over $10,000 and would allow the CRA to manipulate and conduct their own analysis of the data for their civil compliance purposes.
The Chair: That information couldn't pass from FINTRAC to CRA directly, rather than putting an extra load on the client?
Mr. Cook: In terms of how we designed this legislation, the effort is being made to make this seamless for the taxpayer. We drafted this with FINTRAC people and the appropriate people at Finance to make this line up exactly with FINTRAC reporting requirements so that when the report is provided, it is provided to both. There shouldn't be any extra compliance burden on taxpayers themselves.
The Chair: Is FINTRAC authorized to pass that information on to CRA now?
Mr. Cook: Currently they're only allowed to pass information on in particular circumstances. They can only do voluntary disclosures. There are certain offences they have to relate to before the information can be provided to CRA. This would allow CRA access to the full spectrum of information.
[Translation]
Senator Bellemare: I have a question about transfers. The Standing Senate Committee on Banking, Trade and Commerce — whose chair is here with us — is currently studying bitcoins. Will the legislation apply to money transfers in bitcoins?
[English]
Mr. Cook: This may be a question more for the FINTRAC folks than for me. My understanding is there are amendments in Part 6 of the bill to address virtual currencies and online casinos. There are amendments in provision 19 to deal with that.
If I can point the committee to page 21 at subclause (3), and then the following page, subclause (4), there are certain amendments that are held in abeyance, amendments to the definition of "casino" and the definition of "money services business." These are currently proposed amendments in effect under Part 6 dealing with virtual currencies and online casinos that will, if passed, come into effect at some day that is chosen I believe by order-in-council.
Senator Gerstein: Mr. Cook, if it's a $10,000 transaction, it is going to be reported by the client to FINTRAC and to CRA; is that correct?
Mr. Cook: That's correct.
Senator Gerstein: As I recall, if the transaction is for $9,999, it is not required to go to FINTRAC; but if the client felt it was a suspicious transaction, they could forward that information on, regardless of what amount it is. Under this, will they also forward a suspicious transaction to CRA?
Mr. Cook: As I'm certain the senator knows, there are a few different heads of reporting. One of them is the large cash transactions, the electronic funds transfers and the suspicious transactions. This group of amendments deals only with the electronic funds transfer transactions. There is no reporting of suspicious transactions under these amendments.
Senator Gerstein: That information would go only to FINTRAC, and FINTRAC would have to decide whether to forward it on?
Mr. Cook: That's correct. Right now this relates to the electronic funds transfer. If it is under $10,000 and it is not part of a series of transactions that add up to more than $10,000, if there's none of that and it's under $10,000, then it would not be reported to the CRA.
Senator Callbeck: Just on the electronic funds transfer of at least $10,000, why was the figure $10,000?
Mr. Cook: We have picked up what the reporting requirement is for FINTRAC currently. We did not reassess whether or not that was an appropriate threshold. As the committee has talked about, the idea is to make it the same for taxpayers between the two types of reporting; so we just picked the $10,000.
The Chair: Are we at number 30?
Mr. Cook: Yes, clause 30. Subclause (1) relates to the definition of "credit union." It is just a consequential amendment to the introduction of the electronic funds transfer measure.
The Income Tax Act uses a functional definition of "credit union." To make our new part line up with the FINTRAC legislation, we have put in an exception; so that's just consequential in subclause (1).
Subclause (2) is a new measure, and it relates to charitable donations of certified cultural property. As members of the committee may know, under the Income Tax Act, when a charitable donation is made, in certain circumstances the fair market value of the donation for charitable donation credit purposes is limited to the cost as an upper bound, the cost of the property, if the property is given as part of a tax shelter or a donation is made within a short period, like within three years after the person acquired the property. This is to get at buy-low, donate-high schemes that I'm sure some of the committee members have heard about, for example where groups of paintings were purchased at one price and then donated shortly thereafter at a much higher value, and then a charitable donation credit was claimed based on that higher value.
There are rules in the act that deal with that now. However, there's an exception from those rules for certified cultural property. Certified cultural property is property that's been certified by the Canadian Cultural Property Export Review Board as being of cultural significance. At the same time it is certified by the board, a fair market value will be assigned in the certificate.
The concern is that because this property is not subject to the rules to get at buy-low, donate-high schemes, tax promoters may be starting to target these kinds of property and using them in tax-shelter arrangements to gain inappropriate tax benefits.
The amendment at subclause (2) would provide that where the certified cultural property is acquired and gifted as part of a gifting arrangement that is a tax shelter, the exemption from the rule relating to buy-low, donate-high schemes will still apply.
The next amendment can be found at clause 31. It is not an amendment to the Income Tax Act; it's an amendment to the Financial Administration Act. It would require the Minister of Finance to table in Parliament annually a list of outstanding measures. These are legislative proposals that the government has announced and not withdrawn more than roughly 19 months prior. Where there are such legislative proposals, there's a list that would have to be tabled in Parliament. These are amendments to legislative proposals relating to the Income Tax Act or the Excise Tax Act or the Excise Act, 2001. The idea is to provide greater transparency to ensure that taxpayers have greater certainty with respect to the income tax or other tax changes that the government has announced and is moving forward with. It's greater certainty and also greater accountability to Parliament in terms of the progress of tax legislation.
It didn't go through this committee, but, as some of the committee members at least are aware, a 1,000-page Technical Tax Amendments Act was passed last year, and it caught up on several years' worth of amendments, and the idea is to provide greater transparency and accountability with respect to tax amendments.
The Chair: I remember that legislation. When it says "legislative proposals," in this instance you are not talking about something that has passed but has not been proclaimed but rather something that has been announced?
Mr. Cook: It's certainly more targeted at announced as opposed to passed but not proclaimed.
Senator Callbeck referred to the release we had back in November of 2013 with respect to labour-sponsored venture capital corporations. That would be an example of a specific legislative proposal that was announced. If it was outstanding without being enacted for more than approximately 19 months, then there would be an obligation to report that.
The Chair: We already have legislation that deals with something that's been passed by Parliament but not proclaimed. If it stays around too long then it comes back and we can deal with that.
Income tax, as I understand it, once the announcement is made the legislation follows in due course; it's retroactive to the time the announcement was made. This would be to try to deal with that kind of situation where it's been announced, people are expecting it to come, and they know that it would apply back to the time it was announced, if and when it was passed into law.
Mr. Cook: That very often is the case in the sense that when a new tax measure is announced, very often its effective date will be the date of announcement on the expectation that most taxpayers and the CRA will administer the act and act on the basis that it will ultimately be enacted with an effective date as of the announcement.
The Chair: We're into non-income tax amendments now. We've just done the Financial Administration Act and now you're into the Income Tax Regulations.
Mr. Cook: That's right. Again, we'd been talking about the Offshore Tax Informant Program and how amounts will have to be withheld. Clause 32 actually just specifies the amounts to be withheld from payments to residents of Canada: in the case of a payment to a resident of Quebec, 30 per cent of the payment; in the case of a resident of another province, 50 per cent of the payment.
When the individual files the appropriate tax return there will be the tax calculation, and if there's any residual amount they would be entitled to get that back.
The Chair: Are you able to explain the difference between Quebec at 30 per cent and the rest of Canada at 50 per cent?
Mr. Cook: Quebec is not an agreeing province with respect to individuals. So 50 per cent is a proxy for the highest federal-provincial income tax rate, and then 30 per cent is the highest federal rate.
The Chair: Are all other provinces in the agreement with the federal government to collect?
Mr. Cook: On personal income tax, yes.
Clause 33 deals with the frequency for remittance of employer-sourced deductions. Employers have to make source deductions in respect of income tax, Canada Pension Plan premiums and Employment Insurance premiums.
Based on the employer's average payroll, and it's actually based on the last two years' average payroll, the average going back two calendar years, there's a frequency for how often they have to remit. Currently, if an employer has a payroll of between $15,000 and $50,000 they remit up to twice per month, and if their monthly payroll is over $50,000 they have to remit up to four times per month.
Those remittance thresholds were introduced back in 1988 and 1990 and haven't changed since then. This measure would provide now that if an employer has a payroll of up to $25,000, they just remit once per month; if they have a payroll of between $25,000 and $100,000, they would remit up to twice per month; and if they have a payroll of more than $100,000, then they'll remit four times per month.
This will reduce the frequency of remittances for approximately 50,000 employers in Canada. It's obviously sort of relieving in nature with respect to their obligations.
The Chair: Are those figures of $25,000 and $100,000 per month salary payments?
Mr. Cook: That's right, wages and salary. That's clause 33.
Clause 34 again relates to the Offshore Tax Informant Program. It just requires an information return to be filed when you make a payment to a non-resident who is subject to withholding, which we have talked about.
Then in clause 35, this relates to labour-sponsored venture capital corporations. Basically, because we've broadened the application of the transitional rules to federally registered labour-sponsored venture capital corporations, as a consequential matter we could take out a reference to one section in this provision.
Clause 36 is a measure we haven't discussed that was announced in Budget 2014 and it relates to pension transfer limits. When a person leaves a defined benefit pension plan, the Income Tax Act has rules on how much can be transferred to an RRSP by that person on a tax-free basis. Generally, when the amount paid to the person is reduced because the plan is underfunded, the amount that can be transferred on a tax-free basis is also reduced because the transferable amount — that is, the amount that can be transferred tax-free — is based on what the estimated pension entitlement is. That means as well as getting a reduction in your benefit, you get a reduction in the amount you can transfer into an RRSP.
In 2011, a rule was introduced to disregard that reduction in benefits in calculating the transferable amount if a number of conditions are met. The most important is that the employer is insolvent and the pension plan is being wound up. Subsequently, it has come to our attention in a few particular situations where the same type of thing is happening. We've got a reduction in pension benefits because of underfunding, because perhaps the employer is not insolvent or because they're trying to turn around the plan so the pension plan is not being wound up. The budget proposes not to apply the rules that reduce the transferable amount in cases where the assets of the plan are insufficient to pay benefits and the reduction in the lifetime benefits is approved under applicable pension benefits legislation, be it federal or provincial or, in the case of individual pension plans, the plan is being wound up. It's taking a relieving rule that we introduced in 2011 in a particular situation and expanding it a bit to allow taxpayers to have great ability to transfer amounts out of a pension plan on a tax-free basis.
The Chair: If an individual is moving to a different kind of pension plan, and if the pension plan that existed didn't have enough money in there — and that's the kind of thing we're targeting — then, as you said, if it's not there then it can't be transferred into an individual plan. Does the individual get a credit, though? Later on, as he or she makes more money, can more money be put in there than they normally would to reach the credit?
Mr. Cook: Sometimes — and I think this is where it's targeted — when there is a transfer to an RRSP, the way the calculations are made the amount that's transferred might not always be fully protected in the sense that the amount that you're allowed to transfer on a tax-free basis will be less than the amount that you're actually transferring out of the plan into your RRSP. Even though there is a reduction in your benefits, it's not necessarily the case that your transferable amount covers all the cash that's being transferred out of the pension plan.
Clause 37 is the last new measure to discuss in Part 1. Under the Income Tax Act, there are particular rules that are called mark-to-market rules that are applied to financial institutions. The mark-to-market rules require taxpayers to pay tax on accruals in value. If you own a share and the share goes up in value, you don't wait until the share has been sold; you just pay tax on an accrual basis. It applies generally to financial institutions and assets and investments that they hold as inventory. Under those mark-to-market rules, there's an ability to describe taxpayers so that they're not financial institutions and subject to the mark-to-market rules.
In the context of the government's Venture Capital Action Plan, they'll be setting up private-sector-led funds, and the Business Development Bank of Canada and BDC Capital Inc. are going to be involved in the establishment of the initial partnerships and in fact may be majority investors in those partnerships for some initial period.
The Business Development Bank of Canada, even though it is tax exempt, could potentially satisfy the definition of being a financial institution, making the partnership it's involved with subject to the mark-to-market rules. It was felt that was inappropriate and would act as a disincentive to investors participating in these partnerships because they might be forced to recognize income on a mark-to-market basis. This amendment provides that for the purposes of the mark-to-market rules, the Business Development Bank of Canada and BDC Capital Inc. will not be financial institutions.
Clauses 38 and 39 are just amendments to the Canada Pension Plan regulations and the insurable earnings and collection of premiums regulations which relate to Employment Insurance premiums. These amendments just relate to the remittance thresholds we discussed earlier. Remittance thresholds are calculated on the same basis.
[Translation]
Senator Bellemare: When it comes to these regulations on the Canada Pension Plan, the Quebec Pension Plan is normally adjusted accordingly. Will that apply to Quebec? Were any discussions held about that, or can changes be made to the CPP without an obligation to do the same with the QPP? Normally, administrative arrangements are made to ensure the two plans are nearly identical.
[English]
Mr. Cook: To be honest, I'm not aware of any negative response we've had from Quebec since this was released. I'm not aware of specific discussions. When we make changes either to the Income Tax Act or related, Quebec will often do similar changes. I'm not aware in this particular instance of whether there has been a discussion.
[Translation]
Senator Bellemare: Does that have any financial impact?
[English]
Mr. Cook: In terms of financial impact, there is no impact on the amount of withholdings that are made or ultimately are remitted. I do believe that over the five- or six-year planning horizon there will be an increase in public debt charges by virtue of employers being able to hold on to their money and remit less often; then interest charges of the government will be somewhat higher.
[Translation]
Senator Bellemare: Many provisions we have seen previously are very specific and difficult for us to understand as a whole. I assume that those provisions have no financial impact individually. But do they have a financial impact collectively? If so, do you have an idea of how significant that financial impact is?
[English]
Mr. Cook: In terms of all the amendments in Part 1?
[Translation]
Senator Bellemare: Yes.
[English]
Mr. Cook: I'll sort of go through the things that were announced in the budget. For example, the Adoption Expense Tax Credit is in the order of $10 million; the Search and Rescue Volunteers Tax Credit over the planning horizon, $21 million; pension transfer limits, $28 million; donations to ecologically sensitive land, no, the impact is less than $1 million per year. We would expect to gain revenue of approximately $20 million on donations of certified cultural property.
On the remittance thresholds, we had talked about that. It would have an impact on public debt charges.
Those are really the measures for which there is a particular impact. The electronic funds transfer is just an information reporting requirement, so it doesn't have a direct impact on revenues. I think those are the main ones.
[Translation]
Senator Hervieux-Payette: In the case of amendments that have amounts of money attached to them, are those sums the only changes being made? Is the rest of the bill's wording the same as before?
For instance, amounts of $100,000 and $25,000 are set out in paragraph 4. In paragraph 2, $100,000 is mentioned. Were those amounts previously, for instance, $10,000 or $50,000, or is this a complete change in terms of application?
I am talking about section 39.
[English]
Mr. Cook: I will find my numbers. You're quite right. All there were changes to thresholds. So what we're talking about is the frequency with which employers have to remit to the CRA, and it's based on their monthly payroll. Currently, the rules provide that if they have a monthly payroll of less than $15,000, they remit once per month; if they have a payroll of between $15,000 and $50,000, they remit up to twice per month; and if they have a payroll of more than 50,000, then they remit up to four times per month.
The amendment will raise those thresholds to allow certain employers to remit on a less frequent basis. The new numbers are if there is a payroll of less than $25,000 per month, you would remit once per month; on a payroll of between $25,000 and $100,000 per month, the employer would remit up to two times per month; and on a payroll of more than $100,000, the employer would remit up to four times per month.
[Translation]
Senator Hervieux-Payette: If I understand correctly, our administration is lightening its workload a bit by receiving checks less frequently, so fewer financial operations would be involved in those remittances. That may make the system more efficient.
[English]
Mr. Cook: It has certainly been welcomed by businesses that would remit on a less frequent basis.
[Translation]
Senator Hervieux-Payette: That is also true for the department. If the frequency was reduced over the course of the year and, instead of receiving checks every week or every two weeks, you received them once a month, you would have less paperwork and fewer financial operations. Do you agree?
[English]
Mr. Cook: That's correct.
[Translation]
Senator Hervieux-Payette: Paragraph 40(1)(c) talks about property having a nominal value other than financial instruments and property having a nominal value. What does property with a nominal value consist of? What kind of property is that?
[English]
Mr. Cook: I'm sorry. That's in Part 2 on GST. That's not my area.
Senator Hervieux-Payette: Okay. I thought we were also looking at clause 40.
The Chair: Seeing no other senators, it's for me to thank you, Mr. Cook and Mr. Jovanovic. Thank you very much, and I understand that you'll be staying on, Mr. Cook, and it will take two people to replace Mr. Jovanovic. We appreciate your help.
Colleagues, we only have 15 minutes, but the second panel has been waiting here throughout the afternoon. We owe it to them to get started. We will adjourn promptly at 4:30 and continue tomorrow at 1:45, same room, on the same subject.
This is Part 5 we're going to now. Part 5 is the Canada-United States enhanced tax information exchange agreement implementation act, clauses 99 to 101, and we have from the Department of Finance, Brian Ernewein, General Director, Tax Policy Branch; Kevin Shoom, Senior Chief, International Taxation and Special Projects; and returning by popular demand, Ted Cook, Senior Legislative Chief, Tax Legislation.
Thank you very much for your understanding. You see the manner in which we wish to proceed. We're at Part 5. If you could give us an overview and get started on the clauses in Part 5, it would be appreciated.
Brian Ernewein, General Director, Tax Policy Branch, Department of Finance Canada: Thank you. I was going to ask for your guidance. Part 5 is implementing legislation for an agreement that we signed with the United States. We could speak directly to that point, but it seemed to me that might leave begging what that agreement does, and perhaps a bit of the background leading to the agreement as well. With your indulgence, I thought I might offer background to how we got to that agreement and what has led to the implementing legislation.
The Chair: Obviously, Mr. Ernewein, we won't get finished Part 5 today, so I think what you propose to do would be very helpful in our further deliberations, if you can give us an overview of what this is all about and why we need this enabling legislation.
Mr. Ernewein: Part 5 of the legislation of this implementation bill is to implement the Canada-U.S. agreement related to FATCA, the Foreign Account Tax Compliance Act. FATCA is a U.S. law that was enacted by Congress in 2010 and is now scheduled to take effect in July, the middle of 2014.
It would, if it applied, require non-U.S. financial institutions, for example, Canadian banks, to sign agreements with the Internal Revenue Service, the IRS, under which those non-U.S. financial institutions would have to undertake due diligence, so-called, to identify their U.S. account holders and report on those account holders to the IRS in the United States.
In some circumstances the foreign financial institutions — I will start talking about the Canadian financial institutions, so I'm not interrupting myself — Canadian FIs, if FATCA would apply, would be required to withhold 30 per cent of the payments to their account holders that had this U.S. indicia, or to close those accounts. An FI that didn't sign the agreement with the IRS to do this would itself be subject to a 30 per cent withholding tax on payments made to itself or to its account holders that have a U.S. source.
It's probably not surprising, having said that, to go on to say that FATCA raised a number of concerns in Canada, including potential inconsistency with Canadian privacy laws, the potential application of this 30 per cent withholding tax that I've spoken of, the possible requirement to close bank accounts, which I've referenced, and, just generally, a very burdensome regime for financial institutions and their customers.
Without an agreement of some sort, FATCA would have been unilaterally imposed in Canada as of the middle of this year, and the Canadian government, along with, to be fair, several other governments, urged the U.S. to find an alternative to FATCA itself, suggesting that our and other countries' tax treaty — more precisely, the exchange of information provisions in our current tax treaty — would be a better model for collecting information and exchanging it with the United States.
After long negotiations — this took place over a couple of years, if not longer — we did sign an agreement, a so-called intergovernmental agreement, or IGA. If I fall into the parlance of IGA, I'm talking about the agreement itself.
We signed an agreement with the U.S. on February 5 of this year based on a model that relies on the exchange of information provisions in our Canada-U.S. treaty. In broad strokes, the agreement requires us to collect information through our own revenue authority, the Canada Revenue Agency, on some of the aspects that the FATCA rules would require. I'll come back to that in a second.
With that information being transmitted to the Canada Revenue Agency, the CRA itself could use the existing authority of the Canada-U.S. treaty to transfer that information to the IRS, our U.S. treaty partner.
We think that this intergovernmental agreement, or IGA, has a number of benefits relative to the FATCA approach that would have otherwise applied. There is no direct reporting by Canadian financial institutions to the IRS. The exchanged information that goes from the Canada Revenue Agency to the IRS will be subject to the safeguards of the treaty. I can speak at greater length about that, but there are protections in the treaty and limits on the use of tax information exchanged under the Canada-U.S. tax treaty, and this model would rely on those or invoke those.
It turns off the 30 per cent withholding tax and makes it explicitly about the exchange of information; it turns off the requirement that FACTA itself would have for FIs to potentially close the accounts of their customers; and it includes a number of exemptions, both for certain small financial institutions and also for a lot of different registered accounts, for which reporting will not be required, which doesn't eliminate but substantially moderates the compliance burden on financial institutions and their clientele.
The agreement also offers Canada reciprocal benefits in terms of additional information the U.S. will provide to Canada on Canadian residents with accounts at U.S. financial institutions. It's not full reciprocity at the outset — I can talk about that at greater length — but there is additional information coming in Canada's direction as well.
One of the last points I'll make is that the intergovernmental agreement is also consistent with recent multilateral commitments the G20 has made — and that of course includes Canada — to a new standard for automatic information exchange. This is developing into what's come to be known as the common reporting standard for automatic exchange of information. It's not in place yet, but it's under development, and as I say, it has already been endorsed by G20 leaders and finance ministers.
I will note that the U.S. has signed 28 intergovernmental agreements so far, and we also understand from them that they have a further 27 agreements in principle with other countries on these IGAs.
I'll stop there, and perhaps I'll ask Mr. Cook to talk a little bit about the implementing legislation itself.
Mr. Cook: The implementing legislation is spread over three clauses in Part 5. The first clause, clause 99, actually implements the intergovernmental agreement. It creates the Canada-United States enhanced tax information exchange agreement implementation act, and the IGA forms a schedule to that act and is a schedule to this bill.
It largely provides our standard treaty-type implementing language. It provides that the agreement will have the force of law in Canada. To the extent of inconsistency with other laws in Canada, it will prevail, except for Part 18 of the Income Tax Act, which is the actual information reporting requirements contained in the Income Tax Act. Finally, if there is a conflict between the agreement and the Income Tax Conventions Interpretation Act, that act will prevail.
It gives the Minister of National Revenue authority to make regulations and also requires the Minister of Finance to cause the agreement or any amendments to it or the termination of it all to be published in the Canada Gazette.
So that's just a small act at the start of Part 5, which would bring the IGA into force of law in Canada, and I'll mention them briefly. Clause 100 provides one amendment to the Income Tax Act, subsection 162(6), which provides a penalty in the case where a request is made for a person to provide a U.S. tax information number and they decline to do so.
Finally, clause 101 would implement a new part to the Income Tax Act, Enhanced International Information Reporting, and these are the requirements within the Income Tax Act essentially for financial institutions in Canada to perform the appropriate due diligence exercise and report to the CRA on an annual basis.
[Translation]
Senator Bellemare: Did financial institutions have a positive reaction to that?
Senator Hervieux-Payette: No.
Senator Bellemare: Were they consulted?
[English]
Mr. Ernewein: Yes. I guess the answer is yes, but the reason for my hesitation is that I don't think they love it. I think they like it better than the alternative, that FATCA itself, as I described, would have put them in a difficult if not impossible situation with being required by U.S. law to provide information directly to the IRS that might have been in direct conflict with Canadian privacy laws, if not other laws.
If they were being direct, I think they would probably say they would rather not do this at all, but as between this and the FATCA itself, I think they consider it a much better setup in the sense that it carves out all the registered plans, it excludes the application of the rules to smaller financial institutions, and by virtue of the collection of information by our own Canadian revenue authorities and transmission to the U.S., it overcomes, in our view, some of the legal conflict concerns that would have otherwise existed.
Senator Callbeck: I have a question on privacy concerns. I understand that some serious concerns are being expressed over privacy. I'm wondering, has the Privacy Commissioner been consulted?
Mr. Ernewein: The Office of the Privacy Commissioner has been kept abreast of all developments. When FATCA was first enacted, perhaps even before it was enacted and still before Congress, concerns were expressed about its scope and application, and the Privacy Commissioner was alerted to those issues at that time.
In our discussions with the U.S., we've kept the Office of the Privacy Commissioner informed about what we were doing. We've also made sure to alert them that the agreement was being signed, to share the agreement with them and to share the draft legislation at that time.
It's my understanding that the Privacy Commissioner does not bless, if you will, government actions or legislation, so I don't wish to speak for the office or the commissioner, but certainly they have been kept informed of all developments.
Senator Callbeck: I received — and I'm sure members of the committee did as well — emails where people are worried about this legislation. A number have commented that if it passes, there will be a Charter challenge.
Has the government — I'm sure it has — looked at whether the bill is Charter-compliant?
Mr. Ernewein: Yes, we have. The Department of Justice is charged with the responsibility to make an assessment of all pending legislation and to identify to Parliament, I believe, if there's a concern that the legislation is not Charter-compliant. To our understanding, the Department of Justice has fulfilled its responsibilities in this case.
Senator Callbeck: All right.
[Translation]
Senator Chaput: My question was asked by Senator Callbeck. If I understood correctly, this has to do with the Privacy Commissioner's advice. You kept her abreast, but you did not consult her. Is that correct?
[English]
Kevin Shoom, Senior Chief, International Taxation and Special Projects, Department of Finance Canada: I am sorry. We had problems with the translation, but I will attempt to respond.
Yes, we did meet with representatives from the Office of the Privacy Commissioner on several occasions. We informed them of the developments and the negotiations to keep them aware of what was going on, and we signalled to them an openness to hear any concerns they might have. Also, if the commissioner wanted to meet with us, we would certainly have been willing to do so. We did extend that offer to them.
[Translation]
Senator Chaput: Was the offer extended before or after the fact?
Mr. Shoom: It was extended during the negotiations, before the signing.
Senator Chaput: Had she had recommendations that were not in line with what you were doing, would you have taken them into account?
[English]
Mr. Ernewein: If I may answer, we would like to expect that we would have heard, and so we infer from the fact we did not hear that there were not issues. But as I say, we're reluctant to speak on the commissioner's behalf. We did what we could to keep the office informed of developments.
I will add that one of the advantages on this particular file is that for the intergovernmental agreement that we were negotiating, there's actually a model of such agreement. Other agreements were signed before ours came along which gave the commission, as well as ourselves, the ability to talk more openly about what was under negotiation. There's more awareness, if you will, of the matters under discussion.
Senator Gerstein: Mr. Cook, how far back can you go? It is retroactive for how many years?
Mr. Cook: Well, the legislation actually starts imposing the due diligence requirements. It is not retroactive.
Senator Gerstein: It is not retroactive?
Mr. Cook: It is not retroactive. Mr. Shoom would be better to respond, but the review of the accounts will start at the end of June this year.
Senator Gerstein: It has not commenced yet.
Mr. Cook: That's correct.
Senator Gerstein: Once the review takes place, is it retroactive in terms of application?
Mr. Shoom: Under the agreement, the Canadian financial institutions would be expected to begin their due diligence procedures in July of this year. At this time, there's no obligation on Canadian financial institutions to be doing anything to comply with the agreement.
Obviously, they need to prepare, and they're working on their systems, et cetera, so they are getting ready. At this point, they are not screening their clients.
Once the agreement is in operation, they will be obliged to conduct due diligence on new account holders. They will also have a window during which they will be expected to conduct due diligence on their existing account base. Those would be accounts that were in existence at the end of June of this year. If those are identified as U.S. reportable accounts, they would be expected to begin reporting on them beginning in the year in which they are identified as a reportable account.
For example, if an account is identified in January 2015 as a reportable account, the first report that would be due would be for 2015 and that would be a report that's made in 2016.
Senator Gerstein: Do they have the ability to go back on the account to what took place in 2010?
Mr. Shoom: Under the agreement, there's no obligation to do any reporting going back in that manner.
Senator Gerstein: There is not. What kind of quantum are you talking about? I assume we're talking $2 billion to $3 billion a year. Are those the kind of numbers we're dealing with?
Mr. Shoom: Are you talking about the number of accounts or the number of dollars?
Senator Gerstein: No, the amount that will be payable.
Mr. Ernewein: We don't have that number. I'm not sure we're measuring it that way.
I think the question is how many accounts of the financial institutions in Canada will be subject to some sort of review. That is a difficult question to answer.
It will be those accounts which reflect a U.S. connection or an indicia, as the FATCA rules speak of it, and that's a question of how many American residents have accounts with Canada and, potentially, of American citizens who have accounts with Canadian financial institutions.
It is purely about information exchange and providing that information to the U.S. It is not about any collection action or dollars and cents, except in the indirect way that it could have the ability to help the U.S. in identifying taxpayers who are not fully compliant.
The Chair: Colleagues, we're just about at the end of our time. There are a couple of names on my list who wanted to pose questions.
This clause 99 implements the agreement that is Schedule 3, which is at pages 315 to 356. It may be worthwhile if we took the night to get a feeling for just what is in this agreement that is attached as a schedule to clause 99. The agreement has already been entered into, but we're bringing it into law in Canada, so we should understand what it is.
What I would propose, having an eye to the clock, is that we continue this discussion tomorrow at 1:45. Would that be okay with each of you?
Mr. Ernewein: Yes. We are in your hands.
The Chair: Thank you very much. Maybe Mr. Cook could spend a little time going through this schedule, the agreement, just to give us a flavour for what we're adopting here, 40 pages or so of an agreement between Canada and the U.S.
Mr. Cook: Certainly, Mr. Chair.
The Chair: Senator Mockler, you are on the list as the first person tomorrow at 1:45.
The meeting is now concluded.
(The committee adjourned.)