Thursday, May 31, 2018

The Standing Senate Committee on Banking, Trade and Commerce has the honour to table its

TWENTY-FIRST REPORT

Your committee, which was authorized by the Senate on Wednesday, January 27, 2016 to examine and report on the present state of the domestic and international financial system, now tables an interim report concerning taxation of Hutterites in Canada.

On March 29th, 2018, the Standing Senate Committee on Banking, Trade and Commerce held a meeting with the Department of Finance Canada, the Canada Revenue Agency (CRA), the Honourable Dan Hays, P.C., and representatives from the Kings Lake Colony Farming Co. Ltd. and MNP LLP to examine the taxation of communal organizations, with specific focus on the colonies of the Hutterian Brethren Church, whose members are known as the Hutterites.

MNP LLP, an accounting, tax and business consulting firm which represents over 90 per cent of the Hutterites in Canada and has filed income tax returns for them since 1961, explained that the Hutterites earn income collectively, primarily through farming activities. It indicated that section 143 of the Income Tax Act (ITA) was introduced in 1977 to provide a mechanism to tax the income earned by the Hutterites so that they would be taxed fairly when compared to others who earned farming income. Based on a memorandum of understanding between the Hutterites and the Minister of National Revenue, section 143 creates a fictional trust to which all the property of the Hutterite colony and any associated income belongs. The trust’s income may then be allocated to the individual Hutterite members, according to a formula set out in section 143, who can then claim the income on their personal tax returns.

MNP LLP raised several concerns it had with respect to how the Hutterites are being taxed and whether the original intention of section 143 was being reflected in the CRA’s interpretation of this section. MNP LLP stated that the provisions of section 143 were developed to respect Hutterian religious beliefs while at the same time taxing their business or farming income “in the same manner as their non-Hutterian neighbours, that is be taxed favourably, but not more favourably, than other taxpayers.” Its main concern was that the CRA has been unfairly denying the Hutterites the ability to claim the Working Income Tax Benefit refundable tax credit (WITB), which the Hutterites had been claiming since its introduction in 2007. It asserted that beginning in 2014, the CRA began to apply subsection 108(5) of ITA to the Hutterites’ trust, which resulted in the income that was allocated to the individual members no longer being categorized as “farming income” but instead as “income from property,” which is not eligible for the WITB. It pointed out that the Hutterites did not receive any notification by the CRA or the Department of Finance Canada of this change. To resolve this issue, MNP LLP proposed that the wording of section 143 be amended so that the trust’s income retains its character as farming income when allocated to its members, which would allow them to claim the WITB like non-Hutterite farmers.

Some other areas of concern that were highlighted by MNP LLP were in relation to the allocation formula set out in section 143 and how it removes any flexibility when distributing the trust’s income. It said that the formula prevents the Hutterites from claiming a deduction for wages paid to another member of the colony, allocates only a half share of the trust’s income to spouses, and does not allow members who are less than 18 years of age to receive any share of trust’s income. MNP LLP recommended that the allocation formula be replaced with a test that assesses whether an amount allocated to an individual member is reasonable.

In conclusion, MNP LLP asked that the Hutterites be taxed fairly and without discrimination and that the Minister of Finance consider its proposed amendments to modernize section 143. As well, it suggested that the CRA assess the Hutterites’ income tax returns in the manner used prior to 2014. Lastly, it shared that MNP LLP is disputing the CRA’s interpretation of section 143 before the Tax Court of Canada in May 2018.

In response, the Canada Revenue Agency spoke about how subsection 108(5) is a general rule that deems all income generated from property held in a trust to be income from property. It noted that there are provisions in the ITA that permit certain types of income, such as dividends and capital gains, to retain their character when distributed to a trust’s beneficiaries; however, no such provision exists for business or farming income, and so this income is automatically characterized as income from property. It explained that the Hutterites were able to claim the WITB from 2007 to 2014 because the wording of the income tax return form did not reflect the intention of the ITA. It emphasized that the changes in the form have been applied by the CRA on a go-forward basis since 2014 and an interpretation bulletin was issued when the form was changed. The CRA did acknowledge that farming income earned by the Hutterites does retain its character for two specific cases, including Canada Pension Plan calculations; however, this is because there are specific legislative provisions that allow for it.

The CRA stated that it believes that its interpretation of the ITA is correct because of the plain wording of the provisions in question and because farming income is not specifically excluded from subsection 108(5). Furthermore, it mentioned that communal organizations other than the Hutterites file under section 143. Lastly, the CRA acknowledged that it could have done a better job in informing the Hutterites about the change in the form and the reasons for it.

The Department of Finance Canada commented that the last significant changes to section 143 were made in 1999, which changed the allocation formula to provide spouses with a 50 per cent share. It offered that the appropriateness of the policy governing the allocation formula and the treatment of spouses, as well as whether the original intent of section 143 is being met, are issues that the Department could look at as part of its ongoing review of tax policy.

The Committee’s Observations

The Committee notes with concern the issues raised by the Hutterites with respect to section 143 of the Income Tax Act and is of the view that these issues warrant further review by the Minister of Finance. Recognizing that fairness is a key principle of tax policy, the review should examine ways to ensure that, for tax purposes, the Hutterites are effectively treated the same as other farmers.

The committee looks forward to discussing the results of the review with the Minister of Finance and officials from the Department of Finance Canada.

Respectfully submitted,