Proceedings of the Standing Senate Committee on
National Finance
Issue No. 81 - Evidence - November 27, 2018 (afternoon meeting)
OTTAWA, Tuesday, November 27, 2018
The Standing Senate Committee on National Finance met this day at 1:45 p.m. to study the subject matter of all of Bill C-86, A second Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures (topic: Parts 1, 2, 3 and 4).
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: I welcome you to this meeting of the Standing Senate Committee on National Finance. I wish to welcome all of those who are with us in the room and viewers across the country who may be watching on television or online. My name is Percy Mockler, senator from New Brunswick and chair of the committee.
[Translation]
I would ask the senators to introduce themselves
Senator Forest: Éric Forest from the Gulf region in Quebec.
Senator Pratte: André Pratte from Quebec.
Senator Moncion: Lucie Moncion from Ontario.
Senator Forest-Niesing: Josée Forest-Niesing from northern Ontario.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Eaton: Nicky Eaton, Ontario.
Senator Neufeld: Richard Neufeld, British Columbia.
The Chair: This afternoon we continue our consideration of subject Bill C-86 which we started earlier with officials from the Department of Finance Canada. Bill C-86, A second Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures, is what we call a budget implementation act.
We will continue to resume where we left earlier. Before I do that, I want to take the opportunity to thank Mr. Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch; and also Mr. Pierre Leblanc, Director General, Personal Income Tax Division, Tax Policy Branch.
The first measure we will entertain is the stop-loss rule on share repurchase transactions.
[Translation]
Mr. McGowan, the floor is yours.
[English]
Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: Thank you, senator.
This measure is similar to one we discussed this morning relating to artificial losses using equity-based financial instruments. It prevents the generation of artificial tax losses by financial institutions on certain off-market repurchases of shares of Canadian corporations.
As we heard before, the artificial tax loss is created by the interaction of the intercorporate dividend rules which provide essentially tax-free intercorporate dividends between Canadian corporations, as well as another rule that on an off-market share repurchase transaction can generate a loss on the repurchase of the share. You have the amount of the dividend being a tax-deductible intercorporate dividend and you have a loss arising on the repurchase of the share, because the amount of the dividend is reduced from the proceeds on the redemption which creates two deductions for economically the same item, and would generate an artificial tax loss. This measure would prevent tax planning seeking to obtain those artificial losses by ensuring that only one dividend or only one deduction is available on these transactions.
It can be found in clauses 10 and 16 of the bill.
The Chair: Thank you. Any questions honourable senators? Therefore, we will move to the next measure, charities and political activities.
Joining Mr. McGowan and Mr. Leblanc, we have Blaine Langdon, Director, Charities, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada. Thank you for joining the committee.
[Translation]
Also joining us from the Canada Revenue Agency, we have Antonio Manconi, Director General, Charities Directorate, Legislative Policy and Regulatory Affairs Branch.
[English]
We also have Sharmila Khare, Director, Charities Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency.
Thank you, witnesses and officials, for being present.
I would ask Mr. McGowan to open the floor, to be followed by other officials of Finance and Canada Revenue Agency.
Mr. McGowan: Thank you, senator.
This amendment relates to charities and their political activities. Under the current tax rules, charities are required to devote substantially all of their resources to charitable activities. They may devote a limited amount, which is generally interpreted as up to 10 per cent. The phrase “substantially all” in the tax rules is generally considered, as a rule of thumb, to mean about 90 per cent, leaving 10 per cent, of their resources. They are allowed to devote a limited amount, generally interpreted as up to 10 per cent, of their resources to non-partisan political activities that are ancillary and incidental to their charitable purposes.
This amendment would effectively remove that cap on the political activities of charities, which should now be expressed as the public policy dialogue and development activities, so that up to 100 per cent of the activities of a charity could be engaging in public policy dialogue and development activities provided they are in furtherance of the charity’s charitable purpose.
Lastly, this amendment would maintain the currently existing prohibition on the direct or indirect support of a candidate for office or a political party. These measures can be found in clauses 17 and 20 of the bill.
The Chair: Any additional information? If not, the chair will now recognize Senator Eaton.
Senator Eaton: Thank you.
I’m fascinated by what you say, for the simple reason that a charity can devote as much as 100 per cent of its time to so-called education, parliamentary or public policy issues, but if you were strictly a political organization, you could not get a charitable status. Is that correct?
Mr. McGowan: Under the current rules?
Senator Eaton: Yes.
Mr. McGowan: Right; charities are limited in the political activities they can undertake.
Senator Eaton: How can a charity be a charity if there is no cap on its using — if I send my money to charity X and it takes that money to discuss public policy as opposed to doing what it originally, when it was incorporated, for instance, feeding the homeless. How does that work?
Mr. McGowan: Charities would be established for a recognized charitable purpose. The heads of charity go back a long time, to the Statute of Elizabeth, and are generally the advancement of education, relief of poverty, promotion of religion, and other purposes that are beneficial to society, such as environmental causes. Currently the activities of a charity must be related to one of these political purposes.
Senator Eaton: One of the first things I did as a senator was an inquiry into foreign money coming into Canada to support certain environmental charities, and how that money was not going to educating the public per se, or doing school programs for children talking about dirty water, clean air, but was supporting protests of the pipeline. How is that work charitable? Because that, in effect, is not saying, “I’m Liberal or I’m NDP or I’m Conservative,” but it is a political activity per se if you protest a government policy.
Blaine Langdon, Director, Charities, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada: If I can jump in and explain the effect of the changes. Certainly under the existing system, when you’re talking about what a registered charity currently can do, a registered charity can carry on charitable activities, which is generally interpreted by most as being direct-service delivery-type activities, and in terms of their advocacy activities, their political activities, which would be lobbying, protesting, et cetera.
Senator Eaton: Yes. Lobbying, protesting.
Mr. Langdon: Currently those activities are constrained to 10 per cent of the charity’s activities overall.
Senator Eaton: So now you are saying they can do the whole ball of wax?
Mr. Langdon: The effect of the change would be to remove the existing limitations within the Income Tax Act on political activities, but also to deem a public policy development activity, which would include what is currently considered a political activity under the legislation, to be a charitable activity, as long as it was carried on in furtherance of the organization’s charitable objectives.
To go back to your example, if you had an organization that was established for the protection of the environment, and it chose to —
Senator Eaton: Let’s be more direct.
Mr. Langdon: Sure.
Senator Eaton: Not protecting the environment, which sounds wonderful. Protesting the pipeline.
Mr. Langdon: Again, I don’t want to —
Senator Eaton: No, but that is a factual example on the ground of things that are happening in Canada now.
Mr. Langdon: Sure.
Senator Eaton: Protesting the pipeline, and those are supported. Many of those organizations have charitable status, and they are sometimes supported with money that comes from outside the country. Now what you’re saying is you don’t even have to pretend to be a charitable organization; all the money can go to support your protest.
Mr. Langdon: If I can respond to the question directly and then give a bit of explanation around it. In terms of what you have suggested, without predetermining how the CRA will look at it, an organization that carried on activities to protest against the pipeline would likely be registrable as a charity.
To explain, the rationale would be that a charitable organization must have a charitable purpose, which would be, as Trevor enumerated, those categories of charities, including the protection of the environment. If the method that the charity chose to fulfil its charitable purpose to protect the environment was to try to get the government to change its policy towards the construction of a pipeline, then that would be acceptable under the changes proposed in this bill.
Senator Eaton: And there is no limit as to how much foreign money can come into Canada and support Canadian charities; is that it?
Mr. Langdon: Not as such.
Senator Eaton: Thank you.
Senator Omidvar: Let me pursue this line of inquiry. As you know, the Senate has a Special Committee on the Charitable Sector, and I think I recognize and remember all your faces from presentations to that committee.
Do you think the legislation provides enough clarity on the difference between direct and indirect partisanship? Let me contextualize that a little. There are charities on all sides of the political spectrum who have positions that may get adopted by a political party. Think about the Fraser Institute, on one side, and Canada Without Poverty on the other side. One would argue for higher taxes; one would argue for lower taxes. Their mission is to reduce poverty or create a prosperous Canada, but they have positions that indirectly align to that of a political party.
Is the legislation clear on the difference between the two? I’m trying to imagine how the CRA will go about doing its audits under this new environment.
Mr. McGowan: Perhaps I can make a couple of brief comments on the legislation itself before moving on to the interpretation of the legislation and the Canada Revenue Agency guidance that’s being developed.
It’s important to note that the prohibition against direct or indirect support of a political candidate or party is currently in the legislation. It’s something that is currently the law of Canada. It currently applies where there is the, what you might consider the 10 per cent cap on political activities. It’s something that, setting aside the amendments in this bill, is the law of the land, and something that charities are currently dealing with.
It’s important to keep in mind that this bill does not introduce a prohibition against the indirect support of a political party. Rather, it doesn’t change the fact there is an existing prohibition against the indirect support of a party. I think just to put that change in context is important. Then in terms of how the phrase “direct or indirect support” is interpreted, I think the Canada Revenue Agency would have comments on that.
Antonio Manconi, Director General, Charities Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency: That is our challenge, to ensure there is clarity once the legislation is approved. So at the moment we are dealing with our Department of Justice trying to help with the interpretation. We’re dealing with our colleagues in Finance on what is the best way to interpret things like this. Then, of course, once we do our guidance as a normal process that we have always done traditionally and historically, we actually do a lot of consultation with the sector themselves as well. We have various groups we consult with on a regular basis. We have a Technical Issues Working Group. We work together with them to ensure that whatever products we come up with when there is a change in legislation and policy, that they are clear and helpful to the sector. So this is a normal process that we will be undergoing once the legislation is final.
Senator Omidvar: If I may follow up on that line of questioning, there are two polarizing opinions about this piece of legislation, and we have heard at the Charitable Sector Committee some variance of both. One point of view is dark money will enter the country on all sides of the political spectrum, our public space is going to become cacophonous and loud, and we will not be able to withstand these forces. The second opinion is this has been done in the U.S., the U.K., New Zealand, Australia; the same rules that we are now bringing in today were adopted 10 years ago and the sky has not fallen in. When you did your consultations, did you consult with the legal community? Are they mainly onside or are they mainly offside?
Mr. Langdon: If I could put my finger on whether the legal sector inside and outside of the charitable sector is mainly on board with these changes, I would suggest that in the main the legal community supports this. There are certainly people who have suggested it will not be a positive change. I believe you have had some testimony before the committee which would suggest that. We ourselves have received comments from external parties as well. But I would say by and large the majority are on board with this.
Senator Marshall: So why are the amendments retroactive? They appear to be retroactive. Can you comment on that?
Mr. Langdon: The intent of the retroactivity is to ensure that organizations which are currently under audit for their political activities can avail themselves of the changes. Just to expand on that, in and around 2012 to 2016-17, the CRA had an audit program which had the intent of reviewing organizations that were engaging in political activities to determine whether or not they were respecting the existing restrictions within the Income Tax Act.
With the proposed changes, the intent is for this legislation to apply retroactively to allow organizations that were subject to those audits to avail themselves of the same rules which will be applied to charities on a go-forward basis. That’s why you see the retroactivity back to, I believe, 2008, which is the oldest year under audit.
Senator Marshall: Are you able to tell us how many organizations were audited under the current rules, or the old rules?
Mr. Langdon: I believe my colleagues at CRA can respond to that.
Mr. Manconi: If we’re referring to the Political Activities Audit Program, we selected 60 at the time in 2012. Then in 2016 our Minister of National Revenue made an announcement that she was going to put a freeze on the remaining audits. At that point, we had initiated and concluded 54 audits. And then to date, we have five audits on the go.
Senator Marshall: So for the ones that were concluded, is the intent now to go back and redo them, to see how they fit under the new rules?
Mr. Manconi: The amendments are effective for any registered charity that is still registered at the time of the amendment, so anything that is closed will be closed if they are not registered.
Senator Marshall: All of these words like that the organizations, “must be constituted and operated exclusively for charitable purposes.” You are talking about provided those activities are ancillary and incidental. Those are pretty general rules. Really, my understanding is that once the legislation comes into effect, that you will be authoring instructions to audit staff as to exactly what the precise rules are. Is my understanding correct?
Mr. Manconi: Yes. Once the legislation is confirmed, we will turn the legislation into guidance and procedures. Then we will communicate with our auditors and the folks that make applications for registration to help them understand the law. And then that will apply to the new set of rules.
Senator Marshall: Who provides input into the definition of those terms in order to determine precisely what the audit program will say?
Mr. Manconi: We will work with our colleagues in Finance and, as I mentioned earlier, with our sector to make sure there is common understanding. We have an international regulator community as well where we look at different ideas and how to interpret. We try to get the best of all the folks that we work with.
Senator Marshall: When I look at that, and it’s explained to me, really, we’re being asked to approve or endorse something that we don’t know the details of because it’s just generalities. We don’t know exactly what this program is going to say, because the preciseness is not provided.
Mr. Manconi: If we look back at our program, it has been around for many, many years. If you look at the changes, we’re looking at the limits of the political activities that they are allowed or not allowed to do. So we have gone through quite a number of years of law changes and development of guidance and consultation with the sector. So even though there are changes, they are changes that are manageable and that we can enforce once they are in effect.
Senator Marshall: Could you provide insight into just this one item that says here — probably you can tell me something that would fit under it and an example that wouldn’t. It says: “Maintaining the prohibition on charities providing direct or indirect support of, or opposition to, a political party or candidate for public office.” Just take an example, a political candidate for public office. Can you give me an example of what would be acceptable under the rules and what wouldn’t meet the rules?
Sharmila Khare, Director, Charities Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency: Thank you. That’s a very good question. I know this has been an issue that has raised a lot of interest in the house, among our stakeholders and at the special Senate committee.
So basically, the rules that Finance has proposed do not change the existing restriction that exists that prohibits charities from directly or indirectly supporting or opposing any political party or candidate for public office. So the rule isn’t new, but in the context of a very new framework, we need to check our existing interpretation of these words, because we did have policy guidance for the sector on the old regime, to see what meaning we need to bring to these new terms in a world where the public policy dialogue and development activities could potentially be unlimited.
So, it is quite possible today, and in the new world, for a charity to disagree with a decision or a position that the government has taken and publicly criticize that decision or that position. But if the charity were to identify a political party as part of its criticism, we would say that’s prohibited.
Senator Eaton: But you don’t have to identify a party.
Ms. Khare: In the manner in which we are trying to provide guidance to the sector, when they make that link to the political party, then we would say it’s prohibited. If they are simply commenting on a government policy position and don’t make that direct linkage —
Senator Eaton: If they don’t put the Liberal or Conservative name but you’re talking about their policy, that is nonpolitical?
Ms. Khare: The way we have communicated on this issue in the past. We’re certainly going to take the feedback we are hearing today into consideration as we develop our guidance. As a general guidance to charities, their communications have to focus on the policy issue being discussed rather than a candidate or a political party.
We know that within the sector and among members here there is uncertainty as to what the term “indirect” means, because it won’t be defined in the Income Tax Act. We see this term as encompassing situations where a charity will support or oppose a political party or a candidate through means that are not immediately obvious. One example could be a situation where a charity decides to transfer resources to a third party in order to provide that third party with resources to support or oppose a political party or candidate. That would be an indirect activity.
We’re revisiting this concept of what prohibited indirect activities are to make sure they align with the policy intent of the new rules, and we’re planning to provide educational materials that will be put out to the sector’s stakeholders. It is the same educational material used within the charity’s directorate at the registration stage and at the audit stage.
Senator Marshall: The concern I have is that our briefing note said it’s going to maintain the prohibition on charities providing direct or indirect support. They’re saying that’s going to be the same, but then, as you mentioned, the overall policy is changing, so the colouration on that one may change because the overall policy is changing. To say it will maintain the prohibition, it might not maintain it to the same degree as it was under the old policy.
[Translation]
Senator Forest: As I understand it, we withdrew the imposed limit of 10 per cent of the activities of charities following the judgment by the Superior Court of Ontario. Otherwise, the ceiling of 10 per cent of resources that could be used for political purposes would have been maintained.
Pierre Leblanc, Director General, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada: Thank you for that question. It’s a question that the government has been considering for two and a half years now. Our colleagues from the Canada Revenue Agency have conducted broad-based consultations with the sector. We can’t comment precisely on what would have happened if a decision hadn’t been rendered, but we can say that the government has carefully considered the issue. The government stated in the 2018 Budget that it would take action in the following months, and I believe that’s what it did since that’s what you are now studying.
Senator Forest: Here’s my concern. On the one hand, in the new reality, and given what we witnessed during the last election, we’re trying to plug the holes through which international funding or funding from outside the country flows and may have an undue influence on our democracy and on the results of democratic voting.
The whole challenge is the definition because charity can be directed at human beings just as it can at flora, fauna and the environment. It’s an extremely broad concept. A charity may represent a gateway for significant amounts of money and, ultimately, without it being directed to a particular candidate or party but rather at politics in general. However, parties generally have policies. I’m concerned because this door can create an opening that may encourage an inflow of funding from outside the country that could have an impact on our democratic system.
The Chair: Comments? Mr. Langdon.
Mr. Langdon: With your permission, I’ll answer in English.
[English]
I think you’ve raised some good points, which is one of the reasons why we have suggested that the prohibition against organizations engaging directly or indirectly in support or opposition to a political party or candidate for public office be retained.
In our consultations with the charitable sector, they are of the same view, at least in terms of the fact that engagement in partisan political activities by registered charities is something that should continue to be prohibited. There is, perhaps, a bit of debate around whether direct or indirect support should be prohibited.
We’ve maintained that prohibition in the law, which is, I think, an important prohibition if you want to continue to keep registered charities from engaging in those types of activities.
We’re aware of concerns being expressed about foreign money coming into Canada to influence elections. That’s certainly something that I think the government is aware of and has made proposals on. The Minister of Democratic Institutions has taken steps forward in that but we are aware of concerns.
On the other hand, the intent of the proposals is to allow charities to speak out on issues that are important to them, and the concerns expressed by registered charities is that the existing 10 per cent rule did not allow them the full capacity to engage in activities that allowed them to pursue changes to law for the good of their constituents and beneficiaries. That’s the intent of this and we’ve tried to strike the right balance.
[Translation]
Senator Forest: I’d like to ask a final question.
With regard to the act, do you have enough resources? For example, I set up a charity to protect the sunfish and, in the course of its activities, it becomes a vehicle for me to receive money. Is the definition of the very nature of the charity’s purpose being adhered to? I think that’s a weak way to control funding that comes from outside the country. Are we tough enough to establish specific guidelines on the nature of charities?
[English]
Mr. Langdon: I’m not certain I understand the question. Are you asking if we have information about —
[Translation]
Senator Forest: Does the act specifically state how you accredit a charity? In enforcing the act, do you have the necessary resources to ensure that the organization’s primary function is charitable and that it’s not a concealed gateway for political action that’s altogether different from charity?
Mr. Leblanc: Thank you for your question. As we mentioned, the government is aware of these concerns. This is also an argument that others have raised, but we have to strike a balance in what the act provides with respect to charities, with respect to what charity means.
However, we also have the common law; as Trevor explained at the outset, the common law provides us with the four heads of charity. In addition, even though charitable laws have long been in existence, this is an evolving part of the common law. The danger in being too specific in an act is that it may be impossible to continue evolving in step with changes that take place in society. Lastly, since we have the common law, we have the ability to evolve and continue changing.
Senator Forest: If you could allow me a final question, I’m entirely aware that you’re sensitive to this issue as a result of what history teaches us and what we observe among our neighbours. We have an important election coming up soon in Quebec. I’d just like to say one thing, and that is that, beyond sensitivity, we need the legislative tools to help us resolve this issue. I’m willing to believe that we’re sensitized, but do you have the necessary legislative tools to handle this issue? This is a new reality in the exercise of democracy.
[English]
Mr. McGowan: If I may quickly speak to the legislative capacity and framework relating to charities. Currently, in order for a charity to be registered, it must have a charitable purpose. I mentioned earlier the accepted charitable purposes. Also it must state how it is going to achieve those purposes. A charity put forward for the relief of poverty might operate a soup kitchen, for example, and that will, assuming everything checks out, be enough for a charity to be registered.
It’s important to remember that after a charity gets its qualified donee status, then there is an ongoing requirement that the charity continue to operate to achieve its charitable objects through its activities, in this case, operating a soup kitchen. Maybe in the future they start a clothing donation to help clothe the hopeless as well as operate the soup kitchen, and the Canada Revenue Agency would continue with the existing tools in the Income Tax Act to continually assess whether the charity is fulfilling its charitable purposes through its activities.
These mechanisms that allow the Canada Revenue Agency to come in and continually ascertain that charities are fulfilling their charitable purposes through their actions would continue, as this bill would provide the proportion of their activities that could be political in nature — and there could be public policy and development — to be increased. There would still be ongoing oversight by the Canada Revenue Agency looking at the charitable purposes of an organization and then looking at what they’re doing and whether or not that’s being carried out in support of it.
In addition, you had mentioned the charitable donations coming in. Of course the main benefit for a registered charity in Canada is the ability to offer charitable donation tax receipts, as has been expressed including in the other house at the clause-by-clause review. That’s one of the most important aspects of a charity, the ability to give charitable donation receipts.
It is, of course, open to non-charities right now to engage in political advocacy activities without limits, subject to the Elections Act and things like that, but not subject to this 10 per cent limit. When we’re talking the limits imposed and the giving of donations, I think it’s important to keep that context in mind that there’s already an ability to say you want laws changed. The question is whether or not the registered charities can have that kind of flexibility. The intention behind this amendment was to remove the cap and allow charities to engage in public policy development and dialogue activities. But that remains within the context of the existing rules relating to charities that require them to be doing so in furtherance of their charitable purposes. “In furtherance of their charitable purposes” is the language that’s in this bill, but the idea has always been the case that you have to continue to be doing your charitable activities in support of your purpose and properly issuing receipts, and all of those requirements that are currently in the act would continue to apply.
Senator Pratte: Would you briefly elaborate on the reason for this change of policy? You have had consultations. There was a task force, I understand, on charitable organizations. I don’t want you to go through all that. What is the problem that the government is trying to solve by making this change?
Mr. Langdon: I will start with the government’s mandate commitment. The government committed to clarify the rules governing the political activities by charities, recognizing the commitment that they make to public policy. This is why the Canada Revenue Agency launched its consultation with charities.
Certainly charities are confused as to how the existing rules operate. They also feel constrained by the existing rules. Many charities have expressed that rather than being only service delivery organizations, they can better achieve their charitable purposes through legislative changes, for example.
The confusion that arose from the rules and enforcement of the rules led many charities, out of an abundance of caution, not to carry on charitable activities or to constrain their political activities. Certainly that was the problem that was brought forward, that the existing regime was either too restrictive for charities that wanted to put an end to, for example, poverty or pursue some other charitable end; or was too confusing for charities to understand. This is certainly an issue that has persisted over the past couple of decades. We have heard comments from charities that the existing rules are confusing.
The existing changes are designed to address those concerns by removing restrictions and allowing charities to carry on political activities to the extent determined appropriate by the charitable organization. It maintains the requirement that charities operate for exclusively charitable purposes. They still have to be constituted for charitable purposes, but it changes the manner in which they can carry out their activities. They can engage in public policy, development activities and pursue their charitable purposes, if they feel this is the most appropriate way to achieve their charitable purposes.
Senator Pratte: Charities receive foreign money. Do they have to declare that somewhere and does that become public knowledge? If charity X receives $1,000 from a foreign source, does that have to be declared in the forms they have to fill out?
Mr. Langdon: To a certain extent yes. So currently on the T3010 annual Registered Charity Information Return, charities must declare donations from most foreign citizens that exceed $10,000. So that’s currently reported on their annual information return, but I think smaller donations would not be so reported.
Senator Pratte: Does that information then become public knowledge? I know you can consult and go to see each charity, so does that become public information?
Mr. Langdon: Yes. So you would be able to see on the T3010 return all of those are posted online on the website of the Canada Revenue Agency. You wouldn’t see an itemized list of donors, but you would see the aggregate amount for the charity.
Senator Pratte: If I wanted to know who the donors are, that’s not possible?
Mr. Langdon: No, that would be considered taxpayer information and it would be prohibited from release for the CRA under section 241.
Senator Pratte: Is there anything that prevents corporations, multinational corporations, for instance, to participate in policy dialogue? Is there anything besides obviously the Elections Act during the election period, but besides that is there anything that prevents a multinational corporation or a large corporation to participate in policy dialogue?
Mr. Langdon: I’m not an expert in those rules. But as far as I’m aware, no. Certainly most organizations that participate in that type of public policy dialogue would be required, I believe, to register as lobbyists and they would be reported on The Federal Registry of Lobbyists. I’m not aware of any rules that would prevent an organization from lobbying, for example, a member of government for a change to law or policy.
Senator Pratte: So in a way, charities are simply asking to be treated the same as other private groups or whatever, to be able to participate fully in policy dialogue?
Mr. Langdon: Certainly. Forgive me for not mentioning this earlier, one of the concerns that have been raised by members of the charitable sector is that they are on a level playing field when compared to other taxpayers such as businesses. They are constrained to using only 10 per cent of their resources to lobby for a particular change whereas other groups are not. That was an issue that came up during the consultations.
Senator Pratte: My final point, if I may, would address the CRA. So the whole confusion that existed and the concern that exists right now about this appears to me to be centred on the definition of indirect partisan activity, the difference between indirect partisan activity and policy dialogue and development. The concern is heightened by the fact that now charitable organizations will not be limited in their policy dialogue activities but, of course, will be able to engage to the point where it could be their only activity.
More specifically, the issue is, if policy X is closely identified to political party B, and a charity organization supports loudly policy X, then everyone, every voter will understand that the aim is really to attack political party B. That’s where CRA has work to do to make sure that there is no kind of abuse of the definition of policy dialogue and the other definition of indirect partisan activity.
Mr. Manconi: We certainly appreciate the concerns and we’ll take it back. This is something we’ve been struggling with as well. We know this will be a challenge. That’s why it’s really important to make sure that our guidance going forth will be clear so we can help the sector make sure they don’t go off-side and they can interpret the policies properly.
Senator Pratte: Thank you very much.
Senator Klyne: There have been some good questions here that I’m hoping will make a breakthrough for me here because I’m seeking clarity. I looked at this a couple of weeks ago, and I must have been looking at through a different lens or perspective. I thought that what it was allowing a charitable organization to do in some of its activities — let’s take fundraising — they could do some activities that were fundraising with a political connotation to it. Maybe it’s hosting a dinner for a premier and selling tickets to that as a fundraiser, if you will, which is an easy one.
If I’m understanding correctly, it can actually engage in political activities but stay within the scope of its interest or its sphere, which is why its original purpose for getting charitable designation as a registered charity. I think I understand that as well. So getting a registration as a charity is a difficult thing to do. They don’t just hand those out and it’s time consuming. It doesn’t happen overnight either.
You become a registered charity after it’s deemed that you qualify, and you have to stick to those purposes. CRA regulates those very closely. They scrutinize where the monies came from and how you’re handling them and how you’re deeming them. So it’s not taken lightly in the fundraising world or the charitable world.
I can see where activities could be extended to have a partisan view to it, for the purposes of raising funds, but still sticking within the purpose of having received that registered charitable designation. If it was to speak out in a partisan way to something that threatened its purpose or its objects in its charter, that would be allowable.
Now I’m getting confused here because it sounds like you can actually engage in political activities outside of serving its specific purpose that it got that registration for. So I have to wonder, there was a recent story where a wealthy individual created 10 organizations that were specifically meant to support a specific party. How will this legislation discriminate against those charities that have the goals that also align with the party, but hold themselves out as non-partisan? They’re coming in through a different way. We talked about environmental NGOs, non-governmental organizations, and we can also talk about maybe it’s the partisan side of it is behind the scenes or behind the curtains, firearms ownership rights groups. I don’t think that would have gotten a charitable registration if that was the objective of that organization.
Perhaps you can help me out with this. Back to Senator Pratte’s question: What was the problem you were trying to solve here? What is the opportunity here? Who stands to benefit? Is it the charity or CRA?
Mr. Leblanc: They are good questions and thank you for them. I think the object here — and this goes back to Senator Pratte’s question — charities have to continue to be constituted and operated for exclusively charitable purposes. And charitable purposes fall under the four heads of charity that Trevor described for us.
Now, what is the change? The change is that charities can fully engage in non-partisan, public policy dialogue and development as long as those activities are in furtherance of their charitable purposes. On the other hand, partisan political activity was prohibited, is prohibited and will continue to be prohibited for charities.
Blane captured it well. It was a question of the amount of activity, nonpartisan public policy dialogue and developments. Some organizations said in order to achieve our charitable purposes, this cap is too constraining. The best way for us to achieve these purposes is to engage in this sort of nonpartisan public policy dialogue and development. So that’s the quantum, and then you have the question of uncertainty. Blane described that as well. We’re not quite sure what the rules are. We’re not going to get involved in this because we’re worried about being off-side. So I think you have those. That’s the main thing that basically still achieving charitable purposes, because those are the only types of purposes that charities can have, but it’s basically the ends stay the same. It’s the means to the end.
Senator Klyne: The way you have laid that out validates the way I was thinking about it before. What we’re trying to do right now is at what point do you draw a line? Because you’re now starting to encroach past your purposes and you’re actually now becoming a partisan. You may need to engage in some political activity, but you can only go so far before you start to overstep what your purposes were, your original intent of being a charity. Is that correct? There is a limit to this?
Mr. Langdon: Certainly, there is no limit on non-partisan political activities. Using political activities is perhaps the wrong terminology, because it tends to invoke the partisan political activities.
Senator Klyne: I stand corrected here because I heard no partisan.
Mr. Langdon: No partisan.
Senator Omidvar: I want to stick with foreign funding of Canadian charities. We heard last week in the Charities Committee that in 2016, $2.16 billion worth of charitable dollars flowed into Canada in support of Canadian Charities. The largest beneficiary was the University of Toronto, with $400 million. That’s for good reason: They have alumni all over the world.
Probing this question, I heard something that was interesting and I would like to get your response to it. The issue of foreign funding for Canadian charities, and therefore their political activities, is not a matter of charity law but one for electoral law, which is before us. Would you tend to agree?
Mr. Langdon: I would tend to agree that to the extent you are looking at controlling foreign influence in the Canadian electoral system, that would be the place to start. I understand the current government is seized with this issue, and the Minister for Democratic Institutions has made public statements that they are looking at the issue of the extent to which foreign funding is flowing into Canada or to influence Canadian elections. That would presumably include charities, non-profits and other groups as well.
Senator Omidvar: Can someone help me understand the reasoning of the government when it, on the one hand, agreed with the Ontario Superior Court decision to go from 10 per cent to what I call the “full monty” and, at the same time, appealed the decision of the Ontario Superior Court?
Mr. McGowan: Unfortunately, I don’t think we can comment on decisions of the Department of Justice for appealing or not appealing a case. I do know that there is more than just one clear issue at stake in that court decision; it’s not as simple as there being one issue that could be appealed. It’s something that’s more within the Department of Justice’s purview.
Senator Omidvar: Okay. Thank you.
Senator Andreychuk: First, I want to apologize to the witnesses. I had to be in the chamber. It’s a long way here from Centre Block.
If you have covered it the following, just let me know and I’ll read the transcript.
I have always had a problem on non-partisan political activities. It’s a judgment call. If you live in a democracy, political will is everywhere. What we have always tried in the Income Tax Act is to stop any abuse of using public money or getting public advantage, but not necessarily stop; if you want to continue the activity, just don’t register, is what we say.
Are we going to be any better off with the changes you’re proposing, or are we still going to have a struggle of those who are not going to understand what charities are about and are going to say, “This is a vehicle I can use to propound my political beliefs, whether they are small ’P’ political or large ’P’ political, and get an advantage through the Income Tax Act”?
Mr. Langdon: Overall, these changes will have a positive impact on charities’ ability to speak out on public policy issues important to them. In the main, I would suggest that charities are primarily concerned with pursuing legislative or policy changes that are important for the organization or, more specifically, for their beneficiaries. I would say those are the lion’s share of activities out there.
To a lesser extent, there are charities engaged during election periods that are speaking out on issues that are important to them and are trying to draw voter attention to issues that are important. Those are charities that are going to start getting closer to the line.
Where we’re going to have some grey areas — which we are working with the Canada Revenue Agency on developing some guidance to provide clarity for organizations — are with organizations that are engaging in activities that are either directly in support of a political party or candidate, which is prohibited, or are indirectly doing so, doing everything but call for a particular individual to vote for party A or party B, or candidate A or candidate B — all of those activities that are very close to the line.
To go back to your question, I believe there is still going to be an element of interpretation associated with these rules, but by and large, these changes will have a positive effect for charities. The vast majority of organizations are not involved in activities that would come close to that line, so this will certainly be welcomed by the large majority of the sector.
As I said, we’ll have to work on providing clarity for those organizations that come very close to those sorts of partisan activities, indirect or direct.
Senator Andreychuk: People have come together to form an organization, gotten charitable status and they have a particular purpose. It is 12 months of the year, every year, and they may voice it differently at election time by supporting a candidate or not. I don’t think that’s what it was set up for, but how are you going to draw that line? How are you going to know until they clearly have crossed a line and then say they shouldn’t get the benefit?
Mr. Langdon: Again, the main intent of these proposals is to allow charities to engage in non-partisan political activities, which includes lobbying politicians for changes to laws or public policy or inviting the public to make calls to a member of Parliament with respect to a particular issue of importance to the organization. These are all activities we want to support.
Where it falls apart, so to speak — where the limits are — and this is an existing limitation as much as it is maintained in the proposed legislative changes — charities cannot directly or indirectly support a political party or candidate for public office. To the extent that a charity’s activities are turning less about talking about an issue of importance to them, perhaps trying to achieve broad public consensus on that issue, and turning it more into something deliberately designed to undermine a political party or candidate for public office — those are the areas that we’re going to need to concentrate on.
As my colleagues from CRA has mentioned, CRA is going to be developing some policy guidance by end of year. They will consult with the charitable sector on the clarity of that and whether what is set out there is appropriate. They are certainly working with us right now. It’s a challenge, but it’s not an impossible challenge. That’s what we’re currently aiming at.
Senator Andreychuk: Could we get a copy of those guidelines?
The Chair: Could you provide a copy of those guidelines to the clerk, Mr. Langdon?
Senator Andreychuk: You say at the end of the year, and I’m presuming that’s this year?
Mr. Manconi: All of our guidance is posted on our website. We would be happy to provide it.
Senator Andreychuk: Alert us when they are there.
The Chair: Thank you.
Mr. Manconi: We’d be happy to.
The Chair: Thank you. Seeing no other questions, we will move to the next measure, entitled “Reassessment Period, Foreign Affiliates of Taxpayers.”
Mr. McGowan, please go ahead.
Mr. McGowan: This is about reassessment periods and non-resident, non-arm’s-length persons.
The Canada Revenue Agency currently has a fixed period of time within which they can reassess a taxpayer. Specific limits depend somewhat on the taxpayer. In certain appropriate circumstances, the current rules in the Income Tax Act provide for an additional reassessment period in respect to certain types of issues. This measure deals with the interaction between two of these additional reassessment periods, and it ensures that they apply together appropriately.
The first is that transactions between a taxpayer and a non-arm’s length, non-resident entity, commonly thought of as transfer pricing assessments, are provided an additional three-year reassessment period, because they are international in nature, it’s more difficult to get the information and they have a tendency to be somewhat complex.
Another additional reassessment period relates to the carry back of losses. With respect to the Part 4 tax issue, I had mentioned that a Canadian taxpayer can carry losses forward up to 20 years and carry losses back up to three years. This allows them to smooth out their incomes and get a truer picture of profit over time.
If a taxpayer incurs a loss in a year, carries it back against income in a previous year, an additional three-year reassessment period is provided so that when the year is reassessed, if your losses are reduced, say from $100 to $60, the $100 of losses applied against a previous year’s income can be appropriately reduced down to $60. This allows these consequential reassessments, or losses that have been carried back to a previous period, to be effective.
What this measure does is ensure that where you have an assessment of tax relating to a transaction with non-resident or non-arm’s-length people or person, during the additional reassessment period, a loss under that transaction is reduced that had been carried back again up to three years prior to the start of even the extended reassessment period for non-arm’s length, non-resident transactions, that consequential loss carry-back assessment can be made.
Again it’s important to note that that can only be made in respect of the loss that has been carried back. It doesn’t completely open up the earlier reassessment period. It just ensures that where you have a factual situation where both of these extended reassessment periods come into play, they operate consecutively as appropriate instead of concurrently. This measure can be found in clause 18 of the bill.
The Chair: Thank you.
Senator Andreychuk: This will work, if I understand, because the onus is on the taxpayer to provide the information to get the advantage here. Why I’m saying that is in the old days, it was rather simple. Our foreign investments were pretty simplistic. There are now all the electronic methods. It isn’t housed in one foreign country or another. It can be in 50 now, because your account can be here, you can be there, the business can be elsewhere.
Extending time has a risk that the information will get lost somewhere, but the trigger will be CRA to say you’re either complying or not complying. The rebuttal will then have to come from the taxpayer who wants to take advantage of this. They just have more time to do it.
Mr. McGowan: This provides additional time for the Canada Revenue Agency to reassess. The effect would be to reduce the amount of loss that had been applied against previous year’s taxable income. That would be an unfavourable result from the taxpayer’s perspective.
What it does is ensure that where the Canada Revenue Agency has made an assessment in respect of a year to reduce the amount of a loss and that amount of a loss had been carried back and applied against income in a previous year that the consequential reassessment relating to that previous year can be made appropriately in a fairly particular set of circumstances. That has more to do with the interaction between two sets of rules containing two additional reassessment periods in the tax statutes than anything else.
Senator Andreychuk: My point is that there is a time factor. Does that work in the advantage of the burden on the CRA or is it an advantage for the taxpayer?
Mr. McGowan: For this particular measure, based on that way of describing it, it would be an advantage to the CRA insofar as they can apply the tax law and appropriately carry out one of these consequential reassessments in respect to the previous taxation year where a loss has been carried back. It helps the CRA administer the rules appropriately.
Senator Andreychuk: Given the fact that we are adding so many other duties to them, time is difficult.
Mr. McGowan: This would apply only after the amount of an assessment has reduced the income of a taxpayer. So in a sense, all of the work has already been done before this measure comes into play. It just ensures that once the previous year’s loss has been reduced, it can be carried back, and a consequential amendment can be made appropriately in a previous year.
Senator Andreychuk: Thank you.
The Chair: No additional questions to be asked. We will move to the next measure, which is the reassessment period regarding non-resident, non-arm’s length persons.
Mr. McGowan: Thank you, senator. This amendment is similar in that it relates to an additional reassessment period.
As I said, an additional three-year reassessment period is currently provided in respect of transactions between a Canadian taxpayer and a non-resident, non-arm’s-length entity. In many of those cases, the non-resident, non-arm’s-length entity will be a foreign affiliate of the taxpayer.
However, there are situations where reassessments can be issued in respect to a foreign affiliate of a taxpayer where that doesn’t involve a transaction with a non-resident, non-arm’s-length person. So this additional reassessment period that we talked about in the last measure is not available, even though the same considerations and the same policy reasons for having the additional reassessment period in respect of non-arm’s length, non-resident transactions apply similarly in the foreign affiliate context.
So this would provide an additional reassessment period of three years in respect of income loss or other amounts arising in connection with a foreign affiliate of a taxpayer, bringing the reassessment periods for foreign affiliates in line with the reassessment periods for non-arm’s-length transactions with non-residents more generally.
It is, as well, found in clause 18 of the bill.
The Chair: Thank you. We will then move to the next measure, which is the reporting requirements regarding foreign affiliates. Mr. McGowan, please.
Mr. McGowan: Currently, taxpayers are required to file an Information Reporting Form in respect of their foreign affiliates 15 months after the end of their taxation year. The general requirement for corporations to file income tax returns is six months after the end of the taxation year.
What this measure would do is it would reduce the amount of time for filing a foreign affiliate information return, called the T1138 return, from 15 months to 12 months for taxation years that begin in 2020 — this is a phase-in year — and for 10 months after the end of the taxation year for taxation years that begin after that.
This provides the Canada Revenue Agency with additional time to perform their risk assessments and do their analysis in respect of these information returns, while balancing the taxpayers’ needs for time to prepare the returns. That is found in clause 25 of the bill.
The Chair: Thank you. Any questions? If not, we then move to the measure concerning the tax treatment of contributions to the Québec Pension Plan. Mr. McGowan, please.
Mr. McGowan: Thank you. This measure relates to tax treatments to enhance the Québec Pension Plan. As is the case for employee contributions to the enhanced Canada Pension Plan, this measure would provide a tax deduction provided to employee contributions and the employer’s share of contributions by self-employed persons to the new enhanced Québec Pension Plan, so bringing it in line with the enhanced Canada Pension Plan. It is found in clauses 34 and 40 of the bill.
The Chair: Are there any questions, honourable senators? If not, we will move to Part 2.
Mr. McGowan: I don’t want to take too much more of the committee’s time, but I believe there are two measures I haven’t had the chance to discuss and I want to make sure we don’t miss anything.
The Chair: And this would be?
Mr. McGowan: This would relate to the at-risk rules for tiered partnerships, as well as sharing information for criminal matters.
The Chair: We will go first on sharing information for criminal matters.
And then we’ll come to the last one.
Mr. McGowan: This measure relates to sharing information for criminal matters. There will be similar amendments discussed by my colleagues later. In terms of Part 1 of the bill, there are a couple of changes. The first allows provisions in the Mutual Legal Assistance in Criminal Matters Act to be used with respect to the sharing of criminal tax information under Canada’s treaties and tax information exchange agreements, as well as the Convention on Mutual Administrative Assistance in Tax Matters.
Canada currently has an obligation to share information relating to criminal tax matters with its foreign counterparties under these agreements and this measure would implement a procedure in order to share this information.
The procedure, under the Mutual Legal Assistance in Criminal Matters Act, is currently used for other purposes. But it involves, first, when a request is received for information, that the Department of Justice would determine if it’s an appropriate request. If so, they would make an application to a court, who would need to be satisfied that the request is appropriate and also that Canadians’ privacy rights both under the Privacy Act and the Charter are respected. And if that’s the case, the court could order a gathering order that would allow for the collection of the requested information.
After the requested information has been collected, before it could be shared with a foreign counterpart, the Department of Justice would have to go back to court for a sending order in which the court would confirm that any conditions placed on the gathering order were met and that the sharing of the information would be appropriate. So there are two appearances in court to ensure that among other things, the request was appropriate and Canadians’ privacy rights have been respected. This would provide a mechanism for the sharing of information. And again, this is in respect of information Canada is already required to share under these agreements.
The second portion of this amendment measure relates to the disclosure of taxpayer and other confidential tax information to Canada’s bilateral mutual legal assistance partners and pursuant to administrative arrangement entered into with a requesting state under the Mutual Legal Assistance and Criminal Matters Act for the purposes of non-tax criminal investigations and prosecutions of certain serious crimes. For example, this includes terrorism, organized crime, designated substance offences and certain proceeds of crime and money laundering offences relating to these designated substance offences. This would provide a mechanism for the sharing, and allow for the sharing of this information and, again, in circumstances where the Mutual Legal Assistance in Criminal Matters Act is in place and there are appropriate safeguards for ensuring Canadian privacy rights and the appropriateness of the sharing requests.
This measure can be found in clauses 26, 28, and 29 to 33 of the bill.
The Chair: Thank you.
Senator M. Deacon: On that Mutual Legal Assistance in Criminal Matters Act, if other types of international agreements contain provisions in relation to this mutual legal assistance in criminal matters, what might this look like in other countries?
Mr. McGowan: These obligations are reciprocal. The other country would have a requirement to provide information to Canada, and Canada has a reciprocal obligation to provide to them. You’re asking what happens if Canada requests information relating to tax information from a counterparty, another state with which we have an arrangement. The specific local requirements would, I think, depend upon the state. We have the Canadian Charter of Rights and Freedoms, we have the Privacy Act and processes in place with Canada Revenue Agency and the Department of Justice, whereas other countries might contain the two in one. Each country might have a different process but under the agreements, the obligations to provide information are reciprocal and the types of information to be shared are symmetrical. This measure would allow Canada to fulfil obligations in situations where our counterparties would be able to share with us.
Senator M. Deacon: Thank you.
Senator Andreychuk: Is it information that we will be giving about our tax citizens or is it the other way around? My concern is that we signed a lot of agreements, double taxation bills, et cetera, where the department — Foreign Affairs, Finance — has to make an assessment whether this country will abide by the agreement, will ensure that we have the same protections for our citizens that we expect. So you evaluate politically the country you’re dealing with and whether they’re going to have the same focus on confidentiality and privacy and all of that.
You’re adding another layer here. Will the minister have discretion under this bill? I know there is a judicial process, but will the minister say, “No, the times have changed, we signed an agreement and we’re not going to get ourselves into this?” Is it receiving or is it the giving of information?
Mr. McGowan: Thank you for your question.
There are three points to touch on. One is that these are reciprocal agreements. A foreign counterparty can ask the Government of Canada for information on Canadian taxpayers, the same as Canada could ask the foreign counterparty for information on their residents. What this measure relates to is the sharing of Canadian taxpayer information.
Second, as you noted, there’s a judicial process. The minister, whether it is the Minister of Finance, Revenue or Justice, would not be able to obtain a request — the Canada Revenue Agency can’t just get these requests and send the information where this measure would apply. There is a process that involves two court applications for a gathering order and a sending order.
This brings me somewhat to my third point that upon receiving the request, the Department of Justice, assesses whether it’s an appropriate request and at that stage they can look at it and say this isn’t appropriate. This is a fishing expedition or this doesn’t meet the requirements under the agreement or for whatever reason, and they can make it a determination as to whether this is something that ought to be pursued and they would make an application to a court to ultimately fulfil.
There is that initial assessment done by the Canadian government before going to court but it’s also important that there is also the court approval process so Canadian privacy rights are respected and ensuring that it’s appropriate to share information under the agreement.
Senator Andreychuk: Which minister would have the right to say no and make that assessment? Is it Finance, is it Foreign Affairs? Are they bound to say yes unless they can prove something, or is it a discretion to them to determine politically, as well as administratively, that they want to say yes or no?
Mr. McGowan: The Department of Justice performs the initial review and once they have satisfied the matter is appropriate for determination by the courts, then they refer to the courts.
Senator Andreychuk: That’s my problem, because you may have signed an agreement. In the old days we could be reasonably assured that we had countries that had similar processes to us. We signed a lot of agreements with countries who have different systems, but they also have different political regimes that come and go. Is it Justice that will be deciding? A lot of it is value judgment, that’s my point: would Justice have the capability of doing that, or is that really a foreign affairs issue?
Mr. McGowan: I simply don’t know whether the Department of Justice, as a matter of course, would consult with the Department of Foreign Affairs. I know they make the initial assessment and, in addition to reciprocal rights to request information, there are reciprocal obligations under these agreements to appropriately safeguard taxpayer information and ensure it will be used for appropriate purposes.
They ought to have the capacity to make this assessment. They have been charged with making it and the Mutual Legal Assistance in Criminal Matters Act is used for other purposes currently. Even in cases where the Department of Justice makes that determination, no doubt to the best of their abilities, it still goes to the court twice. So there is that opportunity for a judicial review, and the appeal rights that go with that. There are multiple safeguards in place.
[Translation]
Senator Forest-Niesing: My question has two parts, the first of which my colleague Senator Andreychuk has already raised. One detail remains to be clarified in my mind. Given the reciprocal nature of an exchange of information, I understand that this is a process that will require appearances and that it will be done in stages, all in a setting that is protected — at least in the Canadian context — by the system of laws on access to information and individual privacy.
I’m asking the question in light of the reciprocity we’re talking about. If the other government has a different privacy regime, one that’s either more or less strict than ours — and we know that Canada has made progress in that regard — what will the applicable test be? Is Canada the tougher of the two? Will there be a clear choice or will it remain a kind of discretionary matter, depending on circumstances?
[English]
Mr. McGowan: The request would need to meet the standards and thresholds under Canadian law before Canada would provide it. The court would need to be satisfied and the Department of Justice, in its preliminary review, would need to be satisfied that the rights contained under Canadian privacy laws, including the Charter, would be respected if the information were to be shared with a foreign counterparty.
In the circumstances where they may have a different privacy regime in place, the Department of Justice and the courts would need to satisfy themselves that the Canadian privacy rights and our standards would need to be respected.
[Translation]
Senator Forest-Niesing: Consider an example in which it’s my information that has to be shared and I’m very sensitive to the confidentiality of my information. I would like to limit the sharing of that information as far as possible. However, Canadian laws permit a degree of sharing that I’m uncomfortable with, and I see that the government with which the information will be shared has a tougher regime.
Can I secure the benefits of preserving my privacy by claiming the right to apply the higher standard to the sharing of that information?
[English]
Mr. McGowan: The appropriate standard would be the Canadian privacy rights before the information can be shared with a foreign counterparty. If they have stronger rights against sharing, once the information is in their hands, they would be bound by their own domestic laws in terms of what they do with the information.
But in terms of whether or not Canada will share with the foreign counterparty, it’s the Canadian standards that would be applied and they would be applied in testing to ensure that the foreign counterparty has adequate safeguards in place.
[Translation]
Senator Forest-Niesing: Thank you.
[English]
The Chair: That concludes Part 1, but there is one more. Could you identify that? What’s the exact name of your measure that you said was omitted?
Mr. McGowan: My apologies. I just wanted to make sure we didn’t miss anything. It deals with the at-risk rules for tiered partnerships and can be found in clause 8 of the bill.
The Chair: According to the information that I have here, we dealt with that earlier, or at the meeting before lunch. What I have here is at-risk rules for tiered partnerships, and that was on page 7 of 20.
For clarity, and to be obligated by law, if you want to redo it, the chair is open. Therefore, there’s a consensus that we skipped it, so Mr. McGowan, please make your comments on at-risk rules for tiered partnerships.
Mr. McGowan: This measure deals with the at-risk rules for tiered partnerships. They are a currently existing set of rules in the income tax that limit the amount of losses that can be flowed down the limited partnership to its limited partners based on what is called the at-risk amount.
In general terms, you can conceptually think of that as the amount a limited partner has put at risk in the partnership. If a limited partner investments $100 in the partnership, they can take out up to $100 of losses beyond which the losses would become restricted and could be used later, but are subject to the at-risk limitations.
This is a currently existing set of rules in the Income Tax Act and this amendment responds to a decision of the Federal Court of Appeal that, in effect, held that the at-risk rules do not apply appropriately in the context of so-called tiered partnerships. That’s where you have a limited partnership that is itself a member of another limited partnership and that itself could be a member of another limited partnership, ad infinitum.
The court held there were certain gaps in the statutory wording that made the rules essentially not work appropriately where you have this tiering of limited partnerships.
This amendment ensures that the rules work appropriately when you have partnerships that are themselves partners in other partnerships. It works appropriately at every level of the partnership and ensures that the policy underlying the at-risk rules is maintained.
As I noted, it is found in clause 8 of the bill.
The Chair: Mr. McGowan and Mr. Leblanc, thank you very much. This concludes Part 1.
We will resume with Part 2. We have officials from the Department of Finance Canada, and this is Robert Ives, Senior Advisor, Sales Tax Division, Tax Policy Branch; Carlos Achadinha, Senior Director, Sales Tax Division, Tax Policy Branch; and Pierre Mercille, Director General, Sales Tax Legislation, Sales Tax Division, Tax Policy Branch.
[Translation]
Mr. Mercille, I would like to clarify a point before I turn the floor over to you.
[English]
Honourable senators, on Part 2, we have the following measures, and I will name them. It is agreed that we will have Mr. Mercille to comment on all of them, and then we will go directly to questions.
Therefore, Mr. Mercille, you will be asked on item A, emission allowance; item B, GST/HST treatment of group or Registered Education Savings Plan trust extension and assessment period; item C, investment limited partnership; item D, rebate for printed books; item E, reassessment period requirements for information and compliance orders; and item F, sharing information for criminal matters.
[Translation]
Pierre Mercille, Director General, Sales Tax Legislation, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Good afternoon. Part 2 of the bill amends Part IX of the Excise Tax Act to implement certain Goods and Services Tax and Harmonized Sales Tax, GST and HST, measures. The amendments begin at clause 41 on page 44 of the bill and end with clause 60 on page 62.
The proposed amendments in Part 2 are essentially technical amendments, that is to say, improvements to rules respecting the GST and HST to make them more consistent with the intent of tax policy.
[English]
The first measure modifies the way GST/HST applicable on the sale of a carbon emission allowance is to be accounted for. These allowances or permits are created by government entities and issued to emitters of carbon and other greenhouse gases.
At the end of a compliance period, emitters with surplus allowances may sell the surplus to other companies who have exceeded their emission targets. This is the case, for example, under a cap-and-trade system.
The supply of these allowances between companies are taxable under the GST/HST, and the amendment does not change the amount of GST/HST that is payable on such a sale. It provides that the purchaser of the carbon emission allowance is responsible for self-assessing the tax amount.
This replaced the previous requirement whereby it was the vendor of the allowance that had to collect the tax from the purchaser and remit it to the Canada Revenue Agency.
This brings the Canadian rules in line with how these allowances are generally treated internationally, such as in most EU countries where value-added tax applies and cap-and-trade systems exist.
It should be noted that the companies purchasing these allowances are generally involved in commercial activities and would be generally allowed to claim an offsetting input tax credit.
The next measure is purely a timing rule. It extends the assessment period for group Registered Education Savings Plans trusts that have made a particular retroactive and relieving election under proposed regulation under the Excise Tax Act.
Since the retroactive election would apply to periods between July 1, 2010, to July 22, 2016, the amendment ensures that the CRA is not statute-barred to assess the past returns of the group RESP trusts that have made the particular retroactive election.
The amendment allows the CRA four years from the time the amendments are passed into law to assess the GST/HST on these group RESP trusts, but only in respect of the tax consequences of the election.
The next measure deals with investment limited partnerships. It ensures that this GST/HST treatment of investment limited partnerships is consistent with other collective investment vehicles by extending the special HST rules that currently apply to investment plans, to investment limited partnerships.
Investment limited partnerships generally include limited partnerships that are established to carry on certain investment activities on behalf of a group of investors. There are essentially three amendments in that respect in Part 2 of the bill. The first one ensures that investment limited partnership that ensure investors in an HST province and in at least one other province to determine their HST liability based on the where investors are located, as is currently the case for investment plans.
These amendments also confirm the long-standing tax policy that management and administrative services are subjected to GST/HST when these services are provided to the investment limited partnership by its general partner.
Finally, these amendments generally provide a GST/HST relief to investment limited partnerships in respect of which 95 per cent or more of the partnership interest is held by non-resident investors.
The next measure relates to the federal rebate for printed books. Under the GST, educational and literacy institutions are eligible for a rebate of the GST or federal component of the HST paid on printed books acquired for their own use in helping people learn to read and improve literacy skills.
In accordance with the policy intent, the amendment clarifies that the rebate does not apply to printed books acquired by these institutions to be sold on their own, or as part of another good or service.
The next measure introduced a new rule to extend the assessment period of a person by the period of time during which a requirement for information or a compliance order is contested in front of the tribunals. This measure is similar to a measure included in Part 1 of the bill in respect of the Income Tax Act, and it’s being made in Part 2 to ensure consistency between various tax statutes.
I’m going to mention right now that the similar amendment is also included in Part 3 of the bill, again to ensure consistency among tax statutes and in Part 3 it deals with excise tax statutes.
The last measure is consequential to amendments to the Income Tax Act in Part 1 of the bill. So similar to the amendment in Part 1 of the bill, the measure removes a restriction in Part IX of the Excise Tax Act to enable the sharing of tax information with Canada’s mutual legal assistance partner in respect of acts that, if committed in Canada, would constitute serious offences.
Two amendments also propose to align the GST legislation with existing rules under the Income Tax Act. First, the measure removes a similar restriction under Part IX of the Excise Tax Act to enable tax information to be disclosed to a Canadian police officer in respect of serious offences where such disclosure is currently permitted under the Income Tax Act.
Second, the measure removes a similar restriction of Part IX to enable tax information to be disclosed solely for the purposes of a provision contained in a Tax Treaty where such disclosure is currently permitted in respect of tax pay information under the Income Tax Act.
Similar amendment also made in Part 3 of the bill in respect of the Excise Act 2001, and again it’s to ensure consistency among similar rules in various tax statutes.
[Translation]
That concludes my description of the measures provided for in Part 2 of the bill.
[English]
The Chair: Thank you.
Senator M. Deacon: One thing you mentioned briefly around the rebate for printed books, I do wonder why, in 2018, e-books are not considered in this policy? Has the value of rebates in this area been of any significance?
Carlos Achadinha, Senior Director, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: I’ll address that question. There has been a lot of discussion and exploration as to what an e-book is. As you can imagine, it’s not really like a printed book. It doesn’t arrive. Tax authorities around the world are trying to grapple with how would you define an e-book? How is it different from software, something that you would download? It’s more of an issue in that it’s a difficult term and concept to define and put into a piece of legislation that would indicate exactly what you are covering.
It’s a relatively new issue and it’s something that I guess tax representatives and tax officials around the world are grappling with; how do you treat something that comes in an electronic form?
Senator M. Deacon: If I may, I understand that is a bit ambiguous, and tough to pinpoint. But, if your filter for supporting print books might be in helping people learn to read and improve literacy skills, wouldn’t that be more of the umbrella for the decision making; what tools are out there that help with literacy and reading versus if this is an e-book or not? I struggle with that a little bit because the ultimate benefit is the learning piece.
Mr. Achadinha: I understand. The policy is to provide relief for books and printed materials that are purchased by the institution for its own use to educate and promote literacy. The measure now is specific. At the time it was introduced, it specified it was printed books. It’s easier to define and put parameters around what a printed book is.
The electronic book is a far more difficult idea, and it’s harder to put parameters around it. You could be downloading things that would be software. There are all the different aspects with respect to it, so it’s a challenging aspect, and it’s something that tax authorities are looking at in terms of how they deal with new things and emerging issues in terms of how goods are being provided.
Senator M. Deacon: I’m struggling, but okay, thank you.
Senator Klyne: Can I ask a follow-up on that?
The Chair: Senator Klyne follow up on Senator Deacon, please.
Senator Klyne: If a book was available, I’m looking at it maybe online, I can order the printed version or I can order the download version of that.
Mr. Achadinha: Again we’re talking about a rebate that is applicable only to various public service institutions. It’s intended for those institutions who play a role in educating and helping people learn to read and promote literacy. It’s a very specific rebate intended for a specific group of people.
Senator Klyne: So in a remote northern community where the best way to access that might be a download of that book, the rebate wouldn’t attend to that. It’s the same content. It’s in two different formats.
Mr. Achadinha: It’s an issue, with respect, that even the format is difficult to define. What is an e-book? Is a piece of software an e-book? You wouldn’t consider software to be a printed material. Conceptually, putting parameters around something that you can download is far more difficult than a tangible good that you can put various definitions and rules on.
Senator Klyne: Wouldn’t the supplier be responsible for administering the rebate as we go along further and through this? You’re going to allow —
Mr. Achadinha: It’s a rebate that you as the purchaser would claim. It would be for you to determine whether what I purchased is an eligible printed piece of material.
Senator Klyne: I’m still struggling. It’s good.
Mr. Achadinha: It’s an issue, I think tax authorities around the world who deal with special rules for books are grappling with how you deal with this new emerging electronic content. It’s no longer referred to a book, it’s more electronic content.
Senator Klyne: Which is the way things are gravitating, so why wouldn’t you get ahead and go to where the puck is going to be instead of skating where it is?
Mr. Achadinha: Again, when you’re getting something electronically, a lot of cases you can get far more than just the printed material; you can get a lot of supporting materials, rights to various other things. It goes far beyond what you would get in a comparable book.
Senator Klyne: Okay. Thank you.
Senator Andreychuk: Can I have a follow-up question on this? At the risk of showing my age, wasn’t this added? When GST and HST and all that came about, there wasn’t an exclusion for universities and books, and there was a ground swell in Parliament to say they should be exempt. Then the question became, but they also sell books because they have libraries. It was for their purpose, for education that we exempted it.
Mr. Achadinha: Correct. This came in after the introduction of the GST. It was a measure introduced some years later. It was specifically to assist those organizations in their purchase of books that they were using for the purpose of educating, promoting, and help encourage reading.
Senator Andreychuk: I recall a lot of negotiations at that time. We wanted to expand this, and in the end said, okay, printed books. I think the question put by my colleagues is fair for Parliament to reassess whether the old printed book is sufficient now for educational institutions and whether we should try to find some definition that goes beyond the print, but that’s a work in progress.
The Chair: Before we move to Part 3, we will recognize Senator Boehm.
Senator Boehm: Thank you very much. Thank you for joining us today. There are a lot of discussions going on about carbon emission allowances and how to do that, so on the requirement that the purchaser self-assess goods and services, what are the advantages of self-assessment? Mr. Mercille, you mentioned in your comments that some of the EU countries are doing this. Has it worked? Have you conducted any analysis to show and project how this would actually work?
Mr. Achadinha: I’ll respond to the question. In the Canadian context, this is referred to as a “self-assessment approach.” In the EU and other jurisdictions, they refer to this as “reverse charging.” That implies you charge yourself. You acquire something, you charge yourself and you account for it yourself.
It’s found more typically when you have a business-to-business transaction. In that case, the businesses under the value-added tax systems, like the GST, the notion and the design is generally businesses are allowed to recover the tax they pay on their inputs. This would be an input into what they used to carry out their taxable activities, their commercial activities. They would acquire that good, and they would determine if tax applied. At the same time, they could take an offsetting ITC, so there are advantages. In most of these cases, these are large businesses with very strong and robust accounting systems. They account for these mechanisms easily, and this is the way the international world has treated these goods. These emissions, in some cases, are dealt with across borders, they are international supplies, so there is a benefit as well in the GST being consistent with how these goods are treated internationally.
Senator Boehm: So are you going to look at best practices in terms of, for example, what the Germans are doing?
Mr. Achadinha: This has been in place for a number of years. Our understanding in our discussions with them is it has worked out well in those jurisdictions.
Senator Boehm: Okay. Thank you.
The Chair: Thank you. To the officials of Part 2, thank you very much.
We will now move, honourable senators, to Part 3. For Part 3, we will have Mr. Mercille, accompanied by Mr. Gervais Coulombe, Director, Sales Tax Division, Tax Policy Branch, and on Part 3, we do have four little measures.
Thank you, Mr. Coulombe, for being here. I will ask you to make your presentation, to be followed with questions.
[Translation]
Gervais Coulombe, Director, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Thank you, honourable senators. I am always pleased to be here.
[English]
I will start with the measure on fuel taxation. The proposed measure was first announced as part of a broader consultation on tax legislative proposals in July 2018. The text of the proposed measure can be found under clause 61 of the BIA 2.
As you may know, the Government of Canada applies an excise tax of 4 cents per litre of diesel fuel manufactured or imported into Canada. The application of the excise tax on diesel fuel is relieved in specific circumstances, including for use in the generation of electricity.
At present, only licensed wholesalers and manufacturers can sell excise tax-exempt diesel fuel. When purchasers acquire diesel fuel to be used in exempt activities from unlicensed vendors, they must instead claim a refund of the embedded excise tax from the Canada Revenue Agency.
This situation may create some cash-flow issues for some purchasers and put unlicensed vendors at a competitive disadvantage vis-à-vis licensed manufacturers and wholesalers.
To level the playing field among all vendors, this measure amends the Excise Tax Act to expand the regime to allow a vendor to apply for a refund where the purchaser will use excise tax-paid diesel fuel to generate electricity if certain conditions are met. These conditions include, among others, that the quantity of diesel fuel delivered by the vendor to the purchaser be at least 1,000 litres and that the purchaser certifies that the diesel fuel is to be used exclusively to generate electricity.
In practice, unlicensed vendors will be able to account for the specific circumstances for which the application of the excise tax is relieved and adjust the prices accordingly to compete with licensed manufacturers and wholesalers.
This measure comes into force upon Royal Assent of the enabling legislation.
The second measure covered in this bill relates to the taxation of cannabis. The amendment can be found under clause 63 of the BIA.
[Translation]
The government has undertaken to permit regulated restricted access to cannabis to keep that substance out of the hands of young people and to deprive criminals of the profits that result from the trade in that substance. To do so, the government must keep duties at a low level and cooperate with the provinces and territories to continue a coordinated taxation approach. Amendments to the Excise Act, 2001, associated with a new federal excise law framework, were implemented by Budget Implementation Act, 2018, No. 1. The federal government subsequently signed agreements with most provincial and territorial governments to implement a coordinated cannabis taxation framework. To that end, regulations describing additional excise duty rates for every administration signatory to the coordinated framework were announced on September 17, 2018.
[English]
This framework fully came into effect when cannabis for non-medical purposes became accessible for legal retail sales on October 17, 2018. Cannabis products are now generally subject to a combined federal-provincial duty that is the higher of a flat rate of $1 or an ad valorem rate of 10 per cent of a producer’s price.
Clause 63 of Part 3 implements amendments to the Excise Act 2001 to introduce an anti-avoidance rule relating to the rules for establishing the value of cannabis products on which this ad valorem duty is calculated to ensure the cannabis duties are calculated on the appropriate value in certain circumstances. In particular, this technical amendment would ensure that the ad valorem duty applies as intended on the producer sale price of the cannabis product or on the fair market value of the product in the case of an arm’s-length transaction.
In addition, housekeeping amendments are required for two provisions relating to the taxation of cannabis in order to ensure consistency between the English and the French versions of the legislation.
[Translation]
My colleague Pierre Mercille has described the measures respecting the extension of the assessment period, which are outlined in clauses 62, 64 and 65 of the bill, as well as those concerning the provision of personal information, in clause 66. So here we have two technical measures, a few amendments to ensure consistency between the English and French and some amendments to align with the general administration regimes in the tax laws.
I am prepared to answer any questions you may have. Thank you.
The Chair: Thank you.
Senator Forest: I have a quick question. The first concerns the tax on cannabis. We currently tax medical cannabis and recreational cannabis at the same rate. Wouldn’t it be logical to distinguish between the tax burden on medical cannabis and that on recreational cannabis?
Mr. Coulombe: Thank you for your question. First, the clause under consideration by the committee does not concern the differentiated treatment of cannabis based on whether it’s for medical or recreational purposes.
I would remind members of the committee that, when the cannabis taxation regime was introduced, we specified that a total exemption would be included for products containing less than 0.3 per cent THC. Consequently, those products are already excluded from the federal excise framework, as are products that might have THC levels greater than 0.3 per cent but that have drug identification numbers issued by Health Canada.
In the 2018 Budget, the government announced that Health Canada was reviewing the way it issued its drug identification numbers for certain cannabis products that might be used for medical purposes in order to determine whether the list could be expanded in the future. That process is under way. I can provide no further information on this subject.
Senator Forest: As I understand it, an analysis is conducted to distinguish between the rate for a medical product and that for a recreational product.
Mr. CoulombeA regime is already in place to ensure that kind of differentiation is made in certain circumstances. That’s the case for products with THC levels of less than 0.3 per cent. We are dealing with a new regime. I expect amendments will be made to various aspects of that regime in the next few years. I can’t comment on specifications.
Senator Forest: I understand.
[English]
Senator Marshall: I don’t know if you can answer this question; maybe it’s for other finance officials. We’re hearing about the shortages of cannabis. Are the revenue projections holding for the taxation?
Mr. Coulombe: As I mentioned during my presentation, the legalization date was October 17 of this year, which means that, in respect of the first fiscal month, producers have until the end of this month to remit amounts to the CRA. We will know in the next few months —
Senator Marshall: Pretty soon.
Mr. Coulombe: — the revenues realized in respect of the first month.
The first month also contains the so-called inventory tax in respect of all products that had been stockpiled by wholesalers and producers in advance of the legalization date, so it may not fully reflect the pattern.
We hope to be able to report back to our provincial partners early in the new year. Adjustments will be made to the projections of revenues as future finance publications become available.
Senator Marshall: That will be publicly available, probably, in about a month?
Mr. Coulombe: No, that will take more time than that. We need to do the first assessments, ensuring that the data have been properly managed and analyzed. Again, this is a new taxation framework —
Senator Marshall: Yes, I know.
Mr. Coulombe: — so it’s a matter of striking the right balance between the importance of informing the Canadian public and our provincial partners of what is being realized in terms of revenues. At the same time, we must ensure the proper checks and balances are put in place to communicate the right information.
Senator Marshall: Thank you.
Senator Klyne: This is an introduction of the anti-avoidance tax. How does that affect the underground sale of cannabis? Is it making the differentiation larger?
Mr. Coulombe: The measure proposed here does not have any impact on that particular issue. This is simply to ensure that the base value upon which an ad valorem duty could be computed is the right one when you have operators operating at non-arm’s length.
Senator Klyne: Who pays the tax?
Mr. Coulombe: The excise duty on cannabis products is always paid by the last federally licensed producers. These producers are licensed by the CRA as well as my colleagues from the Department of Health.
Senator Klyne: So this was built into the pricing before October —
Mr. Coulombe: The taxation regime was introduced as part of BIA No. 1. We did add a new part to the Excise Act, 2001. The statute currently imposes excise duties on tobacco, wine and spirits, so there is a new part that has been added. Most of the general administrative features of that act now apply in respect of cannabis producers.
The Chair: To the witnesses, thank you very much for appearing, sharing your comments, and explaining the measurements and the amendments to the Excise Tax Act — excise measures — of Part 3. This concludes Part 3.
Honourable senators, our next meeting will be tomorrow afternoon at 1:45 p.m. in room 160-S, Centre Block, in relation to consideration of Part 4, with various measures and divisions.
(The committee adjourned.)