Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 22 - Evidence - Meeting of June 12, 2008
OTTAWA, Thursday, June 12, 2008
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-10, An Act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that act, met this day at 10:50 a.m. to give consideration to the bill.
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: I call to order this meeting of the Standing Senate Committee on Banking, Trade and Commerce. We are continuing our study of Bill C-10, an omnibus bill to amend the Income Tax Act in a variety of ways, including in section 120 to set forth some provisions relating to the film and video business. This morning our focus is on that particular part of the bill.
My name is David Angus. I am chair of this committee and a senator from Quebec. To my right is Senator Goldstein, also from Quebec. He is the vice-chair of this committee. To his right is Senator Fox, also from Quebec — you can see who controls the action here — and Senator Meighen, formerly of Quebec and now Ontario. To my left is Senator Ringuette from New Brunswick and Senator Massicotte from Quebec. There are other colleagues who have other commitments. Some may show up. I will introduce them as they come.
This morning we are privileged to have, from Teamsters Canada, Al Porter, Director, Movie Making and Trade Shows Division; and from Ernst & Young LLP, an international global accountant firm, Neal Clarance, Partner, Canadian Media & Entertainment Leader.
Welcome to the committee. You are aware that we have been holding hearings on this bill since November. We think we have heard a lot. I have a habit of showing this bill. It is a massive omnibus document. We now know that a little bit of knowledge is a dangerous thing. We look forward to learning new things from you this morning.
Al Porter, Director, Movie Making and Trade Shows Division, Teamsters Canada: Thank you for the opportunity to appear before you today to share with you our thoughts on Bill C-10. I started my career as a truck driver, so it is safe to say I am not here to speak to the artistic impact of Bill C-10's contrary-to-public-policy clauses. Creativity is not my strong suit. I admit to having read a film script once and I could not see how one could turn it into a movie. It turns out it was very successful. Those are my credentials as a creative force, but I am just as passionate about my objections to Bill C-10 as the artists are. So is Teamsters Canada, where I am the national director for motion pictures and trade shows.
Likewise, as president of General Teamsters Local 362 based in Calgary, I have first-hand involvement in Alberta's film industry. I have negotiated more than 240 movie agreements.
The teamsters' frame of reference is down to earth. Our concerns are jobs, the well-being of thousands of Canadians employed in filmmaking and the preservation of an industry that provides economic as well as cultural benefits.
As I have said, I am a truck driver, not some overzealous activist, yet we are firmly convinced that the four plain words ``contrary to public policy,'' contained in the proposed amendments to the Income Tax Act, are powerful enough to bring down an industry that took years to create and that has given Canada international recognition.
To us, this is all about keeping our jobs in Canada — well-paid jobs that also pay a lot of taxes; jobs that require bright, well-educated, highly-skilled, sought-after people; jobs in an industry that does not cause industrial pollution or deplete natural resources; jobs that help diversify Canada's economy beyond just drawing water, hewing wood or drilling oil.
Let me be more specific. Here we are talking only about teamsters. I cannot presume to speak on behalf of other unions, although I would be surprised if their issues are substantially different from ours.
Of our 125,000 members, approximately 1,000 teamsters work directly in the motion picture business in Western Canada, primarily Alberta and B.C.
B.C. gets much of the work, and the payroll for our members doing production work there was approximately $70 million over the last two and a half years. Alberta's share is smaller, at more than $9 million over the same period.
Because these figures are approximate, let us say it is a total payroll of $80 million in Western Canada for the last 30 months alone — a period that has not been especially busy for us — all of it paid to people who in turn pay federal, provincial and local taxes, people who spend their income in local economies.
Among other things, teamsters provide transportation services, catering, wrangling and security. As that wrangling role suggests, we work with actors of the four-legged variety. We have a reputation as some of the world's best horse wranglers. For example, Peter Jackson hired some of our members to work in New Zealand on The Lord of the Rings.
As a proud Albertan as well as a proud teamster, I must note that our experience with films and Academy Awards includes Dr. Strangelove and Doctor Zhivago, Little Big Man as well as Superman, Unforgiven, Legends of the Fall and Brokeback Mountain. Our 14 Oscar wins means we are second to none in the motion picture industry.
That is partly what I mean by an international reputation for Canada's film industry. These productions did not come north solely for our scenery. Tax credits helped make all of this possible by supporting our infrastructure.
It is also important to point out that our members typically own and maintain their own equipment. For Teamsters in Alberta and B.C., that represents a personal stake on the order of $85 million. Tax credits help make that possible, too.
I do not pretend to be an expert on tax law, but I do have some understanding of how the motion picture business works and the role tax credits and other incentives play in it. Film financing in Canada is largely a patchwork thing. You shop your story idea to distributors and broadcast media. You assemble a package, which might include Telefilm Canada and provincial money, and then you approach the banks. In effect, as Mr. Cronenberg noted during his testimony here in mid-May, you basically are borrowing the entire budget of a film from a bank based on the various deals you have. Tax credits are very much part of these deals. Governments created tax credits and other incentives for economic reasons and cultural purposes: to build an industry, to create a film production sector that employs skilled Canadian workers and that ensures local workers are available rather than relying on imported workers so that the economic benefits remain primarily within Canada.
The proposed amendment muddies the waters by raising the possibility of subjective factors influencing what should be an objective, job-oriented process.
It is the certainty of the tax credit that gives the banks enough confidence to advance the money that makes filming possible. The tax credit is the collateral for the bank loan.
Remove the certainty and the whole structure collapses. As a statement attributed to the Royal Bank of Canada previously placed before this committee indicates, ``Should the assumption of eligibility currently underlying all bank loans to this industry be compromised or diminished by Bill C-10, this will indeed limit the ability of the bank to continue funding Canadian content production.''
To us, Bill C-10 is not about censorship. It is a jobs issue. After all, it is a labour-based tax credit that is up for amendment. The livelihood of workers is on the line here. Let me explain. Teamsters employed in the film industry have two sources of work — service productions and indigenous or Canadian productions. Together they comprise the critical mass needed to keep the industry running.
The more glamorous work, of course, is service work — in other words, working on Hollywood productions, films such as Brokeback Mountain, with larger budgets and lengthy shooting schedules, productions we have attracted to Canada as a result of hard work, attractive government incentives and the availability of highly skilled, highly experienced workers — a nice gig when you can get it. However, large service productions happen relatively infrequently in Western Canada outside of B.C., perhaps once every couple of years. Consequently, it is the indigenous productions that keep you going. More than that, you look to homegrown productions for the experience you need to help attract Hollywood in the first place.
You hone your skills, acquire your equipment, build your team and polish your reputation on Canadian projects — on films like Jet Boy, for example, which I mention in the same breath as Brokeback Mountain for a reason. Both films concern male homosexuality and both were controversial. Both were filmed in Alberta. Both drew on the same film infrastructure. Both employed teamsters.
Yet the bill before you would treat the two films entirely differently with two sets of rules: one for Canadian productions and one for American productions. That, in itself, should give you pause and suggest that things have not been thought through clearly enough. In effect, we have a Canadian government discriminating against Canadian content.
There are other differences too. One film went on to win three academy awards and earned more than $200 million. Jet Boy probably would not have been made if the amendments of Bill C-10 had been in operation. Those who disagreed with its subject matter would have lobbied hard to have it declared contrary to public policy. That is the real risk of this legislation: public policy will be defined by those who can yell loudest and longest.
I have already talked about Brokeback Mountain and Jet Boy raising complaints. Others feel that criticizing the Catholic Church is hate propaganda. Others believe films involving fantasy and magic condone devil worship. Still others may object to how filmmakers portray Billy Bishop, Tommy Douglas or the October Crisis. I am sure a Disney- style animal adventure would get someone up in arms if you looked hard enough.
The point is, these are subjective factors. Is the government prepared to have the country's film funding policy dictated by those with subjective axes to grind? Moreover, is government prepared to jeopardize the entire film industry in the process? Without Canadian productions there will be no infrastructure when the Hollywood studios come to call.
The motion picture industry is global and very competitive. While Canada has been adept at attracting American productions in the past, many of the advantages have evaporated. The exchange rate on our dollar no longer makes us an attractive venue. Other jurisdictions have been just as creative with tax incentives. They learned most of it from Canada in the first place, although Alberta recently lost a production to Michigan due to a more effective tax credit.
Do we really want to give someone another excuse for not coming here? Proximity and a highly trained work force remain our competitive advantages, and so does our track record of award-winning films. Yet the workforce will erode as a direct result of the proposed amendment. Without the indigenous production to sustain it, the infrastructure needed for service work disappears.
Mr. Chair and senators, our members do not believe that any minister should have such powers. We do not believe our jobs and the livelihood of a vibrant and growing industry in the Canadian economy should be held ransom by special interest groups who are able to elicit a reaction from a minister or a closed-door committee.
Let me be clear. We agree that minimum standards must exist. We also suggest that standards are already in place within the Criminal Code, within the film and broadcast classification systems and within the arm's-length funding agencies. We believe these monitoring and control tools are working well, and we believe they are the proper place for oversight.
Tax credits must remain objective, consistent and predictable to ensure that filmmakers can continue to make films and to continue employing the people who help them do so. Anything that removes clarity and certainty and substitutes subjectivity and ambiguity threatens the whole basis of film production funding in Canada.
Mr. Chair and senators, we are working people. We implore you to remove a real threat to our ability to continue working. We therefore ask the Senate to recommend amendments to remove the subjectivity and, therefore, the contrary-to-public-policy clauses within Bill C-10.
The Chair: Thank you very much. I will recommend that my grandchildren start off as truck drivers. You have had a terrific career.
Neal Clarance, Partner, Canadian Media & Entertainment Leader, Ernst & Young LLP: Thank you for the opportunity to address you on this important issue. I appear here with over 20 years of experience providing financial and business advisory services to the film and television industries.
I am a partner and the Canadian media and entertainment leader at Ernst & Young. I am also a member of the board of directors of the Canadian Film Centre and chair of its Western Canada advisory council. I am on the board of the Motion Picture Production Industry Association and co-chair of its business development committee, on the board of the International Financial Centre British Columbia and a board member and treasurer of the Whistler Film Festival.
Based upon that background I feel it is evident that I am here to speak to the section of Bill C-10 that relates to the film production tax credit and film issues.
I am here to speak specifically to the business and financial implications of the bill. Although I have views about censorship, freedom of expression and artistic integrity, I will leave that debate to more capable and artistically blessed individuals than myself. The views and comments I express here are my own. Although I have many clients affected by this bill, I do not appear on behalf of any of those clients or interest groups. Further, my comments are my opinion and do not necessarily reflect the views or opinions of Ernst & Young.
Ernst & Young is one of the largest accounting and professional service firms in the world, providing audit, accounting, taxation, transaction and business advisory services to the entertainment industry. Among our services, we audit film and television production costs and provide a variety of services relating to the claiming of federal and provincial film tax credits. The film and television tax credits form a fundamental element of the financing of virtually all Canadian television and film productions undertaken in this country.
I would like to take you through a brief overview of our services in relation to the film tax credits and the process followed by a Canadian producer in securing interim financing of those credits.
Our services typically commence during the pre-production stage where we are engaged to provide an estimate of the federal and provincial tax credits that may be earned based upon the production's budget. The tax credits are based upon the eligible Canadian labour incurred during the production and are also impacted by other factors related to the financial structure and production elements. While those elements can vary significantly from production to production, it is important to note that the combined Canadian and provincial film tax credits can form as much as 40 per cent of a production budget — very significant indeed.
Our estimate of the tax credits is typically used for presentation to banks, investors and other financial partners, from whom the production company borrows between 80 per cent and 90 per cent of the estimated amount.
Because the estimate is based upon a budget of future costs, our letter of estimate naturally includes certain assumptions and references to inherent risks, which the lender must consider and feel comfortable with before advancing. Over the years since the introduction of the film tax credit program, our letter has involved certain minor adjustments to address policy changes and amendments to the program, but in general the assumptions and inherent risks have remain largely unchanged. As a result, these banks, investors and financial partners remained comfortable with those risks and have continued to finance the estimated credits.
While our letter is not the only support that a bank or other financial participant relies upon, it represents a significant piece of the due-diligence process.
Bill C-10 in its current form as it relates to the film industry is, in my opinion, poorly worded and far too open to a wide range of subjective interpretation. If passed, it would require us and other professional accounting firms to include a paragraph in our estimate letters explaining the possible consequences of the legislation.
This will introduce an element of uncertainty, inconsistency and unpredictability that threatens the ability of banks, investors and financial partners to feel comfortable enough to advance funds against the estimated tax credits. Even if the bank felt comfortable enough with our letter and the estimated amount of tax credits, I can assure you that it would contain no language from which they could gain any comfort as to the film meeting the standards of ``not offensive'' or ``not contrary to public policy.''
As a result, banks would likely have to start reading the related script to determine whether they felt it contained anything offensive or not in the interests of public policy. The problem with that is that they could not reasonably conclude that their interpretation of ``offensive'' and ``public policy'' would be shared by the committee or arbitrary group selected to administer this legislation.
If the bill is to be passed into law, it needs to include a clearer definition of what these terms mean and what would be considered ``offensive'' or ``not in the interests of public policy.'' It needs to set out clearly by whom, how and when the legislation is to be administered.
I believe it is understood that there will always be a certain level of subjectivity to enforcing such legislation, as there has been with the existing regulations currently administered by the Canadian Audio-Visual Certification Office, CAVCO, and the various provincial film agencies. These agencies have been in place since long before the film tax credits were introduced. The industry has developed a history and a faith in the judgment of those organizations. Further, they are involved at the initial application and eligibility stage before production as well as at the final certification stage at the completion of the production.
It is unlikely that CAVCO would review the initial application and supporting documentation, including a synopsis, and issue an eligibility certificate under Part A and then overturn that position at the final certification stage unless the producer had blatantly introduced some element that was not evident during the preliminary review prior to production.
In my over 20 years of auditing Canadian-content productions I am aware of very few instances where Canadian certification ruled at the preliminary stage as being eligible has been denied after completion of the production. In all of those occasions, the denial was based upon ownership issues, never on content.
The legislation implies that a new and separate group or committee is to be formed that will have the power to overrule the decisions of those experienced agencies that have been charged with ensuring that offensive films have not received public funds in the past. Not only does this add an unnecessary level of additional of bureaucracy and administration, it also concerns the industry that this legislation may provide power to a group with no experience with such matters and no stated guidelines or definitions to follow.
The introduction of a new group to administer this legislation will effectively render the role of CAVCO redundant in this process. Why would any bank put any faith in CAVCO's Part A eligibility certificate if a separate body has the ability to incorporate a different, unknown set of standards after the production is complete?
I am not for a minute questioning the government's need to be fiscally responsible with public funds. In fact, I applaud it. However, there is a point where those efforts can become ridiculous, if not absurd. One has to wonder what possible rationale led to the need to introduce this legislation with respect to Canadian productions and yet not apply similar requirements to foreign films, which also access public funds through the film production services tax credit.
How is it that we require Canadian filmmakers to produce their films to a different standard than foreign producers who shoot in our country and also access public funds, albeit in smaller amounts? I am not suggesting that this proposed legislation should be extended to include foreign productions, as I am sure it is quite clear that I am not in favour of this legislation in any event. However, I can assure you that the inequity in this proposed legislation — the fact that it applies to Canadian films only — is not lost on our American friends. The studios and producers in the U.S. who annually bring billions of dollars in production to our country are looking at what is happening here. They are concerned, and rightly so, that should this proposed legislation pass, it would only be a matter of time until it is extended to encompass foreign production and the film production services tax credit as well.
This raises the same consistency and predictability issues in their minds and will cause them to hesitate on shooting decisions in our country. If it is the intent of this government to pass this bill or something reasonably similar, then it is imperative that there be some level of general understanding and reasonable guidelines to ensure the continued consistency and predictability that is essential to financing. It also needs to be clear who will be charged with administering this legislation and how and when it will be administered.
In summary, anyone who believes that this bill in its current form would not have a significant, if not devastating, effect on the film and television industry is simply not in touch with the reality with the business of film and television production and how it operates in this country. Thank you.
The Chair: Thank you. Senator Fox will open the questions.
Senator Fox: We have heard representations from the union movement across the country, creating a complete picture of viewpoints.
Mr. Porter, I understand that you are involved primarily with productions in Western Canada, in particular B.C.
Mr. Porter: Yes, B.C. and Alberta.
Senator Fox: You brought forth an interesting point, but it is the first time we have heard it mentioned. Your members own most of the equipment that they use.
Mr. Porter: Yes, most of the heavy equipment, such as the tractor trailers, honey wagons and makeup units, are owned by Teamsters Canada members and subsequently leased or rented to the production.
Senator Fox: How many members do you have?
Mr. Porter: We have 1,000 members in Alberta and B.C.
Senator Fox: Is IATSE, the International Alliance of Theatrical Stage Employees, involved in West Coast productions, or are the workers teamsters exclusively?
Mr. Porter: No, in Alberta and B.C. we do the transportation, wrangling and catering, as well as security in B.C.; IATSE has the technical positions.
Senator Fox: Are you concerned about the present state of competitiveness in the Canadian marketplace to attract foreign productions? Obviously, domestic productions have less choice. What would you do to make Canada a better place to shoot films and create more jobs for your industry?
Mr. Porter: There are two factors: the provincial and federal tax credits and state credits in the U.S. Most states have a tax credit, and we are competing against those. As I mentioned, we lost a project to Michigan. My brothers in Michigan said that they have 59 projects with only three or four crews to shoot movies. They are lined up for the next three years. Competition is critical. When I met recently with Warner Bros., they said that you do not have to be better than anyone, you just have to be the same to get the work.
Senator Fox: You indicated, as have other witnesses, that there have to be some parameters within which public funding should be used. Most people have indicated that it would be inappropriate to funnel public funding, through either Telefilm Canada or the tax credit system, to pornographic films or other films that offend the Criminal Code. Would you agree with those two parameters?
Mr. Porter: Yes. I do not recall any movie that we have made that would be beyond those parameters.
Senator Fox: The same question to Mr. Clarance.
Mr. Clarance: Absolutely.
Senator Fox: We have limits under the current system such that pornography cannot receive tax credits or public funding. Therefore, under the present system, a film that is completed could lose its tax credit status if it offended under the terms of the Criminal Code. Do you agree with that?
Mr. Clarance: I do not agree, because the film would not have been approved in the first place. As my notes indicated, included in the current regulation is the fact that pornography is not an eligible genre. The Canadian Audio- Video Certification Office is charged with this determination. They look at a picture, the synopsis and all the elements of it at the front end and issue a party's eligibility certificate. That is the difference. We are talking about a separate group other than the one that we know, which is experienced and has been doing this for over 25 years.
Senator Fox: Am I wrong in thinking that under the CAVCO application the producer has to agree to meet all the conditions of the tax credit regulations, including the one that says no pornography? You may table a scenario where it is not clear at the end of the day that there could be pornography.
Mr. Clarance: Absolutely. It is always possible that something slips through the cracks, and as I mentioned in my notes as well, the producer can put something into the show at the end that turns out to be contrary.
Senator Fox: Even if we brought in parameters that would take out the public policy criteria, which is not defined and is left in the hands of the minister and could be changed from day to day, and we came back to the Criminal Code reference to pornography, would that affect the type of letter that you give now?
Mr. Clarance: No. Our letter has references to inherent risks. The overall inherent risk in our letter is that we are not the ones making the decision at the end of the day. It says that the decision rests in the hands of CAVCO. The banks have established a level of comfort with that. They feel that is acceptable. They understand what is required and they are involved from the beginning to the end, so they accept that risk. It is a matter of having an acceptable level of risk. That is the difference.
The Chair: Your evidence today indicates that you have confidence in CAVCO's experience to be the sole arbitrator of the standard that we are trying to maintain. Can you remind us of who CAVCO is? Is it a permanent organization that could be referred to in the statute?
Mr. Clarance: I believe so, yes. The Canadian Audio-Visual Certification Office is connected to the Department of Canadian Heritage. It is charged with overseeing the certification of Canadian content and the eligibility of both the Canadian content tax credit program and the foreign production services tax credit program.
The Chair: It is a government agency.
Mr. Clarance: Yes, it is a government agency. People continue to wonder what would be different if the bill passes, because it has always been there. They need to understand that the implication in this proposed legislation is to have a new group enter the picture and possibly overrule CAVCO, the group that everyone is comfortable with. I would say absolutely that if this were left in the hands of CAVCO, we would be in a better position to feel comfortable.
The Chair: We are striving for certainty and the industry has convinced most of us that that is the issue. We are not talking about censorship. We are talking about certainty for the purposes of financing and not weakening the industry as it stands today.
If the proposed law that is before us was changed, for example, to say ``must conform to the criteria set from time to time by CAVCO,'' would you be comfortable with that?
Mr. Clarance: I hesitate with the language ``must conform to the criteria set from time to time,'' because again that leads to uncertainty. I have heard that the government has made reference to the fact that what precipitated all this was that it was possible that something contrary to the Criminal Code could end up getting funding. I question why we do not simply have that wording in the legislation, that anything contrary to the Criminal Code should not receive funding. With that in the legislation, and with CAVCO the group in charge of administering this, I think we could then be comfortable.
Senator Meighen: Mr. Clarance, you have provided over the years a letter of comfort to your clients. Did you ever make reference to the fact that there was on the books from 1995 on, when the film tax credit started up, draft regulations administered by Canada Revenue Agency with regard to public policy? After 2003, it was administered as draft legislation, so that spectre has been there for a while. Would that have found its way into your letter?
Mr. Clarance: Basically, what we cover in our letter is the particular project, the assumptions regarding the labour content and the various different elements of the production. It states that we believe the project appears to be eligible, based upon the representations of management and our review of the situation, but that ultimately the final determination rests with the Canada Revenue Agency and with the Canadian Audio-Visual Certification Office, and that we can make no representation whatsoever that this will ultimately be eligible.
Senator Meighen: It sounds like a lawyer's letter — on the one hand, but on the other.
Mr. Clarance: The bottom line is that in discussions with the banks, it is discussed what that means. They are fully aware of those regulations. I do not think anybody is questioning that those regulations have always been there. The key here is that those regulations have been administered by a body that has been doing it probably for 20 years — I am not sure, they predate me — prior to the introduction of the film tax credit program.
You can look at history and weigh that into your comfort zone. You can say that in 20 years, only one or two productions have been overturned and never on this basis, so we feel comfortable enough to advance the funds. One of the major banks recently told me that they have never suffered a loss on any letter that we have issued in relation to tax credits. It is a reasonably certain thing at the present time.
Senator Meighen: As I understand what you said, for you, the important thing is the administering body.
Mr. Clarance: Yes. For me, that is important.
Senator Goldstein: Thank you for taking the time and making the effort to come and help us in our deliberations.
Would it be possible for you to provide the committee with a copy of the form of the letter that you use? I take it that except for changes dealing with specific facts — names, dates, producers — the bulk of your opinion letter, as we would call it in our parlance, is standard boilerplate. Would you take out relevant names so we cannot identify your clients and provide us with a copy of that form?
Mr. Clarance: Sure.
Senator Goldstein: Thank you.
I would like to get an understanding of the sequence of events. A writer writes a screenplay and gets a producer interested in producing it as a movie or a video production. Once the writer has written it and once the producer is interested, I take it that a request is made, in the first instance to Telefilm.
Mr. Clarance: Not always. I do not know what the percentage would be of Telefilm's involvement, but there are many Canadian content films and television programming that do not involve Telefilm.
Senator Goldstein: What happens when it gets to the ministry?
Mr. Clarance: What do you mean when you say the ministry? Do you mean when it goes to CAVCO?
Senator Goldstein: Does it go straight to CAVCO?
Mr. Clarance: No, the producer has the script and puts the project together, and he or she has to have the financing in place. Inevitably, as has been indicated in numerous testimonies before, it is a patchwork of different sources of funding. I always refer to film finance being like snowflakes: no two are the same. It is a complex situation.
Usually, producers will come to us or another accounting firm during the pre-production stage to try to get an idea of what the tax credits will represent. That becomes a key element. They will need to have a Canadian broadcaster or distributor on board to qualify, which is another key element. Then they piece it together through pre-sales of foreign territories and so forth.
Once they have the financing in place and a final, locked budget that is secured and likely bonded, they would come to us to have the letter written that goes to the bank. At the same time, they are also making their application to CAVCO for eligibility under Part A.
Senator Goldstein: The application then never goes to the Minister of Canadian Heritage. It goes to CAVCO, and CAVCO makes a recommendation to the minister; is that correct?
Mr. Clarance: Remember, this is before the production has been made; so they simply say thank you for your application, we have reviewed it and we believe that it appears to be eligible. They issue what is called a Part A certificate. That certificate is all that is necessary to have Canada Revenue Agency issue funds.
Upon the final completion of the film, we will prepare the tax returns and tax credit claims and those will be filed with Canada Revenue Agency. That, together with the Part A certificates — both federal and provincial, for whatever province the film is shot in — is sufficient for Canada Revenue Agency to proceed to assess the claim and issue the funds.
Senator Goldstein: That is where I am confused. There is a definition in the bill that is not terribly new. It is somewhat varied from previous legislation, but it says that a Canadian film or video production certificate is a certificate issued in respect of a production by the Minister of Canadian Heritage, certifying a variety of things. When does that certificate get issued? It is clearly not CAVCO.
Mr. Clarance: No, but CAVCO is a department of the ministry.
Senator Goldstein: Is that what the bill is referring to, that certificate by CAVCO?
Mr. Clarance: It says it is from the Minister of Canadian Heritage, which is really CAVCO.
The Chair: CAVCO is accountable to the minister.
Mr. Clarance: Absolutely.
Senator Ringuette: We know that the current tax credit is applicable to Canadian productions and foreign productions. Do the provinces have tax credits for foreign productions?
Mr. Clarance: Absolutely.
Senator Ringuette: All of them?
Mr. Clarance: All of them, but some of the provinces do not differentiate. For example, Manitoba has one program. It does not matter whether it is Canadian content or foreign; it applies to everyone. The three major production provinces of B.C., Ontario and Quebec have both a domestic and a foreign tax credit program.
Incidentally, the provincial programs are mirrored or somewhat mirrored and piggybacked onto the federal program. Anything that happens here on the federal level will affect the provincial ones.
Senator Ringuette: We can see the ripple effect of what this would do to the provincial program.
Mr. Porter, you have mentioned that your members own the equipment. Are they small business people who are also members of Teamsters Canada?
Mr. Porter: It is kind of a funky relationship, actually. They themselves are hired on the production, and the equipment is rented from other Teamsters Canada members, who may be or may not be on the production. It is a little different, I admit. They are small-business people who may own two or three trucks or a fleet of 35 trucks. Possibly they have the company as well and they may be working as the transportation coordinator on the movie, renting it from themselves or one of the other members.
Senator Ringuette: Thank you for specifying that.
I would like to make a comment to my colleagues and to the viewers and to our witnesses. I have been in politics for 20 years now. In my recollection, this is the first time we have had people who normally have policies at different ends of the spectrum on issues, meaning the accounting profession and the union. Both are here today and both are saying the same thing. You said the same three words. You said that you need to remove the uncertainty and you need to be consistent and predictable. Both of you have said that. It is almost an historic event here, to have both of you representing different entities in the industry but saying exactly the same thing.
I wanted to stress to my financially minded colleagues here that it is certainly a first, from my perspective.
Senator Jaffer: I have found both your presentations very educational. One thing that struck me is that you have to be the same. You do not have to be better or different. Do you know of any other jurisdiction, and I am more interested in the U.S., where there is the kind of contrary-to-public-policy legislation we are considering?
Mr. Clarance: No. Certainly most states have the same requirement regarding pornography, but it is defined. It is straightforward: anything that is pornographic. Once again, I suppose there is a subjective element to that. I believe everyone can get a pretty good idea of what falls into that category and feel comfortable about whether a particular project is or is not pornographic.
More than 40 states now have tax credit programs. They have largely been modeled after ours; we have led the way. The competition is fierce. With the dollar at the level it is at right now, we are challenged. Ultimately, cost is the predominant factor that drives a producer to one location or jurisdiction over another. We must deal with that element, and if you throw in something that says that cost saving may not be available to you, then we are in trouble.
Senator Jaffer: As you know, the minister has offered to form a committee in order to set the guidelines. If the guidelines were known beforehand, would that not be sufficient? Why the concern?
Mr. Clarance: If there were set guidelines and parameters that people could actually look at and judge or determine the production against, I think that would be fine.
Mr. Porter: With regard to service production, certainty with the American studios is paramount. They are planning budgets two years in advance, so we are dealing with next year's work already. It is important that they know what is available and what is not available to them. Every conversation I have had with my friends south of the line is all about certainty on a go-forward basis.
The Chair: I want to thank the witnesses. Mr. Porter, on a personal note, we had a colleague here in the Senate from your organization by the name of Mr. Lawson. Do you see him?
Mr. Porter: No, I do not see him. He is a little farther west sometimes.
The Chair: If you do, give him our best. Thank you very much. You have been helpful to our deliberations.
Honourable senators, continuing our study of Bill C-10, we are privileged to have as our next witnesses three gentlemen, Mr. John Limeburner, Chair, Treasury and Investment Committee, Canadian Association of University Business Officers; Mr. Darrell Cochrane, Chair, Taxes Committee of the same organization; and Mr. John Lyon, Managing Director, Investment Strategy, University of Toronto Asset Management Corporation.
I believe you folks were in the room during the previous testimony so there is no need for us to introduce ourselves. We are interested in what you have to say, in particular with respect to another provision of the bill, not the one dealing with films and video tax credits but rather some of the rules that are proposed with respect to pension funds and the like.
[Translation]
John Limeburner, Chair, Treasury and Investment Committee, Canadian Association of University Business Officers: Mr. Chair, thank you for this opportunity to take part in your consideration of Bill C-10. I am John Limeburner, Chair of the Treasury and Investment Committee of the Canadian Association of University Business Officers (CAUBO).
[English]
I am also the university treasurer and director of pension investments at McGill University, where I am responsible for the management of our endowment fund and our pension fund, $900 million and $1.3 billion respectively in total market value.
Mr. Darrell Cochrane is the chair of CAUBO's Taxes Committee and the comptroller of Dalhousie University with $300 million and $700 million market value in the endowment and pension funds respectively.
CAUBO represents 106 universities and colleges across Canada. These universities, colleges and charities hold in excess of $10 billion in invested assets in endowments that provide continuous support for student scholarships and awards, fellowships, academic appointments and research, equipment and facilities and library materials. The support provided by these endowments and other related investments is critical in providing opportunities for students to obtain a world-class education and to promote leading-edge research. A further $34 billion is held in the pension funds of our member institutions.
CAUBO submitted a letter to this committee, to the Minister of Finance, and to the House of Commons Standing Committee on Finance on January 29, 2008, in which our organization raised concerns about the proposed non- resident trust provisions and the potentially severe negative effect, presumably unintentional, of the proposed legislative amendments to the current and future investment practices of Canadian tax-exempt universities and colleges. In that letter, CAUBO strongly recommended that Bill C-10 be modified so that a provision be added to exempt tax-exempt Canadian universities and colleges from the proposed non-resident trust provisions.
We understand that this committee is aware of our letter. We also believe that the committee has received a letter submitted on CAUBO's behalf by Mr. Charles Gagnon, in which he raises several concerns caused by Bill C-10's non- resident tax trust rules to Canadian universities and colleges. We believe that the committee received a copy of an article on university endowment and pension funds that appeared in the fall 2007 issue of University Manager, our organization's publication.
An important message contained in that article is that our members' endowments are growing and that many are increasing their allocation to alternative strategies and investments outside of Canada. This course of action follows from the need to diversify as assets grow and to find similar opportunities to those that have helped our U.S. endowment fund counterparts achieve such strong results over the years.
Mr. Cochrane and I are joined today by Mr. John Lyon, the managing director for investment strategy at University of Toronto Asset Management Corporation, UTAM. UTAM manages the endowment fund, $2 billion, and the pension fund, $2.8 billion, in assets for the University of Toronto. Mr. Lyon will be pleased to respond to questions that the committee members may have about investment issues and, in his case, the issues facing the largest university endowment fund in Canada. I believe we are open for questions.
The Chair: Thank you, sir, your presentation was helpful.
Senator Goldstein: We saw the letter you submitted in January. Did you receive a response from the Department of Finance to your letter? Did you discuss your concerns with them?
Mr. Limeburner: Mr. Cochrane and I had a discussion with representatives of Finance Canada earlier this week.
Senator Goldstein: Earlier this week?
Mr. Limeburner: Yes.
Senator Goldstein: Did nothing happen between January and now?
Mr. Limeburner: No.
Senator Goldstein: What was the result of that discussion?
Mr. Limeburner: They were inquiring as to whether this proposed legislation had an effect on what we were doing or proposed to do. I had the sense that our letter might have taken them by surprise. Perhaps our appearance at this hearing took them by surprise as well. Basically, they indicated that it was their belief that the proposed amendments were ones that we could work through and work around. We clearly mentioned to them that we felt that that was not the case and that it was putting a new level of burden on us in terms of due diligence and monitoring.
As we understand, the reason for this proposed legislation is in large part to close down some tax shelters that people have been using.
Senator Goldstein: That is correct.
Mr. Limeburner: We feel that the net has been thrown much too far and too wide and has captured us, as I mentioned earlier, presumably unintentionally. That was the extent of our discussions.
Senator Goldstein: Mr. Limeburner, was that discussion initiated by your group or by the Department of Finance?
Mr. Limeburner: It was a response to one or two phone calls that I left with a representative of the Department of Finance.
Senator Goldstein: You asked for a meeting.
Mr. Limeburner: Yes.
Senator Goldstein: They had not responded to your letter of January.
Mr. Limeburner: They had not responded.
Senator Goldstein: Thank you.
Senator Meighen: My question is likely impossible to answer but perhaps you could give me some order of magnitude. You indicated that foreign trusts are a part of the university's endowment fund investment strategy in order to diversify. You also indicated that if this bill were to pass in its present form, it would have a severely negative effect.
How can we quantify that? Is a certain percentage of endowment funds invested through that foreign trust vehicle?
Mr. Limeburner: It is not necessarily a foreign trust, although it may be in a particular case. When we go into private equity, we access limited partnerships, in particular, but they may be invested in trusts down the road. Therefore, we have no control over that. They may get us into some of these ineligible trusts indirectly.
For example, McGill's allocation to alternatives, which include private equity, hedge funds and real estate, is 20 per cent of our endowment fund today. That is our target allocation. We have an ability to go higher than that, and it is growing. Perhaps Mr. Lyon could speak to that more closely because they are the largest fund and have moved in that direction much more than we have.
A number of my colleagues and I have gone to respective existing investments and have determined that nothing appears to put us offside. That does not mean that something in the future will not put us there. The issue is the burden on us in each case of looking at a new investment and trying to determine whether it contains anything that would put us offside. Quite frankly, that burden bears great cost, but that is part of our territory. The real issue is the fundamental unfairness of the unlevel playing field in the situation.
Mr. Lyon and I are both responsible for the management of endowments and pension funds. He might say in many cases, as I do, to look for one investment that is appropriate for both funds. We might have to discard an investment for the endowment because it does not fit the rules, which fundamentally changes what we do and reduces our universe of investable opportunities.
The CAUBO article that went out indicates that many are increasing exposure to alternatives, which means moving investment dollars outside Canada to the U.S. as well as to Europe and Asia.
Senator Meighen: I want to pursue what happens when you follow down the line, which I also want to pursue with Finance Canada officials when they appear after you. There are differences between high-tax jurisdictions and low-tax jurisdictions. You just mentioned the United States and Europe. When you invest in a limited partnership, do you try to follow it down the line to see where it, in turn, invests? What would be your reaction if you found that it would be investing in so-called low-tax jurisdictions?
Mr. Limeburner: In my view, given that at the end of the day we are tax-exempt, especially in the United States through the tax treaty, tax is not an issue. Those structures are usually limited partnerships, so they would flow through to the ultimate beneficiary. Typically, I do not give that much concern. Rather, I look at geographic exposure so that I achieve a balance in the portfolio allowing me to have amounts in the U.S. or in Europe. That is how I would approach it. Currently, the tax issue is not much of an issue for us.
The Chair: Senator, you would not want to have any of that $750 million put at risk.
Senator Meighen: I certainly would not. We have not quite got there yet, chair. We are over $400 million.
The Chair: Mr. Lyon, would you agree with the statements made by Mr. Limeburner on the issue of the tax-exempt and these trusts?
John Lyon, Managing Director, Investment Strategy, University of Toronto Asset Management Corporation: Very much so. UTAM is probably a good illustration of the direction that the university endowment investing community in Canada is headed. We are probably a little farther along the curve than many other organizations. Mr. Limeburner mentioned a 20 per cent target. We run the university's endowment and pension funds each with a 45 per cent target for alternative assets.
To put some numbers to it in the context of what we are managing, we currently have about $1.3 billion of commitments to over 60 private funds on a global basis across venture, buyout, oil and gas, commodities and real estate. We have another $1.3 billion in about 30 hedge funds, also global in scope. All of these cover a broad range of target industries and target strategies. Many of them could not be thought of as exotic, but many of them definitely have complex investment strategies.
The underlying structures they invest through can vary widely. At some point, it is almost impossible to follow the chain all the way down to the underlying investments. In our case, there are over 750 investments inside those 60 private funds across all different kinds of asset types, including infrastructure.
From our perspective, we very much support Mr. Limeburner's comments and CAUBO's position because we are tax-exempt. We are looking at simply an expected after-tax return for a certain risk level. To the extent that tax uncertainty is introduced through the existing wording, it creates a fairly severe potential problem for us.
Senator Ringuette: Thank you very much for your presentation. I should say that I am surprised that the Department of Finance officials only called you back earlier this week. However, I am not really surprised, knowing the way they have operated on this bill.
A month ago, a group of witnesses with the same concern as you in regard to the non-resident provision received what they called a ``comfort letter.'' When you met with them earlier this week, did they show you this comfort letter?
Mr. Limeburner: We are aware of it because, as I mentioned earlier, our university pension funds are for the most part members of the Pension Investment Association of Canada, PIAC. To the extent that letter is comfort, it would cover them. We are familiar with it, and we are aware that PIAC was sending its letter. Ours was sent about the same time in January.
There was no mention that the tax-exempts would be covered by a comfort letter. There seemed to be a reluctance to talk about extending it. The primary part of our discussion, as I recall — and Mr. Cochrane can support me here — was that Finance Canada officials were interested in finding ways to make the legislation work for our situation. Would that be fair to say?
Darrell Cochrane, Chair, Taxes Committee, Canadian Association of University Business Officers: Yes, I would agree with that.
Senator Ringuette: Have they offered a comfort letter?
Mr. Limeburner: No, they have not offered a comfort letter.
Senator Ringuette: Would a comfort letter comfort you?
Mr. Limeburner: We asked in our letter and our position today is that we would like to see the legislation amended to exclude tax-exempts. That has been argued by other witnesses before this group.
Also, on the discussion about what comfort is in a comfort letter, I know a witness here made the case that it is an accepted fact that —
Senator Ringuette: Two witnesses.
Mr. Limeburner: With the uncertainty in the present-day government, comfort with legislation in place that is retrospective to early 2007 does not, speaking for myself, offer a lot of comfort. That would have to be a further discussion that has not yet been discussed with Finance Canada.
We heard the earlier group talk about uncertainty and complexity. We feel the same way about this bill. It provides another level of uncertainty and the downside is so severe.
If it were an implication for a portion of tax on what we have invested, that would be one thing; but we would be responsible for the tax payable on the whole entity. That is what is so sweeping. We are tax-exempt. The rules are changing here for no good reason. We asked Finance Canada why tax-exempts were caught, and I did not feel we got a satisfactory answer, that we were caught in the net and there is no reason why an exemption should be given. I have a problem with that.
Senator Ringuette: Have you spoken with your legal adviser about what kind of amendment needs to be brought forth to accomplish what you are seeking?
Mr. Limeburner: In terms of specific language, no, we have not.
I do note from the evidence that the Investment Council Association of Canada, ICAC, suggested an amendment in December. It seemed a very basic amendment to say that tax-exempts, if they are deemed to have made contributions, are deemed not to have made the contribution.
I do not know if that would work. That would have to be discussed with Finance Canada, but I would think something similar that clearly states that tax-exempts — in our case universities and colleges, although I do not think it could be spelled out as such, it would have to be a much broader term — are exempt from this particular part of the legislation. Further than that, no, we have not addressed the issue.
The Chair: Flowing from the senator's questions and your answer, I have understood you to say that even though you did have meetings within the past week, or at least a dialogue with people from Finance Canada, you had no sense following those discussions that they empathized with your position and might consider relief.
Mr. Limeburner: It was a phone conversation, and there was no indication that they were considering relief.
The Chair: Is that all there has been since your letter of January?
Mr. Limeburner: Yes.
The Chair: Well, stay tuned. They are coming here in a few minutes.
Senator Moore: You just triggered a thought. In your discussion, Mr. Limeburner, did the officials acknowledge that you are tax-exempt and that they want you to remain tax-exempt?
Mr. Limeburner: They acknowledged that we are tax-exempt. They did not indicate that they wanted us to remain tax-exempt in terms of this particular provision.
I mentioned that the discussion was more that there are exemptions under the proposed amendments, and surely you can fall under those amendments. Is that right?
Mr. Cochrane: Yes.
Senator Moore: That does not sound very comforting.
Senator Goldstein: Gentlemen, we are obviously quite concerned about the problem you raise. I think everyone wants to try to find a solution to that problem and a variety of other problems that have been raised with us.
Although you are not speaking here today for any tax-exempts other than universities and colleges, do I take it correctly that the same preoccupations that you have would be equally applicable to hospital foundations, to Canadian Cancer Society foundations or to the Jewish Community Foundation of Montreal, which I chaired until I arrived in the Senate, which has $200 million worth of investments?
All of these tax-exempt non-profits, if I can use that terminology, fall into the same basket that you are concerned about; is that correct?
Mr. Limeburner: I would say yes to that. It would include high school foundations, one of which my son attends, which is Minister Flaherty's own high school alma mater. Any tax-exempt entity today — a registered charity, for example — is caught in the same net. There is no distinction.
Senator Goldstein: We will be hearing from the department in a few minutes, but I understood you to say that they feel comfortable — and we will let them speak for themselves — that the amendments they will be proposing will grant you relief. At the moment, you are not as comfortable as they are.
Mr. Limeburner: It would grant us relief in the sense that, yes, we would have to, in going into future investments, determine and ensure that those particular investment vehicles fell within the exemptions.
Senator Goldstein: I see. That is what you were talking about earlier: proposing a burden that you would not want to have.
Mr. Limeburner: That is right, and it is not only the administrative burden of having to do the due diligence and the monitoring and bearing the legal costs. All that is minor compared to the implications for us of not being able to invest in the largest possible universe.
[Translation]
Senator Fox: If it gives you comfort, clause by clause consideration will not take place before the fall. Does the fact that the bill has not yet been passed put you in a difficult situation?
Mr. Limeburner: We must consider the possibility of it being passed. I just finished doing research for a manager of investments in emerging markets. One might invest in Ireland, in Europe and elsewhere. Some trusts might eventually be affected by this Bill.
[English]
The Chair: Decisions they might make in the interim are affected by the lack of clarity.
Mr. Limeburner: Looking at these vehicles now and at the proposed amendments, I have asked the managers whether the vehicles they are proposing are eligible or ineligible, or will they fall within the exceptions? Therefore, the managers are incurring legal costs to go back and find out whether or not their vehicles do, and in one particular meeting the sense was perhaps that they did not fall within the exemption.
[Translation]
We have problems at the present time.
Senator Fox: You represent a group that is extremely important to Canada, which owns huge capital. Did the Department of Finance consult you in preparing this bill in order to determine if it could have a negative impact on your business?
Mr. Limeburner: No.
Senator Fox: There have been no consultations nor any white paper announcing this might be brought forward?
Mr. Limeburner: No.
[English]
The Chair: Since there are no other questions, on behalf of the committee, I thank you three gentlemen very much. This has been helpful for us. I wanted to make sure that letter of January forms part of our record.
Mr. Limeburner: The other letter that is important to have is the letter from Mr. Gagnon.
The Chair: We have that, yes.
Honourable senators, our next group of witnesses are not here for the first time on this bill, although Mr. Hamilton may be here for the first time. We have before us Bob Hamilton, Senior Assistant Deputy Minister, Tax Policy Branch, Department of Finance Canada. His reputation precedes him. He is an eminent civil servant who I know will help us here today.
Mr. Ernewein, I believe this is the fifth time we have seen you in connection with this bill; and Mr. Lalonde, thank you for coming.
When we called you last week to come today, it appeared at the time that it would be on the narrow issue of the points raised by the Desjardins Group from Montreal. I subsequently met with you in my office, Mr. Ernewein, on that particular issue that very day.
I can tell you that the Quebec representatives, who are familiar with the Desjardins Group, were concerned by their testimony. They have written to us, and we have a letter here that will form part of the record. It is being translated. It came in the past hour from the Desjardins Group. I believe you have had discussions with them. They are comfortable regarding the problem that they alluded to.
I will ask you gentlemen to describe that situation, which evolves from a difference between a common-law trust and a civil-law trust under the civil code of Quebec and the implications of the Supreme Court decision in the matter of Thibault. Regarding the provision in Bill C-10 that relates to this particular matter of RRSPs issued in certain trust vehicles, it was contemplated that you might to have some changes in the year 2010 as mentioned. That is the Desjardins issue.
I direct this comment particularly to Mr. Hamilton, because you have not been here. We have been wrestling with this bill since November. Before we had it here at this committee, many of us also had briefings from the officials about it in contemplation of second reading and other aspects.
You have seen most of the transcripts, so there is no point in going over old ground regarding its being a simple housekeeping bill. The reality is that it has become — and I characterized it as such last night on the record — a sick puppy in need of medicine. We have had so many witnesses — more than 70 as of today. There are serious problems with this bill.
Recently, a group from the very credible Joint Committee on Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants was before us. This brick they gave us is a compendium of letters they have written to your department in relation to matters covered in this bill.
They were here as representatives of their profession but not on personal client matters or any commercial or private interests. They were here in the spirit of the professional associations they represent. They were concerned, and we tend to agree, that the accounting and tax lawyer professions are the ones who make the tax legislation work or not work. They are the ones who have to deal with it, once it has been legislated on the one hand and enforced on the other by Canada Revenue Agency. They feel they have a vested interest in legislation as it comes out. If, in their view, it is not workable, they have a dialogue with people like you to try to find a workable solution. In this case, they used strong language, as I think you have seen in the transcript. Two of the individuals had worked within the department on secondment during the course of the process, during the legal history leading up to these provisions.
This committee is committed now to working together to find a solution to save this proposed legislation and to try to get amendments that make sense, that will render the provisions in question workable. These gentlemen from these associations have offered to give their free time to work cooperatively. We are hoping that you will be open to that. We had discussions with the office of the Minister of Finance. These are serious matters, and the committee is very keen to see them resolved. Nothing is black and white in this world, particularly when you get into tax and similar legislation. However, there needs to be a bit of give and take, and the big word ``compromise'' may be necessary in this case.
The only other thing I would add is that you have heard not only from me but from other members of this committee and of the Senate on the idea of omnibus bills of this nature, where departments save up a whole series of issues and then, when it is appropriate or the system allows it, come forward with these big bills. Such bills are inherently dangerous, risky and difficult to work with. For people like us, it is really tough. It is one of the reasons such bills sail through the House of Commons without any study; it is such complicated stuff, and there are so many unrelated provisions in the bill.
In my first year as a senator in 1993, there was a learned Liberal senator from Nova Scotia who made it a career to study how Parliament works or should work. I remember him speaking about the evils of omnibus bills. We have been seeing again, even this morning, the evils. I say that openly for the record.
I think you are dedicated civil servants who really care as well. There needs to be some mutual understanding, and not at the other end of a phone. Hopefully in the future we can try to avoid this kind of thing and the terrible situations we are getting into.
I believe my vice-chair would like to say a few words.
Senator Goldstein: I would like to second what the chair has indicated. All of us around the table understand that you have a vital job to do and that you do it well. We are proud of the fact that you do it as well as you do.
Sometimes your desire to make sure that the tax burden is shared fairly by all Canadians perhaps overcomes the need to try to understand that sometimes there are exceptions and that, occasionally, dealing with those exceptions legislatively has the unintended consequence of creating collateral damage or perceived collateral damage on the part of other people, who are not envisaged or not intended to be envisaged by the legislation. You try to solve that with comfort letters.
We want to encourage you to work with this group of people who will be coming to work with you on a pro bono basis. We hope and expect that the result of their work with you during the course of the summer, while we are in recess, will have the result of creating amendments that everyone can live with so that we can get on with doing other work in this committee and not spend our entire time on this bill.
Certain areas — and we are lay people, not tax experts — appear to us to cry for amendment, or at the minimum clarification, in a manner other than comfort letters but in a way in which comfort is given to people who have no personal interest. I am talking specifically about our previous witnesses. Their only interest is to ensure that their not- for-profit organizations do not find them themselves inappropriately or unnecessarily taxed. I am sure the department has no intention of that happening.
If those intentions are common, as between the department and the various interveners, then surely and hopefully you will be able to arrive at a set of satisfactory conclusions that will allow all the stakeholders to leave with some comfort. We would find it difficult to be obliged to propose amendments ourselves. We would rather not do that. We would rather you did it.
The Chair: Thank you, Senator Goldstein. I know you are aware of this. This particular committee has a long history, since 1867. It is the oldest committee in Parliament. It has a tradition of working cooperatively amongst the members in a reasoned, non-partisan way. When there are issues such as the ones we have here, we try to develop a consensus in the committee, so that if we propose amendments we would not have a bunch of Tory amendments on one side of the table and a bunch of Liberal amendments on the other. In this case that is what we hope to achieve, and we need your help in that regard.
Over to you now, sir. Perhaps you might deal first with the Desjardins matter. We have said quite a few things, and you certainly have the right of redress. Hopefully, we can fix things.
Bob Hamilton, Senior Assistant Deputy Minister, Tax Policy Branch, Department of Finance Canada: Before I ask Mr. Ernewein to deal with the Desjardins issue, I have a couple of comments to make. They are perhaps not directly in response to what you have said — some things I cannot respond to — but I will attempt to provide a bit of perspective.
First, I appreciate the opportunity to be here to talk about Bill C-10. As you have indicated, both Mr. Ernewein and Mr. Lalonde have been here before on this bill, but I have not had the opportunity to be here and I appreciate it.
Bill C-10 is a large bill. It has had a history, but I do not propose to revisit that. As you have indicated, we have all seen it. I would like to offer a few comments about why, from a tax policy perspective, we think it is important that the bill be enacted in a timely fashion.
As officials from the tax policy branch, we are charged with trying to provide a tax system that generates the revenue that the government requires. It does so in a way that is as efficient as possible, does not impede business transactions any more than necessary but does so in a way that is fair and neutral across the system.
In all cases where we propose changes we like to ensure that they are enacted as efficiently as possible to provide certainty for taxpayers. That is part of our job, and part of that job is to come forward before you and other committees to explain where we can why we are proposing what we are proposing and answer any questions. That is the context within which we are here today.
We do a whole bunch of changes in the tax system. It is an evolutionary process. We will be continuing to propose changes tomorrow, the next day and in the months to come. Bill C-10 is not the last opportunity to visit these issues. We need to come back to them, and certainly we think it is important that we have a dialogue with tax practitioners and others who are interested to look at the tax system and find areas where we can improve it.
We do feel it is important, where there are proposed changes, if we can get them enacted and provide certainty, that is good; but we know that that is not the end of the dialogue. People will be coming back to us in the future with other suggested changes. From our perspective, where we propose changes it is important that they be enacted to ensure that the integrity of the tax system is protected where we are making those kinds of changes, and where we can provide some certainty to taxpayers in areas that are of interest to them.
With this bill, some of the changes we propose have attracted a lot of attention. Some aspects of this bill and certainly other tax changes we have done have attracted attention, but others of the changes we propose do not attract so much attention. They are more technical in nature. They are of interest to the people affected and to us to the extent that they protect the integrity of the tax system.
When we look at this bill, it is important to not lose site of those other important technical changes that are important to people that are affected by them and they are important to us, in addition to some of the changes that have attracted a lit bit more attention than some of those technical ones. We want to make the plea to look at the bill in its entirety and to consider the importance of all of those changes.
I will comment on a couple of aspects of the bill on the foreign investment entities and non-resident trust. I know you have heard a great deal of testimony on these offshore investment measures. These were put in place to curtail certain tax avoidance activities. This issue has been raised with us by the Auditor General, and if these rules were not enacted then we would perhaps be opening up the door for some to come in and exploit potential holes in the existing system.
That avoidance can have a cost. Given that these provisions are really meant to protect the tax base and prevent certain types of transactions and activities, it is inherently difficult to estimate that cost, but we do know, based on some of the transactions we have see, that it could be in the hundreds of millions of dollars.
These are changes we have proposed, as you said, to try to make the tax system fair and appropriate for all Canadians. I want to flag the fact that that is the spirit in which they have been put forward, and one reason we think it is important for the bill to be passed is to preserve the integrity and fairness of the tax system.
People have come forward to this committee and said that the rules are complicated. I would not disagree with that statement. I would just offer the comment that they are complicated because the transactions involved are complicated, and to some degree they are complicated because we have had a consultative process to try to take into account some of the concerns people had with the original proposals.
As you know, some of these proposals have been out there for a considerable period of time. People have come to us with suggestions to improve them. We have tried to incorporate those. Those typically do not simplify the provisions; they complicate them. Built upon the inherent complexity of it, I would have to acknowledge that the rules are complex, but I am not sure there is much we can do about that if we are to have effective rules, although we do try to keep things as simple as we can.
This committee has also heard testimony that is critical of the rules, and within this bill are many things that are relieving and favourable to taxpayers. There are also things that are protecting the tax base and tightening the tax system. Whenever we do that kind of protection of the tax base and tightening we are used to having criticism. That criticism embodies two types: there is the type that we have to accept as being critical because we are trying to do something that shuts down something we think is inappropriate that they are trying to do; and also there have been criticisms that we have missed the boat in terms of trying to close it down. We have done something that inadvertently has an effect we had not intended, and those are the things that would hopefully be captured through the consultations as we put the bill forward. When we do tightening changes its does generally give rise to this type of reaction, and we have to recognize that as we go forward.
I had mentioned the film tax credit. You have heard a lot about that, and I will not speak to the issue of the public policy test. I would point out that within this bill there are provisions that are of benefit to the film production industry in terms of enhancing the credit and increasing the limit on qualifying labour expenditures, and these have delivered significant benefits to the industry. That is an example of the kind of thing that is in Bill C-10 that we think is important to actually get enacted and provide certainty in legislation so that these beneficial changes can move forward.
The other specific comment I would make is in the area of charities. As I have said, the bill contains both tightening and relieving measures. Some measures in the bill are beneficial to the charitable sector and allow, for example, split receipting, where we allow credits and deductions to come into place where they otherwise might not. As well, on the other side, this bill does put into legislation proposals to tighten down on charitable tax shelters and some of the inappropriate activity that we saw back in 2003 that was leading to a significant rise in this activity and which would have obvious impacts on the integrity of the system and potentially revenues. There are both sides of that in that area. Those are examples of the kinds of things that are in this bill.
I have a final specific comment on the issue you raised of comfort letters. The bill contains a large number of amendments that basically put into legislative form the comfort letters that we provide. These letters address technical aspects of the law where someone raises with us a particular provision that may be preventing a transaction or an activity that was not intended; they are very technical, not consistent with the policy, and we can be inappropriately prohibiting transactions.
In those cases, letters are provided to the taxpayers indicating that we would recommend changes in this area and then, over time, we would try to make sure those technical recommendations are enshrined in legislation. Again, that provides certainty for taxpayers that they can go forward. I believe some of your witnesses, including Mr. Ruby, Mr. Marley and the joint committee, have indicated that that is a valuable part of the process. This legislation does put effect to some of those and enact them, and that is another reason we think it is important that this bill move forward as efficiently as possible.
Also, I would re-emphasize the issue of legislative certainty. We think it is important to provide certainty so that the tax system can function smoothly and we can preserve the integrity. As long as there is some uncertainty out there about whether something will be enacted, we do not have that degree of certainty and people can always try to take chances on certain activity. For example, we know that some of the promoters of tax shelters are noting the fact that this bill has not received Royal Assent and are trying to take a run at some areas that we might think are inappropriate.
Even for those people who do not like some of the provisions in the bill, there is some benefit to providing legislative certainty and enacting it. As finance officials, as I indicated, we try to design the proposals as best we can. Once we have done that, we try to ensure we are as helpful as we can be in moving them through the legislative process and answering questions.
We do look forward to seeing them enacted and providing that certainty, knowing that the next day we will have to be back at some of the same issues and looking at particular revisions because the world does not stand still. Business structures and transactions change, and we know we will have to be continually looking at the tax system and responding to those pressures.
Again, I described it as an evolutionary process and I truly believe that. Having said that, it is nice to have some of the proposals we put forward enacted in the bill, providing the certainty, and then move forward.
It is within that context that I would like to say that as tax policy officials, we are here to help in whatever way we can to move this bill through the process and provide that kind of certainty. Part of that process is responding to whatever questions you may have. My colleagues will do the major share of the heavy lifting, given their active involvement in this file, but we are all here to try to help move forward.
That is a little bit longer than I had intended to go on with opening remarks. I wanted to provide you with my perspective. I appreciate your comments in saying we are civil servants just trying to create the best tax system we possibly can. We do not start out to try to hurt people at all. We design it the best we can, and that is the spirit in which we are coming forward to explain what is in Bill C-10 and why we think it is important to move it forward in the process.
With all of that, I will ask Mr. Ernewein to speak to the Desjardins issue and the letter you mentioned.
The Chair: Thank you, Mr. Hamilton. You made reference to a consultative process that you have in place, which was followed. We have substantial evidence that the process is flawed and has not produced the desired result.
We are at a kind of an impasse here with this bill; I will be frank with you. We are well aware, as the place of sober second thought, that we are the first ones who have had a chance to take a real look at this bill. There has been tremendous feedback — in all my 15 years here, I have not seen such an outpouring, quite apart from the film credit issues, on complicated tax measures.
I am hoping that what you just said was not a statement to the effect that it is what it is and we are not open to any changes or amendments. I hope that is not the case, because the people that are willing to sit down and work on their own time to improve these provisions would not be willing to do that if they felt they were just being stonewalled.
I did not want to go into the detail of what was specifically said by a number of distinguished people, but the transcripts are there for you to read. They told us that the consultative process actually did not work.
The minister will meet with them, I am informed, and we will try to start a process that may involve some give and take. I want to leave you with that thought. Hopefully, you can assure us that you do have a mini-window of an open mind so that we can get ahead and give you the bill as soon as possible in the fall.
Mr. Hamilton: To clarify my comment, I have a very open mind on these matters, as we have talked about before.
We are here today to talk about Bill C-10 and provide whatever help we can to understand what is in Bill C-10. We will be having discussions post-Bill C-10, whatever it might be, on a variety of tax issues and we are very open on that. The idea of my remarks was just to say we put together some changes — the government is proposing changes through Bill C-10 — and we are here to answer any questions you have on that.
I was trying to indicate that post-Bill C-10, if it is passed or after it is passed, there will continue to be discussions on tax issues that people will raise with us. We have an open mind.
People can always point to problems in the consultative process. I am not saying we are perfect or the tax system is perfect or any bill is perfect, but we do have quite an established process of putting out proposals, putting out draft legislation, having people comment on them and having lots of dialogue with people like the joint committee. Sometimes it does not work perfectly, but we think we are very open to understanding that we cannot get it perfect the first time and we do need that kind of help.
I want to narrow the context of my comments to say we would be happy to talk about Bill C-10. I will not comment on what the minister may or may not do, but we certainly are open to explaining the elements of Bill C-10, why it is there, and the door will not be closed on tax policy even after Bill C-10 is passed.
Did you want to talk about Desjardins? I do not want to lose sight of that issue.
The Chair: There is a difference. My colleague Senator Eyton is the long-suffering sponsor of this bill. I think it is only fair that he should be given the floor.
Senator Eyton: Little did I know. I want to pick up on the chair's remark that we have a problem with Bill C-10. I heard you well and I understand your motivation and your openness, but we have a problem. We will not get Bill C-10 unless we come to some sort of compromise. We have heard from literally hundreds of witnesses who have raised problems that we think need to be addressed.
The makeup of this committee is such that the government does not control the committee. Legitimate points have been raised, and they must be dealt with.
I am delighted to hear about your approach and attitude post-Bill C-10, but our immediate problem is getting to Bill C-10. We want to make minimal changes, but we need to make changes. There must be some willingness on the part of all of the parties involved to get there; otherwise, we will not get it. The problems that involves for all of us, including the government, get worse day by day.
The program we have now is that we will have a summer recess. We will come back in the fall. We hope that at that stage there will be all-party agreement, or as close to it as we can get, for a package this committee can accept, which can then be reported back to the Senate and go on from there.
However, we do have a problem and we need your help.
The Chair: Thank you, Senator Eyton. I think Mr. Ernewein will speak to us about something that was at page 102. In any case, it is the Desjardins Group matter I referred to earlier.
Brian Ernewein, General Director, Tax Policy Branch, Department of Finance Canada: Yes, thank you.
The Chair: Did you see their letter? It was copied to Mr. Hamilton. It came in this morning.
Mr. Ernewein: I am aware of their intention to send something to the committee on this point.
I should emphasize, first, that I am not trained in civil law. While I believe I have the thrust of the explanation right, I may err in some detail. Please forgive me in advance for that.
In broad strokes, Quebec, being governed by the private property law, by the civil code, did not have the concept of a trust on the original formation. I do not know how many years ago we introduced, in the Income Tax Act, a concept of a trust or deemed trust for Quebec tax purposes that provided parity between common law jurisdiction, where the trust concept is inherent, and a trust concept under Quebec or civil law.
My understanding is that in the 1994 reform of the civil code, Quebec brought into its own code the concept of a trust. Not with blinding reaction speed, but sometime later on, becoming aware of this and identifying the existence of that new civil code definition of a trust, it occurred to us as being logical that we no longer needed this deemed trust concept we had in the Income Tax Act. Therefore, we proposed, in amendments put forward a few years ago, to withdraw it and rely on the actual trust concept that was applicable in Quebec.
In the meantime, while that proposed legislation, now in Bill C-10, was out for consultation, we had a Supreme Court of Canada decision in the Thibault case that cast some doubt on the scope or efficacy of the civil code concept of trust — that it might not allow for the same flexibility, the same range of powers that trusts enjoyed in common law jurisdictions or that are deemed trust-facilitated.
Being aware of that decision when we had this draft out, we proposed to create a window to take stock of the effect of that decision. Bill C-10 proposes that the proposed repeal of our Income Tax Act deemed concept, which was applicable on announcement or thereabouts originally, was not to apply before 2010.
As part of our discussions, we engaged with some financial institutions to try to understand the impact of this. It is fair to say that at the time we proposed to include this window, our view was that the trust concept under the Quebec civil code would work or that adjustments could be made to financial institutions' practices to make it work. That seems a bit more doubtful now. It was not an issue in the past and it is not an issue presently because we have until 2010.
The same issue will arise in respect of the need or lack of need for the deemed tax concept of trust. We have the same issue for RRSPs, which you heard about from Desjardins, with the Budget 2008 for tax-free savings accounts. If the issue is that you cannot take money out of your RRSP under the Quebec civil code form of trust for a homebuyer's or lifelong learning plan, then there is presumably the same issue with taking money out of a tax-free savings account vehicle. That is a basic objective of the tax-free savings account under the proposal.
It seems to us that this issue will require an answer not only for the RRSPs and the existing funds but also in the context of Budget 2008's proposal on tax-free savings accounts. That will come forward to Parliament later this year. We have not made our recommendation to the minister, but an answer will be provided one way or another so that this committee or another committee would have the opportunity to consider our solution or lack thereof at that time.
The Chair: Senators, the floor is open for questions.
Senator Ringuette: Gentlemen, you are lucky that we work under the current chair and co-chair because they were very polite and diplomatic in expressing the views of most of the members of this committee.
In December, when the first issues around trusts were brought forward, we asked for a letter of comfort from the Department of Finance. That letter of comfort was presented at the eleventh hour to the group concerned at the end of April or early May. It took four months. That was not the first time that group had expressed some concern.
Another group before the committee this morning spoke to the student endowment funds in the amount of $10 billion. The fund managers were not consulted on this bill. I am sure you heard from some kind of official at the House of Commons committee meeting on Bill C-10. You have known for quite some time about their concerns. They made numerous phone calls to the department to express their concerns about that $10 billion. From the outset, when this committee received this bill, the first question asked by the chair was whether you had spoken with the stakeholders. We were told, yes, we have spoken with them and they all agree. Now, they are appearing before this committee and telling us that the bill has been creating uncertainty since it was tabled and is still creating uncertainty.
Yet, you come before the committee this morning saying that if we do not pass the bill, it will create uncertainty. Honestly! Of all the comments we have heard on this bill, the last comment that I needed to hear from the department, Mr. Hamilton, is that this committee will create uncertainty if it does not pass the bill.
Both the chair and deputy chair of the committee have asked whether you will work with this committee to develop the needed amendments. Your officials have heard the testimony and they have reported back to you what we have heard from the witnesses and from committee members.
Will you work with this committee to bring forth as soon as possible amendments to remove the uncertainties?
Mr. Hamilton: Let me provide a response to that. I appreciate the politeness and the civil tone. We are officials trying to do the best job that we can. As we come forward with proposed legislation, in particular legislation where proposals were announced a number of years ago, we put out draft legislation, have received commentary, and try to present the situation factually as best we have it and report the concerns that have been put forward to us. As mentioned earlier, to some of the concerns, we would be able to say we did not intend that and we need to think about how that would work, while to others, we would say that certain taxpayers are expressing a concern because that was what was intended. It is unfortunate from their perspective, but that is what we intended.
When we come forward, we present the situation as best we can from our perspective. Far from indicating that this committee would provide uncertainty, I guess my only plea on that front is that, in an ideal world, if a proposal put forward were enacted right away, that would be the most certainty we could provide.
In the tax area, when we put a proposal forward, we have a process of trying to develop draft legislation that makes it more tangible and provides a better basis for commentary. Then the bill is tabled in Parliament and begins that process, which we are engaged in now on Bill C-10.
My only comment is that when we are there, the most certainty we can provide to taxpayers happens when those provisions are enacted. That is a factual statement. As an official working on the tax system, it is nice to have that certainty. My comments at the beginning were to provide that context as we see it from an official's perspective.
I would add that I have no mandate to offer up amendments at the moment. I know there has been an example already where we have made a commitment through a comfort letter to recommend changes going forward should Bill C-10 be passed and to work on that. However, beyond that, I cannot make any commitments here today other than to say that as officials, when people come to us with tax issues, we are as open as we can be to try to consider them from all of the various aspects of trying to make the system efficient, not get in the way of appropriate business transactions, and be fair and neutral. That is all we can bring to the table and what we try to bring to the table.
I cannot comment further than that today, other than to explain as best we can what is in Bill C-10. I would not try to pin all of the uncertainty in the tax system in any one particular area. We try to achieve as much as we can, given that these are complex areas, and to have a process to ensure that we fine tune it where necessary and get things as right as we can, recognizing that they will not be perfect and that we will have to come back to them.
Senator Ringuette: How much certainty are you able to provide soon to the universities' $10-billion endowment fund?
Mr. Hamilton: I will have to defer to my colleagues on that question. Certainly, we have had some discussion.
Senator Ringuette: You had one phone call, yes.
Mr. Hamilton: Perhaps Mr. Lalonde or Mr. Ernewein would care to speak to that.
We are open to hearing what they have to say to us and considering that. Whether it is in the context of Bill C-10 or subsequent to Bill C-10 is a question I will not comment on. Certainly we are always open to hearing what people have to say about possible improvements to the tax system.
Mr. Ernewein: First of all, Senator Ringuette, if I may, you said we knew about the issue of the pension funds that were raised before. I think we learned about it on the floor of the committee last December.
Second, regarding the point about our having resolved this with a comfort letter on the eve of the hearing, the record will show that we sent a letter out in early April. There was a follow-up letter at the end of the week before the committee hearing, with an email exchange following. I do not think anything turns on that, but I did want to clarify that point.
With respect to the universities, yes, we have had the occasion to speak with Mr. Limeburner and his colleague. In terms of your precise question as to the certainty, we have said to you before that we think that the definition of commercial trust — that is the rule that takes you out of the application of the non-resident trust rules because of the commerciality — is the basic rule that ought to apply. Clearly because of the committee's interest in this thing, we wanted to look at this as closely as we could.
In the case of the pension funds, one factor that resonated, I surmise, with committee members and with us was the sheer size of the pension funds. I think we were told that the amount in play was approaching $1 trillion dollars. We were struck by the amount, the sheer scale of the investment that the pension funds were investing in exotic investments — I think I used that term at that time — in fairly sophisticated, unique structures. A power dam in another country, for example, is not your basic play, to use a bit of jargon, and thus might not fit squarely into the commercial trust definition. At least in part, that scale informed our recommendation to provide an exemption for pension funds.
We did not provide an exemption for RRSPs for direct foreign investment, because we did not see that same sense of scale, and indeed there are limitations on RRSPs to make those sorts of unique foreign investments. However, we provide an accommodation for them through the pooling vehicle on the Canadian side of the border.
Senator Ringuette: What accommodation have you put forth for the university tax-exempts?
Mr. Ernewein: I was trying to answer that by providing context for what we did for the pension funds.
Now we come to universities. I was not here for all of their testimony, but if I have the figures straight that Mr. Limeburner and I discussed the other day, I think the university endowment funds represent approximately $10 billion, or perhaps 1 per cent of the pension funds. The largest of the universities are in the nature of $1 billion dollars — still big money but smaller than the pension funds, and perhaps as much as half. Perhaps in some circumstances over half of that will be invested outside of the country.
You might have a university fund, $1-billion fund, with half of its investments outside of the country, or $500 million. Assuming some diversification, and not having more than 10 per cent perhaps in a particular investment, it is a $50-million investment in a particular foreign investment.
Would that sort of scale rival the pension funds? Would the uniqueness of it be such that it would be unlikely to be satisfied by the commercial trust definition? It is not clear to us that that is the case, and therefore that we should be looking again — we would say — at the commercial trust definition and see why that cannot be satisfied.
Senator Ringuette: You have not satisfied my question. You have not answered the question.
Mr. Ernewein: I am sorry. I have attempted to.
Senator Ringuette: I guess it reflects Bill C-10 — attempts. I am sorry to say, but this committee is being used as your consultative process. That is not the purpose of the Senate.
Senator Goldstein: This should not be an adversarial process. We are on the same team. We all want the same things. We want to ensure that all Canadians bear — just as you do — their fair burden of the tax system, because we need tax money in order to run the country. We are absolutely ad idem in that respect.
You, like we, do not want people or institutions to find themselves caught in a taxable situation that is unintended by Finance Canada and inappropriate for them. Again, we are ad idem.
Generally, as the Senate, we do not like to interfere with tax policy. We really do not want to do that. It is not our proper role, in my view, speaking only for myself.
I sympathize, and many in this committee I am sure sympathize, with the proposition you correctly put, Mr. Hamilton, that there is some measure of uncertainty from the mere fact that we are taking this long to deal with this legislation, much of which is very remedial. We are sympathetic to that and understand that. Again, we are on the same team in that respect.
What we are very concerned about, and remain very concerned about, is what I earlier called collateral damage.
You tried to avoid some of the issues in making use of your section 248 availability for general anti-avoidance mechanisms. We are very sympathetic to that. Sometimes they work, sometimes they do not, and sometimes the courts are not sympathetic to the position taken by Finance Canada or the Minister of National Revenue with respect to anti- avoidance situations. We, like you, do not want Canadians to take advantage of a situation if they see it.
However, we, like you, understand that the Privy Council and the Supreme Court and every court in this country have said that it is the privilege of every Canadian to so organize his, her or its tax affairs so as to minimize taxation and to avoid taxation. Not evade taxation, but avoid taxation. Again, we are ad idem. In 99 per cent of what we are talking about, we are all on the same team.
Where we part company is where you have unintended consequences. When Mr. Ernewein just told us that, on a comparison of scale, $50 million is not a lot in comparison to billions of dollars, that is a correct statement. However, with respect, it is not a correct consequence. The $50 million of university funds is very important to the university.
Dealing with universities but not dealing with hospital foundations and the Canadian cancer foundations and all of these other foundations that are not trying to evade taxes — they are not-for-profit vehicles — is not acceptable to them. They are important in our society and important to Canada. Not being ready to amend in such a way as to provide clarity rather than provide interpretation — which is what you just did, Mr. Ernewein — is not acceptable to them. Speaking for myself, I would not be very happy about that.
I do not want to have to worry that some not-for-profit institution will have to go to court to establish that it does not have to pay tax. I do not think they should have to pay tax, period, and you do too.
When we are told that on the broader scale of things it is not that crucial, we do not agree with that. I do not agree with that.
I have to emphasize what the chairman said so well a few moments ago, that we are hopeful and expectant — and Senator Ringuette said the same thing — that there will be concrete and good results from the consultations that will take place during the course of the summer. Not interpretations, not ``they are wrong,'' but whatever comfort they need that does not adversely affect the system should be given to them, in my view. I hope you will do that.
Senator Massicotte: Thank you for being with us today. I do not have much to add to what Senator Ringuette, our chairman and vice chairman have said.
I know Mr. Hamilton because we worked together on the board of the Bank of Canada. I acknowledge that your presentation did not get the voice you had hoped. To us, it sounds like you are trying to tell us to accept the bill as a whole and maybe showing a little less openness than we thought.
I know you well enough. You are open. You are a smart person. You are well surrounded. I am sure you will come back to us with amendments.
The bottom line is that many of us will not accept the bill as written; that is our message. We do not want to negotiate because it is unacceptable. I am sure you will come back with changes, as you are smarter than we are in this matter, to please more of those persons who have complained that the bill contains serious deficiencies. Good luck, and have a good summer. We look forward to your advice.
Mr. Ernewein: Senator Goldstein, it is clear from your remarks that I have left the wrong impression. I was not suggesting that $50 million was immaterial or unimportant. In my books, it is quite material. Rather, I was seeking to suggest that the outlet we have to provide relief to the universities, to the pension funds and to the other tax-exempts exists in the distinction between commercial and non-commercial trusts. The argument brought forward by the pension funds was that by virtue of the scale of their investments it did not fit. We did not know that argument applied to smaller scale investments.
Senator Goldstein: This bill uses the term ``for greater certainty'' a dozen times that I have noticed. What is to stop you from saying by way of an amendment that for greater certainty, that section does not apply to not-for-profits, and you can gear that to those that have receipts giving availability under the Income Tax Act. That would solve a lot of problems for a lot of people. Why do you not do that? Let us start with non-profits.
Mr. Ernewein: Non-profits might be the form of tax-exempts that you do not want to give this to. It might be hospitals and charities as well as the universities. You raise an important question on the broadest point of simply saying that since they are tax-exempt, why not take them out of the field. It causes concern that certain tax-exempts, in particular those that have a connection, can be used as an intermediary for foreign investments to safeguard against that.
Senator Goldstein: I am trying to encourage you to think change, and not to think finance.
Mr. Ernewein: I think we understand that.
[Translation]
Senator Fox: Regarding trusts, you stated in your opening remarks that you understand the problem completely and that you are prepared to bring forward a solution. In other words, you do not want to put at a competitive disadvantage trust companies or companies having investments in trust RRSPs vis-à-vis regular banks.
It is noteworthy that the Canadian Bankers Association supports the changes requested by the Mouvement Desjardins and the other trust companies in Quebec.
There is going to be a three month recess before we resume our consideration. When we do, you will be able to propose an amendment. It is fine and dandy to be talking about 2010 but this is just around the corner, a matter of a few months. Since you have indicated that you might bring forward amendments by the time we return, can we take for granted that this matter will be settled by the fall?
The Chair: Excuse me, just to clarify. We referred several times to a letter dated June 12 from Desjardins Group which we received this morning at 11:25. We sent this letter to be translated into English. I would like to emphasize that this letter was sent to our Clerk and that it will be placed on the record in both official languages.
Senator Fox: When Mr. Steven Ruby, who is a lawyer whom you know very well and who has expertise in several areas, raised the question of property transfers between generations in a document he submitted to us, he said there is a perverse effect in the sense that if you transfer property between generations in a family, there would be more tax payable than if the family business were sold to a third party. I cannot imagine that you would want to discourage intergenerational transfers within a family. I would like to have your comments on these two issues.
Mr. Hamilton: I will ask one of my colleagues to answer both questions.
[English]
Gérard Lalonde, Director, Tax Legislation Divison, Tax Policy Branch, Department of Finance Canada: With respect to the first question concerning Desjardins and whether we will come forward in the fall with amendments, it is consistent with other questions about whether we will be come forward with amendments. As Mr. Hamilton indicated, we do not have a mandate to do that, so we cannot say yes or no. I can say, and repeat what Mr. Ernewein said, that the same issue arises with respect to the tax-free savings account, which is part of Budget 2008. We expect that the Minister of Finance will want to table a bill implementing the remaining measures outstanding from Budget 2008 to the extent that action is needed, and one would expect that to be the place for something like that.
With respect to your second question and the issue of what has been referred to as ``restrictive governance,'' we are talking about covenants not to compete. A couple of tax cases gave us some pause, Fortino v. Canada and Manrell v. Canada. Those two cases read together stood for the proposition that an amount received by a shareholder for a covenant not to compete was tax free. We all would have liked to go to the status quo ante where one saw those covenants but did not see an amount broken out of the deal to be specifically in consideration of the covenant. These court decisions gave rise to the startling proposition of a tax-free receipt in the context of the disposition of a business. We began to see many taxpayers assigning a value to a non-compete covenant in a variety of situations, even to the point where taxpayers would enter into covenants not to compete with their own corporations. That became unsustainable as part of the tax system, and as a result we had to move to implement these rules.
However, we were faced with a problem. The court decisions established the principle that a personal covenant gave rise to a tax-free receipt and brought to the limit, which means that you can have any personal covenant and achieve a tax-free amount. These rules had to be fairly comprehensive and to deal across the board with all kinds of covenants, but we dealt more particularly with the covenants not to compete because they were the more common ones in place. Other covenants would have come forth in order to take advantage of the decisions.
In designing those rules, it became apparent that there was a great willingness on the part of non-arm's-length taxpayers to enter into transactions to create tax-free receipts in order to achieve the benefit before and, with these rules in place, to achieve whatever benefits could be obtained by recharacterizing the receipts from an amount on income account to amount on capital account. Accordingly, their rules are different for non-arm's-length transactions than they are for arm's-length transactions.
Mr. Ruby has presented the case. He has probably picked the poster boy of all cases where it looks rather startling. However, these rules deal with non-arm's-length transactions in general. They can deal with transactions between two individuals, between an individual and a corporation or between two corporations.
When you start looking at transactions between two corporations, there can be various scenarios. Amounts can be paid allegedly for a non-competition payment, and situations arise where you can funnel those payments to individuals. You can see situations where there will be, at least, attempts to convert what would otherwise be corporate surplus coming out as dividends to potentially tax-preferred capital gains or even tax-free capital gains to the extent that the amounts received were receivable under the lifetime capital gains exemption. That exemption has been increased to $750,000.
The conclusion to all this is that yes, Mr. Ruby is correct. He has pointed out a good example. Given the history of this particular file, it is apparent that non-arm's-length transactions are a problem. As I have mentioned, they can be used to convert what would otherwise be income amounts to tax-preferred or tax-free capital gains and, as a result, we have different rules.
That is not unique in the Income Tax Act. We have stop-loss rules for non-arm's-length transactions and a variety of rules that apply in the case of non-arm's-length transactions that are more stringent than in the case of an arm's- length standard.
Senator Massicotte: The legislation deals with RRSPs and savings accounts. However, I would urge you, based on Mr. Hamilton's argument of certainty, that it would be important for the minister or the ministry to make a statement for the public to expect something. There is uncertainty for these people, and 2010 is only a year and a half way. These large companies need certainty, and if you can provide that more formally without expressing precise legislation, I think it would be useful.
Senator Meighen: Like some of my other colleagues, I am not a tax lawyer, which will become readily apparent, although I confess I was a lawyer in a different jurisdiction.
Will the foreign trust be subject to a non-resident tax if there is a Canadian resident contributor?
Mr. Ernewein: Yes.
Senator Meighen: One of our witnesses suggested that other jurisdictions did not have that sort of rule. If that rule were adopted by other jurisdictions, you would have every jurisdiction under the sun fighting over the trust and taxing it. It would be a ludicrous situation. As long as you could trace some connection to the trust back to a resident, then you would get your share of tax.
Whenever we talk about non-resident trusts and tax avoidance and evasion, one thinks of sunny islands and low-tax jurisdictions. If it is a non-resident trust in a high-tax jurisdiction, such as Western Europe or the United States, why are we not satisfied with that being a jurisdiction where tax will be appropriately levied as it is in our country? Why do we want to extend the rule so far that it borders on the ludicrous?
Mr. Ernewein: I appreciate the question. It was Mr. Ruby who raised this in his testimony, and I appreciate the opportunity to speak to it.
First, we used to think what your question implies. We should be able to make a distinction if another jurisdiction had a high or comparable tax rate and we could rely on their rules. Indeed, the original proposals on the non-resident trust measures included an exemption for U.S. trusts on the view that it was comparable tax rate and that they would ensure sufficient tax was paid.
However, that proved not to be the case, but not because their tax rate was judged to be insufficient. The U.S. has great rules as far as I am aware in going after trusts that are used by U.S. residents or citizens to avoid U.S. tax. They are understandably less concerned with the use of U.S. trusts by non-U.S. residents or citizens to avoid third-country tax.
Therefore, we saw situations after we proposed our exemption under which U.S. trusts were being used. The simplest case is to earn income from a third country. The income was not being taxed by the third country or by the U.S. because they did not care. It was income considered to be earned by a non-U.S. person, that is, a Canadian; and Canada thought that the income rested with the trust and was not taxing it either.
In that example, you had a comparable or even a high-rate tax jurisdiction for which the premise that sufficient tax was being paid did not hold. That was the main reason that the proposed exemption for the U.S. trusts was withdrawn several months after the budget proposal. It also puts aside all the decisions about what constitutes a high or low rate. Even in the case of a high-rate jurisdiction, there seemed to be some fundamental issues.
Senator Meighen: I think I am hearing that there is a jurisdiction that does not care to raise tax money. I find that difficult to understand. You are saying the Americans are so rich that they do not care about money they could otherwise tax.
Is there no way of saying that if it is not taxed, we will tax it?
Mr. Ernewein: I think there is a way of saying that if it is not taxed, we will tax it. It is the way we do it, which is to say that we will make you resident here and impose a tax. If you paid tax in the other jurisdiction, we will give you a foreign tax credit.
Mr. Ruby and Mr. Gagnon raised this issue in December about whether our crediting rules work as well as they ought to. It is over the concern that there is a 15 per cent cap, and beyond that you need to go to competent authority. We know that is the case, and we thought it was reasonable in the sense that we think this trust is resident in Canada. That is what informs the rules we have now.
If another country thinks that trust is resident there, why should we always stand second? Perhaps there ought to be a debate over who should give credit for whose tax.
Simply to lay it all out before you, an alternative is to say no, to say that we should always stand second and guarantee that there will not be double taxation by providing a credit up to the full amount of foreign tax paid, whatever it is. I think this is sometimes more of an academic rather than a practical question. We have observed that it is, many times, the sunnier places where these trusts are located and there is not as much to worry about over double taxation arising. However, it can, and when it does, the question is whether to resolve it through double taxation or whether it should be subject to some negotiation.
Senator Moore: I want to say that I thought the chair's opening comments were superb in setting out the position of the committee.
Mr. Hamilton, you ragged the puck for 12 minutes and then you told Senator Ringuette that you have no mandate to offer amendments. I was not expecting you to come here today with amendments, but I am expecting you to say that you will be coming through with amendments after you have an opportunity to work with these volunteers who have given us wonderful presentations that have made sense to us.
We have to be in the Senate at 1:30. Most of the issues I am concerned with have been raised by other members of the committee.
I expect, too, as do others who have an interest in seeing that our universities are sustained, that they will get proper treatment. I will be watching that one very closely. That is all I have to say for now, chair.
The Chair: I would like to make the following clarification regarding Senator Moore's comments. The thrust of my remarks was not that you gentlemen would come forward with amendments, but rather that this committee will come forward with amendments based upon the input we receive from these experts in Toronto.
Our exhortation to you is please cooperate with them as they work toward preparing draft amendments for us so that the committee can get together in a non-partisan way and propose amendments to the proposed legislation. There is a technical difference, Senator Moore, in that these gentlemen are not necessarily mandated to come forward with amendments themselves, but they can certainly cooperate with these stakeholders to help us.
Senator Moore: I agree with that.
The Chair: That was my point.
Senator Moore: I know, and you are right to make that point. However, I did not feel an indication of any receptiveness for that. I may be wrong, but time will tell.
The Chair: This will be my closing, and I think Mr. Hamilton would like to say a word. I appreciate your coming here and listening to us vent. I said to my esteemed colleague to my right that this is a kind of come-to-Jesus meeting today, where we can lay the cards out on the table. It has been a rough go for us. You heard what the sponsor of the bill had to say.
We would like to get the bill passed, get it through and out of here and back through the system. We are at an impasse. We need to find a quick fix that may not be perfect, and I think I made that very clear.
I had the feeling — maybe it is wishful thinking, being a Scot — that you will be cooperative and helpful. Some of my colleagues did not get the same hopeful feeling, but it is a subjective thing. However, thank you on behalf of all of us for being here and listening to us vent. I know you are professionals and you will be there for us, as you said you will, and help us out.
Mr. Hamilton: To close, I do not think I will make everyone happy, but thank you for inviting us and giving us the opportunity. I appreciate the clarification you made on amendments. I hope that, through this, it will help you to understand a little bit about what we are trying to do, as tax policy officials, in putting this bill forward — what we can and cannot do.
We have tried to explain some of the reasons why provisions are in the bill and why it is going forward. I think we have shown some examples where if an issue was raised with us, we felt we could deal with it in the context of passing Bill C-10, but prepared to recommend future amendments.
I think I have also indicated that we will have an open ear to proposals that people want to make to us where they think things are not working. When it comes to an issue of amending Bill C-10 or not, I will not comment upon that. However, I appreciate that we are all on the same page of trying to get a tax system that is appropriate and fair.
That is what we are striving for. From our perspective, enacting the legislation is another element of certainty that we can provide to taxpayers, even knowing we will have to come up to issues in the future.
Thank you very much for giving us an opportunity. As a tax policy official, believe me, we are used to people venting on us or telling us things we do not like.
The Chair: Thank you. You know as well as we do that this is not the normal majority Parliament or anything near that. This committee has the power to make amendments — for example, to take out the non-resident trust rules. I suggest that that would not be a constructive move and you would not like it, but we might.
What my colleagues and I have been saying is let us have educated amendments that we will initiate, but let them be sensible amendments. We need the expertise and the intended consequences of the stuff, which I think I have made clear.
Senator Fox: I have a point of order after you have freed the witnesses.
The Chair: I will thank the witnesses again and declare the meeting adjourned.
Senator Fox: No, I have a point of order.
The Chair: I thought you might want to do it in camera.
Senator Fox: I do not mind doing it in camera.
The committee continued in camera.