Finance Committee on June 5th, 2007

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Yes.

[Wallace Conway]

In the United States they have certain entities that can be treated either as a corporation or as a partnership or a disregarded entity. In certain cases it's advantageous to set up one of these entities that is treated as a corporation for Canadian tax purposes but is treated as a disregarded entity or a flow through for U.S. tax purposes. In so doing, basically you could finance this foreign entity with a loan in a Canadian partnership or a U.S. partnership, which gives you a deduction in Canada. That hybrid entity will loan to another U.S. company. That hybrid entity would be a corporation for Canadian purposes, and that would be treated as active business earnings for Canadian purposes. But for the U.S., if you merge the two companies, there's no interest and no expense.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

In the end, it works about the same way.

[The Chair, Conservative, Brian Pallister]

We'll continue now with Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair. I have two really quick questions.

First, do you have an answer to Mr. Dykstra's question on the rollover piece?

[Gérard Lalonde]

Yes, I do. It's to be found in the amendments in proposed subsection 146(8.1) of the act dealing with a deemed receipt of a refund of premiums. In that provision, when a person dies having money in an RRSP and the RRSP is collapsed and paid out to a beneficiary, if that beneficiary is a spouse or common law partner of the deceased or a financially dependent child, those recipients, when they receive the RRSP balance, have to include it in income, but they can in turn roll it over into another RRSP or a qualified annuity. Those provisions have existed for a while, but the difficulty that was found was that for many financially dependent children, the actual beneficiary of the deceased that would be obtaining the refund of premiums from the RRSP was not the child, for obvious reasons, but rather a trust in favour of the child. These amendments ensure that such a trust for the benefit of a financially dependent child will be eligible for the rollover from the RRSP to a qualifying annuity for the benefit of that child.

[Mike Wallace, Conservative, Burlington, ON]

My second and final question is based on the report from the Library of Parliament. It says, under foreign investment entities, that the proposed foreign investment entity rules under Bill C-33 would apply to all Canadian taxpayers--and then in brackets--except new immigrants to Canada.

Is that true, and what's the definition of a new immigrant? Does that change after they've been here for a number of years?

[Gérard Lalonde]

Yes, it is true. There is a provision in there for people who come to Canada having trusts in their home jurisdiction. If they move to Canada, all of a sudden these rules would apply to those as being non-resident trusts, for example. There is a provision in there for a five-year adjustment period.

[Mike Wallace, Conservative, Burlington, ON]

Okay, thank you.

Those are my questions, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Merci.

To conclude, Madam Wasylycia-Leis is going to have some questions.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you. This is going so fast I can't keep up.

I have a couple of questions.

I'd like to take you back to the whole issue that went through to the Supreme Court regarding the Bronfman family and the challenge they faced after moving $2 billion out of the country. There was a group out of Winnipeg through Choices, a social justice coalition, and an individual by the name of George Harris, who took this right through to the Supreme Court. It didn't rule in his favour, but I think the court made very serious statements around problems within the finance department over this kind of development.

Is Bill C-33 and its predecessors a response to that kind of situation?

[Gérard Lalonde]

I'm not going to respond to any specifics of any particular family in Canada. However, there was an issue a few years ago and it effectively dealt with an issue surrounding the emigration of trusts, and the Income Tax Act was amended some time ago. I think it was effective 1999. I could be corrected on that, but it was effective some number of years ago to deal with that situation. This deals with something else.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

It's no longer possible for a company or a family within this country to decide they can avoid paying taxes by setting up an entity, either an FIE, an NRT, or whatever. You're saying that was looked after in the past and this bill goes another step in that direction.

[Gérard Lalonde]

Yes. The other issue had to do with taxpayer emigration, and that was dealt with before, essentially providing for a deemed disposition of assets and recognition of tax at the time of departure from Canada. This deals with Canadians who are and remain resident in Canada but who have invested funds in foreign investment entities or have contributed funds to non-resident trusts.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

It's clear there are some corporations and individuals who will pursue very aggressively any kind of way to avoid paying taxes. The bottom line for them is, what are the odds of getting caught? My question is, what will be the impact of Bill C-33 on those odds?

[Gérard Lalonde]

The odds of getting caught imply tax evasion rather than tax avoidance, I think, but maybe I'm getting that wrong.

These provisions don't deal with tax evasion. If what you are doing is hiding money offshore and not reporting it, that's already against the law. These provisions don't deal with that. That's what the Canada Revenue Agency does in terms of trying to track that down.

In the 2007 budget we have proposed other measures dealing with tax information exchange agreements with other countries and with the effects of not having either a treaty or a tax information exchange agreement, otherwise known as a TIEA. The proposals are very interesting in that they offer a carrot, if you will, to encourage countries to enter into TIEAs. They get effectively some of the same benefits they would have had they entered into a tax treaty. On the other hand, if they don't enter into the TIEA, then foreign affiliates of Canadian corporations that carry on business in those countries would have to report their income in Canada on an accrual basis.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Aren't we splitting hairs when we talk about the differentiation between tax evasion and tax avoidance? If we still have tax evasion, which is something that's legal, it still means we have lost revenue. We have taxes that should be coming to this country, that are not coming, and therefore there's a weakness in the laws. It may not be illegal, but it is wrong.

[Gérard Lalonde]

I'm not trying to avoid your question, but I think you may have used incorrect words. To correct the record, tax evasion is illegal and tax avoidance is legal.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Sorry, yes, reverse it. But aren't we splitting hairs in terms of differentiating between the two? Is all of this in the interest of trying to get more of the taxes that rightfully belong in this country to stay in this country?

[Gérard Lalonde]

I certainly didn't intend to split hairs. I thought I was responding to your question. If your question was whether these proposals in this bill will clamp down on tax avoidance through various interesting structures, yes, they will.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

Thank you, Madam Wasylycia-Leis.

Mr. Pacetti.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I have a point of order. I see around the table there's a willingness...the fact that this legislation has been around and it is on technical amendments. I don't think there's anybody here who is going to table amendments. Can we go directly to clause-by-clause and expedite this bill?

[The Chair, Conservative, Brian Pallister]

There will be amendments and we'll deal with them on Thursday.

We're adjourned.