Finance Committee on Nov. 23rd, 2010

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

I'm not sure anymore what language we're supposed to be speaking.

[A voice]

Italian.

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

Come on!

Mr. Lalonde, please feel comfortable to speak whatever language.... I struggle with languages all the time. I speak three of them and not one of them perfectly. I think it's better off if you can speak English and tell us what you have to tell us, especially in technical terms, so don't get intimidated, please.

It's unbelievable.

I have a question, and it is the same question I asked the Minister of Finance. I have a constituent who has a bigger problem than what language he speaks. It's based on the fact that he wants to open up a registered disability savings plan, but he can't because CRA has not accepted his disability form or his disability tax credit.

It's fine that this particular taxpayer has gotten some press and some media, and the Minister of Finance has said there's a willingness to change. So my first question would be, is there a willingness by the bureaucracy to change this anomaly, or whatever you want to call it, this oversight?

[Gérard Lalonde]

I don't think it's a matter or a question of the willingness of the bureaucracy. We make recommendations, of course, to our political masters, but the minister has already indicated to the committee that the situation is wrong and needs to be fixed, and he's directed us to ensure that it is fixed.

The manner of fixing it, of course, is an amendment to the Income Tax Act, and we will, of course, produce one for the minister to consider.

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

But that's your job to do so. It wouldn't be up to CRA to do so. It would be up to you; it would up to the--

[Gérard Lalonde]

It would be up to the Department of Finance to do it, that's correct.

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

How long is this going to take? Why would this take so long? It's not possible that this is the only case that's ever come up.

[Gérard Lalonde]

Well, I don't think one could say it has taken so long. The case was reported a couple of weeks ago. The minister has been well aware of the situation. The minister responded--

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

The minister was made aware of this case only a couple of weeks ago, but your department must be aware. There's jurisprudence on these types of cases. It's not the first time that this case or this type of case has been brought up.

[Gérard Lalonde]

Well, there are a series of rules in the act to govern when taxpayers can appeal, either within the CRA or--

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

I understand that, but the department must oversee all the appeals that CRA has to deal with and decide which ones are fair and which ones are not fair and which ones require amendment. I can't believe it has to come to this.

[The Chair, Conservative, James Rajotte]

Mr. Pacetti, let's let Mr. Lalonde complete his response.

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

But he's going to tell me the story about how CRA works. I understand how CRA works. I want to know how Finance works.

[Gérard Lalonde]

First, we don't look at every appeal that comes through. The Income Tax Act does have a series of provisions that govern when taxpayers can appeal their tax assessments and when no appeal is allowed.

In general, no appeal is allowed in circumstances where there's no tax in dispute, and I don't think it takes a lot of imagination to figure out why, as a general rule, that would be the case, the workload being as it is both for the courts and for the CRA.

However, there are some circumstances where--

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

I don't think people would simply appeal for fun if their tax assessment was nil. It would be for a reason. I can't believe that for as long as the income tax has existed, this is the first case that has come forward.

Every time we speak to CRA, CRA is saying they are not the ones who make the rules; it's the Department of Finance.

[Gérard Lalonde]

In fact, there are a number of cases where there are exceptions to the basic rule where you can't appeal. An example that comes to mind is a determination of a loss carried forward, where a taxpayer may want to know for certainty now the determination of a loss for any given taxation year that may be claimed in a future taxation year. Those types of exemptions are introduced from time to time as it becomes apparent that they're necessary.

The registered disability savings plan is a relatively new plan. This particular issue hasn't come to our attention before. It has now and we've briefed our minister, and the minister has indicated to the committee what he plans to do about it.

[The Chair, Conservative, James Rajotte]

Okay.

Monsieur Carrier, pour cinq minutes.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chair.

Good afternoon, ladies and gentlemen.

Earlier I asked the minister a policy question about tax shelters, and I got a policy-based answer. I brought up Barbados, specifically, where, according to my figures, Canadians have invested $41 billion. As you know, pursuant to legislation passed under the Liberal government, money invested in Barbados is exempt from Canadian taxes.

Now I want an answer based on fact. If you consider just that $41 billion invested in Barbados, how much tax income would we recover if that amount had been invested in Canada?

Can you explain your arguments in favour of that policy? Is there a net benefit for Canada in allowing these tax-exempt investments? It is beyond me. Could you tell me what the benefits are of giving companies that kind of tax exemption?

I am not sure which of you is familiar with those files, but surely one or two of you would know the answers.

[Gérard Lalonde]

Your question stems in large part from Canada's historical position on tax treaties and how Canada taxes the income of foreign affiliates of Canadian corporations that carry on active businesses in foreign countries.

I started with the department in 1982, so for at least some 28 years the policy of the department has been that Canada does not tax the dividends paid out of the active business income of foreign affiliates of Canadian corporations that carry on active businesses in jurisdictions with which Canada has a tax treaty. It recognizes that the income in the foreign jurisdiction is earned by a corporation resident in the foreign jurisdiction, and it's up to the foreign jurisdiction to tax that corporation. If there were no tax treaty, the income would be taxable by Canada, but a foreign tax credit would be allowed.

Some were of the view years ago that the policy behind the tax exemption for exempt surplus paid from offshore jurisdictions to the Canadian parent companies was to implement a simplified foreign tax credit. As Canada and other countries reduced their income tax rates, there were many circumstances where other countries, either at the time we negotiated the treaties or subsequently, had lower tax rates than Canada. So it became apparent that we could not look to that as being an underlying policy for our exempt surplus or the ability of foreign affiliates of Canadian corporations to pay tax-free dividends to their Canadian parents.

That policy became very clear in the lead-up to the 2007 budget. As the minister indicated, the key to this isn't so much about telling other countries how much they should tax corporations that carry on business in their jurisdictions and are resident in their jurisdictions, but rather about ensuring that if you are going to provide exempt surplus for dividends paid by those corporations, we should extract a quid pro quo from the countries in which they operate.

That is the essence behind the tax information exchange agreement policy I described earlier that was introduced in 2007. The government indicated that if a country enters into a tax information exchange agreement with Canada, we will provide exempt surplus to the foreign affiliates of Canadian corporations that carry on active businesses in those countries. If after having been invited to enter into a TIEA a country refuses to do so, not only will the exempt surplus not be provided, but we will tax those corporations on an accrual basis.

[The Chair, Conservative, James Rajotte]

Do you have another question?

[Robert Carrier, Bloc, Alfred-Pellan, QC]

I will keep it brief.

Essentially, the problem, as I see it, crops up when those affiliates transfer their profits back to Canada, because they are not taxed. That is the problem, in my view.

[Gérard Lalonde]

Well, the policy recognizes that it is within the domain of the other jurisdiction to tax corporations that carry on business inside their borders in the same way that it is up to Canada to impose taxation or not on subsidiaries of foreign parent companies that are resident in and carry on business in Canada.

For example, if you had a subsidiary of a foreign corporation that carried on business in Canada, and that corporation was resident in Canada, then Canada would have first ability to tax that corporation. We regard the same thing bilaterally with our tax treaty partners and also with our TIEA partners.

[The Chair, Conservative, James Rajotte]

Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

We don't have, really, any questions of the officials. I would like to move to clause-by-clause, if that's okay with my colleagues. If not, you can come back to me and I can move the clause-by-clause piece.

[The Chair, Conservative, James Rajotte]

We can actually go to clause-by-clause consideration but continue with questions, if members desire that.