Finance Committee on Feb. 28th, 2013

[Shelly Glover, Conservative, Saint Boniface, MB]

Is there any way you could show it to us?

[Ted Cook]

Okay.

There's the act, and if you flip randomly through it—although here's a page without it—generally there are grey pages. They are probably at least 50% of the pages in the act are grey, maybe.

[Shelly Glover, Conservative, Saint Boniface, MB]

And the grey pages are exactly what?

[Ted Cook]

The grey pages will be composed of two things. One is draft legislation that has been released that is not enacted yet. As well, grey pages will be comfort letters where the Department of Finance has indicated to taxpayers that they intend to recommend to the Minister of Finance a particular change.

[Shelly Glover, Conservative, Saint Boniface, MB]

So continue with the rest of the question.

[Ted Cook]

With respect to compliance with the Income Tax Act, as I think most of the committee members are aware, we encourage taxpayers to rely on draft legislation. We encourage the CRA to administer based on draft legislation, but taxpayers do have a choice—so there is that question—as to whether they comply with the proposed legislation or the legislation in the act, which may create issues down the road. And I guess for a lot of companies there is an issue in the sense that for financial statement purposes before this bill was tabled in the House they would very often take one position for tax purposes but be required to reflect something else for financial statement purposes, that is the law as it stands as opposed to proposed legislation.

[Shelly Glover, Conservative, Saint Boniface, MB]

That's confusing.

Now with the technical tax bill, what happens to those grey pages? Are we adding more grey pages or are those going to become white pages? Will the code get bigger as a result of this bill?

[Ted Cook]

The short answer is the grey pages will disappear. As to whether this book will actually get thinner, the book won't get any thinner because the way the publishers do it is they show the history of the act. Part of this thickness is just indexing and shows what the act was with respect to prior periods. You will never see the Income Tax Act actually get thinner in terms of the commercial publisher.

[Shelly Glover, Conservative, Saint Boniface, MB]

Okay.

And the grey pages...it's really reflective of what we've got here. It's not that we're really adding to the code, we're just turning those grey pages white.

[Ted Cook]

In terms of what is in the Income Tax Act, what commercial publishers put out, there won't be any additional paper. Obviously in terms of what the actual law is, to the extent that we add a section or something like that, the act itself will grow. But in terms of whether we're adding 1,000 pages to the act, you have to replicate an entire provision to make perhaps the smallest changes within it.

[Shelly Glover, Conservative, Saint Boniface, MB]

But most of what we're doing has already been addressed in the code and we're just making sure that it's now legislated.

[Ted Cook]

If you're talking about the grey pages, in terms of what's not been previously announced, there are very minimal changes in terms of income tax.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Glover.

Mr. Brison, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you very much for appearing before us here. First, what's the fiscal impact of the measures in Bill C-48?

[Ted Cook]

In terms of the fiscal measures contained in Bill C-48, the measures by and large are what the Department of Finance considers integrity measures. Those are measures that protect the functioning of the Income Tax Act as intended. With respect to comfort letters or technical changes, those are things that do not affect the policy framework of the provisions.

The short answer is that, in the bill that is before the committee today, it does not represent either an increase or decrease in revenue, in terms of the fiscal framework.

[Scott Brison, Liberal, Kings—Hants, NS]

So these are all housekeeping measures, as opposed to policy changes, are they?

[Ted Cook]

In terms of what constitutes a policy measure, obviously, as I indicated in my overview, part 5 does contain some budget 2010 measures with respect to specified leasing of property and foreign tax credit generators. In terms of whether they are purely housekeeping, they are to support the existing functioning of the Income Tax Act.

As well, part 1 contains measures with respect to non-resident trusts and foreign investment entities that were first introduced in budget 1999 and were included in Bill C-33 and Bill C-10.

[Scott Brison, Liberal, Kings—Hants, NS]

It's difficult to understand how these would not have an impact on the fiscal framework. Some of them are quasi-policy changes. If you could clarify that all these changes are revenue neutral, that would be helpful.

[Shawn Porter, Director, Tax Legislation, Department of Finance]

Perhaps, Mr. Brison, I could pick up what Mr. Cook said around integrity measures. It is not to say that all the measures are merely housekeeping. They are very important. If they're not enacted, there would be significant revenue loss, but that doesn't mean that when you introduce them they're a policy change. They're an integrity measure to support the existing policy choices that are reflected in the act.

Another observation to make is that these proposed measures have now, for several years, been administered by the CRA as though they are law. Many taxpayers have either paid tax in accordance with the proposed measure or, to the extent it was an integrity measure, they've modified their behaviour and they've ceased and desisted in the kind of planning that was being undertaken that would have otherwise eroded the revenue line.

[Scott Brison, Liberal, Kings—Hants, NS]

In terms of the changes to the foreign affiliate system, how does our approach differ from that of the U.K. or the U.S., for instance, and to what extent does this increase the difference or bring us closer to their approaches?

[Shawn Porter]

We only have a couple of hours this morning.

[Scott Brison, Liberal, Kings—Hants, NS]

I remember when I was young and taking tax at university and writing open-book exams with the tax code. Nobody wants to go back there.

[Shawn Porter]

In the major measures in part 3, there are a lot of what you could characterize as housekeeping measures in the foreign affiliate changes as well. Most of the changes are accommodating, streamlining, simplifying, relieving, and clarifying. The ones that get all the attention, and we're sure the members want to chat further about this morning, involve hybrid surplus and upstream loans. Those are the more significant changes.

Mr. Brison, I will get to your question, but just to provide the necessary context to answer it, the Canadian international tax system, as it relates to certain kinds of income earned through foreign affiliates of corporations in Canada—corporations in Canada, when they're exploiting markets elsewhere in the world, often invest and do that through foreign affiliates—this is a subject matter that involves how Canada taxes that foreign income, be it active business income, passive income, or what have you.

Since the Canadian system was introduced in the 1970s, we've had a component of that foreign income be subject to what we would call a deferral and credit system. That is, the income can be earned offshore and Canada doesn't tax it currently, but it goes into a pool of earnings that the system refers to as taxable surplus, and when the taxable surplus is repatriated to Canada—and it may be repatriated in the same year that it is earned or it may not be repatriated for 30 years—the Canadian system will then impose a residual tax, a top-up tax, to reflect the difference, if there is any, an excess of the Canadian corporate tax rate over the tax borne by those earnings offshore. Therefore, if you earned active income in a jurisdiction that imposed tax at a 5% rate, Canada wouldn't tax it, provided it was active when you earned it, generally speaking. However, when it's repatriated to Canada, we would impose tax on it that would increase the burden to roughly the 25% to 30% rate when you include provincial taxes.

[The Chair, Conservative, James Rajotte]

Just finish up briefly, please.