Finance Committee on Nov. 3rd, 2011

[The Chair, Conservative, James Rajotte]

Absolutely.

[Ted Cook]

I believe what you're talking about is whether it would be appropriate.... Clause 85 deals with an exclusion. Under the proposed rules, they would not apply for what's called an “excluded property”. I believe the suggestion put forward last evening was that investments in mortgage investment corporations would be excluded properties for purposes of the RRSP rules.

In terms of the RRSP rules in general, what's being proposed in the budget is a series of measures to get at avoidance in the context of RRSPs. They piggyback on the rules for tax-free savings accounts, which were implemented previously and have been relatively well accepted. There is a 100% tax and it's on an “advantage”. One of the advantages that may accrue in respect of an RRSP is income arising from what's called a “prohibited investment”.

A prohibited investment is an investment held by an RRSP, for example, where that investment is shares of a corporation in which the holder of the RRSP has a significant interest. A “significant interest” is an interest of the person and non-arm's length persons in excess of 10%.

Now, that 10% rule applies to all corporations, all trusts, and all partnerships. The interesting aspect, at least from my perspective, is that in the legislation with respect to the rules in sections 207.01 through 207.05, there is no specific reference to mortgage investment corporations. Mortgage investment corporations are simply a type of corporation that is caught up in these rules. These rules apply equally to other privately held corporations. They also apply to publicly listed corporations. As I said, they apply to trusts and partnerships. So in that sense, the rule has been drafted in sort of a broad, level-playing-field type of manner.

Mortgage investment corporations seem to be an investment vehicle that has been used by a particular segment of the taxpayer population. Mortgage investment corporations are a special type of corporation that were set up in the 1970s to help increase funding of private mortgages for residential housing purposes. The rules around mortgage investment corporations made them suitable for certain types of investments in terms of taxpayers taking advantage of planning opportunities.

Now, mortgage investment corporations are qualified investments for RRSPs and would continue to remain qualified investments for RRSPs. It's only where they fall offside this significant interest or 10% rule.... So I guess the point in terms of how this measure operates is that it's not specifically with respect to mortgage investment corporations: the significant interest rules apply with respect to all corporations.

Is that helpful to the committee?

[The Chair, Conservative, James Rajotte]

Yes, it is helpful.

Are there any further questions?

Ms. Glover, please.

[Shelly Glover, Conservative, Saint Boniface, MB]

I have just a brief comment.

In response to Mr. Giguère,

All I can say is that I do not have more information on this issue. I cannot help you.

What I would like to suggest and encourage is this. I know that there has been a lot of discussion on this and the members of Finance are very open to continuing the dialogue, both with opposition party members and private people who have an interest in this. I just want to put that on the record, Mr. Chair: that for anyone who wants to continue to discuss this, there is certainly an open dialogue that is going to continue with the members from the Department of Finance.

But I do want to add that we on this side are very concerned about anyone who is able to do as the official said and to abuse what the intent of this section was for. Also, it does bring it in line with the TFSA rules. For that reason, we're going to vote to keep it the way it is written.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Glover.

Is there any further explanation required?

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

I quite understand the need for the department to put an end to this type of tax evasion, even money laundering. I trust what Mrs. Glover says: if some people are unduly taxed, the department is always willing to listen to them and to adjust, if necessary.

[The Chair, Conservative, James Rajotte]

Ms. Glover, do you want to clarify that, please? It's your choice.

[Shelly Glover, Conservative, Saint Boniface, MB]

I'll clarify it, and I'll do it in French so that Monsieur Giguère doesn't misunderstand.

Mr. Giguère, I will talk with the chairman, but I hope you understand that I did not say what you indicated.

I only said that the Finance department is open to continuing the dialogue with people who are concerned about their own situation. That's all I said. I did not go any further and I did not make any recommendation. The government is confident the present wording will prevent some people to evade taxes which other people pay. This will help us. That's all.

[The Chair, Conservative, James Rajotte]

Merci.

Are there any further comments on this issue, Mr. Cook?

[Ted Cook]

No, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Okay. We'll call it on this clause, then.

Shall clause 85 carry?

[An hon. member]

On division.

[The Chair, Conservative, James Rajotte]

(Clause 85 agreed to on division)

[The Chair, Conservative, James Rajotte]

I know that colleagues wanted to discuss clauses 90 to 97, so I'm going to call clauses 86 to 89.

On division?

[An hon. member]

On division.

[The Chair, Conservative, James Rajotte]

(Clauses 86 to 89 inclusive agreed to on division)

I have notice that Mr. Brison wishes to discuss clauses 90 to 97.

Is that correct?

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

Mr. Chair, witnesses have told the committee that provisions in Bill C-13 for individual pension plans could result in additional costs and unfunded liabilities by requiring minimum withdrawals.

Could the finance officials respond to these concerns?

[Gérard Lalonde, Director, Tax Legislation Division, Department of Finance]

Thank you.

Those clauses deal with measures that were implemented or proposed in the budget concerning individual pension plans. As the name implies, individual pension plans are a unique kind of pension plan designed to provide pension benefits to a single person or generally a small number of family members.

The difficulty that the department had identified--and it has been reflected in the budget--has to do with circumstances where these individual pension plans have sufficient funds in them such that they tend to generate, in effect, an intergenerational transfer of funds, where the amount in the pension fund exceeds the amount to fund the pension. As a result, sometimes intentionally, there are amounts that will not be taxed until they fall into the hands of the next generation.

In looking at that issue and comparing these individual pension plans to other types of pension plans that are out there, such as large defined benefit pension plans and RRSPs, it's clear these types of plans are in many senses more similar to RRSPs, because they're available for one person or a small number of persons, versus the sort of broadly available large defined benefit pension plans.

Now, the testimony compared the results one can achieve with these very small plans to the large defined benefit plans, and said, well, the large defined benefit plans have a surplus provision that allows them to go into surplus up to 25%. Those rules were put in on purpose to facilitate and provide that, in those circumstances where you have a big pension plan and you're subject to fluctuations in value of the plan because you have the widespread investments, it is ensured that there's enough funding in that plan, with a little bit of give, to ensure the plan remains viable.

In contrast, if you look to an RRSP, you say, well, with an RRSP, when the person turns 71, they're to convert it into a RRIF and start payout. That reflects the fact that under the tax system, the retirement system is designed as an after-tax system, in that you get a deduction for the amounts contributed, and they're not taxable until they come out. There is some tax assistance there. It's intended for retirement savings. Hence, when you become of retirement age, it only makes sense that you have to start drawing down those funds.

If you compare the tax proposals we've made here for IPPs with the situation of RRSPs, they will be put in exactly the same situation. They will be required, after the age of 71, to start drawing down the pension plan at the same amount and in the same ratios as would a RRIF.

Now, some of the testimony said that sometimes these surpluses aren't always due to tax planning. One of the plans that some people might use is to convert their interest in a defined benefit plan into an individual pension plan, and then, once the conversion is done, reduce the benefits, with the result that this plan automatically gets pushed into surplus situations.

I said, well, it doesn't always happen that way: you could just have been very successful in your investments, and as a result, the plan shows a surplus. Now, that can be exactly equally true of an RRSP or a RRIF. In those circumstances, if you've done very well in your RRIF, you might have more tax-assisted pension funding in your RRIF than would be the case in a defined benefit plan that's not in surplus position. One could say that those things are in a similar situation. They are in surplus position.

Nevertheless, they are required to distribute the funds according to the RRIF schedule, which is all we're asking of these individual pension plans. We're asking them to be put in exactly the same position as those who save in their RRSPs.

In both circumstances, you're looking at, in the case of an RRSP, one particular individual, and in the case of the individual pension plans, one particular individual or a small group of individuals, and we think it makes more sense to align the tax provisions for the individual pension plans with the RRSPs and RRIFs than it does to align them with something else for which a surplus entitlement is in play but for completely different reasons.

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

So you see no delta between the risk of unfunded liabilities with the IPPs from those RRSPs...? You don't see the risk....

[Gérard Lalonde]

If you consider that you have two individuals side by side, and one has saved, say, a million dollars in their RRSP, and the other has saved a million dollars in their IPP, both of them will have to draw down their pension entitlements at the same rate. We're not imposing anything more onerous on the IPP investor than is currently the situation for the RRSP or RRIF investor. Indeed, in the last couple of years, there has been some flexibility added to the RRIF drawdown, in that the age at which you have to start drawing down your RRIF has been increased from age 69 to age 71.

[The Chair, Conservative, James Rajotte]

Does that help clarify it, Mr. Brison?

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

It's helpful. It's a complex issue, but I think that was helpful.

[The Chair, Conservative, James Rajotte]

Thank you.

I just wanted to follow up on that, Mr. Lalonde. I appreciate that information.

The presenters last night were talking about how there's a sort of different standard if there are three persons in this arrangement or if there are four persons. I don't know if you saw that exact testimony, but can you comment on that clarification? Is there in fact that distinction between three and four? If so, why?

[Gérard Lalonde]

We've tried to define an individual pension plan. Quite clearly, if you defined an individual pension plan as being a plan for one individual, well, then, you would have plans immediately for two individuals, and that would include the particular individual and perhaps a spouse or a child.

At some point, you start getting into the broader issues dealing with conventional defined benefit pension plans, where you have an employer with a number of employees and they have a defined benefit pension plan. This is not intended to apply in those circumstances. As with tax measures in general, you have to draw dividing lines, and it was considered that the three-person plan was the dividing line.

As to whether immediately on the one side of that line or immediately on the other side of that line is exactly the right place to be, one can debate that, but our estimation was that it was a reasonable position to try to differentiate between the IPPs and the conventional defined benefit pension plans.

[The Chair, Conservative, James Rajotte]

Two or four could have been chosen, but you must have a number as the dividing line.