Finance Committee on Nov. 21st, 2012

[The Chair, Conservative, James Rajotte]

I have three amendments: Liberal 17, 18, and 19.

We will go to Mr. McCallum.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

This is not unrelated to the previous case about foreign affiliate dumping rules. I'm surprised I heard so many “noes” in those votes, because as the TMX made very clear, this legislation could have important negative, unintended consequences for investment in mining in Canada. I think it is an important and totally non-trivial issue.

Clause 6 relates to deemed interest income, and new subsection 17.1(1) of the act provides the interest-deeming rules for the new elective pertinent loan or indebtedness, in these notes referred to as PLOI regimes, in the context of subsection 15(2) and section 212.3.

More specifically, subclause 17.1(1) applies to pertinent loans and indebtedness as defined either in new subsection 15(2.11), discussed above, or subsection 212.3(11), discussed below.

Subclause 17.1(1) generally requires that the interest inclusion for a corporation resident in Canada, the CRIC, in respect of such loans and indebtedness, be at least equal to the amount determined by computing that interest at the rate prescribed under subparagraph 4301(b)(i) of the income tax regulations, or, where the CRIC has incurred one or more debt obligations in order to fund the loan or indebtedness, the amount of interest payable on that debt obligation if it is greater than the amount determined using the prescribed rate.

The references to indirectly funded and to interest payable by persons or partnerships other than the CRIC are intended to deal with situations where, for example, a corporation resident in Canada that does not deal at arm's length with the CRIC borrows money, makes an equity contribution to the CRIC, and the CRIC then makes the loan to the relevant non-resident debtor. In such a case, the imputed interest under subclause 17.1(1) is intended to be based on the interest payable by the other corporation if that actual borrowing cost exceeds the interest determined using the prescribed rate.

I turn now to the issue of acquisition of control. New subclause 17.1(2) of the act provides 180 days of transitional relief from the application of the interest imputation rules in subclause 17.1(1) where a non-resident acquires control of a CRIC that was not controlled by a non-resident corporation immediately before the acquisition of control.

New subclause 17.1(2) applies to taxation years in fiscal periods that end after March 28, 2012, but additional transition relief is provided for acquisitions of control that occur before October 15, 2012.

The last section refers to tax treaties, but since I might be running low on time, I thought I'd skip that and move on to deal again with this very important testimony from the TSX. I would like to read a little more where they say “Capturing lost tax revenue by penalizing legitimate business activity is not the answer”. That's a pretty clear statement.

This is the TMX speaking:

We believe that the Proposed Rules, in their current form, cast too wide a net and risk impacting or diminishing legitimate and entirely appropriate activity by hundreds of publicly listed companies on our markets.

That's a pretty strong statement. I hope I won't hear just “noes” to our amendments this time around. They say:

Should the rules be introduced without further appropriate amendment, Canada's world-leading position and reputation as a market for resource issuers may be negatively impacted by creating inefficiencies in accessing capital and harming corporate valuations.

Based on our preliminary research....

I again emphasize that this is the TMX speaking, not the Liberal Party, legitimate though we are. They say:

Based on our preliminary research, we estimate that in excess of 700 publicly-traded Canadian corporations with operations in a foreign jurisdiction could potentially be inadvertently and inappropriately impacted by the Proposed Rules, in particular by the “indirect acquisition” rule. At a minimum the provisions in the Budget Bill introduce uncertainty in how legitimate investments in foreign affiliates and certain mergers and acquisitions will be treated under the Income Tax Act....

As you know—

I hope you do.

—market activity is influenced by reputation and confidence....

That's a good note to end on.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McCallum.

I'll go to Ms. Glover, please.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Chair.

Once again I find it very disturbing that the Liberal Party has yet again brought forward amendments to defend tax loopholes.

I'm just boggled by this, Mr. Chair. Not only that, but it doesn't matter what you read to try to defend the positions you put forward in this place, they're defending tax loopholes. This should be outrageous to Canadians. I thank the NDP for standing with us to try to deal with tax loopholes so that all Canadians pay their fair share. It's appalling that the Liberals brought forward 3,000 amendments that they didn't think out very well, which means they continue to go back to some binder they've brought with them to just read off things to fill their five minutes.

The delays are not helpful. This is a serious bill. I would hope that the Liberals would take it seriously and really think about their outrageous position on defending tax loopholes. These measures in particular will delay, once again, by 15 months the implementation of what needs to be done with regard to foreign affiliate dumping. This is an anti-avoidance measure. I hope Canadians understand that: it's an anti-avoidance measure. We will not stand by and allow tax loopholes to flourish and for Canadians not to be treated fairly and equitably.

The Liberals have really fallen off here, with delay for the sake of delay. But to also put Canadians in jeopardy here...we just can't stand by and let that happen.

In any event, we will be voting against the Liberal amendments to defend tax loopholes once again. Thank you to the NDP for seeing the need to defend our position and assure that tax loopholes are closed.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Glover.

I have three amendments.

Can I appeal to the wisdom and generosity of the honourable member for Markham—Unionville to group them, or does he want separate votes on each?

[John McCallum, Liberal, Markham—Unionville, ON]

I think I should not deviate from our past practice, so I would like to ask for recorded votes on each, please.

[The Chair, Conservative, James Rajotte]

All right. We'll have a recorded vote on Liberal 17 then.

(Amendment negatived: nays 10; yeas 1 [See Minutes of Proceedings])

Now we'll have a recorded vote on Liberal 18.

Mr. Jean, on a point of order.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

I just want to clarify that the rules specify that the member must ask for a recorded vote after the question has been put on each and every one, not lumped together.

[The Chair, Conservative, James Rajotte]

You are correct, in fact, Mr. Jean. I've been rather relaxed with the rules on this specific point. Thank you for reminding me.

A recorded vote on this, Mr. McCallum?

[John McCallum, Liberal, Markham—Unionville, ON]

Yes, please.

(Amendment negatived: nays 10; yeas 1 [See Minutes of Proceedings])

[The Chair, Conservative, James Rajotte]

Liberal 19.

[John McCallum, Liberal, Markham—Unionville, ON]

We'd like a recorded vote, please.

(Amendment negatived: nays 10; yeas 1 [See Minutes of Proceedings])

[The Chair, Conservative, James Rajotte]

Shall clause 6 carry?

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

I'd like a recorded vote, please.

(Clause 6 agreed to: yeas 6; nays 5 [See Minutes of Proceedings])

(On clause 7)

[The Chair, Conservative, James Rajotte]

I have two amendments, Liberal 20 and 21.

Does anyone wish to speak to them?

Mr. McCallum.

[John McCallum, Liberal, Markham—Unionville, ON]

Yes, I would like to speak to clause 7. But before that, I'd like to use a little bit of my five minutes to respond to the parliamentary secretary.

Of course, Liberals are not in favour of tax loopholes. We, in fact, have gone after the Conservatives for not attacking tax havens seriously enough using the resources of CRA, as we did when we were the government. So that is not the question.

The question is this. Sometimes in an attempt to do a good thing, such as go after tax loopholes, sloppy legislation can lead to unintended negative consequences on perfectly legitimate job-creating business activities. And this is what we believe is the case.

The clause under consideration involves two amendments concerning provisions related to thin capitalization. In particular, we deal with limitations on employer contributions to profit sharing plans. The Department of Finance states:

Paragraph 18(1)(k) of the Act prohibits the deduction of employer contributions to a profit sharing plan other than an employees profit sharing plan, a deferred profit sharing plan or a registered pension plan. Subparagraph 18(1)(k)(iii) is amended to add pooled registered pension plans (PRPPs) to the list of plans that are excluded from the application of paragraph 18(1)(k).

For further information regarding PRPPs, please see the commentary on new section 147.5, and in particular, the commentary on new subsection 147.5(10). The subsection provides a deduction to an employer for its contributions to a PRPP in respect of its employees (or former employees).

There's also the issue of the limitation regarding deduction of interest by certain corporations:

The thin capitalization rules in subsection 18(4) of the Act prevent corporations resident in Canada from deducting interest on debts owing to certain specified non-residents to the extent that the debts exceed the corporation’s permitted debt-to-equity ratio.

Budget 2012 announced the following amendments to the thin capitalization rules.

The permissible debt-to-equity ratio in subparagraph 18(4)(a)(ii) is reduced from 2:1 to 1.5:1. The new ratio applies to taxation years that begin after 2012.

The thin capitalization rules are extended to include debts of partnerships that have Canadian resident corporate partners, either directly or through multiple tiers of partnerships. For further information, please see the commentary on paragraph 12(1)(l.1) and subsection 18(7).

The portion of subsection 18(4) before paragraph 18(4)(a) is amended to allow for the introduction of an exception to the thin capitalization rules in subsection 18(8) that applies in respect of interest on loans from controlled foreign affiliates. This amendment applies to taxation years that end after March 28, 2012. For further information, please see the commentary on subsection 18(8).

Interest that is denied under subsection 18(4) or included in a corporation’s income under paragraph 12(1)(l.1) will be treated as a dividend and not as interest for the purposes of Part XIII withholding tax. For further information, please see the commentary on new subsection 214(16).

In case this seems a little complex for some members, let me provide you with an example, which might make it easier to follow:

Canco 1 and Canco 2 are Canadian-resident corporations and are equal partners in a partnership that earns income from a business. Canco 1 is wholly owned by Forco, a non-resident corporation. The Canco 1 shares owned by Forco have paid-up capital of $4,000 but Canco 1 has no other capital for the purposes of the thin capitalization rules. Forco lends $3,000 to the partnership and lends $8,500 directly to Canco 1. Absent the application of the thin capitalization rules, interest on both loans is deductible. Interest on both loans is payable on the 15th of every month.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. McCallum.

We'll go to Dr. Leitch, please.

[Kellie Leitch, Conservative, Simcoe—Grey, ON]

Thank you very much, Mr. Chair.

I must say that this is my first time sitting on the finance committee, and I'm absolutely astounded that once again the Liberals are defending tax loopholes. It's astounding to me.

It's exceptionally disappointing that while we—I think the majority of parliamentarians here—are trying to close these tax loopholes and make sure there's tax fairness for individuals....

Oh, now he's not even going to listen. There are no Liberals at the table now defending any of their amendments.

[The Chair, Conservative, James Rajotte]

The chair is always listening.

[Kellie Leitch, Conservative, Simcoe—Grey, ON]

That's great. Thank you, Mr. Chair.

In my riding in Simcoe—Grey, my constituents actually want these tax loopholes closed. They want tax fairness. Again, I'm astounded that the Liberals continue to defend tax loopholes as something that should be justifiable in our tax code.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Leitch.

I will then call the question on Liberal 20.

[John McCallum, Liberal, Markham—Unionville, ON]

You are calling a vote?

[The Chair, Conservative, James Rajotte]

Yes, I'm calling a vote on Liberal 20.

[John McCallum, Liberal, Markham—Unionville, ON]

Could we have a recorded vote, please?

(Amendment negatived: nays 10; yeas 1 [See Minutes of Proceedings])

[The Chair, Conservative, James Rajotte]

Now it's Liberal 21.