Bill C-48 (Historical)

Technical Tax Amendments Act, 2012

An Act to amend the Income Tax Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the First Nations Goods and Services Tax Act and related legislation

Part 1 of this enactment implements, in accordance with proposals announced in the March 4, 2010 Budget and released for comment on August 27, 2010, amendments to the provisions of the Income Tax Act governing the taxation of non-resident trusts and their beneficiaries and of Canadian taxpayers who hold interests in offshore investment fund property.
Parts 2 and 3 implement various technical amendments in respect of the Income Tax Act and the Income Tax Regulations relating to the taxation of Canadian multinational corporations with foreign affiliates. The amendments in Part 2 are based on draft proposals released on December 18, 2009. Among other things, Part 2 includes the amendments to the foreign affiliate surplus rules in the Income Tax Regulations that are consequential to the foreign affiliate changes to the Income Tax Act announced in the March 19, 2007 Budget. The amendments in Part 3 are based on draft proposals released on August 19, 2011. Among other things, Part 3 includes revisions to the measures proposed in a package of draft legislation released on February 27, 2004 dealing primarily with reorganizations of, and distributions from, foreign affiliates.
Part 4 deals with provisions of the Income Tax Act that are not amended in Parts 1, 2, 3 or 5 in which the following private law concepts are used: right and interest, real and personal property, life estate and remainder interest, tangible and intangible property and joint and several liability. It enacts amendments, released for comments on July 16, 2010, to ensure that those provisions are bijural, in other words, that they reflect both the common law and the civil law in both linguistic versions. Similar amendments are made in Parts 1, 2, 3 and 5 to ensure that any provision of the Act enacted or amended by those Parts are also bijural.
Part 5 implements a number of income tax measures proposed in the March 4, 2010 Budget and released for comment on May 7, 2010 and August 27, 2010. Most notably, it enacts amendments
(a) relating to specified leasing property;
(b) to provide that conversions of specified investment flow-through (SIFT) trusts and partnerships into corporations are subject to the same loss utilization restrictions as are transactions between corporations;
(c) to prevent foreign tax credit generators; and
(d) implementing a regime for information reporting of tax avoidance transactions.
Part 5 also implements certain income tax measures that were previously announced. Most notably, it enacts amendments announced
(a) on January 27, 2009, relating to the Apprenticeship Completion Grant;
(b) on May 3, 2010, to clarify that computers continue to be eligible for the Atlantic investment tax credit;
(c) on July 16, 2010, relating to technical changes to the Income Tax Act which include amendments relating to the income tax treatment of restrictive covenants;
(d) on August 27, 2010, relating to the introduction of the Fairness for the Self-Employed Act;
(e) on November 5, 2010 and October 31, 2011, relating to technical changes to the Income Tax Act;
(f) on December 16, 2010, relating to changes to the income tax rules concerning real estate investment trusts; and
(g) on March 16, 2011, relating to the deductibility of contingent amounts, withholding tax applicable to certain interest payments made to non-residents, and certain life insurance corporation reserves.
Finally, Part 5 implements certain further technical income tax measures. Most notably, it enacts amendments relating to
(a) labour-sponsored venture capital corporations;
(b) the allocation of income of airline corporations; and
(c) the tax treatment of shares owned by short-term residents.
Part 6 amends the Excise Tax Act to implement technical and housekeeping amendments that include relieving the goods and services tax and the harmonized sales tax on the administrative service of collecting and distributing the levy on blank media imposed under the Copyright Act announced on October 31, 2011.
Part 7 amends the Federal-Provincial Fiscal Arrangements Act to clarify, for greater certainty, the authority of the Minister of Finance and of the Minister of National Revenue to amend administration agreements if the change in question is explicitly contemplated by the language of the agreement and to confirm any amendments that may have been made to those agreements. Part 7 also amends the Federal-Provincial Fiscal Arrangements Act and the First Nations Goods and Services Tax Act to enable the First Nations goods and services tax, imposed under a tax administration agreement between the federal government and an Aboriginal government, to be administered through a provincial administration system, if the province also administers the federal goods and services tax.
Part 8 contains coordinating amendments in respect of those provisions of the Income Tax Act that are amended by this Act and also by the Jobs and Growth Act, 2012 or that need coordination with the Pooled Registered Pension Plans Act.

Finance

[James Rajotte, Conservative, Edmonton—Leduc, AB]

Mr. Speaker, I have the honour to present, in both official languages, the 16th report of the Standing Committee on Finance, in relation to Bill C-48, An Act to amend the Income Tax Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the First Nations Goods and Services Tax Act and related legislation.

The committee has studied the bill and has decided to report the bill back to the House without amendments.

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is meeting 112 of the Standing Committee on Finance. Our orders of the day, pursuant to the order of reference of Friday, March 8, 2013, are to do with Bill C-48, An Act to amend the Income Tax Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the First Nations Goods and Services Tax Act and related legislation.

Colleagues, I want to welcome officials back from the department to our clause-by-clause consideration of the bill this morning.

Obviously this is a fairly sizable bill. I'm proposing that we do our clause-by-clause consideration in parts. There are eight parts to this bill, and there's one schedule.

Is it okay if I proceed in that manner, colleagues?

Strengthening Military Justice in the Defence of Canada Act

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Mr. Speaker, I will try to make my voice carry. I can do it because I had the pleasure of being involved in the theatre when I attended university.

I heard the interpretation of the Parliamentary Secretary to the Minister of National Defence. I am disappointed with his whining about expediting the process. That was the kind of comment I heard during consideration of Bill C-48, the mammoth 1,000-page bill. Our witnesses said that it was time to adopt the huge tax bill, but they did not ask us to expedite the process. They thought the bill was so lengthy that, given the time allotted, it would be adopted without really having an opportunity to make improvements and that we would have to live with it.

Who is acting in good faith? In a few minutes, the government will introduce a bill and it will probably be impossible for us to study it in its entirety given the time allotted. Therefore, I reject the member's claims.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Mr. Speaker, today it is my pleasure to speak to Bill C-15, An Act to amend the National Defence Act and to make consequential amendments to other Acts, which brings about a number of improvements in response to recommendations concerning the military justice system.

Bill C-15 is simply the latest incarnation of various bills introduced in the House, such as Bill C-7 and Bill C-45 in 2007 and 2008, and Bill C-60, which came into effect in July 2008. Bill C-60 simplified the structure of courts martial and created a mechanism to choose a type of court martial more comparable to the civilian system. Bill C-41 was pretty good. At the time, it went farther than Bill C-15 did initially, but unfortunately, it was never adopted.

It is important to note that Bill C-15 came about because of concerns over how the military justice system has worked for years. A number of flaws were identified in the wake of the 2003 report of the former Chief Justice of the Supreme Court, the Right Honourable Antonio Lamer, and the May 2009 report of the Standing Senate Committee on Legal and Constitutional Affairs.

Justice Antonio Lamer's authority was well established, and the government had every reason to take the former chief justice's many recommendations into account. To a certain extent, Bill C-15 is a response to those concerns. However, because it does not go far enough, we proposed amendments in committee. One of our amendments was agreed to, but the others were rejected, unfortunately. Nevertheless, we are pleased that Bill C-15 was improved enough for us to be able to support it at third reading.

By way of context, it is important to note that our military justice system operates separately from our criminal justice system because our military personnel play a special role in our society. Because of their role, they have certain special powers that ordinary citizens do not. Along with that, they have to comply with very high disciplinary standards related to the hierarchy and organization of the military system on the ground so that they can respond effectively during military operations. A lot of very structured preparatory work also has to happen.

There is a very specific way in which the military justice system must answer to that structure, which is separate from society. The system must be held to very high standards and must not needlessly trap veterans and former members of the Canadian Forces after they have finished serving. They find themselves trapped in needless uncertainty because of mistakes they made that, normally, would not result in a criminal record.

We can be pleased with the fact that, in committee, the NDP was able to get a major amendment passed, which changed nearly 95% of disciplinary code infractions so that they will no longer result in a criminal record.

That is the main reason we are now supporting Bill C-15.

As everyone knows, a criminal record comes with very unpleasant consequences. For example, a criminal record can keep a member from starting a new life and pursuing a second career, a career that could be limited by the member's inability to travel to the United States or to fulfill certain duties that he is qualified for because of his military experience and training. The fact that it is so easy to have a criminal record after spending one's life in the armed forces is a major irritant and totally unacceptable.

I mentioned two reports, one by Justice Antonio Lamer and one by a Senate committee. However, we would have liked the government to respond more quickly, and we want it to respond with tangible measures to the report by the former Ontario Superior Court Chief Justice LeSage. He also completed a study on the National Defence Act, which he presented to the government in December 2011. Bill C-15 does not really cover that, which is very unfortunate.

Another aspect is rather ironic. I am currently a member of the Standing Committee on Finance. We recently examined Bill C-48, a huge and very technical bill that makes changes to some aspects of the Canadian tax system. Instead of a gradual, piecemeal approach, we would have liked to see a more major reform, although not a massive one that would make it impossible to study the military justice system.

I was a member of the Standing Committee on Justice and Human Rights, and I noticed a very similar approach when it was time to change some details in the Criminal Code. There was a real lack of vision, which is truly appalling. Our soldiers, who fulfill a very important and admirable role, both in Canada and around the globe, should definitely not be victims nor should they be subjected to such improvisation on the government's part. It is really appalling. Our soldiers would be much better off if the military justice system had the same or similar standards as the civilian justice system, since this would bring us in line with other countries.

When the NDP forms the government in 2015, our party will be committed to doing more to make a real difference, which will allow us to offer all members of our armed forces a justice system worthy of that name and, above all, worthy of the appearance of justice earned.

That is probably the most important aspect, and the final point I wanted to make. Ensuring the appearance of justice is a fundamental principle of our justice system. This appearance is especially fundamental because it forms the basis of public confidence and, therefore, the confidence of members of the armed forces in the military justice machine.

I hope the government has listened to our hopes and wishes. I thank the government again for accepting a fundamental amendment regarding the consequences of possibly getting a criminal record.

I am now ready to hear my colleagues' comments and answer their questions.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

I want to thank all the witnesses for being here with us.

I would like to thank you, Mr. Richard, for addressing the question of the agreements to avoid double taxation that have been signed with some countries. That principle is entirely valid, in essence. In addition to sitting on the Standing Committee on Finance, I have the privilege of being on the Standing Committee on International Trade. Unfortunately, I have been in a position to observe the very naive and very problematic approach this government takes to free trade agreements. I see that it takes the same problematic approach to these agreements.

On Tuesday, at our meeting on Bill C-48, we were able to demonstrate the problems that are inherent in the process that involves introducing a 1,000-page technical bill after a very, very long time has passed. Brigitte Alepin talked about the new rules for upstream loans. I will not ask you to comment on that subject, which is really very technical and very difficult to grasp. She said that in themselves, these new rules were perfectly valid, which was very interesting. However, she saw a problem, a potential contradiction, in putting these agreements to avoid double taxation in place with certain tax havens, or certain countries that might be considered to be tax havens. Obviously, this is a political issue. It is a matter of making decisions. I hope the government will hear what I am saying about this kind of problem someday. I will not ask you to voice an opinion on that, but do you and your colleagues think that every country in the world merits an agreement with Canada to avoid double taxation? Could we very well think that we might avoid entering into this kind of agreement with certain countries?

[Shelly Glover, Conservative, Saint Boniface, MB]

Well, Bill C-48 actually clarifies it, and I think it's pretty clear: when the lawyer is going to obtain some kind of fee because there's a tax benefit from the tax avoidance measure—so when he has skin in the game—that's when it's reportable.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thanks. I'm going to try to make this brief as well.

I want to thank the witnesses for being here again. We've met many times before, some of us.

I have to say, Mr. Moody, that although you may have Alberta blood, you make a lot of sense to us Manitobans. In that vein, I want to ask you a specific question, but it has much to do with what you've already addressed, the question of solicitor-client privilege.

Just for the record—because we've heard the one side by Mr. Tremblay, for those watching—the B.C. case is not at all a tax issue, first and foremost. It's not at all a tax issue. When the proceeds of crime legislation was first enacted in 2001, lawyers and Quebec notaries were required to report suspicious transactions of their clients. That's what the case in B.C. is about; it's not a tax case at all.

For example, if a client paid a $10,000 bill in cash to a lawyer, the lawyer was required to report those kinds of suspicious transactions. That's why the law societies have challenged this, and have been challenging it for more than a decade that it has been before the courts.

So this is a different act and a different tax issue completely.

Mr. Moody, you hit the nail on the head, because you said that Bill C-48—in fact, page 836 of Bill C-48—actually specifies and clarifies that a lawyer who acts as a legal adviser to a client is not required under the regime to report information about tax avoidance transactions that is covered by solicitor-client privilege. I understand that this clarification was made after consultation with the Canadian Bar Association and the federation in 2010.

Let's move to Mr. Tremblay's concern. The federation is now saying that all lawyers and Quebec notaries should be exempt from the reporting rules. Well, I think the concern here is that if we do a broad exclusion like that, it would significantly undermine this law's effectiveness. The obligation on advisers under Bill C-48 to report exists only in situations in which their fees are contingent on a client obtaining a tax benefit from an avoidance transaction or in which the tax benefit is otherwise guaranteed to the client.

So when the lawyer puts his own skin in the game—when he has money dependent on what comes back—that's when he's required to report. In these circumstances—of course, advisers and promoters already have a personal interest, as I just described, in the success of the reportable transaction—if a lawyer does this, he or she has compromised his or her independence and duty of loyalty to the client and ought to report. I think this is a good compromise.

I want you, Mr. Moody, to comment on the fairness of this. Frankly, if tax advisors have to report and lawyers start to do the same job you're doing under a cloak of secrecy for their own benefit, it will put you out of business, will it not?

Do you think this is a compromise that is fair?

[Brigitte Alepin]

First off, I agree with Mr. Moody. We don't know whether the coming years will bring fiscal crises, but taxpayers are going to have to take a closer look at the Income Tax Act to determine whether it treats them in a fair, reasonable and equitable manner. The current Income Tax Act would make that impossible. It's even a bit tough to do that under Bill C-48.

In the short term, I don't think it's possible to simplify the act. We don't know what will happen in the medium or long term, since we don't know what the future holds or how tax laws will affect taxpayers.

[Greg Boehmer]

We're certainly aware. I have one particular example on the go in which if a taxpayer transfers a particular asset on which there is an advanced income tax ruling based on an outstanding comfort letter and included in Bill C-48, the accounting treatment is very odd. It would give rise to recording all of the tax in the financial statements. When Bill C-48 is passed, that liability that arises in the financial statement will be reversed based on what the law actually will be. It's a very anomalous result, and it has stopped the taxpayer from going ahead and completing the transaction.

[Kim Moody]

No. Bill C-48 doesn't address that whatsoever, and I wouldn't expect it to.

Can I just address one question you had? Proposed subsection 237.3(17), which is what Mr. Tremblay is talking about, does carve out solicitor-client privilege. I'm a little puzzled as to where the issue is. Having said that, I'll just throw that out to you.

[Murray Rankin, NDP, Victoria, BC]

I think in another blog, you referred to, or Moody's Tax Advisors talked about, a deduction against Canadian tax for the vast amount of professional fees paid to the IRS offshore voluntary disclosure program, and you argued that there ought to be this deductibility. Can you speak to whether Bill C-48 addresses your concerns?

[Murray Rankin, NDP, Victoria, BC]

Thank you.

First of all to Mr. Adler, through you, Mr. Chair, I'd like to quote Adam Smith, who I read regularly:

...to feel much for others and little for ourselves, to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature.

That's Adam Smith.

I'd like to ask a question of Maître Tremblay, if I could. You mentioned, sir, the reporting requirements that the B.C. Supreme Court found unconstitutional in respect of parallel legislation, and you indicated that the B.C. Court of Appeal is soon going to pronounce on that appeal. You said, I think, that there's a section of Bill C-48 that has the same effect. What I think you're saying is that if that Court of Appeal decision stands and is applicable across the country, we'll immediately have an unconstitutional section of Bill C-48. Is that what you're saying?

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

I just noticed, for instance, that in part 1 of Bill C-48 it's the eighth time the Department of Finance has tried to change NRT and FIU rules—the eighth time.

Does anybody understand why that is? Why is it the eighth time and we're sitting here studying it again, and the opposition, although they say they're in favour, actually make moves that say they're not?

Does anybody understand why that's taking place? Really, we're talking about fixing overtaxation and closing tax loopholes, which are obviously very important to government revenues and also important for certainty and Adam Smith's mandate.

[Lorne Shillinger, Chartered Accountant, Partner, KPMG]

Thank you.

Good morning. My name is Lorne Shillinger. I am a partner and national leader of the KPMG Canada Real Estate Tax Practice. I greatly appreciate the opportunity to speak with the committee this morning on the importance of the technical tax amendments act and its significance to the real estate industry.

Bill C-48 represents a Herculean effort by the Department of Finance to catch up on a decade of outstanding tax measures. Long limbo periods are difficult. Taxpayers and their advisers need certainty of tax policy and legislation to prepare and file tax returns. Accordingly, the enactment of this legislation will be a welcome relief to the tax community. For the real estate industry, the key amendments in Bill C-48 are the changes to the tax rules governing real estate investment trusts, or REITs.

A REIT is an entity that uses the pooled capital of many investors to invest in and manage real estate rental properties. Unlike direct ownership of real estate, an investment in a publicly traded REIT is highly liquid and available to investors with limited investment capital. REITs are managed and structured to pay out regular, tax-efficient distributions to their investors. For these reasons, investments in REITs have been favoured for retirement savings. These legislative changes represent the successful culmination of six years of back-and-forth discussions.

A brief review is in order. On October 31, 2006, new rules, the SIFT rules, were announced to shut down the public income trust sector. After a reasonable transitional period, a publicly traded SIFT would be subject to tax at rates similar to corporate tax rates. REITs, however, would be exempt from the SIFT tax. This was the first time the definition of a REIT was introduced into Canadian tax legislation. Each subsequent iteration of the legislation was an improvement.

In early 2007, amendments clarified a REIT's rental revenue and property and allowed internal property management subsidiaries. In late 2007, amendments accommodated existing ownership structures and allowed foreign property ownership. In late 2010, amendments further clarified a REIT's qualifying revenue and provided a welcome, safe harbour for a limited amount of non-qualifying revenues and properties to be held by a REIT. The changes in Bill C-48 represent the fourth set of revisions to the REIT rules and complete the cycle. These further changes finally create a workable system for REITs to invest in, develop, and manage real property and to expand globally. Actually, the real estate industry would like a fifth series of amendments, especially to accommodate seniors housing and hotels to qualify as REITs.

In conclusion, we greatly appreciate this legislative process. The Department of Finance did listen. The amendments in Bill C-48 provide the necessary legislative framework for Canadian REITs to invest in and operate in Canada and abroad. Both the industry and government objectives are met. REITs can function in a commercially reasonable manner but must do so within the limitations imposed by policy. For all constituents of the REIT community, we greatly look forward to the enactment of this legislation.

Thank you.

[Greg Boehmer, Partner, Canadian Tax Practice, Ernst & Young]

Thank you, and good morning.

My name is Greg Boehmer. I'm a tax partner with Ernst & Young, and on behalf of the firm, I'd like to thank you for the opportunity to appear before this committee in connection with Bill C-48.

It's important in our role as tax advisers with clients that we be able to provide our advice to our clients based on legislation that is both clear and certain. Clarity and certainty are critical elements in supporting the integrity of the Canadian tax system. Taxpayers must comply with the laws in Canada and the Canada Revenue Agency must administer them. We would observe that this process is made all the more difficult for both taxpayers and tax administrators when there are long delays between the initial introduction of a tax proposal and its ultimate passage into law.

Bill C-48, as you know, contains a number of years' worth of proposals, some of which were introduced in previous tax bills that have never been passed into law. That has left many taxpayers with a great deal of uncertainty in managing their tax affairs. Clearly, the passage of this legislation will restore a substantial amount of that certainty and clear a big part of the backlog.

As noted by Minister Flaherty, the last comprehensive package of technical income tax amendments was passed in 2001, clearly a very long time ago. So, Mr. Chairman, it is fair to say that we greet Bill C-48 with a sense of relief and hope to see its speedy passage.

As the committee is aware, many of the technical amendments included in the bill have been in a state of flux for many years, including changes intended to enhance the integrity of the system and to preclude certain types of planning that the government considers inappropriate. Mr. Moody has commented on some of those, including the NRT rules, and there are other rules, such as the upstream loan rules, the surplus manipulation rules, etc. Clearly, these are a set of complicated rules, but we nevertheless agree with their implementation and passage.

Taxpayers have an obligation to abide by current tax laws, but they must also plan their financial and commercial affairs based on proposed taxation measures, including any legislation introduced by the government. Often proposed tax changes are effective as of the date of their initial introduction. Also, sometimes they're effective on a retroactive basis. These outstanding proposed tax changes, of course, result in a compliance conundrum for taxpayers.

Taxpayers and their advisers also place a significant reliance on comfort letters, which tend to deal with technical anomalies in a complex statute. With such a preponderance of outstanding legislative changes and the prolonged period of time that many of these changes have been outstanding, there will clearly be relief felt by those who regularly deal with the Income Tax Act and have the job of interpreting the statute.

As I've implied, we support Bill C-48 and, for that matter, the timely enactment of tax legislation in general. We recognize that a goal of achieving more timely enactment needs to be balanced with providing an adequate amount of time to study the relevant measures and to seek input from interested parties. In this regard, we commend the Department of Finance for its ongoing efforts to constructively consult with taxpayers and other professional and business organizations regarding these matters.

In the time left to me, I'd like to provide three examples of the types of problems that arise where proposed legislation is outstanding for an extended length of time.

First, in our experience, taxpayers may be reluctant to complete particular commercial transactions where the tax legislation on which the taxpayer must rely has not been enacted. This may be because of possible changes to draft legislation, particularly where the legislation has remained in draft form for an extended period of time.

Second, where draft proposals or legislation are outstanding over a prolonged period, this may have adverse cash implications on a taxpayer, either because refunds have been held pending confirmation of enactment of proposed new tax rules or because taxpayers are effectively prohibited from objecting to adverse assessments.

Finally, there are important financial statement implications relating to outstanding tax legislation, as, generally speaking, the accounting rules prohibit accounting for income tax proposals until they are either enacted or substantially enacted. The accounting rules are based on certainty of knowing what is as compared to what may be.

In conclusion, we see the ongoing need to address the issue of tax certainty and the timely introduction and passage of tax legislation, including regular technical amendments.

Thank you, and I'll be pleased to respond to your questions.