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.

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

Thank you, Mr. Chair.

I would like to thank the Minister of State for being with us.

Minister, my first question is on part 3 of Bill C-48 which is on amendments in respect of foreign affiliates. You could say that this is a philosophical question because, in this part of the bill, the rules on loans between different components of a same multinational company are tightened and a framework is provided for the provisions on non-competition.

As part of the committee's study on tax havens, on which we are cooperating very well, we are looking at elements that are in part related to Bill C-48, such as transfer pricing and other similar issues. When you have some knowledge of economics, you really understand—whether you are an entrepreneur or a multinational company—that it is difficult to deal with the uncertainty and insecurity related to free markets. That is why everyone tends to want to reduce the level of insecurity.

However, multinationals that are oligopolies or even monopolies may start behaving in ways that are morally questionable. This is where my question becomes philosophical. You get the impression that the objective of part 3 is simply to limit the damage instead of dealing with the real problems, particularly the fact that these businesses have perfectly legal loopholes.

Do you believe Bill C-48 goes far enough to fight this kind of practice?

[The Chair, Conservative, James Rajotte]

Mr. McCallum, which part of Bill C-48 does this refer to?

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Chair.

Welcome to the committee again, Mr. Minister.

Welcome to the finance department officials again, and thank you for appearing here concerning Bill C-48.

Obviously, we support the goal of closing tax loopholes and making the tax system in Canada clearer and easier to understand for Canadians. As you know, this is a bill that runs almost 1,000 pages in length, so it makes for some weighty reading for the finance committee.

As you say, it's important that these technical changes be adopted so that there is clarity and certainty in our tax legislation.

I noted that CGA-Canada issued a press release with the introduction of Bill C-48, and it talked about the importance of adopting a mechanism that would set a limit, a date, to have modifications or changes adopted once they're brought into law. As you know, this bill includes changes, some of which are over a decade old, and certainly for some time professionals in the tax field have been clamouring for these changes to actually be put in law for the sake of clarity and ease of understanding.

What do you think about the recommendation of the tax professionals that there be a time limit set for tax changes so that they would be adopted in such a bill in a timely fashion, rather than letting them sit for more than a decade?

[Ted Menzies, Conservative, Minister of State (Finance)]

Thank you.

I don't know that we're going to start numbering, but it is a rare event to have three Edwards sitting at the end of the table. Edward Short is with me, as well as Ted—or Edward—Cook and Shawn Porter. I will be leaning heavily on them, because as you all know this is very technical. We understand it on the surface. We understand the reasons for doing it, but these individuals will be able to explain how we are actually doing this and the depths of it.

Mr. Chairman, if I can, I first want to thank all of the members of the finance committee for undertaking this important consideration of Bill C-48, the Technical Tax Amendments Act.

I will start with relatively short remarks, as I would like to leave as much time as I can for questions from the members of the committee to me and my departmental officials here today.

Prior to beginning those remarks, I would like to pause for a moment to express my gratitude and thanks, as well as those of Minister Flaherty, to both the chair and all the members of the finance committee for their hard work in recent months. To begin with, I'd like to recognize the committee for completing its annual pre-budget consultation hearings and for tabling such a comprehensive report this last December.

In addition to the consultations conducted by me and the Minister of Finance, this committee's proceedings and report are key components of how we all ensure that Canadians from all across this country have the opportunity to provide their input into the federal budget. As in previous years, the recommendations from the finance committee's report will help guide us in the development of that budget.

On another note, I want to applaud the committee for tabling its report this past February on potential opportunities for our government to help boost charitable giving in Canada. As we review this comprehensive study of ways to support Canada's charitable sector, I congratulate the committee for undertaking this landmark study and for consulting so thoroughly with charities from coast to coast to coast.

Now I'll move on to the matter at hand, this Technical Tax Amendments Act. As the name suggests, this legislation is fundamentally very technical. Nevertheless, it has important implications for taxpayers, both individuals and businesses.

Indeed, today's legislation actually represents over a decade's worth of miscellaneous tax amendments that have long been backlogged and that are important to Canada's taxation system. It's a backlog that has festered and grown, as Parliament has not passed technical tax legislation for over a decade, despite previous attempts in recent parliaments, including those by our government.

The backlog has grown to such an extent that numerous groups have urged Parliament to act. In fact, the Auditor General of Canada, after careful examination, recommended in a recent report that this situation needed to be addressed. I will quote from her report from 2009:

Taxpayers' ability to comply with tax legislation depends on their understanding of how the rules apply to their own circumstances.... Uncertainty about how the law should be applied can also add to the time taken [as well as the] costs incurred by tax audits and tax administration.

Our government wholeheartedly agrees with that statement, and that's why we've been working extensively over the past few years to clear this decades-long backlog. During that time, we've held numerous public consultations on these amendments, allowing Canadians to provide feedback before the formal introduction, to allow any issues or concerns to be dealt with in advance.

With that far-reaching consultation process now complete and the legislation introduced, we move to the next stage in this long journey, and that is the examination and the study by Parliament.

I truly believe that all parliamentarians recognize the need to work together in a cooperative manner to conduct the detailed yet timely study that this legislation deserves.

The Certified General Accountants Association of Canada is a strong and vocal proponent of addressing this technical tax backlog, as members of this committee will recall from their numerous appearances before you. Let me quote from them regarding today's legislation:

By tabling this legislation, the government is taking concrete action to deal with the backlog of unlegislated tax proposals.... The new bill will provide more certainty to Canadian taxpayers and lessen the burden of compliance.... With unlegislated tax measures, taxpayers and professional accountants must maintain their records and forms—sometimes for years.... This uncertainty and unpredictability places an enormous compliance burden on taxpayers, businesses, professionals and their clients.

With that background in mind, let me highlight certain aspects of the legislation, specifically those related to closing tax loopholes, something that may be of interest to the committee given your current study on tax evasion and tax havens.

Although some members on one side of this table might not agree with our government's low tax agenda, I think we would all agree on the need for tax fairness. That being said, everyone should pay their fair share of taxes, and the principle of tax fairness is important for a whole host of reasons, none more so than that it allows taxes to remain low across the board and not merely for a select few who abuse the system at the expense of hardworking, honest Canadians who do play by the rules.

Indeed, since taking office in 2006, our government has introduced over 50 measures to improve the integrity of the tax system by closing tax loopholes worth about $2.4 billion annually. In keeping with that principle and with our record, the technical tax amendments act of 2012 proposes to strengthen Canada's tax system by closing a number of tax loopholes and improving fairness for all Canadian taxpayers.

For instance, in order to help protect the integrity of the income tax system, this legislation contains various measures to address aggressive tax planning. A number of these rules are intended to frustrate those who would use aggressive tax avoidance transactions, including, for example, the rules concerning foreign tax credit generators, refinements to the application of the specified leasing property rules, rules to curtail loss trading on the conversion of income trusts to corporations, and rules intended to strengthen the integrity of the non-resident trust provisions. Today's legislation also contains measures to implement a more rigorous information reporting regime for certain transactions associated with schemes that are intended to avoid taxes.

This tougher reporting regime will help the Canada Revenue Agency get early disclosure and detailed information on transactions that present a high risk of abuse to the income tax system and assist the agency in challenging them if they are in fact found to be abusive.

As I said at the outset, I will make these remarks short, so I will stop there and open the floor in the time remaining for questions of the committee that either myself or these officials who are here to help me will be happy to answer.

In closing, let me sum up in a few short phrases why passage of this lengthy bill is important. It provides certainty for taxpayers, it makes compliance easier, and it improves tax fairness for all Canadians.

We welcome your questions.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is the 108th meeting of the Standing Committee on Finance. We are televised, colleagues.

Our orders of the day, pursuant to Standing Order 108(2), concern the subject matter of 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, for the first hour we have again officials from the Department of Finance. We are also very pleased to welcome the Minister of State for Finance, the Honourable Ted Menzies.

Minister, with your officials, welcome back to the committee for the first hour. I understand you have an opening statement, and then we'll have questions from members. I do want to welcome you. Perhaps you can introduce your officials as well. I understand there are three Edwards at the table today. I don't know if you were named after Edward the Confessor or Edward I.

Business of the House

[Peter Van Loan, Conservative, Leader of the Government in the House of Commons]

Mr. Speaker, this afternoon we will continue debating third reading of Bill C-42, the enhancing Royal Canadian Mounted Police accountability act, a bill that would give the RCMP the tools it needs to strengthen accountability and enhance public trust. I am puzzled why the NDP is putting up member after member to delay and block bringing accountability to the Royal Canadian Mounted Police. The New Democrats should let the bill come to a final vote so that these much-needed reforms can be put in place. In fact, the RCMP commissioner, Robert Paulson, was in front of the committee yesterday, and he called for swift passage of the bill.

If the New Democrats heed the commissioner's advice and allow the debate to conclude, we will be able to start third reading of Bill S-7, the combatting terrorism act, and help keep Canadians safe that way.

Tomorrow, we will start the second reading debate on Bill C-54, the Not Criminally Responsible Reform Act. This bill proposes to put public safety as the first and paramount consideration in the process of dealing with accused persons found to be not criminally responsible. It accomplishes this change without affecting the treatment these individuals receive.

The debate on Bill C-54 will continue next Thursday and—if necessary—on Friday. Monday, we will consider Bill C-47, the Northern Jobs and Growth Act, at report stage and third reading. We will continue that debate on Wednesday.

Tuesday, March 5, shall be the sixth allotted day, which will go to the New Democrats.

Finally, I hope that the opposition will support our hard-working approach to business so that we could also consider second reading of Bill C-48, the technical tax amendments act, 2012; the second reading of Bill S-12, the incorporation by reference in regulations act; and report stage and third reading of Bill S-9, the nuclear terrorism act.

In addition, in response to what I will take to be an invitation from the oppostion House leader, I would like unanimous consent to propose the following motion. I hope the opposition will not block it.

I move that, notwithstanding any standing order or usual practice of the House, Bill C-7, an act respecting the selection of senators and amending the Constitution Act, 1867 in respect of Senate term limits, be deemed to have been read the second time and referred to a committee of the whole, deemed considered in committee of the whole, deemed reported without amendment, deemed concurred in at report stage and deemed read the third time and passed.

Unanimous consent for this would show that they really do care about Senate reform.

[Murray Rankin, NDP, Victoria, BC]

This is a question for Mr. Porter because intriguingly you talked about the upstream loans rule a bit and then tantalized us with the hybrid surplus part, but I don't think we gave you enough time to talk about it. As I understand it, the upstream loans rule basically closes a loophole and deals with treating loans as dividends for tax purposes, and that's, I think, excellent in terms of closing loopholes and hopefully acquiring more money for the Canadian taxpayer, this residual top-up tax that you talked about.

So tell us a bit more about hybrid surplus. What is the fiscal impact of the changes in Bill C-48that respect the hybrid surplus rules?

[Ted Cook]

We have been talking about restrictive covenants because I think your concern was the intellectual property aspect and generally the issue of intangibles. You also referred to GlaxoSmithKline and Google, which have obviously been in the news, and probably to Starbucks in the U.K.—those types of situations. What you're probably talking about is something broader, frankly, than what we have in Bill C-48.

We have a set of transfer pricing rules in the Income Tax Act. Of course, concern has been flagged in some other jurisdictions—most recently in the U.K., and they've had some hearings.

Even when you have a developed transfer pricing system in place, does it provide enough scope for multinational corporations to order their affairs, particularly with respect to intangibles? You can take an intangible and by its nature can put it in any jurisdiction in the world that you wish to, and by way of support through transfer pricing studies, you develop expenses and such things to reduce your taxable income significantly.

I would say that while it's somewhat related, really what you're talking about is transfer pricing and how robust Canada's rules are with respect to intellectual property.

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

Thank you, Mr. Chair.

I would like to go back to the goodwill amount. Clause 195 of Bill C-48 makes an addition to section 56.4. In it, several terms are defined, including “restrictive covenant” and ”goodwill amount”, which have some implications. I am specifically thinking of industries that are based on the principles of intellectual property. That is why I gave the GlaxoSmithKline example earlier.

According to the definition, the goodwill amount is included “in computing the cumulative eligible capital of the business carried on by the taxpayer through a permanent establishment located in Canada”. At the end of the definition of the term “goodwill amount”, it says the definition is used in applying new subsection 56.4(7), where the question of restrictive covenants potentially comes up.

With industries based on the principle of intellectual property, are the tax consequences of these technical amendments clearly understood?

[Edward Short]

On any individual case it is a question of fact as to what the value of the property is. I'm not familiar with the example that you've given, and I guess I couldn't comment on it anyway, being a specific case, but in general, what I can tell you about donations of certified cultural property is that they're not covered by these rules that are in Bill C-48. The rule that I mentioned before—that is to deem the fair market value for the gifting provisions to be equal to the cost if you acquired it within the last three years—does not apply to certified cultural property. The reason that it does not is because two things have to happen, and the government is involved in the process.

The Cultural Property Export Review Board will certify, first, that this is a property that's of cultural importance to Canada. The second thing is that the board has to also certify the appraised value of that property. Those are checks and balances that, because they exist within that system, it would be considered perhaps inappropriate to have a policy to then reduce the amount of the value of those gifts for tax purposes back down to the cost.

The point to start from is that when somebody gives up something of value, even if they bought it at a lower price, still when they give that property up, the expectation is that they could have sold it and received, in that example you gave, they would say $30 million. Is it really $30 million, or is it $200,000? That's a question of fact, and for that you need experts in the field to be able to appraise that. In this case, as I say, the cultural board is responsible for making sure that those values are accurate, so it's for that reason that we don't feel that the tax rules in Bill C-48 need to or should apply to that process.

[Ted Cook]

In terms of the income tax side, I think what you're talking about are the new measures where there has not been a consultation as yet, prior to introducing the bill. There are three areas where there are new measures that were not previously announced.

One relates to one I was personally responsible for in terms of preparing the legislation, departure tax and short-term residents of Canada. The Income Tax Act imposes a departure tax, if you will, a tax when people leave Canada and they are deemed to have disposed of most of their properties and to pay tax accordingly. There are rules that excuse certain people from this tax if they are just short-term residents of Canada. So if you've just come into Canada, you're perhaps an American who comes up to work in Canada and you leave Canada within five years, we don't feel it's appropriate to impose the departure tax at that point.

The rule requires that you own the same property. Some people were caught up in an issue where they came into Canada and during that five-year period, the company went through a reorganization and as a result they had a different share than they started out with. But economically they're the same. So a comfort letter was issued in the early 2000s that we thought that was an anomaly and that an amendment would be made to the act, and that's contained in Bill C-48.

The two other measures relate to the allocation of income to provinces by airlines and also some changes with respect to LSVCCs. I think my colleague Davine Roach can just provide a very brief summary of the airline measure.

[Grant Nash, Senior Tax Policy Officer, Business Income Tax, Department of Finance]

Good morning, members, Mr. Chair.

Thanks for your question, Ms. McLeod.

In the simplest of terms, it's possible to reduce Canadian tax by interposing a foreign intermediary between a source of income and a taxpayer. Since the 1970s, the Income Tax Act has contained rules that seek to respond to that to ensure that an appropriate amount of Canadian tax is paid.

Part 1 of Bill C-48 modifies those rules to ensure that they continue to apply appropriately, particularly in the context of circumstances involving a non-resident trust as the foreign intermediary.

[Ted Cook]

I think what you're referring to is that there are some amendments in Bill C-48 that relate to charitable donations. Certainly it had come to the attention of the Department of Finance and the CRA that people were engaging in schemes where works of art or other articles would be purchased at one price, they would receive evaluation that the work of art was worth another price, and then donate it to a charity claiming a charitable donation for the appraised value of the work of art.

The charitable donation measure in Bill C-48 will be addressed by my colleague, Ed Short, who is chief of the personal and general income tax section.

[Shawn Porter]

The reference to the recent Supreme Court decision in GlaxoSmithKline is outside the scope of Bill C-48. It is a recent decision. It concerns transfer pricing. The decision of the court was to refer the case back to the tax court for reconsideration, given direction that the Supreme Court had given. However, it has nothing to do with the subject matter of Bill C-48.

[Shawn Porter]

Yes, but I have a couple of clarifications on that point.

As a result of the consultations, a number of firms and organizations indicated that two years was an insufficient runway to complete the restructuring. Some of these loans have been in place for a number of years and it wouldn't be that easy to arrange for the refinancing.

One of the significant amendments between the August 2011 release and what's in Bill C-48 is that essentially a five-year runway was provided. To tie that into the dates, taxpayers have until August 2016 to clean up the loans in place in August 2011. The mechanism that was used was to say that in August 2014, we'll deem those loans to have been made, and that starts the two-year clock, which in effect takes the restructuring or the grace period up to August 2016.