Thank you.
Just by way of background, I'm a tax lawyer with McCarthy Tétrault, and I practise quite a bit in this area of income funds.
I am here to talk about some technical deficiencies in the current draft legislation. I'm here not to debate whether or not it should go ahead but to instead point out some deficiencies on the assumption that it is going ahead. These deficiencies have been raised with officials in the Department of Finance in detailed submissions, but we thought it worthwhile to bring them to your attention also.
The first relates to the fact that the way the draft legislation is crafted, although it's ostensibly aimed at publicly traded partnerships or trusts, it will similarly apply to trusts or partnerships whose equity is not publicly traded but that have debt that is publicly traded. The reason is that the definition of security and investment in the draft legislation causes the scope of the legislation to be so broad as to capture those types of trusts. That seems to be at odds with the announcements of the minister in the backgrounder when the legislation was released, because the minister indicated then that the legislation was aimed at large public trusts and he talked about the equity being publicly traded.
We think a legislative amendment is necessary in order to carve out debt that is publicly traded where it's not convertible to equity and where the trust or the partnership is not a publicly listed trust or partnership.
A similar problem exists where, in the context of a partnership, you have a partner who has a greater than 50% interest in the partnership, or, in the context of a trust, you have a beneficiary who has a greater than 50% interest. If either of those entities has debt that is publicly traded, you run into the same problem. The underlying partnership or trust is considered to be a SIF and is subject to these rules, although, again, that wasn't the announced scope of the rules. It was aimed at trusts or partnerships whose equity was publicly traded. So we think the rules need to be carved back so they don't capture these types of situations.
It is quite common to have private partnerships or trusts that have parent entities, parent corporations, for example, that carry on business through the partnership in conjunction with a third party. That corporation would go into the public market and issue debt. Because it has issued debt, although it has a private partnership underneath, that partnership gets caught in these rules. Whether it is intended or not, I don't know, but that is the scope of the rules as drafted, and we think they need to be amended.
The next theory I'd like to turn to relates to the normal growth guidelines that were issued on December 15. Those guidelines allow new issues of equity to be made and not considered normal growth if they're used to replace debt that was existing on October 31. But the rules, as contemplated, seem to require a tracing. At least, this is the interpretation being offered by officials in the Department of Finance in discussions we've had with them. The actual guidelines don't say anything about the tracing, but that's the interpretation. They force greater costs and inefficiencies by requiring a SIF that has a debt outstanding on October 31 to use new equity to replace that debt, because it could then turn around and issue new debt, and that wouldn't cause it to be offside. So you could circumvent that restriction by doing a series of transactions. It seems that instead of requiring this tracing concept, it would make more sense to eliminate the tracing concept and just allow a new issue of equity that was equal to the amount of debt outstanding on October 31.
The last couple of points I want to raise are these.
The normal growth guidelines are incorporated by reference into the draft legislation. They're not drafted with the precision of legislation at all; they're very broadly drafted. If they're going to exist in this form, I suggest they be drafted with much more detail so that people will know what's intended. Right now there's no precision to the rules.
On a related point, in the first session, Mr. Chair, you indicated that someone had requested a rollover for subsequent conversions. We endorse that. The existing tax rules don't provide for it, and should provide for it, if these rules are going to be implemented.