Finance Committee on June 5th, 2007

[Wallace Conway, Chief, Tax Legislation Division, Foreign Income, Trusts and Capital Gains, Department of Finance]

Back when we first introduced the measures, we had done some research. We discovered, based on data that was provided to us from various sources, that there was about $90 billion invested in trusts and these types of investments, offshore investments.

Over the years, when we announce the measures, we are in constant contact with the legal profession and the accounting profession--our colleagues on the other side of the table, if you will--and we often have frank discussions. With these measures, they told us, once we introduced them they were unwound because they were no longer tax efficient. There's a lot of cost associated with setting these up. They were unwound just to get rid of the cost and because there was no tax advantage any longer.

[The Chair, Conservative, Brian Pallister]

Thank you, Monsieur Crête.

Mr. Dykstra, five minutes—

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

—maximum.

[Rick Dykstra, Conservative, St. Catharines, ON]

Maximum?

You look striking in those glasses, I must say, Mr. Chair.

I may share my time, depending on how quickly my questions go.

[The Chair, Conservative, Brian Pallister]

[Inaudible--Editor]...may have a little extra time.

[Some hon. members]

Oh, oh!

[Rick Dykstra, Conservative, St. Catharines, ON]

Might I also say that you're one of the most generous chairs I've ever met?

Thanks for the presentation.

A couple of things struck me in the bill. We've obviously had some discussions around tax havens and the offshore aspect, and what we're trying to work against or what we're trying to straighten out. I'm wondering how the tightening of these offshore havens, in terms of the technical amendments in this bill, will actually be viewed by either taxpayers or, quite frankly, the Auditor General.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

As I mentioned, the Auditor General has raised concerns about this kind of tax avoidance. The measures in this bill are to some degree responsive to the Auditor General's concerns. The reason there are concerns, of course, is that if some Canadians are able to shelter or hide some of their tax liability, then other taxpayers have to pick up the slack. We all enjoy the same services, but if only some people pay for them and others who should be helping to pay for them are avoiding that, then you put an unfair burden on those who have not arranged their affairs to avoid tax. So it's very important for fairness.

Further to that, when we can achieve tax fairness, where everybody is paying what they ought to be paying--no more and no less, of course, as the taxpayers bill of rights now says--then we can start providing tax relief for everyone. For example, in our tax fairness plan we were able to increase the age credit amount for seniors by $1,000 a year; that's an additional $1,000. We were able to introduce pension income splitting for pensioners. We were able to make a further one-half percentage reduction in the corporate tax rate.

These are things we can do for everybody once we capture all of the tax revenue that should be coming into government and that may be improperly sheltered through these kinds of devices.

[Rick Dykstra, Conservative, St. Catharines, ON]

You mentioned responsibilities, and while this may be a little bit more technical, one of the aspects in the bill is the expansion of the RRSP rollover options that are available on the death of a parent or the spouse of a mentally infirm individual. I know that's a bit technical, but obviously there are some advantages.

I wondered if either you, Ms. Ablonczy, or one of the members of the staff of the ministry would like to comment on exactly the benefits of that and what that means.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

It is an important measure, and I'll ask Mr. Lalonde to talk about that. He's familiar with the technicalities.

[Gérard Lalonde]

As we mentioned, a large part of this bill has to do with various technical amendments that were introduced to the Income Tax Act. As a result, it's going to take me a moment to refresh my memory as to which one of these very many amendments--

[Rick Dykstra, Conservative, St. Catharines, ON]

I know my colleague Mr. Wallace has a question. Maybe while you're looking for that he could ask his.

Would that be all right, Chair?

[Gérard Lalonde]

Thank you very much.

[Mike Wallace, Conservative, Burlington, ON]

I have two questions. I have my municipal hat on. Could you give me the example of corporations owned by municipalities, how this change would affect them? I'm not sure what we're talking about there, to be frank.

[Gérard Lalonde]

That one I can handle a little more quickly because I recall the particular circumstances.

The Tax Court of Canada, in a case called Otineka--the name's much longer than that, but it goes by the short name of Otineka--in 1994, came to the conclusion that a municipality, for the purposes of determining whether a wholly owned subsidiary corporation of a municipality could be tax exempt.... It took the position that a municipality could be determined such or not such based on the functions the particular entity exercised. In this case it had to do with an Indian band, as to whether they qualified as a municipality and were therefore eligible to have tax exempt municipal corporations.

The Income Tax Act was administered on that basis for some time, until another decision came down, Tawich Development Corporation v. the Deputy Minister of Revenue for Quebec, which came to a contrary conclusion. As a result, you now had a situation where some municipalities or some entities that thought they were municipalities--Indian bands or otherwise that were treated as municipalities based on the functions they performed--might not now qualify for that, and therefore their wholly owned municipal corporations would also not qualify.

The amendment here fixes it to reinstate the status quo ante such that the determination of whether or not an entity is a municipality or not for the purposes of being able to have a tax exempt municipal corporation as a subsidiary is determined based on the functions exercised by the entity.

[The Chair, Conservative, Brian Pallister]

Merci, monsieur.

We continue now with Madam Wasylycia-Leis.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Just before I begin, Mr. Chairperson, are we under a time restraint on this?

[The Chair, Conservative, Brian Pallister]

Five minutes.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

I have lots of questions.

I'm going to start by saying that the fact that this, in large part, was a Liberal initiative doesn't give me a lot of comfort or satisfaction. In fact, I'm even more worried now.

My questions have to do with the ability, through this bill, to get at what this committee has identified as a very large and growing problem. We've spent a lot of time talking about tax havens and tax avoidance. We now have a bill, and we have a commitment through the budget to do some longer-term study on this matter.

Can you give me a concrete example of what this bill would do, what impact it would have on Canadian foreign direct investment? What's the likely impact?

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

I'll lead off with a couple of comments. One is that I think we should be clear that this is not a partisan initiative in any way, shape, or form. It is a measure that any responsible government would need to undertake to ensure that the tax act reflects judicial decisions that are made from time to time, and it is also responsive to some of the ambiguities or problems that are pointed out by tax practitioners and taxpayers.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

I appreciate that, but given the fact that this was started in 1999....

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Whatever government it would be, you would probably be getting the same act.

With respect to the impact on foreign investment, what it will do, in a nutshell, is that it will not encourage Canadians to try to shelter their money in foreign investment entities, because there will now be no tax advantage in doing so. That income would be taxed the very same way it would be if a Canadian invested in a Canadian investment entity. So it levels the playing field between the two and doesn't give preference to a foreign investment entity.

I don't know whether the officials have anything to add, but that's the bottom line.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

But in the last decade, all the while that this bill has been before us and never enacted, we've seen investment in offshore havens or offshore financial centres multiply dramatically. We know it has increased eight-fold from about at least $11 billion to $88 billion.

Is this bill going to make it more likely that we are collecting the taxes we should be collecting, and that in fact we are cracking down significantly on tax avoidance?

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Well, I think it depends on the percentage of investment that was or could be sheltered in these so-called FIEs and NRTs. As the officials have emphasized, once it was clear that this kind of tax shelter was going to be taxed as if it were Canadian income, the use of at least these two entities has fallen dramatically.

Now, you may be referring to increases in the use of other tax shelters. That's outside the scope of the bill, but it's within the scope of the study this committee is undertaking and also of the committee that was set up under the budget. So I imagine we'll get into that, but I would suggest that at this point that's a little bit beyond the scope of what's being dealt with in this bill.