Finance Committee on June 5th, 2007

[The Chair, Conservative, Brian Pallister]

Good morning to our committee members and our guests.

Pursuant to the order of reference of Monday, May 14, 2007, we are meeting on Bill C-33, an act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that act.

Appearing this morning is our colleague, the Honourable Diane Ablonczy, parliamentary secretary to the Minister of Finance.

I call clause 1.

Diane, do you have some opening comments you would like to put on the record?

[Diane Ablonczy, Conservative, Parliamentary Secretary to the Minister of Finance]

Yes, I do, Mr. Chairman. Thank you very much.

To my colleagues, who will no doubt be hanging on my every word, good morning.

I'd just like to make a few comments to set the background on our study of this bill. I hope they will be helpful to my colleagues this morning.

Bill C-33 implements certain tax measures and amendments to the Income Tax Act. Specifically, this bill proposes measures regarding the taxation of non-resident trusts and foreign investment entities, otherwise known as NRTs and FIEs. It also contains a number of proposed technical amendments to the Income Tax Act.

The intent of this bill before the committee today is to help strengthen our tax system by ensuring its equity and integrity.

First of all, with regard to the non-resident trusts and foreign investment entities, the measures in this proposed legislation are intended to prevent tax deferral and avoidance through the use of foreign investment funds and trusts. Since we're studying this whole area, by the way, I think this will be of particular interest to all of us on the committee.

This type of activity has moderated substantially in recent years, but Bill C-33 will ensure that if someone tries to avoid taxes by using foreign investment funds, any income earned on that investment will be taxed as if it were earned in Canada. Bill C-33 does this by proposing to amend provisions of the Income Tax Act relating to the taxation of income earned from non-resident trusts and foreign investment entities to investment vehicles used sometimes by Canadian taxpayers.

I should note here that the amendments in this bill were developed in consultation with professional tax advisers and taxation authorities as well as with taxpayers themselves. These changes also respond directly to concerns raised by the Auditor General.

These proposals were released in draft legislation in June 2005, nearly two years ago now, giving ample time for input by stakeholders. So these provisions are not going to take anyone by surprise.

The amendments are important and necessary for a very good reason, and that has to do with the equity of our tax system. As you know, Canada generally taxes just the Canadian-sourced income of taxpayers who are not resident in Canada. There exists, therefore, an income tax incentive for Canadian residents to earn investment income using non-resident trusts and foreign investment entities based in a country other than Canada that impose no tax or a low tax. In other words, using these investment vehicles to earn investment income, residents of Canada could inappropriately defer or avoid altogether the payment of Canadian taxes.

Mr. Chairman, we cannot have a competitive tax system if it allows a way for Canadian taxpayers to avoid paying appropriate taxes. Not only would that erode Canada's tax base, but it creates inequities that undermine the very integrity of our tax system. And of course when some people avoid paying taxes, other taxpayers must contribute more to pay for the government programs that are valued by Canadians.

The bottom line, Mr. Chairman, is that these changes in Bill C-33 before us will level the playing field. They will also allow Canadian investment vehicles to compete on an equal footing with foreign-based investment opportunities.

Turning briefly to the technical amendments, as I mentioned at the outset, Bill C-33 also includes a number of proposed technical amendments to the Income Tax Act that are essentially housekeeping measures. The intent of these amendments is to correct or clarify the application of existing income tax provisions. They will also implement measures that have already been announced by this government and the previous one and deal with other income tax situations that require legislative response.

Technical tax bills are quite common. They come up every few years and are used to implement small changes that typically clarify provisions in the act so that they better reflect the policy intent. Most often these changes are pointed out by tax practitioners, who identify tweaks that are necessary.

These changes are not controversial. Most are relieving in nature and a few are neutral. They include things like expanding the RRSP rollover options available on the death of the parent or spouse of a mentally disabled individual. Providing income tax exemptions for corporations owned by municipalities or public bodies performing a function of government is another example.

Before I open the floor to questions, I would remind the committee members again that the intent of this proposed legislation is to improve the equity and integrity of our tax system.

I will now be pleased to answer any questions from committee members about Bill C-33. I also welcome the assistance of our brightest and best officials from Finance Canada, Mr. Lalonde and Mr. Conway, who have joined us here today.

Thank you, Mr. Chairman.

[The Chair, Conservative, Brian Pallister]

Thank you, Madam.

We'll begin with Mr. McCallum for five minutes.

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

Thank you, Mr. Chair.

I may share my time with any of my colleagues who are interested, because I believe this bill originated in Liberal days. I don't think there's any controversy surrounding it.

Those are my comments. Thank you.

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

I would like the clerk to note that it is a red letter day when my friend from the Liberal Party is so kind and accepting of a government proposal.

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

We're always happy to work together with the government on the rare occasion when they do something sensible.

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

Touché.

[The Chair, Conservative, Brian Pallister]

I'm hesitant to call for order with so much love in the room, but I think I'll continue now with Mr. McKay.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I think the record should note that the chair is wearing the same kind of glasses as my tie.

[The Chair, Conservative, Brian Pallister]

Do you want to share your time with anyone else?

[John McKay, Liberal, Scarborough—Guildwood, ON]

I don't expect to share any time.

To the officials, it says in the speech that the measures proposed in this legislation are intended to prevent tax deferral and avoidance through use of foreign investment funds and trusts.

Can you be specific about that, please?

[Gérard Lalonde, Acting Director, Tax Policy Branch, Department of Finance]

Sure. These proposals deal with measures that were originally announced quite a while ago, in the 1999 budget. Drafts were released over the years--in 2000 and in 2001-02. In 2003, they were tabled as a notice of ways and means motion, and again in draft legislation in 2005, eventually making their way into this bill. On each of those occasions they dealt with an opportunity to provide more consultation with the tax profession and iron out some of the areas of contention.

In essence, these measures try to ensure, in the context of the foreign investment entities and non-resident trusts, that Canadians cannot get a better tax deal by investing offshore than by investing in Canada. In the case of non-resident trusts, they try to ensure that people cannot move income out of the Canadian tax net by moving assets into non-resident trusts.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So they've already been implemented through a ways and means motion.

[Gérard Lalonde]

That ways and means motion fell with the prorogation of the government at that time and was not re-introduced. Subsequent to that there was another release in draft. So right now the operative document that people are looking at is effectively the 1985 draft, followed by this bill and the announcement by the Minister of Finance that the measures on FIEs and NRTs would come into effect starting in 2007.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I'm not quite sure I'm following this.

Do you mean they were initially introduced in a ways and means motion in 2003, but with the prorogation of Parliament the ways and means motion ceased?

[Gérard Lalonde]

It went into limbo, and it wasn't clear what was going to happen with it at that point. The intent to proceed with the measures was re-established by the government of the day in 2005 with the July 18 release of further draft legislation incorporating these measures.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Have the department and taxpayers been operating as if this has been passed, as if this is law?

[Gérard Lalonde]

With the announcement by the Minister of Finance in November of last year that these measures would be reintroduced in this bill, but effective for 2007, the Canada Revenue Agency and taxpayers are operating on the basis that these proposals may very well become law, and if you don't file in accordance with them you may be subject to a reassessment later, once it is passed.

[John McKay, Liberal, Scarborough—Guildwood, ON]

They may get some unwanted attention from Her Majesty.

Thank you.

[The Chair, Conservative, Brian Pallister]

We'll continue with Monsieur Crête.

Mr. Crête, you have five minutes.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chairman.

Ms. Ablonczy, in your presentation notes, in the chapter on non-resident trusts and foreign investment entities, you state regarding the bill that:

The measures in this proposed legislation are intended to prevent tax deferral and avoidance through the use of foreign investment funds and trusts. This type of activity has moderated substantially in recent years. Bill C-33 will ensure that, if someone tries to avoid taxes by using foreign investment funds, any income earned on that investment will be taxed as if it were earned in Canada.

Could you or could the experts tell us what type of a decrease there has been in this type of activity in recent years? You say this method is used extensively. I would like to know if you have any figures on the importance of the decrease in the use of this loophole that would show that it has been partly or fully closed.

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

That's a good question. I suspect the reduction in the use of these instruments is because there's a pretty sure bet that they're going to be regulated in the way we've set out in the bill.

I'm going to ask Mr. Lalonde to give more specifics on how the use of these instruments is being reduced.

[Gérard Lalonde]

We don't have any specific number, simply because it's hard to place a number on what isn't there. In the lead-up to the 1999 budget, tax avoidance through the use of non-resident trusts and foreign investment entities was becoming more and more prevalent and public. People were giving public presentations on how you could save Canadian tax revenue by investing in these vehicles.

With the introduction of the proposals in the 1999 budget and the 2000 draft, followed by subsequent drafts, the Canadian tax population was put on notice that these proposals were coming down the pike. While the application date for the proposals has been postponed twice, the fact of the matter is that during the period of time when the proposals were expected to be extant, people did not enter into those kinds of transactions because they were expecting the tax results to happen.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I am a bit surprised by the fact that, even though you state in your notes that the activity has moderated in recent years, you are unable to put any figures on this reduction. More generally, what is the size of the tax avoidance problem in Canada at the present time? Are these changes going to close 5%, 10%, 20% of this loophole? What is the total size of the tax avoidance activity that you have been able to identify, for example with the bill on interest costs deductions, this one and other measures? Could you give us a general idea as to how much of the problem Bill C-33 will solve?

[Gérard Lalonde]

Again, it is very difficult to come up with a number on this, and I'll give you an example of why.

We're starting off with a period of some eight years ago, with the lead-up to the 1999 budget. The government was seeing a problem becoming prevalent in those days. These measures put an end to that and curtailed that kind of activity. Where would it have gone if these measures had not been introduced? That's anybody's guess. While one can well imagine how innovative tax schemes are developed for clients who can afford very high-priced tax counsel, you were seeing back in those days that tax savings mechanisms were being marketed basically to the masses. Where that would have gone had the government not proposed changes back then and proceeded over the course of the years, that's a very good question. I can't give you a number on that.

Wally, perhaps you could give them some ballpark estimation of how these measures have curtailed the kinds of activities we were seeing back in 1999.