Finance Committee on April 22nd, 2010

[Daniel Paillé, Bloc, Hochelaga, QC]

So, there is no difference on the basis of credit rating. You told us that it was based on risk and that there are different levels of risk. I understand that when the federal government owes money to someone--triple A sovereign risk being the highest level in Canada--that person would collect a lesser rate of interest than when someone owes money to the government. Is that the explanation?

[Tim Wach]

That is part of the logic behind it. But you're correct in your comment that there is no distinction made among taxpayers. It would be a little difficult for the Canada Revenue Agency to try to do that.

[Daniel Paillé, Bloc, Hochelaga, QC]

However, would it be possible to do that for companies? Some may invest their money, as my Liberal colleagues were saying--it is rather unusual but, still-- with Revenue Canada. Would it be conceivable that some companies in need of money--and some do that--would decide not to pay Revenue Canada or to delay their payment since the rate of interest is the same for all companies?

[Gérard Lalonde]

Well, in this case the upshot of this measure deals not so much with corporations that don't pay tax to the CRA. They will pay interest on their underpaid taxes at the treasury bill rate plus 4%, as would any individual. This measure deals with overpayments of tax, effectively leaving moneys on deposit with the Canada Revenue Agency. Part of this policy recognizes that the Canada Revenue Agency is not a deposit-taking institution; it is an institution that collects tax. Interest is paid on tax overpayments, and that's fair, but when you determine at what rate the interest should be paid, there is a good question as to whether it should be paid at the treasury bill rate, at the treasury bill rate plus 2%--which is what it was before for corporations--or at the treasury bill rate plus 4%. Previous to that, it was the treasury bill rate plus 2% for all taxpayers. Now for individuals it stays at the treasury bill rate plus 2%, but for corporations it's what the corporation would get had it invested straight up in a treasury bill.

[Daniel Paillé, Bloc, Hochelaga, QC]

This brings us back to the earlier discussion.

For people receiving interest and those paying interest, a tax is still collected, which means that those who collect interest from Revenue Canada will have to pay tax on that interest the following year. In the case of those who pay interest to the government of Canada, that interest is deductible the following year.

[Gérard Lalonde]

Interest that you receive is taxable in the same way as if you had received interest from any other source. Interest that you pay depends on whether you have laid out funds for the purpose of earning income or not, and paying a shortfall in your income taxes and incurring interest expense on that is not considered money borrowed for the purposes of earning income. It's a tax liability, and that's after you have determined your income. So the upshot of it is it's not income.

[Daniel Paillé, Bloc, Hochelaga, QC]

If I understand correctly, any interest paid by the government of Canada, for whatever reason and to whomever, is taxable that year. However, the interest paid by taxpayers or companies cannot be deducted from their income tax. This is patently unfair. I understand that interest may be deducted for an investment on which one has collected a profit but, in the case of a loss on that investment, that loss will be deductible later from other income or might be deducted from taxes already paid.

Finally, you said that the interest paid by the government of Canada is clawed back, in a way, through the income tax but, in the case of interest paid to the government of Canada, a significant portion is not deductible from future income tax.

[Gérard Lalonde]

That is correct, and it's consistent with the basic principles that money borrowed for the purposes of earning income is deductible. Interest on money borrowed for the purpose of earning income is deductible and other types of interest are not.

For example, if you had an individual who earned interest from a deposit in a deposit-taking institution and at the same time paid interest on, say, a car loan for a personal car, the interest on the car loan would not be deductible, but the interest on the moneys placed with the deposit-taking institution would be taxable. The same principles apply in the case of interest paid and received from the Canada Revenue Agency.

[Daniel Paillé, Bloc, Hochelaga, QC]

I have another question but I have the feeling that we will not have enough time to deal with it because Mr. Menzies is trying to delay our work.

There are changes to clauses 30, 31 and others of the Canada Education Savings Act. What is the trick that even an experienced tax practitioner such as myself is unable to understand relating to the proposed amendments? I would like to have a quick wrapup about the proposed amendments to the Registered Education Savings Plan.

Very briefly, could you explain the intent of those amendments? Are they related amendments or do they represent significant changes?

[Tim Wach]

These amendments reflect the positions that have been applied by all the interested parties, the federal government, and the provinces for several years, that contributions to these plans from provincial sources, while they're valid and appropriate contributions to the plans, should not attract matching amounts from the federal government, nor should they take up contribution space on the part of contributors to the plans.

[Daniel Paillé, Bloc, Hochelaga, QC]

All right. Thank you.

[The Chair, Conservative, James Rajotte]

Mr. McCallum, please.

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

Thank you.

My question relates to paragraph (e), about people who have retired and are resident in Canada and receiving U.S. social security benefits. I think you'd agree a general principle of taxation is that people in similar circumstances should be taxed similarly.

My question is, if you have two people, two neighbours in a border town like, say, Windsor, and one receives social security from the U.S. and one receives the Canada Pension Plan, which one is better off, or are they equally well off, tax-wise?

[Tim Wach]

Without knowing all of the details, it's hard to say, but it would seem the one receiving the amounts from the U.S., at least on the social security amounts, will be taxed at a lesser rate in Canada.

The change that is being proposed here is simply reinstating the position that had been agreed to and was reflected in the Canada-U.S. tax treaty prior to 1996 and putting people who were in that position prior to 1996 back in the position they were in at that time.

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

Well, if the prior position was unfair, why would it be a good policy to revert to what was unfair, if those receiving U.S. social security are now better off than those receiving the Canada Pension Plan?

[Tim Wach]

I suspect the former American resident receiving the amounts might argue that not being in the same position that he or she was in back in 1995 is unfair to them, and it's for that reason that this change is very targeted. It's only available to those who were in that position in 1995 and have been continuously resident in Canada and in receipt of these amounts since 1995.

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

Okay.

One last question for me has to do with the pension surplus now being allowed to be 25%. I don't object to that. It seems the horse has already left the barn, in the sense that might have had an impact when pensions were in good shape, but 125% may not do much when the average pension might be around 85%.

But I seem to remember.... I think it was the actuaries who had a proposal that companies could make contributions in excess of 100% into some special vehicle and they would then be the clear owners, and that might have had a more powerful incentive effect for companies to do that. Do you know what I'm talking about and whether that proposal was considered?

[Gérard Lalonde]

Well, this measure is strictly a tax measure. What you're referring to is something that would be dealt with under the PBSA, the Pension Benefits Standards Act, and we haven't tried to wade into that with this particular measure.

As you do know, there is a pension consultation process that's under way right now. What this measure does is strictly deal with the issue that perhaps 110% was not sufficient to overcome unexpected downturns in the market. Your question about the timing of it is a very good question, but what this does is ensure that should that situation ever happen again, the pensions will be able to be funded at least to 125%, and if you get a downturn similar to what we've had recently, and let's hope that doesn't happen again, there will be that 25% cushion there.

It doesn't attempt to deal with the ownership issue. That's a much broader issue.

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

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you. No further questions on this part.

We'll go to part 2, then, amendments in respect of excise duties and sales and excise taxes.

I have Mr. Wallace to start.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair, and thank you to all our guests at the table and in the audience here. You're helping us out to understand this legislation.

The issue I'd like to be clear on is the tobacco labelling, I guess you would call it, or a new stamping that we're proposing in this. We're hearing from a lot of our colleagues. It's not too far from my area either, the issue of contraband tobacco products.

I need to understand what this legislation is actually doing in terms of stamping. I'm assuming it's helping in terms of countering that activity. What are your expectations based on the legislation? Why can't we do it through regulation? Why do we have to have legislation for it?

[Carlos Achadinha, Legislative Chief, Sales Tax Division, Public Sector Bodies, Department of Finance]

Sir, I'll respond to that question.

What is being proposed here is a new regime for the stamping of tobacco products. I'm not a smoker, but if you look at a tobacco package, there is a ribbon that goes around it and some words that are required to say “Canada duty paid”. These are intended to provide a sign that these are legitimate products and that all taxes have been paid. The problem is that these products have now become counterfeited. There are offshore manufacturers that are so sophisticated they can reproduce the product and it will look identical to a product that is legitimate.

What we're intending to do with this new regime is put in place a new mechanism for that stamp. The government itself has developed and will be issuing a new stamp. It will be responsible for the production and distribution, and there will also be specific possession requirements and limits on this new stamp. It's a new sophisticated stamp with both overt and covert security features. It'll be an additional tool for enforcement officials to help identify the counterfeit product from the legitimate product.

[Mike Wallace, Conservative, Burlington, ON]

Did we have to have legislation to do this...and not through regulation?

[Carlos Achadinha]

It's a regulatory regime right now, and that regulatory regime just specifies the colour of that ribbon and the wording. What we're producing now and what we're proposing are new specific controls, and those controls will entail that the stamp itself will be under the control of the Minister of National Revenue. So there are legislative requirements there. There will be a requirement on who can possess it, and there are related and complementary penalties and offences for non-legal possession and non-uses of that particular stamp. That requires legislative amendments.

[Mike Wallace, Conservative, Burlington, ON]

Is there any flexibility on packaging? Cigarettes are basically packaged very similarly, I think. I'm not a smoker either, and now that we have in Ontario, at least, all those things, people don't even see them in the stores. But there are other tobacco products--pipe tobacco, cigar boxes, and that kind of thing. Is the stamp flexible enough that it's able to be used on all kinds of products? Or are we having some issues with that?