Evidence of meeting #107 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was measures.
A recording is available from Parliament.
Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
When you say “needed to be responded to”, do you mean in terms of comfort letters that we've issued?
Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
Maybe Mr. Porter has a better sense than I do, but I would say we've issued fewer comfort letters per year in the last few years than we did probably in the early 2000s.
Conservative
The Chair Conservative James Rajotte
Was it because there have been fewer items that have needed to be addressed? Is that correct?
Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
It's partly so. It's a bit in the eye of the beholder. Now we're actually trying to do the technical releases and deal with things in the draft releases as they come up. It's partly the number of requests. It's partly how willing the Department of Finance is to issue. Obviously, the more you satisfy the more there's an appetite. The relationship between taxpayers and the CRA in terms of how provisions are interpreted....
Conservative
The Chair Conservative James Rajotte
Okay, I appreciate that.
Mr. Rankin, we have a few minutes here.
NDP
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?
Director, Tax Legislation, Department of Finance
I will just speak to the measure. Generally, when you have an exemption system and you recognize foreign earnings and you put them in an exempt surplus bucket such that they can be repatriated to the home country—in our case, Canada—without any further tax, you have to have protective measures in the system to avoid transactions that manufacture or fabricate exempt surplus in circumstances where there has really been no underlying surplus.
One of the mechanisms prior to hybrid surplus that may have been available to Canadian-based companies to do that would be when a foreign affiliate that is a holding company—so the holding company is owned by the Canadian parent and the holding company owns shares of other foreign affiliates below it—could sell the shares of the lower tier foreign affiliate to another company in the group, so there's no economic realization of gain outside of the group. That kind of transaction would create...to the extent there was a capital gain, mirroring the fact that we only tax half of the capital gains domestically. We put half of the capital gain in exempt surplus and half of the capital gain in taxable surplus. But provided the shares of the underlying affiliate are involved in an act of business only, we don't tax that gain currently. We will only tax that pool upon repatriation.
There's a couple of things at issue here. It's not really the case that there's been an amount of surplus created equal to the amount of the capital gain. There has, as a matter of form because there's been a real internal transfer, but there hasn't been a real realization by that corporate group, outside of the group, for cash proceeds. That's just one example of the potential to manufacture surplus, so that half of that gain, then—if there was cash available elsewhere in the group—could now be repatriated to Canada without any further tax.
The hybrid surplus concept bolts the taxable and the tax-free portion of that gain together, and if there is no underlying foreign tax related to the capital gain—and usually there is not because that holding company is in a jurisdiction that doesn't pay tax—then effectively now repatriating any amount out of the hybrid surplus pool will result in some level of additional residual Canadian tax. But you can't take the step of just creating an exempt surplus pool to the extent of one-half of that capital gain.
Conservative
The Chair Conservative James Rajotte
Thank you, Mr. Rankin.
On behalf of the committee, I want to thank all of our officials for being here today. We will continue our discussion of this bill on Tuesday. Thank you so much for providing information.
I understand some members may have some written questions they wish to submit to the department officials. If they can do that through me as the chair and through the clerk, we will certainly endeavour to get the answers for all the committee members.
Thank you.
The meeting is adjourned.