Finance Committee on Feb. 28th, 2013

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Okay.

What about in my particular example, which seems very popular in most of the charities that I as a politician attend? People give gifts in kind—for instance, a condominium, a property value that's worth maybe two weeks in Hawaii. They give that, and the value there is $5,000. It's sold at the auction for $5,000 or $4,000, whatever the case may be.

Will that person receive a receipt for the amount that the charity actually receives?

[Edward Short]

You're saying it's the charity that's auctioning it off?

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Yes. The person donates it and the charity—

[Edward Short]

The person will not get a receipt for that, because they have acquired the right to use that condo. They paid $6,000 for it. The CRA would apply these rules, saying that they feel you got fair market value consideration when you auctioned that off.

Now, if—

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

But the money only goes to the charity. It doesn't go to the person who actually owns the condominium.

[Edward Short]

Well, if somebody else has donated the time share—

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Yes.

[Edward Short]

—that person will get a donation credit based on whatever the value was of that....

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Of...paid by the....

[Edward Short]

Yes—which again is a question of fact.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Jean.

Monsieur Côté.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

I would like to go back to the goodwill amount. Clause 195 of Bill C-48 makes an addition to section 56.4. In it, several terms are defined, including “restrictive covenant” and ”goodwill amount”, which have some implications. I am specifically thinking of industries that are based on the principles of intellectual property. That is why I gave the GlaxoSmithKline example earlier.

According to the definition, the goodwill amount is included “in computing the cumulative eligible capital of the business carried on by the taxpayer through a permanent establishment located in Canada”. At the end of the definition of the term “goodwill amount”, it says the definition is used in applying new subsection 56.4(7), where the question of restrictive covenants potentially comes up.

With industries based on the principle of intellectual property, are the tax consequences of these technical amendments clearly understood?

[Ted Cook]

I'll pass that over to Kerry Harnish to speak to restrictive covenants.

[Kerry Harnish]

The restrictive covenant measures, as was previously mentioned, are directed at a couple of Federal Court of Appeal cases. We would view them as integrity measures.

The question that comes up is that when the restrictive covenant was given, the taxpayer, based on the cases, would take the position that the value of the covenant was not taxable. So the portion of a share sale, for example, that was related to the value of the covenant would become non-taxable.

That could have significant revenue implications, because it could arise on any sale of any business asset. As you can imagine, across the economy there would be a lot of sales in a given year. But in terms of the particular amounts for the particular sales, we'd not be able to come up with a firm figure on that, because that depends upon the Canada Revenue Agency finding the particular transactions under audit. The Canada Revenue Agency, of course, in the particular two cases that came up on appeal, found the particular transactions, reassessed the particular transactions, and the courts indicated that they thought the values were not taxable.

So these measures come back to that situation, and we say, look, that's not an appropriate tax policy result to have the particular value not subject to tax. The measures are meant to impose the tax. The risk to Treasury would be significant, but what's the particular revenue saving on it? It would be next to impossible to determine that.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

But I would like to know if that will be enough to cover what you described. I do not want to over-dramatize things, but I am thinking about the Google case in Europe, for example. The government is considering developing a tax policy for intellectual property and for patents to deal with these kinds of challenges, but I am not convinced that the definitions, as they stand, are going to prevent the consequences I am afraid of. I am even afraid that the government may be painting itself into a corner, if you see what I mean.

[Kerry Harnish]

Yes, but what I would say on that subject is that these measures are focused on a particular type of transaction, which is the sale of a business and the sale of its assets. In the context of those sales, what was occurring, for example, was that the vendor would agree not to compete with the buyer's business and would take value.

I think what you're referring to is a broader issue with respect to transactions related to copyright and transfer pricing. Copyright is actual property, under the law, whereas a restrictive covenant was found by the Federal Court of Appeal not to be property.

With respect to transfer pricing, these measures are not about it. That would be a different issue, and I'd have to turn back to Mr. Cook.

[The Chair, Conservative, James Rajotte]

Mr. Cook, would you like to comment on this?

[Ted Cook]

We have been talking about restrictive covenants because I think your concern was the intellectual property aspect and generally the issue of intangibles. You also referred to GlaxoSmithKline and Google, which have obviously been in the news, and probably to Starbucks in the U.K.—those types of situations. What you're probably talking about is something broader, frankly, than what we have in Bill C-48.

We have a set of transfer pricing rules in the Income Tax Act. Of course, concern has been flagged in some other jurisdictions—most recently in the U.K., and they've had some hearings.

Even when you have a developed transfer pricing system in place, does it provide enough scope for multinational corporations to order their affairs, particularly with respect to intangibles? You can take an intangible and by its nature can put it in any jurisdiction in the world that you wish to, and by way of support through transfer pricing studies, you develop expenses and such things to reduce your taxable income significantly.

I would say that while it's somewhat related, really what you're talking about is transfer pricing and how robust Canada's rules are with respect to intellectual property.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Okay.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

We have about seven minutes left. I have a couple of questions, and then we'll go to Mr. Rankin for his final round.

I want to follow up on the discussion with respect to process.

Mr. Cook, prior to 2001, were technical tax bills done on an annual basis? You mentioned the technical tax packages in recent years. Are they prepared on an annual basis by the department, or roughly annually?

[Ted Cook]

I think “roughly annually” is the way it has worked out. As I'm sure you and committee members are aware, we're heavily implicated in the development of the federal budget and all the legislation related to it. For a significant portion of the year, we don't really focus on a lot of other things. So far it has worked out to be roughly annually, but it's really more a question that when packages are ready we will recommend them for release to the minister.

With respect to the first part of your question, I might stand to be corrected by my colleagues, but I think there have been a couple of times in the past when the government has indicated a desire to move toward annual technical bills. But I don't think, if you look at the historical record, that there's been a long period during which annual technical bills have been introduced in Parliament. There was probably a period when we did two or three in a span of four years or something like that, but if you look at the last 20 to 25 years, I don't think there has been a significant period during which they have been introduced annually.

[The Chair, Conservative, James Rajotte]

As you know, we're heading toward a budget in March—presumably the latter part of March. With respect to the timing of technical tax packages, is the fall the best time for the department for their release, simply because of the budget cycle that you follow?

[Ted Cook]

There is a sort of lockdown period at some time on both sides of the budget, when physically our resources are not there. It has rather worked out to the fall, but I wouldn't say that.... Our senior management is very interested in moving forward with additional technical packages, and so I don't think we're targeting the fall; we're targeting whenever we can apply the resources and get them ready and release them.

But certainly, going for more than a year without our recommending a release would not be....

[The Chair, Conservative, James Rajotte]

Just to give us a sense in terms of responding to items that come up, if you use comfort letters as an example, has there been a dramatic increase or just a slow increase in the number of comfort letters that have needed to be responded to in the last, say, 10 or 15 years?