Finance Committee on Feb. 28th, 2013

[Shawn Porter]

As a final word, and I'm sure we'll have an opportunity to come back to this, suffice it to say that the upstream loan rule was an attempt to avoid the residual tax. The residual tax was only imposed when a foreign affiliate distributed a dividend to the shareholder in Canada. If the foreign affiliate made an upstream loan to the shareholder in Canada, which has the same economic effect, then the rule didn't have applications. The upstream loan rule will essentially treat that as a dividend, and then subject to potential—

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Brison.

Mr. Hoback, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Mr. Chair.

I thank everybody for coming here this morning.

I really don't have a lot of questions, but there's one area, in definitions, where you could help me out. You talked a little bit about comfort letters and what they are. Maybe you could define what they are, and the processes used in getting a comfort letter.

I know that Mr. Brison maybe would like to receive a comfort letter somewhere down the road from the Government of Canada.

[Scott Brison, Liberal, Kings—Hants, NS]

I get a lot of discomfort letters.

[Voices]

Oh, oh!

[Randy Hoback, Conservative, Prince Albert, SK]

Well, I think we can give you a comfort one, maybe, from Revenue Canada.

Perhaps you could give us the definition of what a comfort letter is, what it entails; what you would have to do to get a comfort letter; if there's a backlog in receiving these comfort letters; and what the impact would be, after this legislation goes through, in terms of whether or not we'd be sending out more of these comfort letters.

[Ted Cook]

Comfort letters are letters that are issued by the Department of Finance generally to taxpayers. The situation they contemplate is that an individual or other taxpayer is faced with a transaction usually that they would like to undertake, or a particular tax situation. When they look at it, and the CRA looks at it, they come to the conclusion that in fact the transaction the taxpayer wants to undertake doesn't work under the Income Tax Act.

In some cases, the taxpayer will change their transaction, or they may come to the Department of Finance and say, “Well, what we want to do is completely in line with the policy of the provisions of the Income Tax Act”—essentially, you have perhaps a situation that wasn't contemplated at the time the initial act was drafted—“and will you provide us a comfort letter?”

The comfort letter request comes to our division, the tax legislation division of the Tax Policy Branch, and we analyze the situation technically with respect to the act and also the surrounding policy for the provision. If we find that it is in fact within the policy of the act, officials of the Department of Finance may issue a comfort letter.

What a comfort letter does is it indicates our willingness to recommend to the Minister of Finance that a particular change be made to the Income Tax Act, and this particular change usually will have effect as of the transaction date or the date of receipt of the comfort letter. What we can provide is a recommendation. Taxpayers are generally willing to order their affairs based on comfort letters, and the CRA is generally willing to administer based on comfort letters.

The comfort letter process works reasonably well. Of course, it ultimately depends on the subsequent enactment of the changes that were alluded to in the comfort letter. Obviously at some point down the road, for people to sort of maintain faith in the system, it's necessary that those comfort letters be enacted.

We continue to issue comfort letters. We perhaps do it less often than we had in prior years, but we continue to issue comfort letters, and will do so into the foreseeable future.

Sorry, if there's another minute, I think you had also asked about the backlog.

[Randy Hoback, Conservative, Prince Albert, SK]

It was about the impact of Bill C-48, plus the backlog.

[Ted Cook]

I think in terms of the backlog of comfort letters, if I can maybe step back a bit, obviously the Auditor General reviewed the Department of Finance, and particularly our area, back in 2009, and made two recommendations: that we introduce a better system for monitoring technical amendments and that we develop a plan for implementing dealing with this backlog; and—to the minister—the release of smaller packages of technical amendments.

I think we can say that we've done so. In fact Bill C-48 before you has the amendments that were contained in at least two technical amendment packages that were released for comment in 2010 and 2011.

The Auditor General found that there were approximately 250 comfort letters that needed enactment. In terms of the comfort letters that are sort of still outstanding in the backlog, I would note that we did release a technical package back in December. As it stands now, between that technical package and the amendments that are contained in Bill C-48, fewer than 25 comfort letters have not been released in terms of draft legislation at this point.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Hoback.

Ms. Nash, go ahead, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

I just want to pick up on the technical tax changes, because it's been a number of years since we've passed a technical tax bill. It's my understanding the last one was passed back in 2001. Is that correct?

[Ted Cook]

That is correct. Obviously technical amendments were then tabled in the House again in 2006 and 2007 but unfortunately were not passed.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Okay. Now, the Auditor General raised concerns about the slow pace. We're glad to see that this bill has come forward. It's quite a lengthy bill. It's close to 1,000 pages, so we're looking at quite a big document, and that's because there are a lot of changes that we need to deal with. You're talking about wanting to make this process faster. Is there going to be any attempt on the part of the government to, on a more regular basis, update the technical tax changes? I assume you would agree it's not desirable that there be a 13-year gap between technical tax bills. Maybe you can just tell me what the ideal timeframe would be from your perspective.

[Ted Cook]

In terms of the ideal timeframe, whether to introduce a bill and the contents of that bill, and the frequency of introducing technical amendments are obviously decisions—and I think both the public accounts committee and the Auditor General have recognized this—ultimately made by the government. Within the control or ambit of the Department of Finance are the kinds of things I've talked about in terms of preparing packages of technical amendments that would put the government in a position to pursue its priorities as appropriate.

Since the Auditor General's report, with respect to general miscellaneous technical amendments, we have recommended and have released packages of technical amendments—in November 2010, October 2011, and December 2011. So in terms of the Department of Finance's response, I think we've been working hard to deal with technical amendments and to put the government in a position to ensure that it won't be another 13 years.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Right. Now in terms of the number of these technical amendments, the Auditor General said back in 2009, which was during this 12-year period, that there were at least 400 outstanding technical tax changes that hadn't been legislated at that point. How many of those technical tax changes would you say are being dealt with in this particular bill?

[Ted Cook]

In terms of the Auditor General's comments, I think it's a difficult question, as far as what an amendment is and how broad it is. Part 1 makes amendments to non-resident trusts and foreign investment entities. The question is whether there are two amendments or 100. I think perhaps the focus has been rightly on comfort letters, because those are amendments whereby the Department of Finance has publicly stated to taxpayers that it intends to recommend a certain change.

[Peggy Nash, NDP, Parkdale—High Park, ON]

How many comfort letters would be outstanding and how many technical changes would be outstanding even following the adoption of this bill, if it is subsequently adopted?

[Ted Cook]

I'll just answer briefly, Mr. Chair.

The Auditor General found 400 amendments in total, 250 of which were comfort letters. In terms of what is contained in Bill C-48, after you take out Bill C-48, there are probably fewer than 50 comfort letters.

We also did a release in December 2012 that addressed another 20 to 25 comfort letters. They are out in draft. That leaves approximately 20 to 25 comfort letters that are unaddressed, and I would say that some of those are even comfort letters we've issued this year. Some are older comfort letters, because we've addressed them by theme and by what makes sense. I won't say that we're just dealing with the ones that have been issued in the last year or two, but by the same token, we're sort of in the ballpark of having addressed really the great majority of the comfort letters.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Nash.

Mr. Adler, please go ahead.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

You indicated earlier that there was a previous incarnation of this bill under a previous Parliament that died with the dissolution of the Parliament. How different is this bill from that one, would you say?

[An hon. member]

Introduced by us.

[Mark Adler, Conservative, York Centre, ON]

Introduced by us, yes.

[Ted Cook]

Just in terms of overview, part 1 has measures with respect to non-resident trusts and foreign investment entities. There were measures with respect to those in Bill C-10. The Senate committee hearings highlighted a number of specific concerns with those measures. They've been significantly revamped as a result and subject to consultation after budget 2010.

Parts 2 and 3, with respect to foreign affiliates and what we had talked about with respect to a hybrid surplus, are all new from former Bill C-10.

The bijuralism amendments contained in part 4 were contained in Bill C-10.

Part 5 represented the majority of old Bill C-10. It has those amendments to the extent that we haven't found a spot for them, perhaps, in a budget bill earlier, plus certain budget 2010 measures that have not been enacted yet, as well as sort of a list of previously announced measures, and the additional technical amendments that I have just been alluding to.

Parts 6 and 7 were not included in Bill C-10.

[Mark Adler, Conservative, York Centre, ON]

Clearly, these changes are going to have implications for both taxpayers and tax professionals.

You indicated earlier that there were consultations that took place. Could you talk a bit about those consultations, how extensive they were and what kind of feedback you received during the course of these consultations?

[Ted Cook]

On the general responses, aside from a few income tax measures—I'm just talking about the income tax side—there's been an opportunity for consultation. The amount of specific consultation will depend on the measure. In terms of the non-resident trusts and foreign investment entity measures, they have a history that goes back to 1999. There have been a number of releases. It was considered by the Senate committee. It was again released in 2010. It was also subject to review by a panel of tax practitioners. That measure has been through quite a bit of consultation.

On other measures, if they were part of old Bill C-10, then, obviously, there's a consultation process that occurred with respect to Bill C-10. With respect to the technical amendments that were released post-2009, they would have just the consultation period that applied when the initial draft legislation was released, which is normally a general release of the legislation and an invitation for comment.