Finance Committee on Feb. 28th, 2013

[The Chair, Conservative, James Rajotte]

Is it the same with respect to process, with respect to the specified investment flow-through trust? Is it that an issue arose that was not foreseen initially, and therefore this is why this change is being made?

[Ted Cook]

It is. The measures you have before you are in terms of the foreign tax credit generator or specified leasing property. Those are the implementation of the budget measures. It's not that those measures have been previously passed, and these are changes to them.

[The Chair, Conservative, James Rajotte]

My understanding, and please correct me if I'm not correct on this, is that the changes made in 2006.... There were obviously changes made with respect to income trust generally, and this issue was not foreseen at the time those changes were made. Am I correct in my understanding of that?

[Ted Cook]

Now I understand your question.

With respect to that, certainly when the SIFT rules were introduced, there was a provision that SIFT trusts and partnerships, if you will, needed to convert out of SIFT form by the end of 2010 or 2011—

[The Chair, Conservative, James Rajotte]

They had a four-year period.

[Ted Cook]

Or they would be subject to a SIFT tax. The expectation was that most of those SIFTs would convert rather than be subject to the SIFT tax.

What we found, in terms of converting, was that the SIFT trusts and partnerships were looking for loss corporations to amalgamate with rather than just creating a new corporation or something. They were trying to find—

[The Chair, Conservative, James Rajotte]

For taxable purposes they were looking for loss corporations.

[Ted Cook]

Absolutely, to continue sheltering the income going into the future.

The existing rules with respect to losses had contemplated largely the situation of, “we already have rules in the act to deal with that but they deal with corporation-corporation transactions not trust-corporation transactions”.

[The Chair, Conservative, James Rajotte]

Okay. Just a final question, and it may be outside of the scope of the bill, but my understanding was that for the trust it was four years and there was a certain percentage allocated per year at which they could grow, but in fact what Finance did is allow 100% growth within a one-year period. That change, if I recall, was actually announced by the minister in the House in response to a question, but has that change actually been legislated?

[Ted Cook]

I'll pass it to my colleague Grant Nash, who was more involved with the SIFT, but what you're referring to, I believe, is the normal growth guidelines, so when we implemented the SIFT rules, recognizing that SIFTs were in place, there was a certain expectation that they would continue to operate.

[The Chair, Conservative, James Rajotte]

Because the original guidelines were actually amended, if I'm correct on that.

Mr. Nash?

[Grant Nash]

You are correct, Mr. Chair. That amendment, given the nature of how the guidelines were incorporated into the act, didn't strictly speaking occur in legislative form. But, in effect, the SIFT regime has been fully enacted to the extent that it can be, except for the SIFT loss trading rules that are contained in this bill.

[The Chair, Conservative, James Rajotte]

Okay. I appreciate that. Thank you very much.

We'll go to Mr. Brison now, please.

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

Thank you very much, Mr. Chair.

I have a question. You mentioned before that a portion or a big part of Bill C-48 was before Parliament twice before in Bill C-33 and Bill C-10. Both Bill C-33 and Bill C-10 had been studied in the past by the House and sent to the Senate.

There have been concerns we had heard about Bill C-10 with respect to the film tax credit. Those changes that had been proposed to the film tax credit aren't included in Bill C-48. What were the areas of concern that were identified in Bill C-10 and how were they modified or left out of Bill C-48?

[Ted Cook]

You're quite right, the film or video production tax credit was at issue before the Senate in Bill C-10 primarily, I understand, with respect to the public policy test that was related to the credit at that time, a proposed a public policy test.

I'm going to pass it to Ed Short to explain what's happened with respect to that aspect of the credit since then.

[Edward Short]

The rules that were in Bill C-10 were rules to simplify the calculation of the film tax credit for Canadian films and they were the product of a couple of years of consultations with the film industry around 2003. The rules were announced in 2003.

In Bill C-10, in the Senate, the film industry expressed concern with what's called the public policy test. It gave discretion to the Minister of Revenue to deny the credit if in the view of the minister the funding of a film would be inconsistent with public policy. In the latest release of the legislation for this bill—maybe it wasn't the latest but I think it was in July 2010—the film rules were left out. The rest of the rules were not controversial, but just the same all of the proposed film rules were left out of the bill and the government indicated in a news release that it did intend to go forward with the rest of the rules without the public policy test at a future time.

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

So it was the Senate's diligence that resulted in that change ultimately. That's a reminder of the benefit of our hard-working Senate from time to time as to changing legislation, improving it, and removing unintended consequences.

I have a quick question on the change in upstream loan rules. Other than tax avoidance, is there any other reason why one would transfer to an upstream loan, or patriate or bring to Canada funds through an upstream loan, as opposed to a dividend? Is there any other reason besides tax reasons?

[Shawn Porter]

There are other reasons. For the purposes of this discussion, we are focusing on Canadian tax reasons. There may well be foreign tax reasons why the distribution would take the form of an upstream loan instead of a dividend. There could also be foreign corporate law or other commercial restrictions on that foreign affiliate that preclude it from making a dividend distribution so it has to make a distribution in some other form.

So—and I touched on this a moment ago—the rules accommodate that practical reality in those circumstances where there isn't any Canadian tax policy issue or tax mischief issue. The rules will operate to allow offsetting deductions for what would otherwise be deemed income inclusion under these new upstream loan rules. In effect, in those circumstances, if there is no Canadian tax planning, there will be adequate underlying tax paid surplus or adjusted cost bases that will provide a full offset, so those rules would have no practical application.

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

Some jurisdictions would not allow dividends to be paid outside of the country. Is that accurate?

[Shawn Porter]

A common example would be a U.S. subsidiary of a Canadian company. If it paid a dividend, in all likelihood there would be a 5% withholding tax under the treaty, assuming Canada owned more than 10% of the voting shares of the company that paid the dividend. In order to avoid that 5% U.S. withholding tax, which Canada does not give a credit for, often the U.S. company might make a loan up instead and pay U.S. tax on imputed income on that loan. At today's interest rates that would be a much smaller tax toll charge than paying the U.S. withholding tax would be.

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

Thank you.

[The Chair, Conservative, James Rajotte]

I'll go to Ms. Glover, please.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Chair.

I want to go back to something that Mr. Cook said a little while ago on the whole idea of there not being consultation. I don't want anybody to light their hair on fire so we need to delve into that and explain exactly why, because these are very minor amendments that were made. So I want to give you an opportunity to explain them.

Ms. Roach, you may as well start, because you've already explained the formula, which is actually going to benefit the provinces. Why was there no consultation on the formula with regard to the allocation for airlines?

[Davine Roach]

I would say it's one of those integrity measures. It was fairly obvious to everyone that this was just a technicality in the formula. The intention was always clear. One would think that really no consultation would be necessary. However, that being said, it was released in October 2012 and we have heard from no one, and they would certainly know who to call if they had issues. I think it's just one of those things that are very obvious to everybody in the private sector and otherwise.

[Shelly Glover, Conservative, Saint Boniface, MB]

And I can't imagine any province saying, “No, don't give me more”.