Finance Committee on March 5th, 2013

[Shawn Porter, Director, Tax Legislation, Department of Finance]

I just want to take a moment to clarify that the international measures in parts 2 and 3, and 3 in particular, as you refer to, are viewed more as integrity measures. The upstream loan and the hybrid surplus rules that I think are implicit in the question run to the kinds of supporting rules that a tax system needs, where the international tax system has a deferral and credit element. You defer current taxation and you impose additional tax in Canada potentially on repatriation. That's not a change in the general structure or policy of the existing international tax rules. It's an integrity measure to make the existing policy framework work properly.

The transfer pricing rules are outside the scope of Bill C-48. They're contained in section 247. And you're quite right, that's a significant component of international tax system design, but that's not the subject matter of Bill C-48.

As for offshore planning by multinationals generally, there's a continual dialogue in the international community in which Canada plays a role and participates. For example, at the OECD at present there is work being done on base erosion and profit shifting, and the transfer pricing rules of Canada and any other country play into that. Those are the subjects of ongoing and continual study by the department and by the government, but they are not part of the scope of Bill C-48.

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

Minister, you can obviously count on us to go further on this issue.

I have been doing my own income tax returns for 30 years. I started doing them when I was a teenager, and I learned from my father. However, I am always dismayed by the increasing complexity of these tax returns. While I am in favour of clarifying the rules in Bill C-48 and of including them in the act, it is still huge and I am still disappointed about that. There you go. I will stop there.

[The Chair, Conservative, James Rajotte]

Do you want to briefly respond to that, Minister?

[Ted Menzies, Conservative, Macleod, AB]

Certainly we've heard many times from the accounting firms that we should simplify the Income Tax Act. Then, in their next breath, they say if you give a tax credit to my client, I'd be happy.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

Minister, thank you so much for being here today. I know your schedule is jam-packed. We really appreciate your time here, and thank you for working so hard on behalf of Canada.

I want to pursue a line of questioning on the real estate investment trust in part 5 of the technical tax amendments. But just before I do that, I want to reiterate what Mr. Van Kesteren said and clarify a couple of points. One is that, as Mr. Van Kesteren has said, the opposition keeps putting forward speakers—and through you, Chair, I say to Mr. McCallum, you should be listening to this carefully—to delay a bill that is clearly a no-brainer.

Also, in 2008, as Mr. Van Kesteren said, under the Liberal-dominated Senate, a bill was put forward and was delayed by your party—through you, Chair—to delay the bill. Certainly there's your share of responsibility.

On the real estate investment trust, Mr. Minister, there was a lot of consultation that took place to propose those amendments. Could you talk about the consultative process a bit and how extensive that really was?

[Ted Menzies, Conservative, Macleod, AB]

Thank you.

Through you, Chair, it was extensive. Some of the officials yesterday were explaining the complexity of and the depth with which their consultations took place with those involved. These are very complex rules just specifically to do with REITs, as they're referred to. We need to make sure they apply properly.

Through back-and-forth consultations over a great length of time, this legislation will allow REITs to hold up to 10% of the equity value of non-qualifying property, clarifying that mortgages and similar securities that could not be held as part of the REIT's qualifying ancillary property.... Now, if that isn't technical enough for you, Mr. Adler, I'm not sure what needs to be.

But the fundamental requirement was to maintain the character of REITs and the original intent of REITs, allowing REITs to earn what is referred to as “good revenue”. The gains derived from foreign currency fluctuations are also protected in this.

That is a reflection of what the consultations brought us.

I'll pass this on to one of our officials to perhaps explain it in depth if you wish.

[Ted Cook]

On your initial question, I can speak to the technical aspect, but just in terms of the consultation, I think the main thing to note, or the thrust of the REIT amendments in this bill.... I think you're referring to a set of draft amendments that was released in December 2010. Really, what these amendments are meant to do is reflect industry practice.

We introduced a set of rules around specified flow-through entities and real estate investment trusts, the SIFT rules, and it was brought to our attention that perhaps some of the rules didn't reflect industry practice. For example, a real estate investment trust might earn some actual business income, as opposed to property income, because they run a parking lot. It's to take into the account the nature of the relationship between major tenants in a mall—those types of things.

[The Chair, Conservative, James Rajotte]

You have one minute.

[Mark Adler, Conservative, York Centre, ON]

Chair, I'd like to give my one minute to Ms. Glover.

[The Chair, Conservative, James Rajotte]

Ms. Glover, please.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Adler.

Thank you, Mr. Chair.

Minister, I think you're going to witness some collaborative efforts here in the finance committee. History is about to be made—

[Ted Menzies, Conservative, Macleod, AB]

We used to do that all the time.

[Voices]

Oh, oh!

[Shelly Glover, Conservative, Saint Boniface, MB]

I hear on all sides how enthusiastic we are about just passing this bill.

The speeches are being heard in the House at this very moment and are repetitive. There really are no questions about the content. Everyone is talking about how long it has taken, for so many years, and why we haven't moved forward. Mr. McCallum is here, and I'm glad to see him here wishing that we could move this forward even faster.

I would ask both parties here today to come back to this committee the next time we're in session and tell us that we are going to have your unanimous consent—through you, Chair, of course—to move this forward to the Senate, following committee, so that we can stop these delays. We've had seven hours of speeches so far by the NDP, with the same thing over and over again, and some days the Liberals put some up and some days they don't.

Minister, I'm really hopeful that we will see a vote of confidence on the other side of this room and that they will come back to committee next time and say we have unanimous consent to proceed.

[The Chair, Conservative, James Rajotte]

Minister, do you have a brief comment?

[Ted Menzies, Conservative, Macleod, AB]

Only that I wish you luck.

Thank you.

[Voices]

Oh, oh!

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Rankin, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Mr. Chair.

Thanks to you, Mr. Minister, and to your officials for being here today.

I have a question on process, and I hope in the question time available a question on substance for Mr. Porter.

I'd like to read to you from something written by a tax lawyer at Thorsteinssons in my jurisdiction in British Columbia. Referring to the 900-page bill, Mr. McDonnell wrote:

This Bill will also be passed without much in the way of informed debate in the House. Most parliamentarians voting on it will admit that they have not read it, let alone tried to fully understand the consequences of voting for (or against) it. This is not how Parliament is supposed to deal with one of its essential functions—the raising of revenue. It’s sad to say it, but I don’t think most of our parliamentarians understand this aspect of the role of Parliament, or, if they do, have the courage to go to the wall in defending it.

Given that this has been one bill of almost 1,000 pages, do you see a better way forward so that parliamentarians can deal with the content of this bill?

[Ted Menzies, Conservative, Macleod, AB]

Mr. Rankin, I agree that in the future, barring unforeseen circumstances, we will certainly attempt to bring forward smaller pieces of legislation that are more consumable by parliamentarians. I would suggest that all parliamentarians are not necessarily tax experts. In fact, few of us are, and I think, Mr. Rankin, you probably understand this sort of legislation as well as anybody here, which is good. But I don't think we're expected to be. We depend on officials who are experts in this to be able to explain it to us, and I think that's their role here, to explain the details. Our role as parliamentarians is then to decide whether that's a good policy to put forward or not.

But certainly, going forward, we hope that smaller pieces of legislation will be brought forward on a more regular basis.

[Murray Rankin, NDP, Victoria, BC]

Thank you, and Mr. Chair, if I may ask you to identify when I have one minute left, I'd appreciate that.

This is for Mr. Porter, if I may, sir. To what extent do Canadian taxpayers use non-resident trusts and foreign investment entities for tax avoidance purposes? Which of those vehicles is more popular for those purposes?

[Shawn Porter]

It's a good question and a difficult question. I don't know that the matter gets studied in those terms. Rather, the focus in developing the legislation is to maintain a neutral and balanced playing field. So fundamentally, the foreign investment entity rules and the non-resident trust rules are companions to the foreign accrual property income system rule that applies to controlled foreign affiliates of Canadian-based multinationals.

All of those regimes are aimed at situations whereby taxpayers resident in Canada would transfer income-earning property to foreign intermediaries, be they non-resident trusts, controlled foreign affiliates, in the case of the FAPI rules, or a non-controlled foreign affiliate, in the case of foreign investment entity rules, as they were at one time called; they are the offshore investment fund rules because those rules were not fundamentally changed, and that's reflected in Bill C-48.

[Murray Rankin, NDP, Victoria, BC]

How much money through taxation does the CRA or Finance get from the taxation of these two entities, NRTs and foreign investment entities? How much per year? Is it a significant amount, or can you estimate it?

[Shawn Porter]

I'd have to get back to you with the actual amounts. Generally speaking, those rules are often referred to as prophylactics; that is to say, if there is nothing to be gained by making an investment in an offshore investment fund, i.e., if the Canadian resident cannot achieve the tax deferral objectives they would otherwise seek to achieve, then they will stop. The behaviour will stop, and they would make an investment in a property that throws off current taxable income.