Finance Committee on March 7th, 2013

[The Chair, Conservative, James Rajotte]

Please give us a brief response.

[Carole Presseault]

We would say 12 months, 24 months, and 48 months. For us it's the principle of it. Whatever parliamentarians may think is reasonable is certainly acceptable, as long as there's a principle that there is a trigger, on a regular basis, for legislation to be brought forward. Whatever might appear reasonable for parliamentarians would be fine for us.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Nash.

We'll go to Mr. Adler.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

Before I begin my questioning, I would like to raise a point of order. Given that we've just been joined by Mr. Hickey, in the spirit of fairness, I would ask for unanimous consent from the committee to hear Mr. Hickey's presentation and then proceed with questions from the members.

[The Chair, Conservative, James Rajotte]

Do I have the committee's consent to go to Mr. Hickey's presentation?

[Some hon. members]

Agreed.

[The Chair, Conservative, James Rajotte]

Mr. Hickey, are you ready for your five-minute presentation?

[Paul Hickey, Partner, Tax, KPMG]

Yes, I am. Thank you very much, and my apologies for being a bit tardy. It was out of my control, unfortunately.

I'd like to start by thanking the committee for the invitation to attend these public hearings on this massive but extremely important piece of tax legislation.

I'm Paul Hickey, national tax partner at KPMG, based in Toronto. KPMG is an audit, tax, and advisory accounting firm. We have over 1,200 tax professionals who provide tax compliance services and tax planning advice to our clients in 33 offices across the country.

Bill C-48 contains over 900 pages of detailed tax fix-up amendments, literally affecting hundreds of sections of the Income Tax Act. These tax amendments have been sought by the CRA, the Department of Finance, and taxpayers alike. They're often intended to fix unintended tax consequences, a rule that might be too harsh, too lax, or whatever. They really are fix-up amendments.

In our communications with clients, we've dubbed Bill C-48 the big “catch-up” tax bill, as in lagging behind and trying to get back to the mark, as opposed to mustard, ketchup, and other condiments for a hot dog. It brings forward a buffet of enabling legislation to enact amendments dating back to 2002. There are general tax amendments going back to 2002, touching almost every corner of the Income Tax Act: charitable donation rules, restrictive covenants, non-resident trusts and foreign investment entities, REITs. There are also remaining 2010 federal budget measures. There are also 2010 and 2011 fix-up changes in the bill. So it's a massive piece of legislation. We applaud Parliament for finally dealing with this huge backlog of old tax business. We hope it will put an end to the problems that this 10-year delay has caused.

There are four problems I'd like to touch on. The first is the uncertainty that's been created for taxpayers and indeed the CRA. The implication of outstanding tax legislation being out there for so long is that taxpayers have been in a state of limbo for over 10 years. This is unprecedented in my 35-year career. Every year, taxpayers face a decision and a dilemma about how to file their tax returns. Do you file tax returns based on proposed legislation, press releases, and other things? Do you file your returns based on your best guess of what may pass or what may not pass? Or do you file your file your tax returns on the basis of enacted law and worry about squaring things up later when it's all passed?

I've already mentioned the challenges faced by taxpayers over the past 10 years. The CRA, of course, has a whole parallel set of problems on how to apply and assess tax returns and then go back and reassess if necessary based on enacted law.

Second, there are also tax administration issues, given that we're dealing with over 10 years' worth of backlog. Because the normal period when a tax return can be assessed is three to four years, many years of a taxpayer's return could well become statute-barred since 2002—while this legislation remained in this state of legal limbo. As a result, both taxpayers and the CRA could have lost their rights to assess proposed tax amendments, whether they be tightening or relieving in nature, depending on how the returns were filed and assessed by the CRA during the period of uncertainty.

The third problem I want to mention is the court system. The courts are also struggling to come to grips with this massive tax backlog. I want to point out, for example, the recent case of Michael Edwards v. The Queen. This was heard recently by the Federal Court of Appeal. This is because Bill C-48 contains a series of important amendments to the charitable donation rules related to the determination of an advantage and split receipting, among other things. These proposed amendments, for the most part, were introduced in 2002 and were generally aimed at leveraged charitable donation arrangements and buy low, donate high types of arrangements. They're still not law.

In Edwards, the court recently postponed the hearing of the taxpayer's appeal to the Tax Court of Canada on the basis that the CRA had disallowed the $10,000 donation he claimed. He actually paid a little over $3,000; the $10,000 donation was denied under a leveraged donation program.

[The Chair, Conservative, James Rajotte]

You have one minute, Mr. Hickey.

[Paul Hickey]

Thank you.

The court felt the postponement was justified on the grounds of fairness, as it should allow the taxpayer to challenge the CRA's assessment that the proposed amendments would not apply to this case.

To add to the mix here, it isn't just one taxpayer and a $10,000 donation at stake, but Edwards is a lead case for eight other appeals that are being held in abeyance. And in the court's words, “thousands of taxpayers are waiting in the wings”.

One other quick problem is a tax accounting problem. It goes to the integrity of companies' financial statements and the capital markets. You can't reflect these tax changes in your financial statements unless a bill has been introduced in Parliament or is passed into law. That creates a financial statement reporting problem.

I'll conclude my remarks. I have two asks for Parliament.

The first one is to ask Parliament to act decisively and to pass Bill C-48 to essentially clean the slate of this old pending legislation and to finally bring the Income Tax Act up to date. Taxpayers could then move on and focus on running their business, and the CRA could carry on administering and collecting tax in a more stable system.

The second ask is perhaps more of a plea than an ask. Could we please try to get onto a regular track of legislative amendments?

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation, Mr. Hickey.

We will resume questions from members with Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Mr. Chair.

Thank you all for being here this morning.

Mr. Vineberg, are you a lawyer or an accountant?

[Michael Vineberg]

I'm a lawyer, sir, with Davies Ward Phillips & Vineberg.

[Mark Adler, Conservative, York Centre, ON]

Thank you.

I was very interested in your comments about the serial entrepreneur, whom you gave the example of, who found himself in legal limbo; presumably he would want to pay tax, but he didn't know where, to whom, and how much. I found that story very interesting.

I listened with great interest to all of you, who were saying we need to introduce these kinds of amendments to bring the Income Tax Act up to current status on a more timely basis. We on this side have introduced technical amendments to the Income Tax Act a number of times that have been stalled by the other side. Even today, with our majority government, we're finding that members on the other side are still attempting to do whatever they can to delay the implementation of this act. So I find it passing strange; they're just crying crocodile tears when they claim we need to pass these things more quickly. It's all in their court right now. If they want to do it, we'll find unanimous consent to do it.

Getting on to my questions, I would like to begin with Mr. Hickey.

I want to talk a bit about REITs, real estate investment trusts. Under part 5 of the amendments, a consultation process was undertaken, and presumably a number of your clients participated in these consultations. Do you feel that consultation process was adequate and thorough enough?

[Paul Hickey]

The short answer is yes. We and our real estate clients participated in that discussion. I know Ryan, who couldn't make it today, was going to comment on that, and Lorne Shillinger from our firm, who's going to be here next week, will also be speaking to that. But in general, yes, we're very pleased with the ear that we and the industry obtained from the Department of Finance, and generally we are happy with the fix-up amendments that are included in this bill.

[Mark Adler, Conservative, York Centre, ON]

Okay. And you're familiar with the specific changes that are being proposed?

[Paul Hickey]

I am, in broad terms.

[Mark Adler, Conservative, York Centre, ON]

Okay. Because it does have some affect on REITs expanding into international markets. Could you comment on whether you think those changes are...?

[Paul Hickey]

I can't.

[Mark Adler, Conservative, York Centre, ON]

You just don't know it well enough.

[Paul Hickey]

As I said, my partner Lorne Shillinger will be here in a week or so and will be happy to expand on that.

[Mark Adler, Conservative, York Centre, ON]

Good stuff.

Mr. Hickey, could you walk me through the process of how one obtains a comfort letter, and a timetable of how long that would take?

[Paul Hickey]

Typically it occurs when a deal is in progress or is being contemplated and you want to do a deal a certain way and find that there's a technical roadblock to doing it that way, one that in policy terms really shouldn't be a problem but is. And because the dollars are so big and you're doing the deal or would like to do the deal.... I guess you could go around this roadblock, but it would be extremely costly.

The first step in a comfort letter is typically that you will contact the CRA to find out whether they are aware of this issue and have an administrative policy with respect to it. If they say no, the law is what the law is, then the next approach is to write a letter to Finance indicating that there is this technical anomaly and that there appears to be a completely unintended result, in tax policy terms, that frustrates an otherwise normal commercial transaction—

[The Chair, Conservative, James Rajotte]

You have about 30 seconds.

[Paul Hickey]

You write a letter asking whether the department would be willing to—