Finance Committee on March 7th, 2013

[The Chair, Conservative, James Rajotte]

I call to order this 109th meeting of the Standing Committee on Finance.

Our orders today, pursuant to Standing Order 108(2), include the subject matter of Bill C-48. I'll just remind colleagues this is a pre-study of the bill, as this bill has not yet been referred to this committee. Bill C-48 is an act to amend the Income Tax Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the First Nations Goods and Services Tax Act, and related legislation.

We're very pleased to have with us here today three witnesses. A fourth witness will be joining us; I understand his plane has delayed him somewhat.

We have Mr. Michael Vineberg. Welcome to the committee this morning.

From the Certified General Accountants Association of Canada, we have Ms. Carole Presseault, vice-president. Welcome.

And we have, from Osler, Hoskin and Harcourt LLP, Mr. Andrew Kingissepp, partner.

Welcome to all of you. You each have five minutes for an opening statement.

We'll start with Mr. Vineberg and then move down the list.

[Michael Vineberg, As an Individual]

Thank you, Mr. Chairman and honourable members. Thank you very much for the invitation to appear before you today.

I would like to address a possible anomaly of foreign trusts, which only have a marginal relationship with Canada, as well as clause 274 of the bill, remedying an inequity in the departure tax provisions.

Trusts are established for a lengthy term, whether by deed or by will. The principal purpose of a family trust is to divide functions of administration and beneficial ownership, with settlors often arranging for assets to be held in trust for two or three generations.

There are numerous Canadians who established trusts 60 or 80 years ago, with respect to which most of the family beneficiaries were born and have long been resident elsewhere, and the trust administration has similarly been resituated. These trusts generally have no Canadian assets and their ancestral relationship with Canada may even have been forgotten.

In the event a single beneficiary, perhaps a great-grandchild of the settlor, remains in Canada, the trust would, however, be deemed to constitute a section 94 trust, subject to Canadian taxation, generally on its full income, notwithstanding that the trust assets, the trust administration, and most of the beneficiaries are elsewhere. This would, no doubt, come as a surprise, a most unwelcome surprise, to the foreign trust, the trustees, and in particular to the non-resident beneficiaries.

Unless the interest of the Canadian resident beneficiary could be segregated in a separate trust, which is probably not feasible, or the Canadian resident could be persuaded to give up his or her interest, which wouldn't be fair, the foreign trustees are placed in a quandary. While they may wish to comply with Canadian law, generally speaking, under trust law they would not be able to comply because the Canadian tax obligation would not be enforceable. Taxing a foreign resident trust on its entire income, based upon the slender thread of a single Canadian resident beneficiary, often with a minor interest, is excessive, in my opinion.

This could be remedied as set forth in this submission by excluding non-resident trusts in which Canadian residents may have a minor interest, 10% or 20%, excluding Canadian trusts established 20 or more years ago, or perhaps taxing only the share of the trust allocable to Canadian residents. This latter alternative could be effected through an elective mechanism similar to the QEF mechanism in the United States code. This issue could perhaps be reviewed by Finance after the adoption of the bill to determine the appropriateness of a technical amendment.

Clause 274 will remedy a longstanding problem under section 128.1 relating to departure tax for individuals who reside in Canada for less than five years. Foreign entrepreneurs come to our country for several years, owning shares in their companies. They establish businesses and jobs and then return to their country of origin. In the event their company shares were subject to a corporate reorganization, even one without any economic effect, which is entirely tax free in Canada, they would, however, be subject to Canadian departure tax upon their leave.

The exemption from the departure tax liability relates only to identical shares that the person held upon his or her migration to Canada. This problem will, fortunately, be remedied such that a share reorganization or other tax-free event would not deny the availability of the exemption. This remedial provision will assist in the establishment of Canadian businesses by foreign entrepreneurs who may wish to come to our country for a limited time, and it gives effect to the original intent of subsection 128.1(4).

Lastly—and I believe I share the views of my colleagues here as well as many outside—the adoption of the bill will be welcomed, as it will finally enact provisions, many of which were originally proposed in 1999, and which will have effect from 2007 or 2010, and in certain instances even earlier.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your remarks.

Ms. Presseault, you now have the floor.

[Carole Presseault, Vice-President, Government and Regulatory Affairs, Certified General Accountants Association of Canada]

Thank you, Mr. Chair.

Once again, it is a pleasure to appear before you. This time, it is to speak to you about our point of view on Bill C-48.

First of all, I wish to say that we support the tabling of the bill and that we encourage you to move swiftly to pass this important piece of legislation. The bill deals with a massive backlog of unlegislated tax measures. Its passage would, in our opinion, bring greater clarity to the tax system and strengthen the integrity of our laws.

We do of course have some concerns about the way in which technical amendments to the Income Tax Act are managed by the government and Parliament.

I will speak today about the process-related issues and briefly focus on three particular themes: where we have been, what we have learned, and where we go from here.

There are a few things we do know. For many reasons, most of them quite legitimate, it has been more than 11 years since an income tax technical bill was passed by Parliament. This delay has created, obviously, a significant backlog of unlegislated tax measures—400 of them, as estimated by the Auditor General in 2009.

What have we learned? We all know these delayed technical amendments cause serious difficulties for taxpayers, businesses, professional accountants and their clients, and of course for government. These include lack of clarity and certainty in tax legislation, inability of Canadians to self-assess or correctly calculate taxes, higher costs for taxpayers to obtain professional advice to comply with tax law, absence of appeal rights for taxpayers for unlegislated measures, less efficiency in doing business transactions, and likely a greater cynicism about the fairness of the tax system.

This past December, CGA-Canada convened a summit on tax simplification, which some of you attended, and brought together 60 stakeholders, public officials, and thought leaders on tax policy. Many well-informed recommendations were generated during that day in the areas of compliance, tax planning, and policy-making, but a majority of participants expressed concerns about the lengthy delays in legislating technical tax amendments and agreed that this situation should not be permitted to happen again. Based on this idea, one of the chief recommendations stemming from this forum was that legislation be brought forward in a timely manner.

You are now tasked with the challenge of having to scrutinize this mammoth piece of legislation, almost 1,000 pages in size, which represents about one-third of the length of the entire Income Tax Act. This is no small feat. The complexity and scope of these highly technical measures put an enormous strain on the oversight abilities of parliamentarians.

How can we improve the situation?

Clearly, there is a need for a better process to deal with passing tax amendments. In the debates on Bill C-48, members from the government and opposition spoke about the need for Parliament to regularly adopt technical tax legislation in a timely manner so the situation does not repeat itself.

CGA-Canada has proposed that a process be introduced that would bring discipline to the manner in which technical tax amendments are legislated.

We understand that, as a matter of basic housekeeping, the intention was that government bring forward an annual technical bill of routine amendments. However, only four income tax technical bills have been enacted since 1991.

We know there have been some discussions in the House Debates and at committee about our suggestion to introduce a sunset mechanism. We think this should still be adopted, despite some of the opposition. What we mean by a sunset mechanism is that if a tax policy change is announced but is not incorporated into legislation within what we say is a reasonable period of time, the measure would lapse. This measure, although drastic according to some people, would create the necessary discipline to bring forward tax amendments, say within a period of 24 months, as opposed to sitting like this one for more than a decade.

We urge you, as members of the Standing Committee on Finance, to seriously consider this proposal. We really do think it would bring fairness, clarity, certainty, and transparency to tax legislation. We think this is what good governance and responsible public administration are about. We believe it is in the best interests of all Canadians, and it should be a priority for Parliament.

We thank you for your time and would be pleased to participate in the question period.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Mr. Kingissepp.

[Andrew Kingissepp, Partner, Taxation, Osler, Hoskin and Harcourt LLP]

Good morning, and thank you, Mr. Chairman.

Thank you for inviting me to appear before this committee to provide some insights into one specific aspect of Bill C-48.

I'm a tax partner at Osler, Hoskin & Harcourt LLP, a national Canadian law firm.

My submission today deals with the proposed technical amendment to section 86.1 of the Income Tax Act, which is included in Bill C-48.

First, let me say that we very much support these amendments, and we commend the members of all parties for indicating their support for Bill C-48.

Second, I would echo the comments of the previous witness to encourage all parties to enact this proposed legislation into law at the earliest opportunity.

Over the last 10 years, and actually a little bit longer than that, our firm has represented the interests of over 80 Canadian individuals who have been patiently waiting for the section 86.1 amendment to become law. While the predicament these individuals find themselves in has a lengthy history, in my five minutes I don't have time to address all of that. In simple terms, the issue is about ensuring that share distributions by certain foreign private corporations receive the same tax treatment to a Canadian taxpayer receiving such shares as share distributions by certain foreign publicly traded corporations.

This discrepancy in treatment arose in June 2001 when Parliament enacted section 86.1 of the Income Tax Act. That's the rule that provides tax-deferred rollover treatment for foreign share distributions, but only for foreign publicly listed corporations. In the situation we were concerned with, the transaction spinoff was by a foreign privately held company—it was implemented in 2000—and it involved the 80-odd Canadian shareholders we represent. They met all of the requirements of the rule, except that the shares of the distributing company were not listed on a U.S. stock exchange.

There were discussions with the Department of Finance, and as a result of that it was recommended to the Minister of Finance and a comfort letter was issued to the effect that section 86.1 would be amended to allow Canadian taxpayers receiving share distributions from certain foreign privately held companies registered with the SEC to get the same treatment. In particular, it was agreed that the registration and disclosure requirements for a private company SEC registrant would be basically analogous to those for a U.S. public company.

A commitment was made by the government of the day to amend section 86.1, a comfort letter was issued in 2001, and despite that, the tax status of these shareholders remains unresolved to this day.

There have been various attempts by successive federal governments to put this amendment through, but they've been unsuccessful, not because the provision was not supported—it was—but because of external events such as elections and other parliamentary priorities.

The passage of time has caused, as you might imagine, additional expense, and in some cases anxiety for these shareholders. I would just emphasize that they're individuals. So we're very pleased to have this amendment included in Bill C-48. Again, we're delighted to have it supported by all the parties represented here at committee today.

The main point we want to reiterate is how important it is to have this amendment passed without further delay. It assures fairness and certainty for your constituents; it ensures equal tax treatment in other provinces and territories with the Province of Quebec, which addressed this inequity in its own taxation act several years ago; and it eliminates unnecessary stress for all those Canadian taxpayers who have been waiting patiently for this matter to be resolved.

We do acknowledge the complex and lengthy history of the file, but we're grateful for the fact that the amendment is going forward. We'd be more than happy to respond to any questions.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll begin members' questions.

We will start with Mr. Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you, Mr. Chair.

I thank the witnesses for being with us today.

This is a fairly complex subject. We have little time to discuss it. All the same, there are many amendments. Generally, the focus is on process issues. I will probably have a few questions to ask of Ms. Presseault about the process.

First of all, Mr. Kingissepp, I studied the issue of spin-offs. It's technical. As I am not a tax expert, I would like you to guide me in this matter.

I read the proposed amendment to section 86.1. I understand the intention behind the change. However, I have the impression that this could open the door to other loopholes, because shareholders are starting to be paid instead of having their dividends taxed.

Could you give me some insight on the possibility that the amendment could be used as another tax loophole?

[Andrew Kingissepp]

I don't see that as a concern. I think all that's really happening here is that where you're a shareholder in a foreign publicly listed U.S. company or, as I mentioned, an SEC registrant, you presently hold all of your investments in basically one piece of paper, and if they divide that up and put it into two pieces of paper, the gain that's in those shares, if there is one, is not escaping taxation. It's still there in the shares.

All the amendment allows you to do is to hold your investment through two pieces of paper, that being the distributing company and the spun-off company, instead of in one. But the gain is not escaping taxation. It's still there to be taxed when the shares are ultimately sold.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

The technique that you mentioned, could it be used inappropriately by a company to attempt to avoid a dividend escalation payment, for example?

[Andrew Kingissepp]

I don't think so, because basically you're talking about a situation where the requirements of the rule are such that it be widely held in the first place. Also, this treatment of spinoffs I think is widely accepted as neutral tax policy, so the tax law should not be imposing a draconian result on what amounts to just a change in the form in which the investment is held.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

Ms. Presseault, I very much enjoyed your presentation.

We've spoken a great deal about the fact that for nearly 10 years, no other bill had gone as far. We will probably have the opportunity to pass it.

We're coming to the process issue, which proposes that there should be regular bills that keep us up to date on letters of intent and court decisions. You suggest a period of 24 months.

Would it be so difficult, in your opinion, to establish a regular period that would allow us to stay up to date by using routine bills? What would be the obstacles?

Finally, what would you have to say, for example, to the Minister of State who came before us on Tuesday? He mentioned that the recommendations were interesting, that he had noted them, but there do not seem to be any further developments on this issue.

[Carole Presseault]

Thank you for your question.

I don't know if you have had the opportunity to ask this question of the public servants who appeared before you. That really is the same question that we have been asking ourselves, which is what are the obstacles to regularly introducing a bill?

Some obstacles are simply a matter of timing: the legislative calendar, for example. Some years, there were minority governments. At that time, it was difficult to get a space in the legislative timeline.

However, we have found that these arguments are not valid. Indeed, it is the role of government to introduce bills, and it is the role of Parliament to study and pass them. Therefore, we don't really understand the dilemma.

There has been a great deal of consultation. I mentioned the summit on tax simplification that we held in December, where former public officials were in attendance. The intention was always to regularly introduce technical amendments, as it is done in other parliaments, for example, the British Parliament.

Indeed, we asked ourselves the question: how to choose the moment to act? This led us to study a type of measure that supports a sunset mechanism.

The British Parliament has a procedure called the recess rule. This states that if a technical amendment is not introduced within a 12-month timeframe—in this case, we find it a bit excessive—the measure is withdrawn and reintroduced at a later date.

I took a brief look at the Westminster Parliament website. There are indeed technical bills included regularly in their legislative agenda.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Caron.

Ms. Glover, please.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Chair.

Welcome to the witnesses once again. It's nice to see all of you here again.

I'm going to ask you for a very brief comment on the following statement: would you agree that this technical tax bill is well supported and uncontroversial?

Mr. Kingissepp, do you want to start?

[Andrew Kingissepp]

The short answer would be yes. I think it's widely supported within the tax community.

[Shelly Glover, Conservative, Saint Boniface, MB]

Ms. Presseault?

[Carole Presseault]

Yes, absolutely. Again this week we met with our volunteers, the members of our tax and fiscal policy committee, and that was the very clear message that we received from them.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you.

Mr. Vineberg.

[Michael Vineberg]

Widely supported, but in a bill of 1,000 pages I'm sure everyone who practises tax law has tens, if not hundreds, of suggestions for the future.

[Shelly Glover, Conservative, Saint Boniface, MB]

Very good. It's in that vein, of course, that we heard from the Conservative government about trying to push forward more timely legislation, etc. It was commented on at the last meeting by another witness that there have been in fact nine occasions where we've attempted to bring technical tax changes forward in Parliament, and for whatever reason they were unsuccessful.

I do want to say we had officials here as well who said very clearly that technical tax packages will be released in a timely and regular manner. These will be released in smaller and more timely packages to create more certainty for taxpayers and tax professionals.

It's in that vein that I'd like to present a motion, Mr. Chair. I hope this motion might be considered when clause-by-clause commences, if we can ever get the bill out of the House of Commons. As you know, it's being delayed there for whatever reason. It is, as you have all said—as everyone who has appeared has said—uncontroversial, well supported, and there have been 10 years to review it to be prepared for this very day.

In that vein, I'm going to propose the following motion:

That the Finance Department provide an annual update to the Finance Committee on the status of all outstanding technical tax changes in an effort to ensure regular and timely legislation as already committed by the Conservative government.

As I say, I hope that might be further discussed when it gets here, and I'm hoping that's soon.

Now that I've presented, I want to ask—

[The Chair, Conservative, James Rajotte]

Ms. Glover, is that a notice of motion?

[Shelly Glover, Conservative, Saint Boniface, MB]

It's a notice motion, and I'll pass it to you so you have it, Madam Clerk.

I do want your opinion on what I've just said, if you can each give a brief response.

[Andrew Kingissepp]

I think that's a good idea. I think it would help to remain current, and it would help to avoid having any kind of backlog building up. It would help to keep it on the current agenda as a priority.

[Carole Presseault]

Thank you for that motion.

To a certain extent, I think that will go to helping parliamentarians perform the role of scrutiny they ought to be performing. Having regular reports is certainly one way of tracking progress.

Let me say that it doesn't go far enough, from our point of view, and I'm sure you expected that. It is one way, as I said, for parliamentarians on the finance committee.... This is where this kind of business belongs.