Finance Committee on May 9th, 2013

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is meeting number 121 of the Standing Committee on Finance.

Our orders of the day, pursuant to the order of reference of Tuesday May 7, 2013, is to begin our study of Bill C-60, An Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures.

We have a full meeting with officials today.

The way I'm suggesting we proceed is that we do it by part. We'll ask the officials to give a very brief overview, for instance, of part 1, and then we will deal with all questions from part 1, and then we'll move to part 2, part 3, and part 4.

We do have a full meeting, and I'm sure members have a lot of questions.

Welcome back to the committee to all of you.

Mr. Cook, if you could give a brief overview of part 1, then we'll have questions from members.

[Ted Cook, Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance]

Thank you, Mr. Chair, members of the committee.

I'm here today with Sandra Phillips, the associate assistant deputy attorney general of the tax law services of the Department of Justice; Sean Keenan, director of the personal income tax division of the Department of Finance; and Geoff Trueman, who is director of the business income tax division of the Department of Finance.

To give you a brief overview, I'll go through the measures as set out in the summary, and then we can turn to the committee's specific questions.

Part 1 contains a number of measures that were announced in budget 2013. The first relates to the adoption expense tax credit. Specifically, certain expenses are eligible for the adoption expense tax credit if they are incurred during what's known as the adoption period. What this measure does is to extend the adoption period by allowing it to start at the earlier of the time that an application to register with a provincial ministry responsible for adoption is made, or with an adoption agency licensed by a provincial government, and the time at which an application for adoption is made to a Canadian court.

The second measure relates to the first-time donor super credit. This measure provides for an additional 25% tax credit for a first-time donor on monetary gifts of up to $1,000 in donations. A first-time donor is defined in the legislation as a person who has not made a donation since 2007, and this credit is available on a one-time basis for taxation years 2013 to 2017. The credit can be split between an individual and a spouse.

The next measure relates to the deductibility of expenses for safety deposit boxes. This measure provides that expenses for the use of a safety deposit box of a financial institution will no longer be deductible. This applies to taxation years that begin after March 20, 2013.

The next measure relates to the dividend tax credit. In order to ensure better integration of dividends other than eligible dividends received by an individual, this measure adjusts the gross-up factor and dividend tax credit associated with dividends.

The next measure relates to taxes in dispute and charitable donation tax shelters. This measure allows the Canada Revenue Agency to take collection action on up to 50% of the taxes, interest, and penalties in dispute in respect of a tax shelter that involves a charitable donation. That's in respect of the donor and the donation tax shelter.

The next measure relates to the mineral exploration tax credit for flow-through share investors. This measure extends that credit for one additional year, and it's applicable to flow-through share agreements entered into before April 2014.

The next measure relates to manufacturing and processing machinery and equipment. It provides that the 50% straight-line capital cost allowance rate currently available to machinery and equipment on a temporary basis be extended for an additional two years. It will apply in respect of equipment and machinery acquired in 2014 and 2015.

The next measure relates to reserves for future services and provides that the reserve currently available under paragraph 20(1)(m) of the Income Tax Act in respect of future services and goods to be provided is not available in the context of reclamation obligations.

The next measure relates to credit unions and would provide a phase-out of the additional deduction, allowing credit unions to access the small business tax rate on amounts that would not be eligible for the small business rate. This measure will be phased out over the current year to 2016.

The next measure relates to information requirements regarding unnamed persons. Currently, in order to obtain a judicial authorization to require a third party to provide information in respect of an unnamed person, the CRA must apply to a court for judicial authorization using an ex parte application. That is an application without notice to the third party. What this measure would do is actually streamline the measure by requiring the CRA to provide notice to the third party. This would allow the third party to participate in the actual judicial application and obviate the need for potential judicial review after the application has been heard.

The next measure relates to international banking centres. In recognition of the fact that the international banking centre rules haven't been used by any financial institution since 2007, what this measure would do is repeal the international banking centre rules in section 33.1 of the Income Tax Act.

There are additional measures contained in part 1. The first relates to caseload management for the Tax Court of Canada. This measure would do three things. It would update the monetary limits for access to informal appeals. In the case of income tax appeals, it would change the informal appeal limit from amounts of tax of $12,000 to $25,000. In respect of losses of a taxpayer, it would change the informal appeal threshold from $24,000 to $50,000. It would introduce an informal procedure appeal limit in respect of GST/HST appeals of $50,000.

As well, it would allow the Tax Court to separate issues. Currently, the Tax Court must deal with all issues at once relating to a particular taxation year of a taxpayer. What this measure would do is allow taxpayers and CRA to agree to deal with some issues separately. Perhaps if there's a question of law that could advance more quickly, that could be dealt with in one decision, and then the questions of fact could take their normal course without holding up the question of law issue. As well, on application, it would allow the Tax Court to hear appeals affecting groups of two or more taxpayers that arise out of substantially similar transactions and provide that the results of any applicable decision would be binding on all the taxpayers involved.

The bill also provides a measure to streamline the provision of relief for Canadian Forces members and police officers deployed on international operational missions. Currently, for missions that are assessed at risk level 2, in order to receive the tax relief available under the Income Tax Act, the mission must be prescribed by regulation. What the new measure would do is allow the Minister of Finance, on recommendation of the Minister of National Defence or the Minister of Public Safety, to designate the mission, and that designation would implement the tax relief for the members involved.

Part 1 also contains a technical amendment with respect to registered disability savings plans. In order to clarify the application of a measure that was introduced in budget 2012, allowing qualifying family members to open an RDSP for a beneficiary whose contractual competence is in question, this measure would simply ensure it is clear that the qualifying family member who opens the RDSP can continue to hold that RDSP on behalf of the beneficiary.

The final measure contained in part 1 of the bill relates to Canadian-source income for non-resident pilots. In a recent Tax Court of Canada case, Price v. The Queen, the Tax Court indicated how complex it was to determine the Canadian-source income of non-resident pilots. In order to deal with this issue, we have introduced a simplified determination of income for non-resident pilots. If a flight takes off and lands in Canada, the income associated with that flight will be Canadian-source income. If the flight takes off or lands in Canada and the other end of the flight is outside Canada, it will be 50% Canadian income. If a flight takes off outside Canada and lands outside Canada, there will be no Canadian-source income.

Those are the measures that are contained in part 1.

[The Chair, Conservative, James Rajotte]

Thank you very much for your overview, Mr. Cook. We appreciate that.

Colleagues, we will have any questions related to part 1 of Bill C-60.

I'll proceed in the usual fashion.

We'll start with Ms. Nash, please.

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

Thank you, Mr. Chair.

Welcome again, Mr. Cook and the other officials. We appreciate you being here. Thank you for the earlier briefing that we received on Bill C-60.

I'd like to focus my time on the subject of credit unions and the tax changes for credit unions.

Many Canadians have experience with credit unions and other forms of cooperatives. They play an important role in investing in their communities, which distinguishes them from banks, because they have a social mission as part of their makeup. They're also generally much smaller than banks. Vancity, which is the largest credit union, is some 16 times smaller than the smallest of the major banks.

My question is around the purpose of these tax changes. It says that the goal is to create a level playing field with the private sector. Do you really think that credit unions are playing on an even playing field, or ought to play on an even playing field, with the large financial institutions?

[Ted Cook]

Perhaps I'll make some introductory comments, and then Mr. Trueman can talk a little bit more.

What this measure deals with is an additional deduction in excess of the small business deduction, which is available to Canadian-controlled private corporations.

The small business deduction is available on the first $500,000 of income for corporations whose taxable income is less than $10 million, and then it's phased out as taxable income increases up to $15 million.

Over time, when the additional deduction was first introduced, the structure of the small business deduction back in the 1970s was significantly different, and the limit on the small business deduction was actually based on cumulative taxable income. The policy concern that was being addressed in the 1970s, when the additional deduction was first introduced, was that because of the statutory requirements on credit unions that applied, it would prevent credit unions from replenishing their ability to access the small business deduction in a way that other corporations could do.

The small business deduction structure has changed significantly since the 1970s, so the same technical policy reason for the additional deduction is not the same. Now the ability to access the small business deduction is based on taxable capital as opposed to cumulative taxable income.

That's just some background on how the additional deduction came about.

I think I'll just pass it to Mr. Trueman. He can speak more specifically to your policy question.

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

I'm running out of time, so perhaps you could be very brief. I only have a couple of minutes.

[Geoff Trueman, Director, Business Income Tax Division, Tax Policy Branch, Department of Finance]

Sure.

I think the basic idea in phasing out the additional deduction is to put credit unions and caisses populaires on a level playing field, a level tax playing field, with other corporations.

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

With other banks?

[Geoff Trueman]

With other businesses; there's no other area where the small business deduction is allowed extended access for a particular group of business. So really, it puts the small business deduction consistently available to all businesses in Canada.

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

But these organizations also have a social engagement that most other businesses, including most other small businesses in the private sector, don't have.

They have certainly, in my meetings with credit unions, expressed great concern, not only about the impact of this measure but also about the lack of consultation.

Can you describe what kind of consultation with the credit union sector went into this change, prior to it being announced?

[The Chair, Conservative, James Rajotte]

Just give us a brief response, please.

[Geoff Trueman]

I would make the point that credit unions and caisse populaires offer a broad range of financial services. They compete in that market, and that's the reason for levelling the tax playing field. This measure was not discussed ahead of time with the credit union sector.

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

That's what we've heard them say. We've heard them say there was no consultation.

[Geoff Trueman]

That's correct.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Thank you, Ms. Nash.

Ms. McLeod.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair, and I also would like to thank the officials.

I'm going to start by asking for some clarification around the dividend tax credit. I understand this is a very technical change. It was to correct an inconsistency in the tax system that we reduced the rate to 11%. Can you confirm that this will simply, for tax purposes, treat small business owners who use dividends to take money out of their company the same as those who do it through salaries or bonuses?

[Sean Keenan, Director, Personal Income Tax Division, Tax Policy Branch, Department of Finance]

Dividends are essentially paid out of after-tax corporate earnings and taxed as part of an individual's personal income. The dividend tax credit mechanism ensures that income is not taxed twice, once at the corporate level and once at the personal level. The gross-up factor and the dividend tax credit rate are set such that the overall amount of tax that's paid on the dividends would be equivalent to the same tax rate that would apply if the individual earned the income as labour income. So essentially there's more neutrality in deciding whether to take the income out of dividends or as labour income.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Would it be fair to say that it became just a little out of balance with the original purpose when we lowered the business tax rate?

[Sean Keenan]

It would be fair to say that the gross-up factor and the dividend tax credit mechanism no longer reflected the federal or average provincial rate that applied to non-eligible dividends.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Like the federal government, many provinces and territories have made efforts to integrate corporate and personal taxes. Can you outline the provinces that since 2008 have changed their DTC rate, similar to what has been proposed in Bill C-60, to correspond with the reductions in their provincial and small business tax rate? I understand the provinces have done the same thing, because the intention is to create that balanced playing field.

[Sean Keenan]

I don't have all of the details with me today. But I do know that when the enhanced dividend tax credit was introduced in 2008 and then adjusted for the reductions in the small business rate, a number of provinces, including Ontario, Manitoba, Saskatchewan, Alberta, British Columbia, and Prince Edward Island, made adjustments to their provincial DTC rates to reflect changes in provincial corporate income rates and changes in the small business rate. Since the federal budget was introduced in March, some of the provinces that have had their budgets have made changes to their dividend tax credit rate to reflect the fact that the system needed to maintain a certain level of integration

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

On page 121 of the 2013 budget there is a chart outlining the impact of all tax measures since 2006 that have provided tax relief to small businesses. It's very impressive as part of the overall picture. In the context of the DTC modifications in Bill C-60, can you tell us what type of overall tax relief since 2006 the small Canadian-controlled private corporation is benefiting from?

[Geoff Trueman]

You're absolutely right. Significant reductions have been put in place. The small business tax rate has been lowered to 11%, and at the same time the amount of income eligible for that preferred lower rate has been increased to $500,000. In the budget, you'll note that it refers to a figure of $10.4 billion in tax relief over the fiscal framework and $2 billion annually as a result of those measures.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. McLeod.

Mr. Hsu, please, for your round.