Finance Committee on Nov. 1st, 2012

[Shawn Porter]

Other countries deal with this measure, but in a variety of different ways because each country has to graft this kind of rule onto their own system of international taxation. Every country has a slightly different system of international taxation. Some countries would deal with this through interest deductibility provisions, for example. Other countries would take different approaches. It's fair to say that all of our major trading partners would be mindful of having rules that deal with this kind of tax planning.

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

Thank you.

[The Chair, Conservative, James Rajotte]

I want to follow up on this issue as well.

Some companies from the mining sector have approached a number of us and raised concerns. My understanding, and you can correct me if I'm wrong, is that they've actually worked with finance officials on the draft, or at least given their feedback in terms of these specific amendments. I think a lot of their concerns were addressed in terms of the drafting of these amendments, and now some in the mining sector are looking at it again and saying that they still may have some concerns.

I assume this will be raised with us during the hearings, so I wonder, Mr. Porter, if you could give us some background on that, or tell us what Finance has been doing to try to deal with some of the issues raised by the mining sector.

[Shawn Porter]

We have been engaged quite actively in discussions with the mining sector and other affected stakeholders. We met with them in late September. They raised a number of issues in response to the August 14 legislation. The vast majority of those have been dealt with and they have acknowledged that they've been adequately dealt with in the legislation that was tabled in BIA 2.

We continue to have discussions with the mining industry to try to hone in on areas of particular concern that they have, and they would run to the question about whether they hit situations that aren't intended to be addressed by the rule. But generally speaking, the legislation that was introduced as part of BIA 2 for the most part seems to address the concerns, certainly of the major miners. But we do continue to have discussions with the mining industry.

[The Chair, Conservative, James Rajotte]

I think just the juniors, then, have some concerns, and you are continuing to dialogue with them.

[Shawn Porter]

That's exactly right.

[The Chair, Conservative, James Rajotte]

Okay, I appreciate that.

Mr. Harris.

[Dan Harris, NDP, Scarborough Southwest, ON]

I have just a quick follow-up on my colleague's questions.

If you don't have the number of transactions that took place last year, do we know the financial value of the transactions that did take place that this is built to affect? Do we know the financial value of those transactions?

[Shawn Porter]

In the course of coming up with the $1.3 billion revenue number in the budget plan over the five-year period, that's based on a review of the historical transactions over the previous 10-year period. Transactions prior to the budget are all grandfathered; they are unaffected by this measure.

The estimate takes into account the rate at which foreign affiliates were being transferred under Canadian subsidiaries of foreign multinationals, and assuming that rate of capital accumulation, if you will, would continue in the absence of a measure of this nature. These transactions, generally speaking, aggregate well into the billions of dollars in terms of the value of the foreign affiliates put under any Canadian subsidiaries.

[Dan Harris, NDP, Scarborough Southwest, ON]

I have one more question.

You mentioned that this is being built so as not to affect legitimate transactions. What measures are in place to ensure that this doesn't affect legitimate transactions and avoids adding red tape to the process?

[Shawn Porter]

The answer to that gets a little technical in places.

Essentially, for equity capital raised by Canadian subsidiaries of foreign multinationals, if equity capital is raised to invest in foreign affiliates of those Canadian subsidiaries, then there's a relatively certain and simple mechanism to avoid the application of the rule. The reason for this particular measure is that most reasonable people will agree that there's no Canadian tax benefit if Canadian equity capital is raised and it's used to fund investments in foreign affiliates. This rule is earmarked primarily at borrowings in Canada where borrowed money is used to invest in foreign affiliates. That's the main measure.

An alternative mechanism has also been provided since the budget. This came out of consultations post-budget whereby Canadian subsidiaries can lend money to their foreign affiliates. They can elect into a system whereby they are required to impute income at a particular interest rate, and that's consistent with the base protection objective of the measure.

Finally, and this was announced as part of the budget package, there is a provision for a strategic business expansion. This is intended to look at a Canadian subsidiary and determine whether its profile and conduct is similar to that of a Canadian-based multinational. If it's undertaking a legitimate strategic business expansion through its foreign affiliates, then it would be excepted from this rule.

[Dan Harris, NDP, Scarborough Southwest, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll move to the overseas employment tax credit section.

Are there any questions?

Mr. Cuzner.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

Thanks very much, Mr. Chair.

Being an Atlantic Canadian member of Parliament, I know that tradesmen and craftsmen from Atlantic Canada have long taken pride in being a mobile workforce and working on some of the biggest construction projects not just across Canada and North America but around the world. I've received a great deal of interest in this particular change as it will impact a great number of people from my area.

The first question I have to ask is if this will apply to those Canadians who work on Canadian rigs off other shores in international waters.

[Ted Cook]

I believe it applies to income earned outside of Canada for residents. For international waters and rigs outside Canada, those employees should be caught by the measure.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

They will be caught by the measure?

[Ted Cook]

I believe so.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

Could we get clarification?

[Ted Cook]

Sure.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

Do we know how many Canadians this particular measure will impact?

[Ted Cook]

It will impact approximately 7,500 employees.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

That's 7,500.

[Ted Cook]

Yes.

I would point out that it's worth bearing in mind that while this measure is a credit that's available to the employees, from a policy perspective it has always been for Canadian employers an incentive to help maintain the competitiveness of Canadian employers in bidding for projects overseas.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

In encouraging employees to relocate for that portion of work.

[Ted Cook]

Essentially, the history of this measure goes back to 1979. At that time in looking at the ability of Canadian firms to compete for Canadian projects it felt like there was a tax disincentive, a tax competitive disadvantage for Canadian firms. To help address that, it would help their competitiveness by allowing them to price the labour costs differently because their employees would be paying less tax. As a result they might be able to have the employees accept a wage that's somewhat lower than otherwise would have been the case once all the taxes had been factored in.