Yes, I would like to speak to clause 7. But before that, I'd like to use a little bit of my five minutes to respond to the parliamentary secretary.
Of course, Liberals are not in favour of tax loopholes. We, in fact, have gone after the Conservatives for not attacking tax havens seriously enough using the resources of CRA, as we did when we were the government. So that is not the question.
The question is this. Sometimes in an attempt to do a good thing, such as go after tax loopholes, sloppy legislation can lead to unintended negative consequences on perfectly legitimate job-creating business activities. And this is what we believe is the case.
The clause under consideration involves two amendments concerning provisions related to thin capitalization. In particular, we deal with limitations on employer contributions to profit sharing plans. The Department of Finance states:
Paragraph 18(1)(k) of the Act prohibits the deduction of employer contributions to a profit sharing plan other than an employees profit sharing plan, a deferred profit sharing plan or a registered pension plan. Subparagraph 18(1)(k)(iii) is amended to add pooled registered pension plans (PRPPs) to the list of plans that are excluded from the application of paragraph 18(1)(k).
For further information regarding PRPPs, please see the commentary on new section 147.5, and in particular, the commentary on new subsection 147.5(10). The subsection provides a deduction to an employer for its contributions to a PRPP in respect of its employees (or former employees).
There's also the issue of the limitation regarding deduction of interest by certain corporations:
The thin capitalization rules in subsection 18(4) of the Act prevent corporations resident in Canada from deducting interest on debts owing to certain specified non-residents to the extent that the debts exceed the corporation’s permitted debt-to-equity ratio.
Budget 2012 announced the following amendments to the thin capitalization rules.
The permissible debt-to-equity ratio in subparagraph 18(4)(a)(ii) is reduced from 2:1 to 1.5:1. The new ratio applies to taxation years that begin after 2012.
The thin capitalization rules are extended to include debts of partnerships that have Canadian resident corporate partners, either directly or through multiple tiers of partnerships. For further information, please see the commentary on paragraph 12(1)(l.1) and subsection 18(7).
The portion of subsection 18(4) before paragraph 18(4)(a) is amended to allow for the introduction of an exception to the thin capitalization rules in subsection 18(8) that applies in respect of interest on loans from controlled foreign affiliates. This amendment applies to taxation years that end after March 28, 2012. For further information, please see the commentary on subsection 18(8).
Interest that is denied under subsection 18(4) or included in a corporation’s income under paragraph 12(1)(l.1) will be treated as a dividend and not as interest for the purposes of Part XIII withholding tax. For further information, please see the commentary on new subsection 214(16).
In case this seems a little complex for some members, let me provide you with an example, which might make it easier to follow:
Canco 1 and Canco 2 are Canadian-resident corporations and are equal partners in a partnership that earns income from a business. Canco 1 is wholly owned by Forco, a non-resident corporation. The Canco 1 shares owned by Forco have paid-up capital of $4,000 but Canco 1 has no other capital for the purposes of the thin capitalization rules. Forco lends $3,000 to the partnership and lends $8,500 directly to Canco 1. Absent the application of the thin capitalization rules, interest on both loans is deductible. Interest on both loans is payable on the 15th of every month.