Finance Committee on Nov. 21st, 2012

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

I think the amendment would certainly create some great challenges, so I don't think our side will be supporting. I know we won't be supporting this amendment.

[The Chair, Conservative, James Rajotte]

Okay. Thank you.

All right. I will therefore call the vote on Liberal 9.

[An hon. member]

I would like a recorded vote.

[The Chair, Conservative, James Rajotte]

(Amendment negatived: nays 10; yeas 1 [See Minutes of Proceedings])

Shall clause 3 carry?

[An hon. member]

I'd like a recorded vote.

[The Chair, Conservative, James Rajotte]

(Clause 3 agreed to: yeas 6; nays 5)

(On clause 4)

I have one amendment, Liberal 10, for clause 4.

Is there any discussion, Mr. Brison?

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you, Mr. Chair.

This amendment delays provisions related to partnerships. Budget 2012 announced the extension of the thin capitalization rules in subsection 18(4) of the act to debts of a partnership of which a corporation resident in Canada is a member. As part of the implementation of this budget measure, proposed paragraph 12(1)(l.1) is introduced to include an amount in computing the income of a corporation in certain circumstances. The amount included in a partner's income is determined by reference to interest paid or payable by a partnership of which the corporation is a member on the portion of the debts of the partnership that is allocated to the corporation under proposed subsection 18(7). That exceeds the corporation's permitted debt-to-equity ratio under the thin capitalization rules. Since partnership income is calculated at the partnership level and allocated to its partners on a net basis, i.e., after any deduction of interest expense, a partnership's interest expense cannot be denied at the partner level.

This income inclusion effectively adds back the relevant portion of the interest that is deductible at the partnership level to the partner's income. The net effect is therefore similar to the interest restriction rule in subsection 18(4). For further information, please see commentary on subsection 18(4) and proposed subsection 18(7).

Further, the amount included in computing a taxpayer's income is the total of all amounts determined on a partnership-by-partnership basis by the formula A times B divided by C minus D. Variable A is the deductible interest on the taxpayer's share of the outstanding debts, of the particular partnership owing to specified non-residents. The taxpayer's share of the debts is determined by reference to its debt amount as defined by proposed paragraph 18(7)(a).

Now, consistent with the look-through approach to partnerships in proposed subsection 18(7), the taxation year of the corporation is the relevant period for determining what interest is included. Interest that is paid by the partnership in the corporation's taxation year or that is payable by the partnership in respect of the corporation's taxation year, depending on the method followed by the corporation in computing its income, is therefore included regardless of the fiscal period of the partnership. So B divided by C is the fraction if any of the taxpayer's debts, including its share of the partnership debt that exceeds the allowable debt-to-equity ratio specified in the thin capitalization rules....

Variable D effectively reduces proposed paragraph 12(1)(l.1) income inclusion by the amount of any foreign accrual property income of a controlled foreign affiliate of the taxpayer that is in respect of interest described in A. That is included in the taxpayer's income for the year or a subsequent year or included in computing the income of the partnership. This variable is the corollary in the partnership context of proposed subsection 18(8), which applies in respect of interest paid or payable to a corporation by the controlled foreign affiliate of the corporation. For further information, you can see the commentary on proposed subsection 18(8). This paragraph applies to taxation years that begin after March 28, 2012.

Further, Mr. Chair, according to the Introduction to Federal Income Taxation in Canada, the 31st edition, interest on loans used to earn income from business or property is deductible in computing taxable income of a Canadian corporation. The tax deductibility of interest creates preference for financing Canadian corporations through debt rather than equity, particularly where tax rates are lower in the lending jurisdiction.

The thin capitalization rules are a set of rules designed to prevent specified non-resident shareholders who hold significant equity positions, which would be 25%—

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Brison. Your five minutes are up.

Is there further discussion on this?

Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair, for recognizing me.

[The Chair, Conservative, James Rajotte]

You did put up your hand.

[Mark Adler, Conservative, York Centre, ON]

I would also like to express my shock and outrage, as my two colleagues, Ms. Glover and Ms. McLeod, have done so far, that Mr. Brison has put forward 3,000 amendments and does not wish to debate any of them, which would lead me to believe that he's not interested in a robust and sincere discussion of public policy, but rather in mischief.

[Scott Brison, Liberal, Kings—Hants, NS]

A point of order.

[The Chair, Conservative, James Rajotte]

A point of order, Mr. Brison. I hope it's not a point of debate, but a point of order.

[Scott Brison, Liberal, Kings—Hants, NS]

No, no, of course, it would never be.

Mr. Chair, I do not have a challenge with debating my individual amendments. What I have a problem with is the fact that they are deemed moved and I did not have the opportunity to move them individually. That's the opportunity I'm being denied.

[The Chair, Conservative, James Rajotte]

Mr. Brison, as an experienced parliamentarian, I think you know that is debate. That is not a point of order.

I will return to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you very much, Mr. Chair.

Pardon me for speaking while Mr. Brison was trying to interrupt me.

I'm not surprised at the temerity of the Liberal Party that they would be proposing such mischievous activities. However, speaking to the substance of the motion, I would like to say that if this motion is adopted, it would have very serious fiscal implications. It would delay, of course, by one year the implementation of the thin capitalization measure relating to partnerships. This is an anti-avoidance measure. Delaying its implementation would provide an opportunity for taxpayers and their advisers to undertake inappropriate transactions in the interim.

It would encourage tax avoidance by individuals. I am really surprised that Mr. Brison would be advocating a position such as tax avoidance.

In the interests of good, solid fiscal management and sound public policy, this motion put forward by Mr. Brison should be defeated.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Adler.

I will then call the question on Liberal 10.

(Amendment negatived: nays 9; yeas 1 [See Minutes of Proceedings])

Shall clause 4 carry?

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

On division.

[Scott Brison, Liberal, Kings—Hants, NS]

Mr. Chair, we'd like a recorded vote on that.

[The Chair, Conservative, James Rajotte]

I never heard “recorded vote”. That's on division.

(Clause 4 agreed to on division)

(On clause 5)

We have Liberal amendments 11, 12, 13, 14, 15, and 16.

On that, Mr. Brison.

[Scott Brison, Liberal, Kings—Hants, NS]

Mr. Chair, we have several amendments to clause 5.

I'd like to first of all discuss the overall issue of the shareholder debt. Subsection 15(2) of the act requires that certain shareholders' indebtedness be included in the income of the debtor. Where the debtor is a non-resident, subsection 15(2) works in conjunction with subsection 214(3) to deem a dividend that is subject to non-resident withholding tax under part XIII of the act. Subsection 15(2) is amended in two ways.

First, the French version is amended to correct an unintended inconsistency in terminology by replacing the expression “contracter une dette”, to incur a debt, with the expression “devient la débitrice”, has become indebted. Subsection 15(2) was amended in 1998 by S.C. 1998, c. 19, subsection 17(1).

Mr. Chair, I'd like to draw to the committee's attention to some of the representations we've received on these changes, particularly some of the representations we've received from the TMX, the Toronto Stock Exchange. They have expressed concerns. The TSX is writing to express concerns with the foreign affiliate dumping provisions as contained in Bill C-45. The TSX says:

It is our belief, based on careful analysis, and discussions with issuers and other market participants, that in their current form, the Proposed Rules could have a significant negative impact on the efficiency and effectiveness of Canadian capital markets as well as Canada's reputation as a global leader in resource financing and listing.

This is important, Mr. Chair. This is the TSX saying that these changes will have a very negative impact on natural resource financing and the natural resource sectors in Canada. They go further to say:

We are concerned that the Proposed Rules could unnecessarily penalize hundreds of issuers on our markets, leading to a negative impact to the entire eco-system of legal and financial advisors, geologists, engineers, and the resource sector analysts that depend on the leadership of Canadian markets in the global resource sector to earn their livelihood.

Mr. Chair, it's important to remind the committee that over the last five years, 80% of mining transactions or financings in the world were transacted in Toronto. So the TMX warns us that these changes will have a deleterious effect on Canada's capacity to remain a leader in this area, which is creating a lot of jobs in Toronto, but also a lot of jobs across Canada within these sectors, and it's also increasing the reach of Canada's extractive sectors and Canada's extractive companies around the world, with the capacity to create jobs in Canada and globally. I think we should take this warning from the TMX very seriously.

They go further:

As operators of Canada's two leading equity exchanges we believe we have a central view of the issues being raised by the Proposed Rules.

We believe that the Proposed Rules, in their current form, cast too wide a net and risk impacting or diminishing legitimate and entirely appropriate activity by hundreds of publicly listed companies on our markets. Should the rules be introduced without further appropriate amendment, Canada's world-leading position and reputation as a market for resource issuers may be negatively impacted by creating inefficiencies in accessing capital and harming corporate valuations.

This speaks particularly to members from Toronto. This is going to have a terrible impact on the financial industry in Toronto. It will have a very negative impact on our resource sector, which employs Canadians in every province.

This is from the TMX, Mr. Chair:

Based on our preliminary research, we estimate that in excess of 700 publicly-traded Canadian corporations with operations in a foreign jurisdiction could potentially be inadvertently and inappropriately impacted by the Proposed Rules, in particular by the “indirect acquisition”—

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Brison.

We'll go to Mr. Van Kesteren.

[Dave Van Kesteren, Chatham-Kent—Essex, CPC]

Thank you, Chair.

The Liberal amendments to clause 5 have some serious ramifications. They would delete amendments relating to foreign affiliate dumping, particularly those that allow an elective income inclusion rather than a deemed dividend. The foreign affiliate dumping measure responds to avoidance transactions that seek to erode the Canadian tax base and to extract amounts from Canada, without paying appropriate tax. The elective income inclusion is a relieving measure developed after consultations with stakeholders.

These motions—specifically 12, 13, and 14—would delay by 15 months, until July 1, 2013, the implementation of amendments related to foreign affiliate dumping. This is an anti-avoidance measure. This is the third amendment. We're talking about tax loopholes. This is the third amendment that would protect tax loopholes. So delaying its implementation would provide an opportunity for taxpayers and their advisers to undertake inappropriate transactions in the interim, and this would subsequently have fiscal implications.

We will not be supporting these amendments.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Van Kesteren.

We will call the vote on Liberal 11.

[John McCallum, Liberal, Markham—Unionville, ON]

We would like a recorded vote, please.

(Amendment negatived: nays 10; yeas 1 [See Minutes of Proceedings])