Thank you very much, Mr. Chair. I will preface my comments by noting that I'm here as an individual. I'm not here as a representative of my firm or of any of my clients. Accordingly, my comments and answers to questions will reflect my own personal views only.
By way of background, I've practised in the field of tax law for nearly 25 years. For 13 of those years, I practised with the Department of Justice in Toronto. Both before and after my time with the federal government, I've represented taxpayers and tax controversies and litigation with various tax authorities, including the Canada Revenue Agency.
Having seen the world from both sides, then, I'd like to offer a bird's-eye view of certain amendments to the Income Tax Act in Bill C-4, particularly those that are commonly referred to as loophole-closing provisions. In general terms, those provisions aim to preserve Canada's broad tax base so that our low corporate tax rates can be maintained. If our tax base is compromised in any significant way, new taxes will have to be imposed or rates of existing taxes will have to rise in order to make up the difference.
In today's competitive global marketplace, it's more important than ever for Canada to maintain its corporate tax rates at the lowest possible level to enhance job creation and investment in Canada. Of equal importance is the integrity and perceived integrity of our tax system. Canadians must be confident that all taxpayers are subject to the same set of rules. When some taxpayers take advantage of benefits that were never intended for them, other taxpayers lose confidence that the system is, indeed, just, equitable, and fair.
The loophole-closing provisions in Bill C-4 include measures aimed at precluding the enjoyment of unintended benefits from the use of, or avoidance of, various provisions of the Income Tax Act. For example, Bill C-4 aims at ending the use of leveraged life insurance arrangements by investors who took advantage of multiple tax benefits offered by various provisions of the Income Tax Act that were never intended to be used together.
Other provisions of Bill C-4 deal with character conversion transactions. Through the use of derivative forward contracts, investors could effectively convert ordinary income into capital gains, only one half of which would be subject to tax. Bill C-4 proposes to put all investors on a level playing field, so that ordinary income cannot be converted into capital gains through the use of derivative forward contracts.
Other provisions of Bill C-4 deal with synthetic disposition arrangements. Because the Income Tax Act is generally based on the legal attributes of transactions, one could avoid realizing a capital gain and thereby defer tax by transferring all, or substantially all, of the risk of loss and opportunity for gain in respect to a property, while at the same time retaining bare legal ownership of that property. Until there's a disposition in law, no capital gain will have been realized. From an economic point of view, though, the taxpayer has effectively disposed of that property. In those circumstances, Bill C-4 would deem a disposition to have occurred and a capital gain to have been realized as soon as the risk of loss and opportunity for gain is eliminated.
To prevent profitable corporations from artificially reducing taxable income by purchasing losses from other companies, the Income Tax Act restricts the use of losses where one corporation acquires legal control of another. In law, control is acquired when one corporation acquires more than 50% of the voting shares of the other. Bill C-4 proposes to treat the acquisition of economic control of a corporation in the same way as the acquisition of legal control for purposes of these rules. So when a corporation acquires more than 75% of the economic value of another company, the acquisition of control rules would be triggered, thereby precluding the acquiring corporation from using the losses of the other. Bill C-4 also proposes to extend the same acquisition of control rules to trusts. For trusts, the rules would be triggered when a majority interest in the trust is acquired.
Finally, there is an incentive for non-residents to fund their Canadian subsidiaries with as much debt as possible, as interest is deductible in computing taxable income in Canada. To preclude the undue extraction of profits from Canada, the Income Tax Act has thin capitalization rules that require that a certain debt-to-equity ratio be maintained by Canadian subsidiaries owned by non-residents. Bill C-4proposes to extend those thin capitalization rules to trusts resident in Canada, as well as non-resident trusts and branches of non-resident corporations.
Additional fine tuning to these rules may be required going forward, to the extent that any of these amendments affect transactions that are not offensive from a policy point of view. The Canadian Bar Association and the Chartered Professional Accountants of Canada have a joint committee that works closely with the Department of Finance to reduce the extent of any unintended consequences that arise from such changes.
Mr. Chair, I'd be happy to answer any questions.
