Evidence of meeting #56 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site.) The winning word was measure.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Alexandra MacLean  Director, Tax Legislation, Tax Policy Branch, Department of Finance
Miodrag Jovanovic  Director, Personal Income Tax, Tax Policy Branch, Department of Finance
Trevor McGowan  Senior Chief, International Inbound Investments, Department of Finance
Kevin Shoom  Senior Chief, International Taxation and Special Projects, Department of Finance
Pierre Mercille  Senior Legislative Chief, Sales Tax Division, Tax Policy Branch, Department of Finance
Adam Martin  Tax Policy Officer, Sales Tax Division, Tax Policy Branch, Department of Finance
Shari Currie  Acting Director General, Civil Aviation, Department of Transport
Stephen Van Dine  Director General, Northern Strategic Policy Branch, Department of Indian Affairs and Northern Development
Martin Raillard  Chief Scientist, Canadian High Arctic Research Station, Arctic Science Policy Integration, Northern Strategic Policy Branch, Department of Indian Affairs and Northern Development
Elisha Ram  Director, Financial Markets Division, Financial Sector Policy Branch, Department of Finance
François Masse  Chief, Labour, Market Employment Learning, Department of Finance
Joyce Henry  Director General, Marine Policy, Department of Transport
Corrie Van Walraven  Manager, Ports Policy, Department of Transport
Sylvain Segard  Acting Assistant Deputy Minister, Strategic Policy, Planning and International Affairs Branch, Public Health Agency of Canada
Rob Stewart  Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance
Margaret Tepczynska  Senior Economist, Financial Sector Policy Branch, Department of Finance
Erin O'Brien  Chief, Financial Sector Policy Branch, Department of Finance
Dominique Laporte  Executive Director, Pensions and Benefits Sector, Treasury Board Secretariat
Deborah Elder  Acting Director, Pensions and Benefits Sector, Treasury Board Secretariat

3:35 p.m.

Conservative

The Chair Conservative James Rajotte

I call to order meeting number 56 of the Standing Committee on Finance.

The orders of the day are pursuant to the order of reference of Monday, November 3, 2014, Bill C-43, a second act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.

I want to welcome our officials who are both here to help us go through this bill.

Colleagues, we'll go through the bill part by part. We'll have all the officials for part 1, part 2, part 3, and then for part 4, we will go by the various divisions.

We have before us here, as I understand it, officials who are all from the Department of Finance to deal with part 1 of Bill C-43. Is that correct?

I'm suggesting we follow the order of questioning that we have normally, and we will do five-minute rounds.

Mr. Caron, we will start with you. You have five minutes.

3:35 p.m.

NDP

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

Thank you very much, Mr. Chair.

I have a number of questions, but most of them require brief answers. Things should go well. At least I hope so.

I would first like to talk about the series of amendments on intergenerational rollover and the capital gains exemption for farming and fishing properties.

My first question is about the clauses related to the capital gains exemption. My understanding is that the exemption threshold does not change. It will just be applied to eligible farming and fishing assets. Is that correct?

3:35 p.m.

Alexandra MacLean Director, Tax Legislation, Tax Policy Branch, Department of Finance

I am sorry, but I did not quite understand your question.

I didn't, in fact, hear either of them very well. The question related to the farming and fishing measure. I caught that much.

Thank you. My colleague has clarified the questions somewhat.

The farming and fishing measure applies in quite narrow circumstances. There was an existing exemption for farming businesses and another for fishing businesses. Both of those measures applied if the taxpayer was primarily involved in the farming activity or the fishing activity. This measure would only apply in cases where the taxpayer couldn't meet either of those tests.

For example, if the taxpayer was 40% in farming and 35% or 40% in fishing, he or she would not meet either of the conditions. With this rule, that narrow set of circumstances is now accommodated.

3:35 p.m.

NDP

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

So it applies to a small segment of the population if they have a mix of eligible assets.

3:35 p.m.

Director, Tax Legislation, Tax Policy Branch, Department of Finance

Alexandra MacLean

Yes, it affects a very small number of taxpayers.

3:35 p.m.

NDP

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

Are the qualified farming and fishing assets part of the capital gains exemption threshold or do they have to be sold separately with the same tax advantage?

3:35 p.m.

Director, Tax Legislation, Tax Policy Branch, Department of Finance

Alexandra MacLean

Once again, I did not quite understand what you said.

Yes, the properties could be sold separately. Yes, you're correct.

3:35 p.m.

NDP

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

Thank you very much.

As for the rollover rules, we are not really amending the list of people with whom farmers can do business if they want to divest their gains and farming assets. We are talking about the children, grandchildren and any children over 19 for whom the person is legally responsible. Is that correct?

3:35 p.m.

Director, Tax Legislation, Tax Policy Branch, Department of Finance

Alexandra MacLean

The measure for farming and fishing businesses applies in relation to two existing tax measures: the lifetime capital gains exemption and the rollover for children and grandchildren. Those are the main applications for the measure.

3:35 p.m.

NDP

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

Thank you.

I will now focus on the definition of “split income” in the amendments.

Could you give the members of the committee some tangible examples of split income transactions with minor-aged children, which you are trying to eliminate with this amendment?

3:35 p.m.

Director, Tax Legislation, Tax Policy Branch, Department of Finance

Alexandra MacLean

Once again, I apologize. I didn't quite understand your question.

This is in relation to the income tax on split income, the existing rules of long standing. The measured target situations are where the parent is earning income from a partnership or trust—it could be another adult, but typically it's the parent—and the child is reporting the income for tax purposes from that partnership or trust.

3:35 p.m.

NDP

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

Do you have an estimate for the loss of tax revenue related to this measure?

3:35 p.m.

Director, Tax Legislation, Tax Policy Branch, Department of Finance

Alexandra MacLean

I'm not sure that we have the number of affected individuals. We do have the revenue figure. It's a revenue gain of approximately $35 million per year.

3:35 p.m.

NDP

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

Thank you.

I would like to ask a question about trusts and estates.

Why has the highest tax rate of 29% been chosen? Have discussions been held on the possibility of setting a graduated rate based on the amount in trust?

3:35 p.m.

Director, Tax Legislation, Tax Policy Branch, Department of Finance

Alexandra MacLean

The application of the top rate for trust is a long-standing measure since 1972. The presumption behind that rate choice, as I understand it, is that typically trusts are used by sophisticated, higher net-worth taxpayers who would, if they earned the income directly, likely be paying that top tax rate. Deviating from that is the concession in the testamentary context.

3:40 p.m.

Conservative

The Chair Conservative James Rajotte

We'll come back, Mr. Caron.

We'll go now to Mr. Saxton, please.

3:40 p.m.

Conservative

Andrew Saxton Conservative North Vancouver, BC

Thanks to the departmental officials for being here today.

My first questions arise from part 4, division 22. In economic action plan 2014—

3:40 p.m.

Conservative

The Chair Conservative James Rajotte

We're doing part 1.

3:40 p.m.

Conservative

Andrew Saxton Conservative North Vancouver, BC

Oh, sorry. I jumped way ahead of the game.

I'm going to allow my colleague, Mr. Keddy, to ask questions because it's his area of interest.

3:40 p.m.

Conservative

The Chair Conservative James Rajotte

Mr. Keddy.

3:40 p.m.

Conservative

Gerald Keddy Conservative South Shore—St. Margaret's, NS

I want to talk about tax loopholes.

We as the government have closed over 85 tax loopholes, which has certainly enhanced the integrity of our taxation system, and we're looking to close down even more.

I have a couple of questions. The captive insurance changes in the bill adjust Canada's foreign accrual property income rules in order to address offshore insurance swap transactions and ensure that income from the direct or indirect insurance of Canadian risk is taxed appropriately.

Can you comment on these changes and what is the expected fiscal impact? I know that's a little hard to predict, but what's the expected impact of that?

3:40 p.m.

Director, Tax Legislation, Tax Policy Branch, Department of Finance

Alexandra MacLean

Budget 2014 projects the fiscal impact for the captive insurance measure to be approximately $250 million per year for a total of $1.015 billion per year over the planning horizon.

If you'd like, I could describe the type of transactions targeted.

3:40 p.m.

Conservative

Gerald Keddy Conservative South Shore—St. Margaret's, NS

Please do that.

Is that a five-year projection?

3:40 p.m.

Director, Tax Legislation, Tax Policy Branch, Department of Finance

Alexandra MacLean

Yes, from 2015-16 to 2018-19 is the projection.

Briefly the existing tax policy under the Income Tax Act is to tax Canadian corporations on income earned in offshore jurisdictions where that income comes from property: passive sources. An existing tax rule treated income from the insurance of Canadian risks as part of this foreign accrual property income regime, even if the income from Canadian risks appears to be earned in a controlled foreign affiliate, that is, an offshore subsidiary of a corporation. The transaction targeted by the measure involved controlled foreign affiliates, so offshore subsidiaries of Canadian taxpayers swapping portfolios of Canadian insurance for foreign insurance so that the Canadian insurance income appeared to be earned by a non-resident and to escape Canadian taxation. This measure addresses that transaction.

3:40 p.m.

Conservative

Gerald Keddy Conservative South Shore—St. Margaret's, NS

Thank you for that.

This is the strengthening of our foreign tax rules. The other part of that would be our back-to-back loan arrangements. We've added a specific anti-avoidance rule in respect of withholding tax on interest payments and by amending the existing anti-avoidance provision in the thin capitalization rules.

How many Canadians would participate in these foreign affiliate rules? Do you think this move makes it easier to collect that? What is the expected fiscal impact of that?