Finance Committee on Nov. 5th, 2014

[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.

[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?

[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.

[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.

[Alexandra MacLean]

Yes, it affects a very small number of taxpayers.

[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?

[Alexandra MacLean]

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

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

[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?

[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.

[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?

[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.

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

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

[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.

[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?

[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.

[The Chair, Conservative, James Rajotte]

We'll come back, Mr. Caron.

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

[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—

[The Chair, Conservative, James Rajotte]

We're doing part 1.

[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.

[The Chair, Conservative, James Rajotte]

Mr. Keddy.

[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?

[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.

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

Please do that.

Is that a five-year projection?

[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.

[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?