Finance Committee on Nov. 17th, 2014

[James Carman]

It essentially helps the commercial investment trust by laying out a series of tests so that if they're commonly invested commercial vehicles, they will be able to meet those tests, and therefore, they won't have these loss restriction events, which means investors won't lose their losses. It means tax reporting and filing won't need to be done, and it also makes sure that for fund-on-fund situations, that money can continue to flow.

Fund-on-funds are used because they're more efficient forms of investment to meet the fund's investment mandates.

All the things the government has done in this bill are very helpful.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

Chair, how much time do I have?

[The Chair, Conservative, James Rajotte]

You have about two and a half minutes.

[Andrew Saxton, Conservative, North Vancouver, BC]

My next question is for Lindsay Tedds in Victoria. Welcome, Lindsay.

Could I clarify that you agree that tax fairness for amateur athletes is something you're supporting?

[Dr. Lindsay Tedds]

Tax fairness? Yes.

[Andrew Saxton, Conservative, North Vancouver, BC]

It's something you're supporting.

[Dr. Lindsay Tedds]

I'm sorry. Did you ask if tax fairness for amateur athletes is something I'm supporting? I'm supporting the recognition of earned income as earned income. That's what I'm supporting.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay. Now in order to support amateur athletes across this country, we've introduced several measures. Do you agree with those measures?

[Dr. Lindsay Tedds]

We've introduced a number of different issues, but here I'm talking specifically about recognition of earned income as earned income.

[Andrew Saxton, Conservative, North Vancouver, BC]

Right. Okay.

Thank you, Chair.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Saxton.

We'll go to Mr. Scarpaleggia for seven minutes, please.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

Thank you very much, Chair. It's a pleasure to be here today substituting for my colleague, Mr. Brison.

My question is for Mr. Kennah. As I understand it, this tax change would put you at a competitive disadvantage with your competitors who are based in other countries. This is what you said in your presentation. Am I clear on that? It will place you at a significant competitive disadvantage.

[James Michael Kennah]

That's correct. We only have competitors from other countries.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

Right. You are the only Canadian player in a very high-tech, future-oriented business. I just wanted to confirm that.

The government claims it's attempting to clarify certain definitions. Do you feel, in your case, in the case of your business, and the way it has been treated by the tax code, that somehow some clarification was required or was in order, or is it pretty clear from the start what your business is and therefore how it should benefit from the international shipping provisions of the tax code?

What's your response to this argument that you're bearing the brunt of an attempt to clarify terms and conditions to make the tax code somehow simpler or stronger?

[James Michael Kennah]

We find it very interesting, because you'll notice the exclusions there already are things such as fishing, dredging, and things like that, where there is no finished product being manipulated. But in our industry it's a finished product. It's a glass cable, which is manufactured throughout the world. It needs to be transported to various locations throughout the world, and that's what we're doing.

We find it very unusual that someone would put laying cable into this new legislation when there's only one company that does it. I don't know why. It's almost as if we're being singled out, which I doubt is happening.

It just seems the people who put in the words “laying cable” don't really understand the magnitude of the industry or what we really do.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

That's interesting, which is, of course, why you're here to clarify what your industry does.

I would mention that your firm is part of an industry in which Canada has always been proud to be leaders in the world, which is the telecommunications industry. We hear all the time about how Canada is a world leader for various reasons—because of our vast expanses and the need to communicate over great areas—and here we are making a change that singles out one company in Canada that is competing fiercely against foreign competitors.

Is there anything you would like to add to your presentation? It was only five minutes, but I've more or less touched on the two issues I wanted to touch on.

Maybe you could tell us how much you think the government would really benefit in terms of additional tax revenues from this change that, again, is aimed at one Canadian company in the international market.

[James Michael Kennah]

This is unusual because we are basically a small business. We operate two vessels. There are only 39 cable ships throughout the world. We have two of them. They are purpose-built vessels to do this, so it's a very specific industry.

In a good year, we might do $50 million worth of business with $45 million in costs, so I don't think we're going to break the government on this one. I think the low price of the tax at the gas pumps is probably a bigger issue, and for one small industry....

We just can't understand it, and that's why we've been working with people to try to get an answer as to why it appears we're being targeted, which doesn't make a lot of sense.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

It was inadvertent, of course, but you're still being targeted.

[James Michael Kennah]

Yes, it's probably by accident, out of ignorance, more or less, as to the magnitude of what is involved in cable laying.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

Yes, it's a very specialized business and there's only one firm in Canada in it, so most people would naturally not be familiar with the ins and outs of that business.

Thank you very much, Mr. Kennah.

The trust issue is very complicated. I've had constituents come to see me, especially constituents who might have a dependant who is, say, intellectually challenged, and they're quite upset. In fact, I received a letter from an organization in my riding called Friends for Mental Health. It was against aspects of this change. As I say, it's very complicated.

I don't know if Mr. Ball could maybe elaborate on whether these changes would harm people in those situations, who are setting up trusts for their dependent adult children, trusts so that they can be properly taken care of when the parents pass away.

There was another issue you raised about spousal trusts. There was a change regarding spousal trusts. Right now I believe that, when assets are moved to a spousal trust, there's no capital gains tax paid, but this is changing. Is that what you're saying?

[Bruce Ball]

Well, I'll deal with the disability one first.

When the joint committee discussed the graduated rate estate and the testamentary trust changes, we did bring up issues around disabled beneficiaries. There was a suggested solution to that in the legislation. It's a little early to tell, because we've only known about it for a couple of months. It does seem to address some of the issues, but it is, at the same time, complicated. So I think the jury's still out on whether things are worse. Things are better than they were with the original proposals, but it's hard to say how this will compare to the old legislation.

On the spousal trust change, the issue is quite common. Say if you're on a second marriage and have children from a first marriage, it's quite common to leave your assets in trust to benefit the second spouse, so that person is often an income beneficiary only. Then there is no realization of gain when the trust is formed, but it's realized later. That's really the issue because the tax could potentially go to people who won't be getting the assets, so that is our main concern. It's quite common to want to benefit—

[The Chair, Conservative, James Rajotte]

Thank you very much.

Thank you, Mr. Scarpaleggia.

We'll go now to Mr. Keddy for a seven-minute round, please.

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

Thank you, Mr. Chairman.

Mr. Ball, I just want to examine a little closer how the taxes end up going to someone who is somehow not a beneficiary of the trust. You started to explain that, but I'd like you to finish.

[Bruce Ball]

Okay.

I'll just use the example, say, of what I set up in my will. If I'm on my second marriage but I have children from my first, I want to make sure my wife is taken care of as long as she lives, as an income beneficiary, but I want the assets to go to my children from the first marriage.

The way things would work in my will right now is that I'd say she can participate in any income but she wouldn't have capital, and then the children get the assets when I pass on. My assets go to this trust on a tax-free rollover when I die, and then when she dies there is a deemed realization of gain, and that gain will actually go to her final return, and the assets go to my children. If my second spouse had family of her own, they'd end up having to potentially pay tax on assets that are going to someone else.

Now, the trust is jointly liable, but we're worried that the estate of my second spouse in my example is the one whom CRA is going to recognize as owing the tax.

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

However, your spouse would be the beneficiary of any income earned and deemed taxable by that trust.