Finance Committee on Nov. 17th, 2014

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is meeting number 57 of the Standing Committee on Finance. Orders of the day are pursuant to the order of reference of Monday, November 3, 2014, our study of Bill C-43, a second act to implement certain provisions of the budget tabled in Parliament on February 11, 2014, and other measures.

Colleagues, we have two panels at this session, and we're very pleased—

Mr. Saxton, you have a point of order.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thanks, Chair.

Just before you introduce the panels, I want to raise a point of order and point out a concern the government side has regarding the selection of witnesses for this study of the bill.

Of course, we welcome all witnesses to our committee. However, when I look at the panel of the proposed list of witnesses for the rest of the study, it appears the opposition has invited witnesses that do not pertain to the divisions our committee is studying. One of those, it would appear, will be here later on this afternoon and the other one is scheduled for tomorrow.

I'd like to point out that this is not standard practice, and as I understand it, we have never invited witnesses on divisions that were being studied at other committees.

I wonder if I could get clarification from the opposition as to why these witnesses are being invited and what relevancy they have to the divisions we are studying here at this committee. Our understanding is that we are here to hear from witnesses on the divisions we are actually studying at this committee, to maximize our time and use it efficiently.

[The Chair, Conservative, James Rajotte]

Which witnesses are a concern?

[Andrew Saxton, Conservative, North Vancouver, BC]

The two witnesses I noticed who are bringing up issues that are at other committees are from Romero House and Canada Without Poverty.

[The Chair, Conservative, James Rajotte]

Do you want to address this, Mr. Cullen?

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

It's somewhat challenging to address, in the sense that this implementation act deals with a whole range of issues that affect poverty. It's unusual I think, Chair, just because we haven't heard the witnesses' testimony yet, to know whether it's relevant or pertaining to the issues that are addressed by this committee.

It's an issue of precluding witnesses based on the organization they are attached to, simply because they are attached to that organization. I'm grasping for what Mr. Saxton's actual concern is.

Romero House is a Christian organization that deals with anti-poverty issues for new Canadians. I'm not sure if the budget implementation act or any of the acts in the sections we're dealing with have some concern for him, but it's difficult for me to argue witnesses' relevance to the case we're studying before we've heard their testimony.

I would suggest, Mr. Saxton, maybe we should wait to hear from the witnesses before you raise some objections, and we can deal with it as a committee then.

[The Chair, Conservative, James Rajotte]

Is there anything further on this?

Mr. Saxton, it's very hard for me to say a witness ought not to come to committee based on what they may say before the committee, so unless you have something further you can provide that would say.... I don't know if you have their opening statements, and this is what is causing you concern in terms of what they are going to present to the committee, but members can raise points of order as people are presenting.

Also I remind you that relevance is always interpreted very broadly both within Parliament and at committee.

[Andrew Saxton, Conservative, North Vancouver, BC]

Chair, I appreciate your position and that it's not always easy for you to know ahead of time what those witnesses will be saying.

I'm just reminding the opposition that, because this bill is being studied at other committees, and we are studying specific divisions of the bill here in the finance committee, the witnesses should be relevant to what we're studying here in the finance committee and not necessarily to what other committees are studying.

[The Chair, Conservative, James Rajotte]

I'll just point this out, though. I refer members to the motion that was adopted at committee, in terms of the chair writing to other committees. It said:

the Chair of the Committee write...to the Chairs of the following Standing Committees inviting those Standing Committees to consider the subject-matter of the following provisions of the Bill....

And then it identified the provisions of the bill.

So it would make eminent sense, if members of parties have witnesses who relate to those clauses of the bill referred to those committees, that they present there. But there's nothing in this motion as I read it—and I'm willing to be advised differently—that says if a witness is presenting on certain clauses.... I mean, they may present on items that are both within clauses before this committee and before other committees in terms of the witnesses, but I'll also remind Mr. Saxton that this committee will deal with all the clauses, which was the government's position.

I'd really like to move on to witnesses, if I could.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Just very briefly, I didn't want to get into the technical question of the motion we are deemed with at committee. I understand what Mr. Saxton is saying, but I also read very carefully the motion we were granted. There was no provision excluding this committee from addressing any part of the bill. Ultimately, as deemed by the House of Commons, resting authority for this legislation was with this committee. There was no subsection direction, and we take that very seriously. So to try to limit the scope and scale of what we're doing over such a complicated 460-page bill....

I read the motion very carefully, as I'm sure Mr. Saxton did, and we think everything's in order. But I also want to get to the very limited time we have with the witnesses, rather than having a debate about who gets to testify in front of us and who doesn't.

[The Chair, Conservative, James Rajotte]

Okay. I would just add that for witnesses who are appearing only on certain specific clauses—for instance, clauses 102 to 142—it would make more sense for them to present to the industry committee than to the finance committee.

I'm going to leave it at that. I won't get into a protracted debate. At this point, without having heard any of the testimony, I'm not prepared to rule on a point of order.

Again, apologies to our witnesses, both here and in Victoria. I want to welcome you and thank you very much for appearing on very short notice before the committee.

We have with us, from the Canadian Media Production Association, the president and CEO, Mr. Michael Hennessy. From the Chartered Professional Accountants of Canada, we have the national tax partner, Mr. Bruce Ball. From the Investment Funds Institute of Canada, we have the senior policy adviser, Mr. James Carman. From IT International Telecom Incorporated, we have the co-president, Mr. James Michael Kennah; and from the University of Victoria, we have Dr. Lindsay Tedds.

Each of you will have five minutes maximum for your opening statement, and then we'll go to questions from members.

We'll begin with Mr. Hennessy, please.

[Michael Hennessy, President and Chief Executive Officer, Canadian Media Production Association]

Thank you, Mr. Chair.

I will skip over a few paragraphs, but I've timed myself out just to make sure I do that five minutes.

Good afternoon. As the chair said, my name is Michael Hennessy and I'm the president and CEO of the Canadian Media Production Association, known as the CMPA.

On behalf of the over 350 primarily English-language independent producers of Canadian film, television, and digital media, we appreciate the invitation to contribute to the committee's important work on implementing certain provisions of the budget bill, tabled in Parliament earlier this year.

Our sector has become a success story because of increased focus on audience in export markets, and equally important, due to the support of government over the past 20 years through its tax incentives and regulatory policies.

The success of that investment is measurable. We work with the Department of Canadian Heritage and the Quebec producers' association on “Profile”, an annual economic report that tracks the production sector. According to “Profile”, expenditure on Canadian film and television production in Canada is now just under $6 billion. Included in that figure is approximately $1.5 billion of spending by other countries in Canada, particularly Hollywood on U.S. shows shot here, like Suits, Covert Affairs, and Once Upon a Time. They shoot here not only because of the attraction of investing here, but because of the quality of our talent and crews, which have been developed under the regimes I talked about earlier. These productions not only attract investment, but help create over 30,000 jobs annually.

But the real success can best be measured by popularity with audience, and last year we hit home runs. According to the Canada Media Fund, over 26 TV shows had audiences of over one million. Original shows like Saving Hope, Orphan Black, Rookie Blue, and Murdoch Mysteries are just a few examples.

Canadian content is no longer just for domestic consumption. CanCon sells overseas and the export value of our works is now almost $2.5 billion annually. Over 127,000 full-time jobs, according to “Profile”, are sustained because of this system of private and public partnership.

Predictable tax incentives, such as the Canadian film or video production tax credit program, have helped create an industry that has gained international respect. The program-related amendments in Bill C-43 are important to further improve the efficiency of the current system. These progressive changes are the fruit of many years of dialogue between the sector and the government, and they will provide both clarity and guidance to Canadian producers when closing business deals and securing financing.

But in parallel, as the industry moves into more a globally competitive and consumer-driven model for broadcasting, anchored by pick-and-pay options and increased competition from the Internet, we will be working closely with government on further increasing the efficiency of the program to maximize its intended return to producers and to the economy at large.

From a broader perspective, we believe growth will come from exports and increased inward investment in the sector. Accordingly, we want to collaborate with government going forward to increase export opportunities and partnerships with other countries to better exploit the intellectual property that Canadians create.

We believe that in a global information economy film and TV are not merely cultural products but an economic opportunity to build new and global markets and trade in content. Just as government support was critical in building a world-class domestic system, we believe government, through its trade arm, could help facilitate access to international film, television, and digital media markets, and related financing opportunities. Through export and other dedicated international programs, government and its agencies could actively support and promote the efforts of Canadian producers in securing foreign financing and increasing their business potential around the globe.

All of this will lead to even more jobs in Canada, more business opportunities, and more business and investment revenues for the Canadian economy.

In closing, I'd like to thank the committee again for allowing me, on behalf of the CMPA, to appear before you today. But I would be remiss if I did not end with thanks to the government and the taxpayers it represents for its faith that the incentives it put in place two decades ago would deliver returns in terms of popular content, high-value jobs, and increased inward investment in Canada. A spinoff of this is a reputation that, when it comes to entertainment, Canada is a favourite destination to do business.

I'll be pleased to answer your questions at the appropriate time, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Hennessy.

We'll hear from Mr. Ball, please.

[Bruce Ball, National Tax Partner, BDO Canada LLP, and Member, Tax Policy Committee, Chartered Professional Accountants of Canada]

Mr. Chairman, committee members, on behalf of the Chartered Professional Accountants of Canada, thank you very much for the opportunity to appear before the committee today.

As mentioned, my name is Bruce Ball. I'm a national tax partner of BDO Canada—my day job—and I'm also a member of CPA Canada's tax policy committee.

My comments today will focus mainly on the income tax legislation in part 1. We are going to just focus on a few specific things, just to highlight some concerns we have.

In addition to being a member of the CPA tax policy committee, I'm also the past chair of the joint committee on taxation of the Canadian Bar Association and CPA Canada; it was called CICA Canada when I was chair. As I mentioned, we have identified some concerns in the legislation that I want to address. I'm going to break my comments into two parts. We had some comments on immigration trusts but also on domestic trusts as well, and I'm going to start with them.

The bill eliminates the graduated rate taxation of trusts and estates. We're not here to question the policy because we recognize the government's right to change policy, but the bill also contained a number of changes that affect just the taxation of trusts from a practical perspective. These changes weren't really part of the budget but they were included in clause 26 of part 1. I'll just focus on a couple of issues with them.

The one thing I'll mention is that the joint committee I was chair of in the past did send a letter in September to the Department of Finance just to outline some of these concerns. I'm just going to touch on a couple of them.

The one that has the most interest I think, and the one we have the most concern about, is a change that affects some special purpose trusts, like a spousal trust, a trust that someone may set up for their spouse. Without getting into technicalities, with these trusts when the person passes on there's a gain that generally arises, a deemed gain. The new legislation effectively attributes this deemed income to the deceased's estate, even though the deceased's family may not be beneficially interested in the property.

The trust is jointly liable, the trust where there's the deemed income that's realized, but when it's passed out to the beneficiary's estate it is a joint liability and the beneficiary's estate will be the primary taxpayer from the point of view of whom the assessment will be issued to. We thought that was unfair.

It's a complicated area, but our concern really is that there's this deemed income that will arise for certain estate beneficiaries, their families, yet they won't actually be getting the assets that give rise to the income. In a lot of situations those assets pass to someone else.

Just in a similar vein, if the income arises in the trust and then it's allocated out to someone else, if there's a loss to the trust in a subsequent year, which there often will be because of planning that a lot of people do after someone passes away, there's quite often a capital loss. It's unclear if the legislation, the way it's written right now, would allow that loss to be carried back to apply against the income from the prior year because it's been allocated out to someone else.

The joint committee letter I mentioned, which was sent in September, lists some other concerns as well, but those were the two main ones we identified.

Our recommendation is that we'd like to really work with the Department of Finance more. Our suggestion is that those parts of the bill be withheld until they could be discussed a little bit more. They really don't relate to the graduated taxation on estates; they really relate to something else.

The other thing that was recognized in the joint committee's letter was just the change for immigration trusts, the changes to section 94 of the Income Tax Act. These changes had actually survived a number of tax changes over the years, and people believed that they had five years if they set up one of these trusts.

Our main issue here is the fact that these changes were made without grandfathering. We thought it was appropriate that people who set up these trusts in good faith should be able to get their five years of tax exemption, as they believed they had when they set up the trust in the first place. We believe that grandfathering should be allowed.

Thank you for your attention. I'd be more than happy to answer any questions you have.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Ball.

We'll go to Mr. Carman, please.

[James Carman, Senior Policy Advisor, Taxation, Investment Funds Institute of Canada]

Mr. Chair, thank you for this opportunity to provide the views of members of the Investment Funds Institute of Canada at this hearing. We are the voice of Canada's investment fund industry. By connecting savers to Canada's economy, our industry contributes significantly to Canadian economic growth and job creation.

In my remarks today, I will be focusing on the amendments to the loss restriction event, LRE, rules in Bill C-43.

First, I would like to thank the government and the minister for the amendments. We believe that these amendments will address many of the concerns faced by our members. As originally enacted through the Economic Action Plan 2013 Act, No. 2, a trust would be subject to an LRE if an issuance or redemption of trust resulted in an investor or a group of investors holding more than 50% of the units of the trust. The trust would have a deemed year end, resulting in potential distributions to investors, be required to file a tax return and provide tax reporting to investors, and any previous loss carry-forwards and accrued losses on its investment portfolio that could not be applied in the deemed year end, including against accrued gains, would be lost.

The principle intent of the legislation was to ensure the majority investor could not buy into a fund that had suffered extensive losses and take advantage of these losses to offset future gains within the fund. While the department's intent to protect the Canadian treasury against lost revenue due to aggressive tax planning was completely appropriate, the scope of the legislation was too broad and had unintended consequences.

The original legislation did not take into account important distinctions in events that result in LRE that are simply situational in origin, and have no aggressive tax planning intent. Some examples include changes in majority ownership that frequently occur when an investment fund is in a start-up or wind down phase. During these periods, a single investor may easily end up holding 50% or more of a fund because of the small number of other investors and capital. Fund-on-fund situations where a bottom fund has a small number of investors, primarily widely held top funds, are also problematic.

The application of the LRE rules is also unfair to minority investors where the result is that the trust loses previous loss carry-forwards and accrued losses. Minority investors are entitled to benefit from their share of the losses and have no control over changes to majority ownership.

The amendments in Bill C-43 address many of the significant issues that I've just outlined. However, as IFIC noted in our submission dated October 31 to the department, there is still one more important issue that needs to be addressed.

Bill C-43 defines the conditions to be met in investment trusts in order that what would otherwise be an LRE is disregarded. A key component is the definition of “portfolio investment fund”, which contains elements drawn from the specified investment flow-through trust rules, or the SIFT rules. These rules were enacted for a totally different tax policy reason, to shut down income funds. The definition of “portfolio investment entity” includes a condition that will require trusts to ensure that they do not hold more than 10% of the equity value of an issuer. This is not a concentration test applied to prospectus-qualified funds that are subject to National Instrument 81-102. The test will require investment managers to make portfolio investment decisions that they wouldn't otherwise make. Also, the definition of “portfolio investment fund” effectively means that funds that invest in portfolio securities, Canadian and foreign real estate, or resource issuers, cannot qualify.

It is our hope that we can work with the government to find a solution based on the investment restrictions in National Instrument 81-102.

Mr. Chair, that concludes my opening statement. Once again, we appreciate this invitation and would be pleased to answer any of your committee's questions.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Carman.

We'll now hear from Mr. Kennah, please.

[James Michael Kennah, Co-President, IT International Telecom Inc.]

Thank you to the committee for the time.

Also thanks to Mr. Scarpaleggia, who has worked with us for about two years trying to get us here.

Who are we? We're a Canadian company. We're an offshoot of Teleglobe Canada, from the time when it was privatized and subsequently sold. We have facilities in Quebec, Nova Scotia, and British Columbia. We're also a large lessee for Ports Canada in Nova Scotia.

What do we do? We're involved in the submarine fibre optic business through our vessels in our international shipping company. We transport and deliver fibre optic cable throughout the world and Canada. For example, in the next 18 months one of our ships will have gone to the United States, Norway, the U.K., Germany, Chile, Ghana, Venezuela, American Samoa, Hawaii, Algeria, and then back to Newfoundland.

What's the importance of fibre optics, you may ask. Well, your cell phones only go to the nearest tower; 95% of the world's communications operate on fibre optics, which is basically a glass hair around the world. It's seamless and the most reliable communications system ever developed.

Why is it important to Canada? Canada has the longest coastline of the world. We are a marine country. We have so many lakes—I couldn't even find out how many we had. But as an example, we do communicate to our islands by fibre optics: Vancouver Island, Prince Edward Island, even across the Quebec north-south divide of the St. Lawrence River, and to Newfoundland, as well as in many lakes throughout the country.

Why are we here? Most of our business, as I said, is involved in the transportation and delivery of submarine cables by our ships. We can remain competitive by using the international shipping provisions of the Income Tax Act to operate our vessels through our Barbadian subsidiary. This allows us tax incentives and reduced operating costs. It's important to equalize these low-cost foreign shipping competitors. That is the problem. It also provides us the capability to reinvest in equipment and vessel upgrades. It allows us to keep the Canadian expertise in Canada. We are the only company in the country that does this, just us.

Why exclude cable laying? That's what happened with Bill C-43; you put a new provision in saying that cable laying is excluded from international shipping. Why does the government feel it necessary to exclude International Telecom from access to beneficial international shipping regulations that put us on an equal footing with our competitors throughout the world? These sections of the Income Tax Act, 250(6), were set-up for this exact purpose, to encourage Canadians in the international shipping industry. We are the only Canadian company that does cable laying.

How does this hurt the regulations? Companies like Canada Steamship Lines and Teekay Shipping use these regulations to remain competitive throughout the world.

How will this change hurt us? Well, we've suffered through a communications meltdown in the year 2000, and our company and our industry has struggled. We have allowed ourselves to remain in business by utilizing some of the beneficial income tax regulations. If we lose these, we will be disadvantaged against our international competitors who have these advantages.

The conclusion and summary of this is that cable laying needs to be removed from Bill C-43. We require the status quo. Canada cannot afford a brain drain again. We are the only guys, and our people will go to other international companies and not remain in Canada. It is so important in the upcoming few years with Plan Nord, which will be hooked by telecommunications primarily, and also the Arctic development. I think everyone would agree that we would rather have Canadians installing this than foreign companies.

That concludes my little talk, and I stand ready to answer any questions. I thank you for your attention and hope you have a chance to read my brief.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Professor Tedds in Victoria, please, for your five-minute opening statement.

[Dr. Lindsay Tedds, Assistant Professor, University of Victoria, As an Individual]

Good afternoon. I am Dr. Lindsay Tedds. I'm an associate professor here in the School of Public Administration at the University of Victoria.

My primary area of expertise is in Canadian tax policy, particularly with respect to design and implementation. I've written a number of peer-reviewed journal articles in this area, along with book chapters, technical reports, and two books.

I'd like to thank the committee for this opportunity to share my views on two tax policy measures included in Bill C-43 that includes the income contributed to an amateur athletic trust, as well as the children's fitness tax credit.

With respect to the amateur athletic trust changes, under Canadian tax rules Canadian athletes must claim any athletic prize money, as well as any income from endorsements and other remuneration-related activities. They have to report that as taxable earned income. Amateur athletes, though, can defer paying tax on this earned income by placing it in an amateur athletic trust. Tax on this earned income then is deferred until it is paid out by the trust and back to the athletes.

While the athletic money is considered to be earned income and eligible for determining RRSP contribution room, this recognition does not occur if the income is instead placed in an amateur athletic trust—that is, the money is never treated as earned income either at the time of placement in the trust or upon disbursement when the taxes are paid. As a result, the athletic money never qualifies toward determining an athlete's annual RRSP contribution limit.

Through Bill C-43, the federal government is changing the rules to ensure that this earned income in an amateur athletic trust is recognized as such for the purposes of determining an athlete's annual RRSP contribution limit in the year it is earned. It's eliminating a penalty that these athletes unwittingly incurred when using a government-sanctioned tax deferred vehicle and recognizes the importance for everyone to be able to garner RRSP room from the income they earn from their endeavours.

With respect to the children's fitness tax credit, this tax credit was introduced in 2007 with the stated goal of increasing enrolment of children in sport. This tax credit has been shown through at least four studies now to be ineffective in achieving this goal. Only about 15% of parents agree that this tax credit enables them to enrol their children in the program when they would not otherwise have been able to, subsidizing the behaviour of 85% of households. As a result, this tax credit does little more than subsidize behaviour that normally would otherwise occur.

It's also been shown this subsidy disproportionately goes to high-income households. About half of the households that claim the credit earn more than $100,000 annually. This regressivity is not going to be undone by making the tax credit refundable. This is due to the fact that the size of CFTC claims increase with income. That means high-income households obtain a greater and greater benefit from the credit.

Economists have long been calling for an end to these types of boutique tax credits because they are poorly targeted and ineffective in achieving their goals. The goal of a tax system is to raise the most revenue with the least distortions in a progressive manner, while minimizing administrative and compliance costs. These boutique tax credits mean that statutory rates are higher than they would otherwise be, distorting work and other effort; revenue is sacrificed that could be used more effectively; our progressivity is compromised; and time and money is wasted on administering the program and complying with the rules.

Do you really want hard-working Canadians to keep more of what they make, whether they be families or otherwise? Eliminate these wasteful boutique tax credits and instead cut tax rates. Doing that respects the principles of efficiency, equity, and economic growth, all while reducing administrative costs.

In closing, I'd like to thank you for providing me with this opportunity to provide my views on these two measures. I look forward to your questions.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Professor Tedds, for your opening statement.

Colleagues, we'll begin members' questions with seven-minute rounds.

Mr. Cullen, please.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you, Chair.

First to you, Mr. Ball, and then to Dr. Tedds. You didn't testify on this, but I believe your group has done a certain amount of work on the cost of tax compliance in Canada.

If you have any specific testimony to offer us today, would you say in general the taxation system is moving toward greater efficiency and lower costs for Canadian families and businesses or to higher complexity?

I'm starting to feed off a bit of what Dr. Tedds talked about in her testimony around compliance costs. I know chartered accountants have certainly testified before about the direction and cost to businesses and to families.

[Bruce Ball]

I don't know if I can talk to, specifically, whether it's getting better or worse, or quote you a number. For something like the fitness tax credit, in CPA Canada we've been of the belief that we prefer, more generally—not talking about that credit—a broader-based tax reduction and simplification at the same time, so—

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Can I just ask why? Isn't it more work for your members to have a more complicated tax code and more pages in the tax form?

[Bruce Ball]

You'd think that, but actually our clients really don't want to pay us to spend more time working on complicated issues, so that's why we really believe in a less complicated system and more broadly based reductions, if there were going to be a tax reduction.