Finance Committee on Nov. 2nd, 2017

[John McKay, Liberal, Scarborough—Guildwood, ON]

There's a public policy goal.

You say here under the anti-avoidance rules that these measures will extend the application of the anti-avoidance rules to registered education savings plans, RESPs, and registered disability savings plans. I don't understand how you could use an RESP or a disability savings plan to avoid taxes. What's the public policy harm being addressed here?

[Trevor McGowan]

These anti-avoidance rules are developed in the context of RRSPs, mainly, and tax-free savings accounts. Perhaps the potential harm is clearest in those cases, but also definitely seen in the RESP and RDSP sphere.

There are essentially three different concerns that are addressed by these rules. One is improperly removing value or property from a tax deferred account. Classically, if you have money in an RRSP, you're taxed on the way out, so it prevents the avoidance of that. There is getting a deduction for or some sort of other tax benefit for contributing amounts to a plan.

Then there's also the inappropriate shifting of income to a plan with certain tax advantages. A very simple example might be if I had an account, and I put in $100, used that $100 to buy shares of a company I control, and then paid as much dividends as I wanted into it in order to just shelter all my money in say a tax-free savings account.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Do people actually shelter their money in RESPs?

[Trevor McGowan]

No. That's kind of the harm that these anti-avoidance rules were intended to prevent. These measures provide for a consistent set of anti-avoidance rules that apply across the different vehicles, from RESPs, RDSPs, and TFSAs, to RRSPs.

[John McKay, Liberal, Scarborough—Guildwood, ON]

You're applying anti-avoidance rules to all classes of these savings plans even though there's no real evidence that RESPs and disability plans actually engage in any anti-avoidance of tax.

[Trevor McGowan]

Most of the anti-avoidance activity we've seen has been in the RRSP and TFSA context, less so in, I think it's fair to say, the RDSP and RESP context, but the potential is still there.

[John McKay, Liberal, Scarborough—Guildwood, ON]

This is a potential abuse that you're addressing, rather than a reality of abuse.

[Trevor McGowan]

Currently, there are inconsistencies in the tax treatment of different deferred plans, so for simplification of benefits, and the benefit of having a more coherent tax system, there are certain advantages to having one set of rules apply to everyone instead of a more piecemeal approach, but then also, there are gaps in the rules that could be exploited. We believe these would proactively prevent abuses in those two types of plans.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I understand the symmetry one might want as a tax official, but again, the reality and the practicality is maybe something less than that.

Finally, I share the general concern expressed by Mr. Gerretsen and Mr. Albas concerning the billed-basis accounting. Having practised law for 22 years, I would look at this as just a major headache, an absolute delight for my accountant, and a conflict for my partners, because one partner would probably do the work-in-progress stuff, and the rest of us would be doing cash or something very similar, where the bill and the activity were closely linked.

What I don't get, since this is one great deferral that started out as a two-year deferral, and now a five-year deferral—a deferral isn't quite right, a phase-in. I don't see the public policy gain in this activity. Initially, when you started, you essentially moved a whole bunch of work in progress into income, and you whacked the tax. Now you've pushed that out over five years. I don't see the revenue gains to the government now that you've effectively moved from two years to five.

[Trevor McGowan]

I think there are maybe a couple of points to that, if I understand your question correctly. One, you'll see in the revenue estimates published as part of the budget supplementary information that when it was initially a two-year deferral, there was a short three-year period of income inclusion—extra revenues for the government—and then it went down to zero, representing the fact that it was a timing change. You are absolutely correct that we had not booked any revenues after the phase-in period. Of course, moving from two years to five years would prolong that phase-in and would reduce the impact per year for affected professionals.

In terms of the public policy, this arose as part of the tax expenditure review undertaken by this government over the past year—or more than a year. They looked at all the tax expenditures, deferrals, and the like available and determined which ones continued to meet a good public policy goal and which did not.

In the 1980s, professionals, other than the enumerated professionals in section 34, were required to move from a billed-basis system over to an accrual accounting system.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I can remember that.

[Trevor McGowan]

That was seen as providing a better recognition of income, a truer picture of income, with the idea that under the tax system—and you can look at the IKEA and Canderel Supreme Court of Canada decisions—the goal is really to provide the truest picture of income in any year to determine the most appropriate base for taxation. The ability to elect to defer income until a bill is sent out under billed-basis accounting was seen as a deviation from that ideal system.

As I understand it, it was done in the 1980s in part because of the different regulatory landscape of the time and in recognition of the fact that back then the enumerated professionals weren't able to access a lot of the benefits available through incorporating their businesses. Of course, that's not the case any more, so the original justification for excluding those professionals from the general rule, which provides the truest picture of income, is no longer available, and it was considered to be inappropriate to maintain the election.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I'd like to carry on this conversation about going from cash to accrual to modified accrual to billed-basis accounting, but I'll defer my time to my colleagues because they'll get a little upset with me. I wouldn't want the chair to be upset with me. That wouldn't be very—

[The Chair, Liberal, Wayne Easter]

That's a great idea, John.

I will take this opportunity to remind members that we have 17 sections to get through, and we're on part 1. It will be the longest, no doubt.

Now we have Mr. Poilievre, then Mr. Dusseault, and then Mr. Fergus.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you.

I want to follow up on the questioning of Mr. McKay regarding the registered disability savings plans and the anti-avoidance measures that the BIA would institute with regard to those plans. I'm still not clear on exactly how one would use an RDSP to avoid paying tax that one ought to pay.

[Trevor McGowan]

An RDSP is set up as a trust for the benefit of a disabled individual.

[Pierre Poilievre, Conservative, Carleton, ON]

Yes.

[Trevor McGowan]

It's tax-advantaged in the sense that it allows for the trust to have access to graduated rates that are normally only available to individuals, or natural persons, whereas trusts are typically taxed on their top marginal rate. There would be an incentive, then, for a top-rate taxpayer to shift income to a registered disability savings plan to access the lower tax provided by the marginal rates, and to leave it in that plan to earn income subject to lower rates. Then at a later time they could use one of the schemes that the anti-avoidance rules are designed to prevent from extracting value from the registered disability savings plan to their own benefit, as opposed to paying it out to the benefit of the disabled beneficiary. That might be one example.

[Pierre Poilievre, Conservative, Carleton, ON]

Doesn't the plan have to be paid out to the beneficiary?

[Trevor McGowan]

Yes, that's absolutely the policy, and that's—

[Pierre Poilievre, Conservative, Carleton, ON]

That's currently the policy, isn't it?

[Trevor McGowan]

That's right, and that's—

[Pierre Poilievre, Conservative, Carleton, ON]

Okay. Under the scheme you've just described, how would a non-disabled person improperly use an RDSP to accumulate low-tax gains and then pocket them himself, rather than having those gains go to the disabled beneficiary?

[Trevor McGowan]

One example could be taking funds from the RDSP and investing them into a corporation owned by that individual. That would be a prohibited investment under the anti-avoidance rule.

Thus, you could put $100 into a registered disability savings plan, to use a simple example, keep it in there to access the marginal rates, and then when you want access to the money, you invest it in one of your private corporations. Let's say that it's $120 because you earned income over a number of years. You take that $120 and invest it in a corporation you control or lend it to a corporation you control or to yourself, and then the money ends up essentially back in the hands of the person who established it. Again, you can see that as being more enticing tax planning in the world of registered retirement savings plans and TFSAs, where income earned in the registered plan is tax free.

[Pierre Poilievre, Conservative, Carleton, ON]

What is the current contribution limit per year for RDSPs?