Finance Committee on April 24th, 2018

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Why is it so broad? To me, for a service business, if you're going into a particular type of professional service, accountant, lawyer, etc., and again I go back where they may have certain fees paid to them through a different corporation to circumvent these, you already have rules in place to pick up on that.

Why put forward something that is so undefined into the act, which could apply to many businesses that you or other people in your department may not have anticipated?

[Trevor McGowan]

As I said, the excluded share exclusion looks to capital. There is the excluded business exclusion that looks to labour contributions. And where your income from your business is almost entirely because of the labour inputs of an individual, that would be an appropriate exclusion to look to. Also, even if you don't qualify for the services test, there's still—assuming you're over 25—the base reasonableness test, so as long as what you're receiving is reasonable, then the tax on split income would not apply.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Who decides what is reasonable? Usually a court of law is the one that determines what a reasonable person or a reasonable position would be, given a certain set of context. Are you putting CRA in the position of defining to people in those kinds of cases so as to arbitrate that?

[Trevor McGowan]

The reasonableness standard appears in a number of places in the Income Tax Act. You're absolutely correct that ultimately it would be the court, and going up to the Supreme Court, that decides questions of how statutes ought to be properly interpreted.

This reasonableness test doesn't look to an abstract reasonable level of income based upon your investment. Rather, it looks to a reasonable allocation of your income between you and your relatives vis-à-vis a business. This is one of the refinements made from the version that was released in July. It's not asking, if you invested $100 and you put in 50 hours of labour, what's the absolute value number of what you should be able to get. Rather, it looks to the relative contributions of both the individual receiving the income and any of the relatives who are involved in the business to see if it can reasonably be considered as appropriate. Again, it's not a specific number. It's more that it is in a reasonable range.

Lastly, it builds upon an existing reasonable allocation rule that applies currently, and has for some time in the context of partnerships, in subsection 103(1.1) of the act, where they look to whether or not an allocation of income or other amounts from a partnership are reasonable, having regard to the contributions of labour and capital by each partner to the partnership.

That's something where there's long-standing Canada Revenue Agency guidance. There has been some case law on it. It has been used for quite some time and I think people have gotten comfortable with it. In this context this builds on some of those same ideas. The Canada Revenue Agency has provided guidance. You're absolutely correct that if a taxpayer doesn't agree with the Canada Revenue Agency's assessing position, it can be appealed to the courts for an ultimate determination.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

I certainly appreciate that this process is there, but for many Canadians the idea of having to take something to court and going through many years sometimes to get to that point I don't think is reasonable.

You didn't answer the original question. What problem are we trying to solve in this legislation by utilizing the term “services business”, which is extremely broad? I reiterate that it could apply to many businesses not imagined by your department.

[Trevor McGowan]

The purpose of putting the service....

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

I'm not after the purpose. I meant what problem are you trying to solve? Can you define the problem?

[Trevor McGowan]

There are probably two problems. The first is that if you have a capital contribution test as the excluded share test looks to.... Service businesses where more than 90% of your income is from the provision of services are often not very capital intensive. You could have a lawyer providing legal services and that might not take a lot of capital.

It may well be that a nominal investment of capital by a related person would be sufficient to get more than a 10% interest in the corporation carrying on the business, just because the capital needs of the business are much less than they would be for a company that has inventory and is selling. That's one of the reasons; they're less capital intensive.

The other is that it represents a much more pure diversion of income. As I said, the basic idea behind the tax on split income rules is that it involves a diversion of income from a high-income earner to a relatively lower-income earner. So where you have the higher-income earner earning their income almost purely from the provision of services, then that seems to be much closer to the paradigm case of income-splitting. It's much less likely to be properly considered to be a return on equity, where all your income is really coming from services.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

I appreciate your at least trying to answer the question. I ran a martial arts school for many years and so I definitely know what a service business is, but it's not always going to be a professional corporation. There are not always sophisticated strategies used for this. If you have a pizza shop owner versus a retail outlet, that's suddenly where you would have two different types of businesses, or several types of businesses where it may apply, it may not apply, or sometimes it could apply.

I think without putting definition to it, we're headed down a road. Thank you for trying to answer my questions.

[The Vice-Chair, Conservative, Pierre Poilievre]

Mr. Fergus.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you very much, Mr. Chair.

My question is for Ms. Norrie, who is in Prince Edward Island. It's about veterans.

I am very interested in the standard models that you have created and offered to provide to my colleague Mr. Kmiec a little earlier. You said that you could present a few models to give us an idea of what will happen to future veterans who apply for this new allowance.

[Kathy Norrie]

Thank you.

We developed a number of scenarios or examples, if you will, to illustrate how VAC's benefits, including the pension for life benefits, will work together for veterans and their families. They are to illustrate what a veteran would receive if the program started now. Of course, by 2019, due to inflation and tax rates, it could change slightly.

The examples range from a veteran with five years of service to a veteran with 25 years of service. For example, we can look at a single, 25-year-old veteran who served five years in the Canadian Armed Forces and was injured while serving as a corporal in the infantry. He's suffering amputations above the elbow and knee and has PTSD, a 100% disability. The veteran would receive a total lifetime value of $1.36 million, which is non-taxable, in recognition of the service-related pain and suffering and the barrier to re-establishment. In addition, the veteran would receive a lifetime total of $2.5 million net after taxes through the income replacement benefit.

In addition to these pension for life benefits, they would also be entitled to case management services, treatment benefits, the veterans independence [Technical difficulty--Editor] rehabilitation, and vocational assistance.

The overall lifetime total would be close to $3.9 million in this scenario.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Excellent.

Fundamentally, you're trying to say that no one will lose out with the new pension for life allocation. It will always work in the veteran's favour.

[Kathy Norrie]

That's it exactly.

The pension for life benefit is meant to be streamlined and simplified, consolidating the benefits for IRB, and providing those with permanent severe injuries the financial support they need and deserve.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you very much.

My second question is about the Canada child benefit.

Mr. McGowan, I liked what you said. Legislative changes will be made to get things back in order.

In your opinion, Mr. Leblanc, will this be the last time we will be looking at the issue of changes to the Canada child benefit?

[Pierre Leblanc]

Thank you for the question.

In terms of data sharing, we can say that the transition is over and it will not be an issue for a few years.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

So the transition will be completed.

Thank you.

My questions were not very specific, Mr. Chair. They were first and foremost about veterans.

[The Vice-Chair, Conservative, Pierre Poilievre]

Mr. Kmiec.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Thank you, Mr. Chair.

I want to go back again to information about the child benefit. Before I do, in clause 45, class 43.2, schedule II, you're extending the capital cost allowance by five years on green energy, I think.

I went to look it up, and it said “generate renewable energy or conserve energy in order to encourage investment in these properties.”

What would this include in the “conserve energy” class? What would this be?

[Maude Lavoie]

There are certain types of equipment that would make efficient use of energy, and conserving energy in terms of heat that would generated out of a system that could then be reused for certain useful purposes.

I'm not an engineer, but it's in terms of how the equipment can reuse either the energy or heat efficiently.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

However, this is a class of property that's getting preferential tax treatment, kind of the way mineral exploration does, but only for three years. I'm wondering what that is, on the conservation-of-energy side. It says, “or conserve energy.” I understand “generate renewable energy”. I think we all do. I'm just wondering what that “conserve energy” is. It says until 2025.

[Trevor McGowan]

As I understand conservation, and building on Maude's answer, it might include an energy generation facility that retains heat and uses it in, say, an adjoining greenhouse instead of just producing waste heat, so that the excess energy is conserved and put to a productive end.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

So the facility is retaining it, where the facility has a means to try to retain that captured energy and does some type of co-generation, or where a by-product is heat-generated and captured in some way. Okay, that would cover everything possible, both the generation and some type of conservation. How many of these facilities are there across Canada?

[Trevor McGowan]

In terms of qualifications, there is a number of technical guidelines and requirements that need to be met. Specifications are put out by NRCan, Natural Resources Canada, so it's not just a general set of rules. There are some very specific conditions that need to be met in order for it to qualify to be a high-efficiency co-generation facility.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

I'll go back now to the child benefit data. Mr. Leblanc, you explained to me what it would be, the content. That makes sense to me. I'm still struggling, however, with what you said, Mr. McGowan, about 2016 and the changes. There was a reference to some vestigial information. I want to understand what, in the consolidation of the program between 2016 to 2018, the provisions in this part are trying to change. What was the information that was provided? Is it a formatting change? I'm still not understanding what this information is.