Finance Committee on Nov. 1st, 2018

[The Chair, Liberal, Wayne Easter]

I'll call the meeting to order.

As members certainly know, we're dealing with Bill C-86, the budget implementation act 2018, number two.

To start off this morning, we have officials related to a number of areas in the bill: part 1, part 2, part 3 and some of the divisions in part 4, hopefully.

We'll start with part 1. With us we have, from the finance tax department, Trevor McGowan, Pierre Leblanc and Blaine Langdon.

I'll let you introduce people, Mr. McGowan, and you can start from there.

I would remind members that when we're dealing with officials on the bill, we stick to questions related to that particular area of the bill. For the more general and broader questions, we will go to the minister when he comes.

Mr. McGowan, the floor is yours. Welcome.

[Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance]

Thank you, Mr. Chair.

I was going to go through each of the measures in the bill briefly, in the order in which they appear. If it would be helpful to committee members, I could also provide the relevant clause numbering for each of the measures. I understand this is a prestudy and the packages haven't been sent.

The first measure in the bill relates to what are called foreign divisive reorganizations and provide the appropriate tax consequences for a Canadian investor in a foreign corporation that essentially splits in two in a particular type of transaction. That can be found in clauses 2 and 39 of the bill.

The next measure amends the cross-border surplus stripping rules to apply appropriately and clearly in the case where partnerships or trusts are used in a cross-border structure. The cross-border anti-surplus stripping rules are an existing set of rules that prevent the extraction of retained earnings tax-free from Canada to a foreign investor. These rules ensure that when partnerships and trusts are used in a corporate structure, the rules work appropriately by essentially looking through the partnerships and trusts. These can be found in clauses 3 to 5, as well as clauses 14 and 21 of the bill.

The next set of measures—

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Sorry. Good morning, Mr. McGowan. Can you just repeat that last part? We're trying to write down some details as you're going and it's a little fast.

[The Chair, Liberal, Wayne Easter]

He wants the parts of the bill.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Yes, could you repeat the parts of the bill again, please.

[Trevor McGowan]

Of course, I would be happy to.

For the first measure, the divisive reorganizations, it is clauses 2 and 39. For the second measure, the cross-border surplus stripping involving partnerships and trusts, that is clauses 3 to 5, as well as 14 and 21.

[The Chair, Liberal, Wayne Easter]

Okay.

[Trevor McGowan]

I'll combine the next two sets of measures. They deal with foreign affiliate rules. There's a set of currently existing rules in the Income Tax Act that prevents the shifting of income on passive property offshore to a controlled foreign affiliate of a taxpayer. If you have that kind of passive income held in one of your controlled foreign affiliates, it's taxable in Canada on an accrual basis, so every year.

Recent tax planning techniques have evolved to use what are called tracking shares in order to avoid this accrual and taxation of passive income. These measures would prevent the use of tracking shares to avoid the foreign accrual property income regime, both by artificially meeting a five employee test and also through the avoidance of controlled foreign affiliate status itself. These are found in clauses 6 and 7 of the bill.

Also, another foreign affiliate measure relates to the rules for trading or dealing in indebtedness. It essentially aligns the rules for trading or dealing in indebtedness with the rules that relate to investment businesses, to better ensure consistency within the tax regime for foreign affiliates. That is also found in clause 7 of the bill.

The next measure relates to the at-risk rules for limited partnerships. It ensures that the currently existing at-risk rules for limited partnerships apply appropriately in a situation where there is a tiered structure of partnerships—that is to say, where one member of a limited partnership is itself a limited partnership—and it ensures the at-risk rules work appropriately in that situation. The at-risk rules restrict the deduction of losses and expenses by limited partners of a partnership to the amount that they, in effect, put at risk in the partnership. Therefore, if you invest $100, generally speaking, you can deduct up to $100 of losses in respect of the partnership interest. This ensures that the rules work appropriately where there are multiple tiers of partnerships. It is found in clause 8 of the bill.

The next measure relates to tax relief for Canadian Armed Forces personnel and police officers on international police operations. It allows international police missions to be eligible for the purposes of a deduction from income tax that is available for Canadian Armed Forces members deployed on certain designated international missions. It is found in clause 9 of the bill.

The next measure—

[The Chair, Liberal, Wayne Easter]

Just so that members are clear where we're at, that would be part 1(f) that we just dealt with. Thanks.

[Trevor McGowan]

The next measure relates to artificial losses using equity-based financial instruments. These amendments tighten up and improve upon gaps or weaknesses in the currently existing rules that prevent the creation of artificial losses by primarily financial institutions on certain equity-based transactions.

[The Chair, Liberal, Wayne Easter]

Mr. Julian.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you, Mr. Chair.

Coming back to clause 9, it says “assessed for risk allowance at level 3 or higher” or “assessed at a risk score greater than 1.99 and less than 2.50”. Can you explain to us how that then allows for the deduction and what the risk score is based on?

[Pierre Leblanc, Director General, Personal Income Tax Division, Tax Policy Branch, Department of Finance]

Thank you for the question. There is a—

[The Chair, Liberal, Wayne Easter]

We'll go with the question. The way we normally proceed is just to make a note of the question as we go through, Peter, and then come back to it. There's no limit on the amount of time for questions. People have to be satisfied on where we're going with each clause, but go to this question now.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you, Mr. Chair. We are dealing with the largest omnibus bill in Canadian history. I think it may be a better way to proceed if we can intervene. I appreciate your flexibility on that.

[The Chair, Liberal, Wayne Easter]

All right. We'll see where we go and how much there is as we go along.

Go ahead, Pierre.

[Pierre Leblanc]

Thank you for the question.

Missions are assigned a risk score by the Department of National Defence. Up until 2017, those members of the Canadian Armed Forces and of the police who were on missions that had high and medium risk scores were able to have a deduction for the pay associated with those missions abroad.

The government announced that effective in tax year 2017 this deduction is available for all of those members of the Canadian Armed Forces and police on missions designated by the Minister of National Defence or his designate, regardless of the risk score.

This measure is basically ensuring completeness. It ensures completeness because some police are not on DND missions. They're on missions that are designated by the Minister of Public Safety and Emergency Preparedness. Those individuals aren't covered by the current legislation, either back to 2012, when a high risk score or medium risk score was required, or now that no risk score is required. It's making sure they're covered as well.

In other words, if police are on a police-only mission that's designated by the Minister of Public Safety and Emergency Preparedness, they'll also be eligible for the tax relief.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

If you don't mind a follow-up, Mr. Chair, then I don't understand why the risk score is defined in the legislation if what you're saying is that all operational missions would qualify, which I think is something that we would all support.

[Pierre Leblanc]

It's basically to ensure that the measure applies appropriately in a retroactive manner. If you look at this between 2012 and 2016, a risk score was required under the law for any sort of mission, whether it was a Canadian Armed Forces one or not. The legislation doesn't cover that in its current form for where the mission was designated by the Minister of Public Safety and Emergency Preparedness. It's just to provide assurance under the law that those missions are covered, both under the old regime, which required a certain risk score up to 2017, and from 2017 on, where the risk score isn't a factor.

[The Chair, Liberal, Wayne Easter]

Thank you.

Go ahead, Mr. McGowan.

[Trevor McGowan]

Thank you, Mr. Chair.

I had started discussing artificial losses using equity-based financial instruments.

This measure relates to tightening up and improving upon gaps or uncertainties in the currently existing synthetic equity arrangement and security lending agreement rules that had been used by taxpayers to, in essence, create artificial losses by deducting the same expense twice, the same amount twice—primarily financial institutions.

These measures improve upon those rules in order to prevent inappropriate tax planning that can lead to the generation of artificial losses by financial institutions. Those are found in clauses 10 and 27 of the bill.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

If you don't mind, Mr. McGowan, if you could give the clauses first and then explain, I think that would be easier for us. That way, we can follow along in this massive tome, which is the largest omnibus legislation in Canadian history.

[Trevor McGowan]

Thank you for the comment.

The next measure is found in clauses 10 and 16 of the bill. It's a similar measure dealing with stop-loss rules on share repurchase transactions, and again it prevents financial institutions from generating artificial losses in off-market securities transactions that involve the repurchase of shares and the utilization of the inter-corporate dividend deduction as well as the market-to-market property rules to effectively deduct the same amount twice in situations where they're redeeming a fully hedged market-to-market property and generate artificial losses on those transactions. This would ensure that a double deduction is not available, although, of course, the single deduction would continue to be available to reflect the economic reality.

The next measure is found in clause 11 of the bill and it relates to eligibility for the Canada child benefit in respect of certain provincial kinship programs. It ensures that the receipt of amounts under these provincial kinship programs will not, in and of themselves, disqualify an otherwise eligible recipient from obtaining the Canada child benefit. It ensures that the benefit is available in appropriate circumstances, including where amounts are received under a kinship program by an individual in respect of the care of a child who is not the biological child of the individual. It corrects a potential technical interpretation that could arguably disqualify individuals from receiving the Canada child benefit in that situation and ensures that it's available where appropriate.

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

I'm sorry, Mr. McGowan, can you just give me an example as to where this popped up as being a problem? Was this from Quebec? Was this from other provinces?

[Trevor McGowan]

I believe this issue was raised by the Canada Revenue Agency in its application of the program where it asked.... There is a rule that says you can be treated as a child of an individual in the tax act if that individual is, among other conditions, not the biological parent but you, the child, are wholly dependent on them. The question that was raised was whether a child can be considered to be wholly dependent upon an individual when the individual is receiving these amounts under these kinship programs for the care and maintenance of the child. An interpretive question arose about whether or not the child is wholly dependent in those circumstances. It was raised by the Canada Revenue Agency and the correct answer, of course, is that, yes, a child can still be considered to be wholly dependent upon the adult in the kinship programs, even if they're receiving amounts under these provincial programs.