Finance Committee on May 10th, 2016

[Steven MacKinnon, Liberal, Gatineau, QC]

Mr. Chair, this is a fairly important issue for the constituents in my riding. So I'm asking that we be given an answer to this question quickly.

[The Chair, Liberal, Wayne Easter]

Okay, we'll come back with that information at a later point. Do you have anything further in part 1?

[Steven MacKinnon, Liberal, Gatineau, QC]

Yes, I'd like to build on the questions Ms. Raitt asked about children whose divorced parents share custody or who live with one of their two parents.

How is the calculation done for them? I would also like clarification on this.

The universal child care benefit, which is now being replaced by the Canada child benefit, was taxable at both the federal and provincial level, in Quebec and elsewhere, wasn't it?

[Pierre LeBlanc]

Yes, you're right.

[Steven MacKinnon, Liberal, Gatineau, QC]

So it's an added bonus for the vast majority of Canadian families.

[Pierre LeBlanc]

And nine out of 10 families will receive more child and family benefits following this reform.

[Steven MacKinnon, Liberal, Gatineau, QC]

That's right.

You are considering both the fact that this income will not be taxable and the gross amount of the benefit.

[Pierre LeBlanc]

Yes. The calculation takes into account the fact that the UCCB was taxable income, both federally and provincially.

[Steven MacKinnon, Liberal, Gatineau, QC]

Right. We are eager to receive confirmation and more information about this.

Mr. Chair, in the summary of part 1 of the bill, point (k) reads as follows:

(k) extending, for one year, the mineral exploration tax credit for flow-through share investors;

If I'm not mistaken, this tax credit is renewed year after year. Is that the case?

[James Greene, Director, Business Income Tax Division, Tax Policy Branch, Department of Finance]

The mineral exploration tax credit was introduced in 2000 for a three-year period. At the end of that period, it was extended, and has since then been extended on an annual basis, with one exception, a brief period in 2006, when it was allowed to expire. It was reinstated, however, and has subsequently been extended annually since that time.

[Steven MacKinnon, Liberal, Gatineau, QC]

Why are we choosing to renew this tax credit in particular year after year?

[James Greene]

I'm not sure that I can speak to the motivations of different governments over time, but I can say that the tax credit is designed as additional or extraordinary support to the mining sector that supplements the ongoing permanent support available through flow-through shares to finance their exploration spending. The credit is an additional credit, on top of the deduction, that investors receive from a mining company. I think governments over time have wanted the opportunity to review current conditions in the sector to determine whether they merit extending this supplementary support.

[Steven MacKinnon, Liberal, Gatineau, QC]

You realize that since 2006, if not 2000, the mining sector has experienced almost every up and down in the commodity cycle? That's why I am curious about this. Obviously, we are trying to encourage mining exploration in Canada, hence the decision to renew the credit this year.

Given the fluctuations that the mining sector is experiencing, I'm wondering about the appropriateness of this decision. Should we review it? Should we instead consider extending the credit over several years to increase investor confidence?

[James Greene]

Mr. Chairman, I would just add for the honourable member that, while the credit is extended for a one-year period, the credit has a feature called a “look-back” rule. When a company issues shares in one year, it has until the end of the following calendar year to expend those funds. This allows for a fairly lengthy period of planning. This year's credit will support exploration spending into the following year. For that reason, I think it involves a kind of binoculars to gauge how long that support will continue to be merited in the future. Obviously, an extension on a different basis is a possibility.

[The Chair, Liberal, Wayne Easter]

Mr. McColeman, part 1.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Thank you for coming today.

My questions have to do with what you describe in the presentation booklet as “the top marginal tax rate”. I want to go to the bullet point that says, “amend the recovery tax rule for qualified disability trusts to refer to the new 33-per-cent top rate”.

Now, my understanding is that the new tax rate applies to personal income over $200,000. You get hit with additional taxation.

However, I wonder if you could help me understand this in the context of a real-life example. Suppose a trust is set up for a disabled child within a family. Then, as the disabled person becomes independent and perhaps the parents pass away, the trust money flows out to sustain the disabled person in whatever environment the money was set up to do so. Is this now topped up in terms of having to pay more tax at the 33% rate?

[Trevor McGowan]

The general rule for trusts is they're subject to taxation at the top marginal rate on all of their income. The two exceptions to that rule are qualified disability trusts and graduated rate estates that arise when an individual dies.

For qualified disability trusts, as you pointed out, the policy is that these are trusts that are set up to support a disabled individual. They are therefore provided access to the graduated rates and not the top rate of tax, which was 29% last year. Under Bill C-2, that would be 33%.

The access of a qualified disability trust to the graduated rates is predicated on the income of the trust being paid to an eligible beneficiary, someone eligible for the disability tax credit. If ultimately there has been income accumulating in the trust that has been taxed at these lower rates, and income is later paid to someone who would not be entitled for it to continue as a qualified disability trust, then the rules have what is called the “clawback” of the graduated rates. This essentially provides an additional tax in respect of the lower rate in previous years, where an amount has ultimately been paid out to a non-qualifying individual.

This would prevent, for example, a qualified disability trust from being set up notionally in support of someone who is actually disabled and who would normally qualify, but then, after earning income in the trust for a number of years and taking advantage of the lower graduated rates, ultimately being paid out to someone else—perhaps the settler of the trust or whomever—who doesn't qualify. That's the policy underlying the qualified disability trust recovery rules. That's why, with the amendments that are consequential to the introduction of a new top marginal rate, it follows. The existing rules reference the previous top marginal rate of 29%, and the new rules would reference or be built upon the new top marginal rates. That policy actually remains consistent.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Okay.

I will take from that, in my layman's terms, that if you have a trust set up for a child today and that trust begins to pay out, there will be no change for the family or the individual in terms of taxation, as long as that individual is receiving it out of the trust. However, if that individual becomes deceased and the trust has to be wound up in an estate, then there is some additional taxation that is going to happen to whoever the recipients of the estate are. Am I correct in assuming that?

[Robert Demeter, Chief, Business Property and Personal Income, Tax Legislation Division, Tax Policy Branch, Department of Finance]

Yes, that is correct. I would just add, provided that the trust qualifies as a QDT, qualified disability trust. As long as it is going out to the beneficiary it was intended for, and that beneficiary has a disability that qualifies the trust as a qualified disability trust, there should be no change from this particular amendment to move the top rate in the recovery tax to 33%.

[Phil McColeman, Conservative, Brantford—Brant, ON]

I am still not 100% clear. Perhaps I might ask you about the best way for most people who are in the situation of having set up trusts for their disabled children and would like to know the consequences this tax increase may have for their families.... When the beneficiary, who is disabled, stops receiving it because they are deceased, what happens in the case of the rest of the family members, who are left to close things up in terms of that trust?

I would like more clarification, if you could, with real examples from you, as to how this tax treatment changes for typical, average families who have set up these trusts—and there are many of them across this country.

I will move on, because I know we are limited in time, so if you could provide that—maybe two or three examples, if there are variables in there that I haven't hit on—I would really appreciate it.

Second, the same section of the notes we were given talks about the charitable donation tax credit in Bill C-2. This is where the government has moved to take away the ability that was previously put in for persons with real estate and such giving those to charity.... I don't totally understand the description you have given me here.

Again, in a situation where a person bequeaths to a charity assets in real estate, the previous government put into place rules that they could do that without taxation, and now there is going to be taxation on those, or this whole provision is going to be removed. Is this what that speaks to?

[Trevor McGowan]

No, they're separate measures.

This is actually more closely related and is a purely consequential amendment to the introduction of the new top marginal rate. The proposed amendments that you mentioned that deal with the donation of proceeds from the sale of real property or private company shares to a charity were announced in budget 2015, and two were to have become effective in 2017. They've not been included in the bill and they were never enacted. In budget 2016, the government announced its intention to not proceed with those proposed amendments.

The proposals in Bill C-15 are unrelated to those. What they relate to is, as I said, further consequential refinements to the charitable donation tax credit that followed from the introduction of a new top marginal rate. Individuals can obtain a charitable donation tax credit in respect of their gifts. Currently—and this is not proposed to be changed—it's 15% on the first $200 of gifts. Previously, and previous to Bill C-2 and this, it's $29% on gifts in excess of that.

Those sets of proposed amendments provided, back in December, a set of rules that—to the extent you're an individual and you have income in the top marginal bracket so it's now taxed federally at 33% instead of the 29%— effectively, given the old rates, gave you a deduction. For people who are taxed at lower rates, it provided an incentive.

For people who have income in the top marginal bracket that is subject to the top 33% rate, the Bill C-2 amendments would provide a 33% tax credit. Following up on the government's announcement, those amendments that are in Bill C-2 provided further refinements to that policy, specifically for trusts. As I mentioned before, most trusts are actually subject to flat taxation, so all of their income is taxable at the top marginal rates.

What these amendments would do—as well as, in fact, replace what is in Bill C-2—is provide that, if you have a trust that is subject to top flat-rate taxation, it can access the new 33% tax credit to offset its income that's taxed at the top rate. It doesn't have to be income in excess of $200,000, because their first dollar of tax is taxed at 33%. It ensures that trusts have the same incentive to donate as high-income natural individuals.

Second, it provides that, in situations where you have a trust, a taxation year can straddle the end of 2015. It starts in 2015 and ends in 2016. It, for that year, can be subject to the.... That might be the case for a graduated rate estate where an individual dies mid-year. It can be subject to the top marginal rate of 33% on its income for the year. This would provide that gifts made before 2016—in the first part of that taxation year that straddles the year-end—can qualify for the new higher 33% tax credit as well, so that they get an effective deduction against their income taxes for those gifts.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

I have only a couple of questions, and they are relatively short, Mr. Chair, regarding things like the arts tax credit, income splitting, and things like these.

I'll talk about the arts tax credit first. This tax credit, or the fitness tax credit, is only applicable if the family can actually afford the arts program or the sports program in the first place—the old system. They would, in their taxes, submit that, and then get an up-to amount. But families who can't actually afford the arts program or sports program in the first place didn't get any money under the old program, whereas with the new child benefit, you get an amount based on your income, and you can do what you wish with it.

Am I understanding that correctly?

[Pierre LeBlanc]

What we can say is that both the children's fitness tax credit and the children's arts tax credit are based on eligible expenses. They're based on what you pay.