Evidence of meeting #58 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was rules.
A video is available from Parliament.
4:30 p.m.
Liberal
Robert-Falcon Ouellette Liberal Winnipeg Centre, MB
We haven't dealt with graduated tax rate estates, have we?
4:30 p.m.
Liberal
Robert-Falcon Ouellette Liberal Winnipeg Centre, MB
I'd like to get into that section, actually, and the amendments to increase flexibility for recognizing charitable donations made by an individual's former graduated rate estate. For those 35 viewers at home listening to this wonderful conversation, I'm wondering if you could just explain what that is. Then I have a few questions for you.
4:30 p.m.
Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
Yes, of course.
A graduated rate estate is a trust that is entitled to use the graduated rates. Trusts are generally taxed at the top marginal rate, but these trusts, the graduated rate estate trusts, arise on the death of an individual, and they're entitled to use the marginal tax brackets.
When they make a donation, there's some flexibility in what income that donation can be applied against. It can be used in the taxation year of the estate in which the donation is made, in an earlier taxation year of the graduated rate estate, or in the last two taxation years of the deceased individual.
The issue arises because a graduated rate estate only is in existence for 36 months. What these measures do is increase up to 60 months the period in which you can make one of these donations and have it applied against a previous year of the estate or against the last two years of the individual. It thus gives extra time for donations to be made after a graduated rate estate crosses that 36-month threshold.
4:30 p.m.
Liberal
Robert-Falcon Ouellette Liberal Winnipeg Centre, MB
These are not small people; these are large trusts or large estates—essentially the assets of people who have passed away, in layman's terms. What would be the cost, then, to the Canadian estate for increasing it from 36 to 60 months? Obviously you're allowing greater flexibility in that time period. That's one question.
Then I was wondering, if you happen to know it, what the potential impact would be from the difference between now and before we had the graduated rate.
It's probably a very difficult answer to come up with, I'm sure.
4:30 p.m.
Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
I don't think we have the specific costing of it. I think it's fairly small.
I should say that it's not necessarily the case that the estates that take the longest are the biggest-dollar ones. You can have complicated estates and contested estates, I'm sure, without big dollars at play. However, no, I'm sorry; we don't have the cost of it. It is small.
4:30 p.m.
Liberal
Robert-Falcon Ouellette Liberal Winnipeg Centre, MB
That's okay.
Do you think this is going to allow more donations, though, to be given out to charities? This is also enshrined with shares, obviously, and capital gains, and tax-free capital gains. Is allowing those shares to remain tax-free going to lead to an increase or to an ability for more charities to receive a greater level of funds?
4:30 p.m.
Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
My colleague Pierre can fill this in.
It's always difficult to talk about behavioural responses to a tax change, and particularly one in which, as here, we're introducing more flexibility so that these donations, when they're made, can be applied against previous years, the last two years of the individual, or any of the years when it was a graduated estate.
Would the donor have made the gift otherwise...?
4:30 p.m.
Liberal
Robert-Falcon Ouellette Liberal Winnipeg Centre, MB
That means probably you made the change because there has been a request of some type made, and then you've seen probably a number of groups saying they haven't had enough time to wind up the affairs of these estates. Would that be a good characterization?
4:30 p.m.
Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
Yes. I think what we heard is that it takes a fair bit of time sometimes to wind up the estates, and sometimes for the remainder of the estate—what's left after each interested party gets their share—there might be a provision saying “and donate the remainder to charity”. That might be the last thing to be settled, and that provision might push it to the end of the process, which might be past the end of the 36 months.
4:30 p.m.
Liberal
Robert-Falcon Ouellette Liberal Winnipeg Centre, MB
Thank you very much. I hope more Canadians will use this for our loved ones when they wind up their estates.
Thank you.
4:35 p.m.
Liberal
The Chair Liberal Wayne Easter
Thank you.
Are there any other questions on this round, anyone?
I'll just come back to the first thing that was mentioned. We will likely be having the Canadian Medical Association as a witness at some point, but I think I can give you an idea of what they're going to be suggesting.
They're going to be suggesting that altering access to the small business deduction will impact incorporated physicians in group medical structures. They believe that could have an impact on these group medical structures when undertaking medical research, training future doctors, and delivering specialized care in our academic health science centres and communities. I expect they will be asking us to exempt group medical structures.
From your perspective, is that a good idea? Is there any reason that we shouldn't do it? We may as well ask the question now rather than after we hear from them, so that we can hear from them with this testimony on the table.
4:35 p.m.
Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
The department has also heard from a number of stakeholders, including the medical community. I can't speak to any specific discussions, but I can make a few points.
First, it applies to partnerships and corporations. As you said, in these joint medical arrangements one question is whether it has to be a partnership or if it is in fact a cost-sharing arrangement to which the rules would not apply.
Second, as I said earlier, the rules are of general application and are intended to ensure that where you have one business operated through a partnership, you have one $500,000 small business limit, and that limit cannot be multiplied. For example, if you have 10 partners each entering into this type of structure, it could go from $500,000 to $5 million or $5.5 million, I suppose. It's a broad application, and it ensures the integrity of the small business deduction rules without regard to the industry in which the people practise.
I'm sure there's a question about the benefits to be spent on medical research or paid to doctors. I think one tax policy question is whether or not additional incentives or funding ought to go to a particular business or category of business through the maintenance of a loophole in the tax system that they've been using, or if it ought to be done through direct spending. I think that's one important consideration.
Also, I think that in order to respond to specific comments, it's necessary to understand what exactly from a business perspective these expenditures are preventing. Of course, if a researcher is paid a salary, that's paid out of pre-tax dollars, which, regardless of the tax rate, would not be affected. As I said earlier, if you have a cost-sharing arrangement rather than a partnership, that's not going to be affected. There are a lot of details and specific facts in any particular case that can come to bear on the extent to which a particular industry or type of business is affected.
To summarize, ultimately it comes back to the question of whether or not this is an integrity rule intended to protect the integrity of the small business deduction and to ensure that the policy of one $500,000 limit for one business is maintained. To the extent that the exclusion from an integrity rule for a particular industry creates a tax preference for that industry, there might be a question as to whether it's appropriate to deliver those revenues through the maintenance of a technical provision like this in the tax act versus through direct spending. It is probably an important question as well.
4:40 p.m.
Liberal
The Chair Liberal Wayne Easter
Thank you for that.
Two more questions have popped up while we were going through that discussion. We'll go to Mr. Ouellette and then Mr. Albas.
4:40 p.m.
Liberal
Robert-Falcon Ouellette Liberal Winnipeg Centre, MB
Thank you very much.
I just wanted to go to the amendment to the Employment Insurance Act regulations.
4:40 p.m.
Liberal
Robert-Falcon Ouellette Liberal Winnipeg Centre, MB
Oh, we're doing that? It's already part 1, though.
4:40 p.m.
Liberal
4:40 p.m.
Liberal
The Chair Liberal Wayne Easter
We'll come back later. We'll get to that down the road a little piece.
Go ahead, Mr. Albas.
4:40 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Thank you, Chair.
I certainly appreciate your explanation for the change. I believe we've probably all been receiving the same volume of emails as many other members of Parliament, particularly in Ontario. The arrangement that the provincial government has with research hospitals to be able to have this work done requires them to be in a partnership.
While I totally understand your argument that in order to keep the integrity of the tax code we shouldn't have one particular type of preference, this is again the province saying that they want it done a certain way. Now the federal government is saying that they can't do that.
The inevitable consequence of that, if it's a bit of a standoff, is that often these private doctors will just say, “I'll just go and practise by myself in something else where I don't have to deal with these kinds of rules.” Then the public value of that research and all the consternation that goes on will affect both provincial members of Parliament as well as members of Parliament here.
Has there been any outreach, specifically with the Government of Ontario, with representatives of doctors who are currently regulated under this practice and who are utilizing the small business deduction in this current arrangement? Has there been any consultation to be able to ensure that this is a smooth transition?
4:40 p.m.
Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
One thing my colleague reminded me that I may have glossed over in terms of numbers is that the current small business tax rate is 10.5% on active business income and the general rate is 15%. What we're talking about here in terms of the impact of qualifying or not for the small business deduction is that 4.5% point spread.
Without getting into specifics, I can say that the Department of Finance has heard from stakeholders. We've been in consultation with stakeholders and are familiar with the issues raised by those in the medical community. We have heard from not just one jurisdiction, as well.
We have, then, been consulting with stakeholders. Whether that extends specifically to the Province of Ontario, which you mentioned, I can't say, but I know we've been having numerous consultations with affected stakeholders and have heard some of the same points.
Provincial regulatory authorities require you to be operating in partnership, although one question that came up is whether it really is a partnership, because I think one agreement said, “This is not a partnership,” or, “This is not to be construed as a partnership”. That's why I mentioned earlier that there are some technical things we are working through with stakeholders in trying to come to a better understanding, and not only with external stakeholders but also with Canada Revenue Agency as to how they would apply these new rules.
4:40 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Based on that—and I appreciate that you've been very consistent, which is a virtue in the public service, because when we ask questions, the answers should be consistent every time—is there any practical value, then, in not proceeding with this clause at this time until those discussions with the provinces can happen?
I guess I could be asking this of the members opposite, not you, so I can appreciate your possibly not wanting to answer that question.
4:40 p.m.
Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
No. It's in the bill.
We often have consultations with stakeholders on many of our measures. I think there are two or three measures in the bill—I'll point to the spousal trusts, the loss restriction events dealing with investment funds, and the graduated rate estates, and I think we talked about two of these earlier—for which those changes came in in 2013, and because of ongoing consultations with stakeholders, as we constantly do, we made refinements to those rules to achieve the appropriate tax results.
As I said about graduated rate estates, those changes came in a while ago. Then we heard from estate planners that for those gifts they really needed a bit more time, and so further amendments were made down the line.
I will point out that this is a continuing process that we do, and there is certainly evidence of it in this bill.