Finance Committee on Nov. 17th, 2016

[The Chair, Liberal, Wayne Easter]

Thank you.

Coming back to Mr. Ouellette, there are amendments to the Employment Insurance Act in part 1. I believe they relate to a name change, but go ahead; ask your question.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you very much.

It's related to clauses 85, 86, and 87, changing the name “Canada child tax benefit” to “Canada child benefit”. Actually these, especially clause 87, change the Canada Pension Plan Regulations, the Employment Insurance Regulations, and the Immigration and Refugee Protection Regulations. For instance, just with EI, I was interested in knowing—because there's a supplement that families can receive—what impact those name changes would have on those families who receive that supplement.

It's a very pointed question, and I apologize—

[Pierre LeBlanc]

I would say that our colleague from ESDC is better placed to answer. He is on later. I might just pause that question.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

You would pause the question? Okay.

[The Chair, Liberal, Wayne Easter]

All right, we'll deal with it when we're dealing with part 4, division 1.

There being no further questions, thank you, gentlemen, for your presentation.

We will suspend for three or four minutes while we turn to part 2.

I believe Mr. Mercille is next up.

Thank you very much, folks. We are suspended.

[The Chair, Liberal, Wayne Easter]

We'll reconvene.

Welcome, Mr. Mercille.

We'll deal with part 2, amendments to the Excise Tax Act in relation to GST/HST measures and other related texts.

We'll deal with part 2 first, and then, I believe, you're also the witness for part 3. We'll look at part 2 first, and then go from there.

Welcome.

[Pierre Mercille, Senior Legislative Chief, Sales Tax Division, Tax Policy Branch, Department of Finance]

Good afternoon. My name is Pierre Mercille. I am the senior legislative chief of the Department of Finance Sales Tax Division.

As you said, part 2 of the bill deals with the goods and services tax, or GST, and the harmonized sales tax, or HST. Part 2 starts at clause 89 and ends at clause 99.

There are four GST/HST measures in this bill.

The first measure provides a GST/HST relief for exported call centre services. More specifically, the relief will apply to supply of a service of rendering technical or customer supports to individuals by means of telecommunication. We understand “by means of telecommunication” as by telephone, by email, by webchat. The relief will apply if the service is supplied to a non-resident who is not a consumer of the service and if the person is not registered for GST/HST purposes. The amendment will allow Canadian call centres to compete more effectively with call centres located outside Canada.

The next measure is fairly technical, and it deals with the “closely related” test under the GST/HST.

Under the GST/HST, there are special relieving rules that allow members of a closely related group of corporations or partnership to neither charge nor collect GST on intercompany supplies. To qualify, each member of this group must be considered to be closely related to each other member of the group by having a degree of common ownership of at least 90%. The amendment in this part will require that in order to meet the closely related test in the future, in addition to having that degree of common ownership of 90%, a corporation or partnership must also hold and control 90% or more of the votes in respect of every corporate matter of the subsidiary corporation.

The next amendments are consequential to the repeal, effective January 1, 2017, of the eligible capital property regime. That was explained earlier because these amendments to the Income Tax Act are included in part one. Because some provisions of the GST/HST refer to those amended provisions in the Income Tax Act that are being amended, the amendments are made to ensure that the application of the GST/HST in this area is not affected. Essentially, these amendments ensure that there's no change for GST/HST.

The last measure in part 2 of this bill is an administrative measure. It clarifies that the Canada Revenue Agency and the courts may increase or adjust an amount included in an assessment that is under objection or appeal at any time, provided that the total amount of the assessment does not increase. This measure is similar to a measure that is included in part 1 of the Income Tax Act because it originated in the Income Tax Act, and it's made under the GST legislation to ensure greater consistency across administrative provisions throughout the tax act, the federal tax statutes.

I will take just a few seconds here just to say that this last measure that I explained, the administrative measure, is the only amendment that is included in part 3 of this bill. Part 3 includes amendments to the Excise Act 2001. That's a different piece of legislation that deals with excise tax on alcohol and tobacco. Again, this amendment is made to ensure greater consistency in administrative provisions across federal tax statutes.

That concludes my presentation.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr Mercille.

You're telling us we can be efficient and do part 2 and part 3 together. We like that.

Are there any questions to start?

Mr. Albas, I have one if you don't

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

Thank you, Mr. Chair.

Thank you for your presentation.

I'd like us to talk a little bit about the control of corporations. This is again going back to amendments with respect to the test for determining whether two corporations or a partnership and a corporation can be considered closely related.

Can you give me an example in which this might occur?

[Pierre Mercille]

The intent behind that “closely related” test is to identify when you have a group of corporations that essentially act as one entity because the overall control of everything is under the same person, essentially.

These rules were working well and still work well, but given the fact that there are more and more complex corporate structures and types of shares put forward by corporations, there are a few scenarios that went to the CRA to ask whether, in certain situations, the closely related test was met when technically, according to the old working of the legislation, it could have been met but it was not the intent.

To give you an example, you could have a corporation that holds 90% or more of the value and number of shares that have only one vote, and the other 10% of shares have 100 votes associated with them. Essentially a person asked CRA whether the corporation that holds the 90% of single-vote shares would be closely related to another corporation.

That's not the intent, because even if that person held 90% of the value of the corporation, they don't really control the corporation, so they are not acting as one person when the group is making decisions.

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

The question I would have, and I believe the Canadian Tax Foundation did a paper on it, is that there are some concerns.... Let's say that you have three sisters on the Prairies. One runs a John Deere dealership, another has a gas station, and the other is a farmer. Now, you could say that their interactions among each other, because they're all closely related, would somehow change under this, and perhaps that change might also change how they are related to taxation. That's what I remember as the gist of it from the report.

Have you heard any of this?

[Pierre Mercille]

I have not heard about the three sisters in Alberta, but—

[The Chair, Liberal, Wayne Easter]

It's just an example.

[Pierre Mercille]

—what I want to point out is that this “closely related” test is specific to the GST. It's not like the “related” test in income tax, whereby your brothers and sisters are “related”. We're talking here about 90% ownership of the value of the shares that have full voting control. This is the way it's described, and it's very specific to the GST.

In your example, there are three persons, but if you tell me that one sister owns 90% of the shares of the business of her other two sisters, then the group would be closely related, because essentially all of the important decisions would be made by only one sister, because she controls all the decisions of the three corporations. That would be a closely related group. However, if they are just three sisters who own shares of their own corporation, they're not closely related and they are not subject to this, as before—

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

Okay, so as long as they're completely separate corporations and whatnot, and their operations are....

Let's go to your example, in which one sister does have control. What would be the tax fallout with that? Would she not be eligible for certain tax treatment; or would she be subject to a different process?

[Pierre Mercille]

I assume that in this fictitious example the person was qualifying under the closely related test before and will not qualify now. In that case, there are three different relieving rules that exist under the act that will not be available.

There is one rule that allows a group of financial institutions to treat some intercompany supplies as financial service, and financial service is not subject to tax under the GST. That relief would not available. The most common one is that intercompany supplies of a closely related group can be made for a consideration deemed to be nil—so for zero cost—and so there is no tax within those supplies.

This is just a cash flow relief, because those companies, to be operating under that test, need to be exclusively in commercial activity, so if they pay tax they can claim it back as as an ITC.

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

I'm going to ask a few questions that our analysts have put together. Thanks to them for putting these together.

How many closely related corporations provided services to each other in the 2015 taxation year? Do you have any kind of...?

[Pierre Mercille]

No, I don't think we have that information.

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

Okay.

How would the proposed measures affect the tax treatment of services among corporations that are controlled by one individual rather than a single...?

This is services, not just goods.

[Pierre Mercille]

The services are relieved also. The supply is deemed to be made for—

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

Okay, so it's—

[Pierre Mercille]

—some consideration. If one person controls everything and has 100% of the shares and all of the votes, this doesn't affect that situation.

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

Okay. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Dan.

Look, there's a business near home called The Five Sisters, so we have two up on you—and they sell lavender, so you'd be really enthused.

[Some hon. members]

Oh, oh!