Finance Committee on May 13th, 2021

[The Chair, Liberal, Wayne Easter]

Who wants to take that question, as it relates to part 1(x) and part 1(y)?

[Trevor McGowan]

Under the transfer pricing measure, I could speak to that first. Then, if there's a question on the fiscal impact of the cross-border securities lending arrangement rules, hopefully one of my colleagues could mention that. It's from budget 2019, and it would be in the table for that.

The transfer pricing measure here is really more of a clarifying measure. It's not intended to tighten the rules. Generally speaking, it's not intended to tighten the rules or make sure that taxpayers can't avoid the transfer pricing rules. Rather, it affects the interaction of the transfer pricing rules with other provisions of the Income Tax Act.

It could be contrasted with a consultation that was announced as part of budget 2021, which the question may relate to. In that, the government announced an intention to consult on the transfer pricing rules more broadly so that they would apply appropriately, particularly respecting an adverse decision that went up to the Supreme Court in the context of transfer pricing. The idea behind that would be to improve the operation of the transfer pricing rules more generally, so that they apply to prevent tax avoidance and are applied appropriately in that respect. However, this measure here is much more targeted and is more of a clarifying measure.

There are two components. The first, as I said, deals with the interaction between the transfer pricing rules and the other rules in the act. Transfer pricing is essentially the price that is charged between entities across borders in a multinational group, and the rules attempt to ensure that those prices reflect prices that would have been charged at arm's length. When the transfer pricing rules apply, they can apply to recharacterize or change the amounts paid. For example, under the transfer pricing rules, a payment of interest could be changed from $100 for one that is not arm's length, down to $60 for arm's length.

Interaction questions were arising with other rules in the Income Tax Act that would have similar effects. For example, the thin capitalization rules could say that, if you pay $100 of interest, only $40 of that is going to be deductable. The question had arisen as to which comes first. These rules provide clarity to both taxpayers and tax administrators that the provisions in the transfer pricing rules are to be applied first to set the appropriate prices, and then the rest of the rules in the act apply as they should.

The other component of it just relates to the normal reassessment period definition and the fact that it talks about transfer pricing, but it uses the wrong definition of transaction. All the transfer pricing rules are based on transactions. It has a special definition, and this ensures that, when they're talking about transactions and transfer pricing, they're using the correct definition. It's more clarifying in that respect. The actual consultation regarding the effectiveness of Canada's transfer pricing rules was announced in budget 2021 and is still to come in the coming months.

You'd asked as well about the cross-border security lending arrangement rules. Those are integrity measures, for the most part, that are intended to ensure the appropriate application of the cross-border securities lending arrangement rules. They are to ensure that companies cannot enter into what are colloquially called broken securities lending arrangement transactions in order to avoid the application of a dividend withholding tax through cross-border derivative financial instruments.

I say they're generally integrity measures, but there is an aspect of it that ensures that dividend withholding tax will not apply when the underlying shares are shares of a non-resident company that would not normally attract a Canadian dividend withholding tax. There is a relieving aspect to them, but they are entirely to make sure that the securities lending arrangement rules under the act work appropriately.

[The Chair, Liberal, Wayne Easter]

Is that okay, Gabriel?

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you for your responses, but I would like a clarification.

So in terms of transfer pricing, there aren't any figures on additional revenue or on the number of companies. In terms of what part 1(y) prevents, there aren't any figures other than the ones provided in the 2021 budget.

There aren't any more specific figures on transfer pricing measures and on impediments for non-resident taxpayers in part 1(y). That's my take-away from this.

[The Chair, Liberal, Wayne Easter]

Mr. Fast is next and then Mr. Julian. We will take questions on both (x) and (y).

Mr. Fast.

[Ed Fast, Conservative, Abbotsford, BC]

That was one of the best explanations of transfer pricing I've heard, so thank you, Trevor. It was very well done.

I have one question on that. It's a broader question that goes beyond transfer pricing.

For the anticircumvention measures that the budget contains, what revenues are they expected to raise collectively? Has a calculation been done on that? Transfer pricing is just one small element of that, presumably.

[Trevor McGowan]

For each of the measures announced in the budget.... This transfer pricing measure was in the 2019 federal budget. A number of other integrity measures were announced in the 2021 federal budget.

Each of the supplementary annexes that accompany the budget provides a table of the expected revenue increases or decreases associated with each measure. That's probably the best place to look.

[Ed Fast, Conservative, Abbotsford, BC]

Can you give me a ballpark figure? You must have an idea of what this looks like. Are we talking about billions? Are we talking about hundreds of millions?

[Trevor McGowan]

For this transfer pricing measure, no revenue was booked because it was a clarifying amendment. However, in terms of the integrity measure, the international integrity measures announced as part of budget 2021.... I don't have that information at my fingertips as they're not included in this bill, but those amounts would be reflected in the budget's supplementary information tables.

[Ed Fast, Conservative, Abbotsford, BC]

Okay. I will look at those tables. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Ed. That completes your round.

Peter Julian.

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

That was exactly my question regarding the increased revenue for tightening the definition and other integrity measures.

We have a lot of officials here, so I'll ask you to supply the figure in the budget, if you could, please.

[The Chair, Liberal, Wayne Easter]

Do you mean in the schedule in the budget?

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

Yes.

[The Chair, Liberal, Wayne Easter]

If somebody could find that, come back and give it to us when you find it. I have the budget here, but I will not look for it. Somebody can think about that in the meantime, and if they have a budget document handy, they can come back to us with it.

We'll turn to (z), in part 1. We covered (y) in that round. Its summary says, it is “allowing for the electronic delivery of requirements for information to banks and credit unions”.

Are there any questions or any extra points people want to raise on that? All right.

We'll move to (aa), in part 1. The summary says it is “improving existing rules meant to prevent taxpayers from using derivative transactions to convert ordinary income into capital gains”.

Gabriel.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Again, do you know how many people are affected, and do you know the estimated additional revenue?

[Trevor McGowan]

When the character conversion transaction measure was announced in budget 2019, there were no specific numbers booked. It was largely a preventive measure based upon a new market development.

The character conversion transaction rules were introduced back in budget 2013 to prevent the conversion of ordinary income into capital gains. In 2019 and in the lead-up to 2019, a new second generation or third generation of this planning was first developed. This measure was introduced at the earliest opportunity in order to prevent the proliferation of that type of new planning.

I don't see any revenue booking associated with the character conversion transaction measures from budget 2019, but it would have prevented the proliferation of this type of tax planning strategy.

[The Chair, Liberal, Wayne Easter]

We may have to go to Ed Fast on that one, Trevor, because he was sitting around the cabinet table then. Maybe he has the answer.

Pat Kelly, you're up.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

I wonder if Mr. McGowan could give us, if it's possible, a simple example of the type of garden variety scheme that this measure and maybe its previous iterations that currently exist are designed to prevent.

[Trevor McGowan]

I would be happy to do so. I will try to make it as clear as possible.

As I said, it attempts to transform ordinary income into half-tax capital gains. Let's say I want to invest in a bond portfolio and I'm going to earn so much interest income. That interest income is fully taxable to me as ordinary income. Even if I own it through a mutual fund trust, it's coming to me and I'm paying the full amount of tax on it.

What the strategy would do is that a mutual fund trust would be set up. It would acquire a bundle of Canadian securities. These are shares of publicly listed Canadian companies, usually. It would agree to sell those shares in five years' time to a counterparty. The price for those shares was going to be determined by the return on the bond portfolio. In that way, the fund was able to get an economic exposure to the return on the bond portfolio, which, if held directly, would be fully taxable as ordinary income. However, when they sold those Canadian securities, they'd claim them as capital gains and pay tax at half the normal rate.

That's generally how this planning works.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Thank you for adding that to the record.

[Trevor McGowan]

I suppose I should add that this was a description of the first generation planning. This third generation planning exploited an exclusion in the character conversion rules that was intended to apply in the case of a mergers and acquisitions style of transaction, where you're buying shares at some point in the future because you're buying a company. This new planning attempted to use that exclusion in order to obtain the same results.

[The Chair, Liberal, Wayne Easter]

Thank you to all.

Let's go to part 1(bb). The summary says it is “extending to a wider array of eligible automotive equipment and vehicles the 100% capital cost allowance write-off for business investments in certain zero-emission vehicles”.

Are there any questions there?

Ms. Dzerowicz.

[Julie Dzerowicz, Liberal, Davenport, ON]

I have a quick question.

Is this just to accommodate the updated CUSMA, the updated agreement with the United States, or is this as a result of something else?

[Maude Lavoie]

This is a measure that would extend an accelerated capital cost allowance that was announced in budget 2019. The one that was announced in budget 2019 was for those businesses that purchased electric cars, plug-in hybrid vehicles, vehicles using hydrogen or those types of vehicles. This measure would extend that to off-road type of equipment. For instance, if you're in the mining sector with electric excavators, you could benefit from this incentive. It would be Zambonis and golf carts and all types of fully electric equipment used by businesses to extend the environmental benefits of that measure.

It's not related. That's the quick answer.