Evidence of meeting #51 for Finance in the 43rd Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was agreed.
A video is available from Parliament.
Conservative
Liberal
The Chair Liberal Wayne Easter
Do we see clause 85—consequential amendments to what was discussed—on division?
(Clause 85 agreed to on division)
(On clause 86)
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
Clause 86 is perhaps not the most intuitive measure.
The new zero-emission vehicle rules create a new class for depreciable properties. Each type of depreciable property is arranged by class, and each class has its own depreciation rate. I say “depreciation”, but the technical term in the tax rules is “capital cost allowance rate”. That's just tax depreciation.
It creates a new class 56 for the new types of zero-emission vehicles, and then there's the existing class 54.
In some circumstances, for various reasons, a taxpayer may want to place one of those new vehicles or something else that would go into class 56 into another class. This clause would provide the flexibility for a taxpayer to elect out of the property being included in this new class when it might also qualify for another class.
Conservative
Ed Fast Conservative Abbotsford, BC
That's very interesting. Thank you.
(Clause 86 agreed to on division)
(On clause 87)
Conservative
Ed Fast Conservative Abbotsford, BC
Could someone explain “accelerated investment incentive property”?
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
My colleague Maude described the accelerated investment incentive. Broadly speaking, that is a measure that was recently introduced. It's temporary and it's phasing out. It applies to most classes of depreciable property eligible for the capital cost allowance.
In order to qualify for this accelerated depreciation, tax depreciation or accelerated capital cost allowance, certain conditions need to be met. Some of those, for example, relate to buying used property or buying property from non-arms-length persons. It's a measure to prevent gaming of the tax deduction system.
The definition of “accelerated investment incentive property” is just the types of property that can qualify for this new enhanced capital cost allowance deduction.
Liberal
The Chair Liberal Wayne Easter
I was just wondering myself, Trevor. What's the percentage on that CCA?
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
The general rule for capital cost allowance is that the CCA rates track the useful life of the asset. The rate that is associated with any asset will depend on how long it's expected to last. The rate on a building would be lower than the rate on a computer, for example. Each one of these classes has its own rate, ranging from some very low—I think down to 2%—up to 100% capital cost allowance rates.
The accelerated investment incentive increases the rate that can be taken and allows more deductions to be taken earlier in a lot of cases, in addition to the base rate that basically reflects the useful life of the assets.
Conservative
Ted Falk Conservative Provencher, MB
Thank you, Chair.
Mr. McGowan, is subclause 87(2) talking about a piece of property being purchased, having a deduction applied with the accelerated investment incentive opportunity and then being flipped to another corporation that would do the same thing?
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
That was one of the concerns that led to the introduction of some of the non-arm's-length restrictions that I mentioned. I can speak to what the specific amendment would do.
As we discussed, an investment incentive property is what gets you in the door for these enhanced deductions that let you take tax depreciation in excess of what's currently provided for in the base rules.
Right now, in order to qualify for this enhanced deduction, when it's acquired from a non-arm's-length party, such as through a sister corporation or something like that, the rules require that the property cannot have been used for any purpose before its acquisition. It has to be new. The rules also require that no other person or partnership can have claimed a capital cost allowance deduction or a terminal loss in respect of the property. These two conditions have to be met currently in order for a property to qualify for the accelerated investment incentive.
This amendment would actually remove the first conditions so that there's no requirement that the property must never have been used for any purpose before it was acquired, leaving only the second requirement that nobody else may have claimed a tax deduction on it. You can have a property, acquire it and use it, and because capital cost allowance deductions are discretionary, you don't need to take a deduction in the first year—or any year, really—but when a non-arm’s-length person has acquired a property, never taken any tax deductions on it, and then transfers the property to you, the risk of the kind of game playing whereby multiple people can take the accelerated deduction just isn't there.
These would relax the rules for something to be an accelerated investment property so that the rules are better targeted to where a non-arm's-length person has actually started taking the deductions.
Liberal
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
Clause 88 relates to the introduction of the new VPLAs, variable payment life annuities. These are investment products that are being introduced that would provide additional flexibility for registered retirement vehicles and the kinds of investments that they could make in pensions and things. It includes the introduction of these new VPLAs, or variable payment life annuities, and the rules relating to them.
Conservative
Ed Fast Conservative Abbotsford, BC
Yes, you just answered my question. These would be an alternative to a RRIF, correct?
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
Not exactly. They're a specific type of annuity that can be held by certain plans.
I should say that this is the first time that VPLAs have come up, although this is actually one of the consequential amendments. The main body of the rules are in regulation 8506, and this is regulation 8502. It's a type of annuity that can be held by certain types of plans, as opposed to a new type of registered plan.
I don't know if my colleague Max Baylor is here. He can provide a great deal more information on the design of VPLAs and how they work.
Conservative
Ed Fast Conservative Abbotsford, BC
I think most Canadians are familiar with registered retirement income funds, RRIFs, which have to start paying out at around age 71. This seems to be a similar vehicle, but I assume it is a response to changes in the tax act that enable a new product to be produced. Is that right?
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
These are changes to the tax rules that allow a new product to be provided to investors. It's a response to comments saying that such a thing would be useful.
Again, I don't know if Max Baylor is here. He can provide more details.
Liberal
The Chair Liberal Wayne Easter
If Max is there, you can come in, Max, but while we're waiting, we will go to Mr. Lawrence.
Conservative
Philip Lawrence Conservative Northumberland—Peterborough South, ON
I had a further question. Probably Max is better positioned to answer it. I'm guessing that this is different from a life annuity. I'm guessing, by the definition, that there's some variability to the payment schedule.
Also, for my colleague Mr. Fast, can these can be held in registered and non-registered environments, or just in registered environments?
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
It would allow pooled registered pension plans or defined contribution registered pension plans to provide these variable payment life annuities to their members directly from the plan.
Of course, I can go out and buy annuities or all sorts of derivatives or whatever I want, but this really relates to allowing these PRPP or pooled registered pension plans and defined contribution registered pension plans to offer these new variable payment life annuities.
The VPLAs provide payments that vary based on the investment performance of the underlying annuities fund and the mortality experience of the annuitants so that there's a bit more flexibility in what they can do than is currently provided.