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.
5:40 p.m.
Liberal
The Chair Liberal Wayne Easter
Shall clause 59 carry on division?
(Clause 59 agreed to on division)
(On clause 60)
5:40 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
Clause 60 provides the more significant amendment relating to transfer pricing. As we have discussed, transfer pricing refers to the prices charged in cross-border transactions between non-arm's-length parties. When those rules apply, they essentially can reprice or recharacterize transactions to be in accordance with arm's-length terms and conditions.
This measure would clarify the interaction between the transfer pricing rules on the one hand and the other rules in the Income Tax Act on the other hand so that it's clear how the rest of the rules in the Income Tax Act work once there has been a transfer pricing reassessment.
For example, if a Canadian company pays $100 to a foreign non-arm's-length party, and an arm's-length price for that widget would have been $60, then the price paid for the widget under the cost of sale to the Canadian company would be reduced from $100 to $60. Then it tells you to plug that $60 into the rules in the other act in order to determine your tax liability.
It clarifies the interaction between the transfer pricing rules and the rest of the rules of the Income Tax Act to allow for transfer pricing to come first.
5:40 p.m.
Conservative
Ted Falk Conservative Provencher, MB
Thanks, Chair.
Mr. McGowan, on transfer pricing like that, who determines if it's market value or if it's not? How is that determination made? Is there a calculation, a formula?
5:40 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
It's a fairly complex determination. The rules in the Income Tax Act are actually not that long, but there's a tremendous amount of guidance done through the Organisation for Economic Co-operation and Development and transfer pricing guidelines put out by the Canada Revenue Agency.
Ultimately, the Income Tax Act essentially provides that you have to use arm's-length prices, and then there's a broader mechanism that's used for determining what those arm's-length prices are. For example, companies are required to have contemporaneous documentation in order to establish how they came up with their arm's-length prices. Companies engaged in cross-border transactions will often keep that kind of contemporaneous documentation to show their transfer pricing methodologies.
The Canada Revenue Agency can, of course, come in and challenge whether or not the transfer pricing was done correctly and whether the prices should be something else. From that, of course, taxpayers can challenge an assessment with the Canada Revenue Agency, and it ultimately goes up to the courts to determine whether or not arm's-length prices were charged, and if not, what the consequences would be.
5:40 p.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you very much for all the information you are providing to us, Mr. McGowan.
Do you know how many taxpayers and companies this change could affect? Can you estimate how much additional revenue the Canada Revenue Agency could generate? Do you have that information?
5:40 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
No, I do not have that information with me. I will say that this is not intended as a tightening amendment in order to really change the outcomes of transfer pricing cases. Rather, it is intended as a clarifying amendment so that it's just much clearer how the transfer pricing rules interact with the other rules in the Income Tax Act. To that end, as it is intended to be clarifying, it's not expected to produce revenues, so there's no revenue associated with it, for example, in the budget estimates. It is really intended to be a clarifying amendment.
I would say that the government announced a consultation on the transfer pricing rules more broadly as part of budget 2021, which could lead to more substantive changes to the transfer pricing rules, but that's not reflected in Bill C-30.
5:45 p.m.
Liberal
The Chair Liberal Wayne Easter
Shall clause 60 carry on division?
(Clause 60 agreed to on division)
(On clause 61)
5:45 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
Clause 61 amends section 248 of the Income Tax Act. Section 248 contains the definitions that are relevant generally for the purposes of the Income Tax Act, so there are several measures that are reflected in clause 61. I'll go through each of them.
The first measure relates to the definition of a “derivative forward arrangement”. These are arrangements that were popular a number of years ago that effectively sought, through the use of derivative financial instruments, to convert fully taxable ordinary income into capital gains, which were only half-taxable, and also to defer the inclusion in income of those amounts. It provided a deferral benefit generally for up to five years and also a recharacterization from fully taxable ordinary income to capital gains that are only half-taxed.
In 2013, the previous government implemented rules in order to prevent this type of derivative planning. A new iteration of the planning was recently developed that sought to exploit an exception to the previous rules. What this measure would do is ensure that the derivative forward arrangement rules work appropriately to prevent this type of planning.
5:45 p.m.
Conservative
Ed Fast Conservative Abbotsford, BC
Trevor, there are anti-circumvention measures within the Income Tax Act that allow the government to address unwarranted attempts to avoid tax, correct?
5:45 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
Yes, there are certainly anti-avoidance rules, including the general anti-avoidance rule.
5:45 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
That's right.
5:45 p.m.
Conservative
Ed Fast Conservative Abbotsford, BC
Are they not broad enough to capture these constantly evolving efforts to avoid taxes?
5:45 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
I'd probably answer that in two ways.
One is that not every GAAR case applies in the way that the Crown hopes, so sometimes it's necessary to make these amendments when the GAAR is found not to apply. That also happens when in a lot of cases when the government spots a new type of planning that's being used to exploit the current rules.
Amendments are made before the general anti-avoidance rule has been applied and litigated, because that kind of case can take many years to be assessed and work its way through the courts, and during that time, there's a lot of uncertainty for taxpayers. What often happens is the government makes these amendments in order to, in colloquial terms, close the loophole immediately to provide the certainty up front, and then the cases can be challenged later in court.
5:45 p.m.
Liberal
The Chair Liberal Wayne Easter
Shall clause 61 carry on division?
(Clause 61 carried on division)
(On clause 62)
5:45 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
Clause 62 provides a consequential amendment related to the changes for the basic personal amount.
5:50 p.m.
Liberal
The Chair Liberal Wayne Easter
Shall clause 62 carry on division?
(Clause 62 agreed to on division)
(On clause 63)
5:50 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
Clause 63 is another consequential amendment that comes under the advanced life deferred annuity rules, the ALDA rules. It relates to extended meanings of “spouse” and “former spouse” that can apply for the purposes of the ALDA rules. It extends the rules in subsection 252(3) to be available for the ALDA rules.
5:50 p.m.
Liberal
The Chair Liberal Wayne Easter
Shall clause 63 carry?
(Clause 63 agreed to on division)
(On clause 64)
On clause 64, go ahead, Mr. McGowan.
5:50 p.m.
Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance
Clause 64 amends section 260 of the act, which involves the rules dealing with securities lending arrangements. I've already discussed this measure in the context of the part XIII withholding tax rules in section 212 of the Income Tax Act, and this provides the other portion of the securities lending arrangement rules that exist in section 260 of the act, which is where the securities lending arrangement rules work, so it relates to that measure.
(Clause 64 agreed to on division)