Finance Committee on May 27th, 2021

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Could I ask one more question?

[The Chair, Liberal, Wayne Easter]

You can. Can we vote on the clause first, seeing that we have called the question? Then you can ask your question.

(Clause 24 as amended agreed to on division [See Minutes of Proceedings]).

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

I was talking to the restaurant industry, and they were saying that they would require that both be running at the same time, in the sense that it's going to take them much longer to recuperate. That's not what this is saying, is it? One will stop, and the other will begin. Is that correct, Mr. McGowan?

[Trevor McGowan]

Both the wage subsidy and the recovery subsidy will exist at the same time for a number of periods.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

But you cannot pull from both at the same time, or can you?

[Trevor McGowan]

No, you can't. You get the greater of the two, but not both.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Okay. That's pretty clear.

There are no amendments for clauses 25 to 99. Do we have unanimous consent to see them carried on division?

[Ted Falk, Conservative, Provencher, MB]

No. I thought we wanted a brief explanation on each clause, a 30-second explanation.

[The Chair, Liberal, Wayne Easter]

I thought that somebody might have looked ahead and said, “Look, we have no questions” and that we'd be able to move them all at the same time.

(On clause 25)

Is it still Mr. McGowan who's on? this?

Go ahead, Trevor.

[Trevor McGowan]

Clause 25 is a consequential amendment on the employee stock option measure. It specifically relates to the calculation of foreign tax credits and deductions you're allowed to take, so it's a consequential amendment for employee stock options.

(Clause 25 agreed to on division)

(On clause 26)

[The Chair, Liberal, Wayne Easter]

On clause 26, Trevor, go ahead.

[Trevor McGowan]

Clause 26 relates to the foreign affiliate dumping measure. The main measure amends section 212.3 of the Income Tax Act and comes later. This clause deals with a specific case in which a tax avoidance strategy could be used to affect foreign affiliate dumping through the use of a foreign corporation that immigrates to Canada. It's consequential to the main foreign affiliate dumping changes, and it applies specifically in the case of corporate immigration through which they try to achieve the same tax results.

(Clause 26 agreed to on division)

(On clause 27)

[The Chair, Liberal, Wayne Easter]

Trevor, go ahead on clause 27.

[Trevor McGowan]

Clause 27 relates to the “allocations to redeemers” measure, which relates to certain mutual fund trusts. Over the last several years, the mutual fund trust industry has developed a methodology for avoiding double taxation whereby they have redeeming unitholders. Some planning had evolved in order to achieve tax deferrals or recharacterization benefits through the use of this methodology, so this measure would prevent the use of this “allocations to redeemers” methodology, which was intended to prevent double tax, from providing tax benefits.

[Ed Fast, Conservative, Abbotsford, BC]

Mr. Chair—

[The Chair, Liberal, Wayne Easter]

Go ahead, Ed.

[Ed Fast, Conservative, Abbotsford, BC]

For the terms “redeemers” and “recharacterization benefits”, could Mr. McGowan just explain what those are?

[Trevor McGowan]

I would be happy to do so. Thank you.

I'm sorry. I'm trying to balance going quickly with providing a full explanation, and it is a complex measure.

A mutual fund trust is a trust with a number of unitholders, and those unitholders can achieve liquidity, which is to say sell their investment or change their investment for cash, either through selling their units in the market or through a redemption of their units. They can tell the mutual fund trust that they'd like to redeem some of their units that currently have a net asset of x dollars and they can redeem them for that.

When a unitholder redeems their units of a trust, they can be taxable on a gain themselves, based upon their disposition of their trust units, and then the mutual fund trust itself will have to sell off some of its investments in order to refund their redemption, so they can have capital gains or ordinary income triggered in the mutual fund. The allocation-to-redeemers methodology is used in order to allocate some of the gains realized by these trusts in order to fund redemptions out to the unitholders, to avoid double tax so that the trust and the unitholder aren't taxed in the same economic vein.

Where the tax planning occurs is that some of the trusts were allocating more than was required to fund the redemption, which, through the specific mechanism of the tax rules, would provide a deferral benefit in certain cases, and also provide for ordinary income in the trust to be effectively taxed at a capital gains rate for redeeming unitholders. This measure would ensure that the methodology can be used to prevent double tax, so that when I redeem some of my units of my investment fund, there are not two incidents of tax on it, but it would prevent some of the tax benefits that have developed.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you.

[The Chair, Liberal, Wayne Easter]

I see that Mr. Lawrence has his hand up. We are on page 46 of the bill, for those who are following.

Go ahead, Mr. Lawrence.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you.

I have just a quick question for Mr. McGowan.

Is that what's commonly referred to within the industry as “corporate class funds”? Is that what this is meant to deal with?

[Trevor McGowan]

No. Corporate class funds are a different thing and they relate to.... There was a budget measure a few years ago relating to them. This measure relates primarily to mutual fund trusts.

Corporate class funds, or “switch funds”, as the term is used, relate to mutual fund corporations. In this case, you have a mutual fund corporation that is a similar type of flow-through vehicle to a mutual fund trust, but they have classes of shares instead of just one type of units. One mutual fund trust can have several different classes of shares, each class of those shares tracking a different investment portfolio in the mutual fund trust. I think that's generally what's referred to as corporate classes.

[The Chair, Liberal, Wayne Easter]

Shall clause 27 carry on division?

(Clause 27 agreed to on division)

(On clause 28)

We'll go back to you, Trevor.

[Trevor McGowan]

Clause 28 relates to the tax deferral for patronage dividends. Those are dividends that can be paid under certain agricultural co-ops to their members. What they would do is extend an existing deferral that allows them to avoid immediate taxation, which can help with cash flow for these agricultural co-operatives.