Finance Committee on May 25th, 2023

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

Okay. We have one of the facts out there, so that's helpful. You said that the car is only being used in the course of employment and that this is perhaps indicative that there's something more, because arm's length.... It means at arm's length, so, by definition, you don't have a relationship.

You're doing a great job and I really appreciate your patience, Ms. Gwyer, in informing me and, hopefully, some of the viewers as well. Could you just put on the record, to the best of your ability, what the definition of “arm's length” is?

[Lindsay Gwyer]

Well, it depends on the situation, but if you're looking at corporations, if one corporation controls the other corporation, then they're considered not to be at arm's length, or if they're controlled by the same person or are part of a group of companies that are controlled by the same person, then they would not be at arm's length.

If they're not related, if they're corporations owned by different people, then it's a factual question, just as the test in the Income Tax Act is just a factual test, a question of fact, on whether they deal at arm's length. Depending on the situation, there would be all different facts that might be indicative of the fact that people are not dealing at arm's length.

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

Okay.

I guess where the loophole would come in, then, is that we have the corporation that employs the employee and then we have another corporation providing the vehicle. However, the court must have found that even though there was some type of relationship between these two corporations, they were still dealing at arm's length, and then you put in the provision.

You're going back to facts again, so what's the difference between the factual test to determine whether this individual is receiving this car as part of their employment from a third party—there's a relationship of some sort there between the two corporations—and the arm's-length test between the two corporations? The court obviously found—at least I'm assuming, as I'm not familiar with the case law—that they were dealing at arm's length there. It's a bit confusing. I can clarify if I didn't make sense there.

[Lindsay Gwyer]

Yes, can you repeat the question, if you don't mind?

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

Yes, no worries. I'll lay this out as clearly as I can. We have company A: They employ the employee. We have company B: They are providing the employee with the car. I'm assuming that with the case law.... As I said, if this is not true, please, by all means, interject. What happened in this case is that company B was providing the car and CRA said, “No, no, that's an employee benefit. You guys, company A and company B, are not dealing at arm's length and, therefore, there is an employee benefit that is going to be deemed to the employee”, or something like that.

Now you're putting this new patch into the Income Tax Act that says that regardless of whether company A and company B are dealing at arm's length, we still want to be able to tax the employee, but then you're coming back to me and saying that we will base that on a review of the facts. Once again, are they related?

What's the difference between the test of the facts, between seeing whether company A and company B are related or dealing at arm's length...? With respect to the patch, how do we know as a question of fact that A and B are related? I don't understand how you don't get into a Monty Python skit here.

[Lindsay Gwyer]

Well, in your example for the issue, if that car was provided by company B and is not related to company A, then it wouldn't have been picked up under the current rule. Now, the rule would look at whether that car is being provided by company B to the employee of company A as a result of or a consequence of the employee's employment by company A.

Instead of looking at the relationship between company A and company B, you'd be looking at the sorts of reasons why that car was provided by company B to the employee of company A to determine whether that was done as a consequence of that person's employment.

[The Chair, Liberal, Peter Fonseca]

MP Lawrence, when you are not speaking, if Ms. Gwyer is answering one of your questions, I would ask that you always mute. It does affect the interpreters here in the room. I ask that you stay on mute when you are not speaking.

Thank you.

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

Thank you, Mr. Chair.

I'm sorry. This is a discussion, so I was hoping to jump in. I thought we were actually having a good exchange.

Thank you again, Ms. Gwyer, for that.

The finding of facts will come down to asking whether it is a connection between the employee and company B or a relationship between company A and company B.

[Lindsay Gwyer]

I think it would be a question of looking at the entire picture to see whether company B is providing that car as a consequence of the individual's employment. In a situation where that's happening, there's probably some connection between company A and company B. Otherwise it wouldn't make sense that company B would be providing that car. You would really be looking at that entire situation to see whether all the facts support a finding that the car was being provided as a consequence of the individual's employment.

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

That's exactly what I am getting at. I cannot envision a situation in which there was no connection between company A and company B and yet company B was providing the car to the employee for use in their employment in company A. I would suspect that the test would be to go back to company A and see whether it is at arm’s length from company B.

[Lindsay Gwyer]

The previous test was whether company A and company B were related. You can be at non-arm’s length and not be related. One option would have been to make the amendment look at whether company A and company B were dealing not at arm’s length. Instead, the way the amendment was done was to look at whether the car was being provided as a consequence of the individual's employment. I think whether there's some connection between company A and company B would be taken into account in that assessment.

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

The good folks at the Canada Revenue Agency were given very broad discretion to sort of paint just based on the facts, as it were. Don't you think it would have been more precise to simply ask whether company A and company B were related, or whether there was a relationship between the two, as opposed to amending it to look only at a question of facts and let CRA decide “Oh, well, maybe, maybe not”, or at least list a series of factors that would predispose CRA to including this in an employee's taxable income?

[Lindsay Gwyer]

I think the way the amendment has been drafted is consistent with the way other rules that deal with employee benefits are drafted, which generally look at whether the benefits are being provided in the course of employment. They're not necessarily specific as to who's providing the benefit. They look more generally at whether the benefit is provided in the course of employment.

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

Maybe that's a discussion in general we could have as well. Actually, I'm curious about that. Maybe I'll just follow that for a quick minute here. When an employee receives a benefit in what you call the course of employment—I'm not sure whether that term is defined by CRA or whether it comes from the case law—regardless of who provides it, it is a taxable benefit to the employee. Am I understanding correctly?

[Lindsay Gwyer]

Yes. There are specific rules that deal with specific kinds of benefits, but in general, if a benefit is something that's provided to someone in the course of their employment, then it is a benefit to them regardless of who is providing the amount for the thing.

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

If, for example, a tradesperson received a tool or a vehicle that was used exclusively for their employment, regardless of who provided it to them, even if that were a parent, could that be interpreted as an employee benefit?

[Lindsay Gwyer]

No. I mean, in that situation the parent wouldn't be providing it. There has to be some sort of link to the employment relationship. It's a benefit that is being provided to the person because they are an employee. If a parent is providing something to their child to use related to their employment, that's not something that would be treated as a taxable benefit.

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

Well, that's a little bit of relief. I appreciate that.

Getting back to the standby charge on automobiles and going back to the example of company A and company B, I really struggle with finding a situation where they are not related or at arm's length and company B would provide a vehicle to company A. I mean, cars aren't inexpensive, so there had to have been, I would think, a cash transfer or some monetary value being transferred.

What was the motivation of company B in providing that? Are they all part of the same corporate sort of structure? Is that why? What's the motivation of company B?

[Lindsay Gwyer]

I'm not sure. I think there was some sort of arrangement between the companies. The expectation would be that this is going to be a really narrow situation, like I said, because obviously, like you said, you're not going to have companies just providing cars to random people for no reason. There has to be some sort of arrangement there that is motivating that company to provide the car to the employee of the other company. There could be some sort of cash payment or other sort of arrangement in place between the companies that is creating the motivation for that car to be provided.

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

The status of the current law is that if they're not at arm's length, this would be caught, but if they are at arm's length, then it would not be caught. Is that correct?

[Lindsay Gwyer]

If they're related, it would be caught. If they're not related, it would not be caught.

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

It's based on being related, not on being at arm's length. My apologies for that.

What's the difference between “arm's length” and “related”?

[Lindsay Gwyer]

If companies are related, then they are deemed to deal not at arm's length. “Arm's length” is broader than “related”, because if you're not related, you can also be considered not to deal at arm's length as a result of other factors. If you're related, you're not at arm's length, but you could also be not at arm's length even if you're not related.

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

Mr. Clerk—and I do have a copy of that, Mr. Chair, before you scold me again—would you be kind enough to read the section again, specifically with respect to the arm's-length amendment there?

[Philippe Méla]

To spare our interpreters and change to French, this may be easier for them for a bit:

(2) Subparagraph 6(1)(e)(ii) of the Act is replaced by the following:

(ii) the total of all amounts, each of which is an amount (other than an expense related to the operation of the automobile) paid in the year by the taxpayer, or the particular person who does not deal at arm's length with the taxpayer, to the employer for the use of the automobile;

(3) Subparagraph 6(1)(k)(ii) of the Act is replaced by the following:

(ii) amounts related to the operation (otherwise than in connection with or in the course of the taxpayer’s office or employment) of the automobile for the period or periods in the year during which the automobile was made available to the taxpayer, or a person who does not deal at arm's length with the taxpayer, are paid or payable by the employer within the meaning of paragraph (e) that made the automobile available (in this paragraph referred to as the “payor”), and

(4) The portion of subsection 6(2) of the Act before the formula is replaced by the following:

Reasonable standby charge

(2) For the purposes of paragraph (1)(e), a reasonable standby charge for an automobile for the total number of days (in this subsection referred to as the “total available days”) in a taxation year during which the automobile is made available to a taxpayer, or to a person who does not deal at arm's length with the taxpayer, by a person (referred to in this section as the “employer”) shall be deemed to be the amount determined by the formula

There, that's all.