Finance Committee on May 25th, 2023

[The Chair, Liberal, Peter Fonseca]

Indeed.

Thank you, Mr. Méla, for reading that again into the record for MP Lawrence in both official languages.

Go ahead, MP Lawrence.

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

I'm sorry. I might have misunderstood something, Ms. Gwyer, hearing that again.

In order for the amended provision to apply, company A and company B are not at arm's length.

[Lindsay Gwyer]

They could be at arm's length or they could not be at arm's length. The relationship between the two companies isn't directly relevant to the test. The car is being provided as a consequence of the employee's employment.

Practically, the relationship would likely be relevant factually to that determination, but technically, that relationship is not directly relevant.

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

There are a couple of facts we've been able to pull out. Company A and company B could be at arm's length. A couple of the facts we've been able to pull out are that perhaps there is a cash payment between company A and company B when the employee is using the vehicle that they have strictly within the four squares of their employment.

Have I understood that correctly?

[Lindsay Gwyer]

I think that's an example of a situation where the amendment might make a difference to whether the benefit is included in employment.

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

Why would we not just have...? I struggle to find a situation where company A and company B are dealing at arm's length with one another, and company B, out of the goodness of its heart, is providing a car to the employee.

[Lindsay Gwyer]

Yes, that's the purpose of the amendment. The fact is that if that's happening, it would suggest that a car is being provided as a consequence of employment.

The amendment is being made so that there isn't the ability for taxpayers to put in place some sort of arrangement that has another entity provide the car and then try to take the position that.... It removes the need for the CRA to assess the relationship between those companies and allows it to look at the situation as a whole to see if the car is being provided as a consequence of the employee's employment.

Like I said earlier, that's consistent with other rules that look at employee benefits.

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

Thank you for that.

I understand that it might very well make CRA's life easier, but I'm not in the business of making CRA's life easier. I'm in the business of making life easier for Canadians. Don't you think it will be more difficult for tax professionals and small business owners if in fact a vehicle is received, in this situation, that's being used in their employment? Would they not, to mix metaphors, be looking in their rear-view window to see if CRA is going to come after them? What ability do they have to say that company B, or even individual B, is just providing this vehicle that happens to be used in employment?

[Lindsay Gwyer]

The main rule that provides that employee benefits have to be included in income looks at whether benefits are received as a result of employment. The standby charge rules are really like a subset of those rules that calculate how you determine the employment and how you determine the amount of the benefit.

I don't think this change is creating any new obligations on taxpayers. It's really just eliminating a loophole that existed because of the fact that the car had to be provided by the employer or someone related to the employer. It's simply eliminating the ability for employers to enter into some sort of arrangement where they have a non-related person provide the vehicle and then avoid the employee having to pay tax on the standby charge.

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

As a matter of law, not a matter of fact, could a spouse who gave a vehicle to another spouse for utilization, to use it strictly for their business, be caught by this provision?

[Lindsay Gwyer]

I don't think that would be a reasonable interpretation of the provision, no.

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

Again, it's not a matter of fact; we're looking at the letter of the law. You can see that this casts a very wide net. Anyone who got a car who utilized it for the purpose of vehicles—perhaps there was even money going between those two individuals for unrelated causes, because money is fungible—could be caught by this provision.

We're giving CRA a broad amount of discretion. I hear you that if CRA does its job correctly...but it doesn't always. That's the truth of the matter. You could catch individuals who were not trying to avoid taxes but who just happen to be providing a vehicle being used almost exclusively for work.

[Lindsay Gwyer]

Again, I think this language is consistent with other employment benefit provisions. I don't think this is an issue that arises with respect to the employment benefit rules in general. I think it's normal under the Income Tax Act to look at the circumstances in which a benefit is provided, to assess whether that relates to employment and to tax the benefit on that basis.

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

One of the items that came up for discussion from the very limited witness testimony.... We had only 10 hours on a half-trillion dollar budget there, or $490 billion, to be more precise. That's like $50 billion an hour. I guess $50 billion an hour is all that's required to pass things through legislation.

One thing that came up was that the Canadian Bankers Association.... Of course, CRA has put in new legislation and they've made it retroactive to 30 past years. Will you be making this section retroactive?

[Lindsay Gwyer]

No. The amendment applies to tax years that begin after 2022. The amendment was released for consultation last summer with a package of technical amendments.

Typically, in most cases with respect to income tax when tightening changes are made, they're made on a prospective basis based on the date when the changes are announced. This rule is consistent with that. It wouldn't apply to any tax years that began before 2023, so that's after it was announced.

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

I'm glad for that. Thank you. That's good to hear.

My question, though, is about the genesis between these two provisions: the one reassessing the banks with respect to GST and HST on credit card charges, if I have that correct, and this one, which is also from a case situation where the CRA lost again, this time with respect to automobile standby charges. One is made retroactive and one is not.

I agree with you that for the vast majority of the time—in fact, I can't think of another time, but maybe you could enlighten me—it's always prospective, not retroactive. In the banks case, what was different from the automobile standby charge?

[Lindsay Gwyer]

I can't speak to the amendment you're talking about, but like I said, in general for income tax amendments we normally make them prospective if they're tightening. I can't speak to that other amendment.

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

Maybe you can speak to this, then. As I said, I do appreciate your testimony. I think it has been excellent.

With respect to talking about why it is prospective, I have a bit of a background with respect to taxation, so I think I have a handle on this. I suspect that many of the viewers don't have that same background.

What guiding principles would have you make these amendments prospective as opposed to going retroactive when the CRA had made a finding otherwise? It sounds like this benefit—

[Julie Dzerowicz, Liberal, Davenport, ON]

Mr. Chair, on a point of order, I just want to see what the relevance would be to the standby charge for automobiles.

[The Chair, Liberal, Peter Fonseca]

It's just to relevance, MP Lawrence.

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

Thank you. I appreciate that.

If I wasn't clear, Mr. Chair, I will seek to be this time.

We're talking about the automobile standby charge and whether it is retroactive or prospective in nature. Ms. Gwyer has told us that it's prospective in nature, so one of the alternatives perhaps would be an amendment to this, to make it consistent with the banking. I certainly would not, but maybe another party would like to move to make this retroactive. To make this consistent with what they're doing with respect to the HST/GST charges to banks would be to make this retroactive.

I'm wondering why in one case the government is going back 30 or 40 years to collect charges, and then in another case it is not. I would say that in either case the idea of making tax policy retroactive is a dangerous precedent to set, as it gives it to the CRA, and in fact the government of the day, to remake history, to change the laws as they were written 20 or 30 years ago and just say, “You know what? Regardless of what the court says, regardless of what the judiciary says and regardless of what the law says”—it is really almost a violation of the rule of law—“we believe it should be x, so we're changing it, and we're going back in history and changing the legislation.”

I was hoping that Ms. Gwyer, given her incredible depth of knowledge with respect to taxation, could explain to us why the automobile charge and, in general, tax changes that are tightening are prospective and not retroactive.

[Lindsay Gwyer]

As I said, in general for income tax changes they are prospective when they are tightening. I think that in general that's considered to be fair, because taxpayers can structure their affairs in accordance with the law. If the law is changed, then in general it's usually appropriate to do that on a prospective basis, but sometimes there may be special circumstances that warrant a tightening change being made on a retroactive basis.

In this case, for this particular amendment, we felt that it would be appropriate to be applied on a prospective basis.

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

What is interesting here is that there might be extenuating circumstances.

Ms. Gwyer, could you point to a situation where a tightening change has been made retroactively, other than the one I've discussed with respect to the charging of GST/HST?

[Lindsay Gwyer]

In the income tax context, it's not typical to make them on a retroactive basis. My expertise is in income tax, and I can't, off the top of my head, think of a retroactive income tax amendment.

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

Thank you for that. We can't recall any tightening changes that have been retroactive.

I want to build upon what you said, and I think you said it quite well, which was that in general, in the principle of tax fairness in tax law, if we make changes that are tightening, that put the taxpayer in a worse situation, we do it prospectively to give them fair notice. This is because when you make a legal change retroactively, what you are in effect doing is changing the rules of the game after you have played it.

You can imagine.... For those of you who are watching the Stanley Cup playoffs right now, it would be akin to watching a Stanley Cup playoff game and then after the game.... In this case, the rules are set out by the legislators and interpreted by the courts. The courts are the referees in this situation, so the referees interpret the law and at the end of the game, it's 5-0 to the Toronto Maple Leafs. As they are Canada's team, that might get me some emails. They have the 5-0 victory, and then at the end of the game, the commissioner comes in and says, “Actually, no, offside is no longer a rule and we're going retroactively to the beginning of the game. Because of that, the score is now actually 5-0 for the Carolina Hurricanes.”

That's why we don't, in general—