Mr. Speaker, it gives me great pleasure to take the opportunity to present Bill C-70 to the House for second reading. It is an item arising out of the budget presented in February 1994.
I will explain the process we go through with a major piece of legislation such as this one. Immediately after the minister presents the budget we have a debate on it and it is voted upon. Subsequently we introduce the budget measures act which incorporates many of the activities of different departments. It was begun last year and took up the time of the House of Commons in May and early June and of the Senate in June. It was finished before July 1.
Subsequently in the public perception we began to deal with the budget for 1995 but we had not finished the work arising from the 1994 budget. Today we are continuing the work from last year's budget.
Last fall we found out about the changes to the Income Tax Act, which is the second part of the work done in a budget. At first we have changes to departmental activities, including for example the Unemployment Insurance Act. Then we have changes to the Income Tax Act. Previously the House considered amendments to the Income Tax Act arising out of the business of the budget of last year. They were reviewed in the House of Commons last November and were reviewed in committee in December. A few witnesses appeared. We considered some of the changes offered by the opposition and decided to go ahead with the bill as it stood. It was then presented to the House, went through the Senate, and is now law.
Because of the enormous number of changes made, we split the amendments to the Income Tax Act into two different sections. This is the second section. Bill C-70 represents the second set of amendments to the budget arising out of the February 1994 budget statement.
They are a number of technical amendments which affect the income tax situation of those in the business world and corporations. In summary, the amendments implement certain measures announced in the budget of February 22, 1994 as well as other measures announced by the government in 1994.
The measures are described, first, as debt forgiveness. It requires a debtor whose indebtedness is forgiven to apply the unpaid amount to reduce any tax losses and the tax cost of properties owned by the debtor. Any unapplied balance is brought into the income by individual debtors whose incomes exceed $40,000 and by corporate debtors that are not bankrupt or insolvent.
Second, we are changing some of the rules by which we treat foreign affiliates. We expand the categories of income of foreign affiliates which must be reported as income of their Canadian shareholders.
It responds to a widely held view by Canadians. It was a perspective that we certainly heard about in the late eighties and early nineties when we were in opposition. Canadians saw the corporate world was able to transfer moneys to foreign affiliates and to avoid taxation in certain regimes which they considered to be too high. We took a very progressive step in our first budget, the budget of February 1994, to expand the rules and ways in which we were able to deal with foreign affiliates.
Third, we now require financial institutions to report profits and losses on securities held in the ordinary course of business, on income rather than capital on a market to market basis.
I was very much involved with the initial discussions that were held with industry when we announced the rules. I am very happy to say the relationship between the financial institutions and the government have greatly improved through numerous discussions.
The industry felt at first that the tax measures were too aggressive and did not take into account some historical developments, particularly in the insurance industry. We argued very strenuously that the insurance industry should be understood. We held discussions not only in Ottawa but across the country. We listened to representatives of their associations and met with senior officials of individual companies. They pointed out that if we did not proceed with some care our evaluation of their securities and our treatment of their securities no longer being on the capital side but on the income side would greatly hurt their business.
The insurance industry is very important to the country. There are more than 140 active insurance companies. We want to make sure we stabilize the companies and do not do anything negative to affect either their capital base or their income base.
After several weeks of discussions amendments were suggested back and forth. I think all parties will agree that the rules as finally presented to the House a few weeks ago and now being expanded upon at second reading are fair to everyone.
We must remember the purpose of the Government of Canada is to ensure that every corporate sector is taxed properly and pays its fair share. That is the demand of all Canadians. The insurance industry has responded admirably. It is more than willing to pay its fair share and now feels the rules and regulations we are developing are more appropriate to its business activities.
I take this opportunity to publicly thank members of the insurance industry who have taken many hours to explain to me the nature of their business. Last year was my first year in the finance field on behalf of the Government of Canada. When that is the case we need a lot of kindness from people in the private sector to explain how they operate and the way new regulations or new tax regimes negatively affect their businesses. There was no element of hostility. I very much respect their willingness to spend time with me to ensure I understood their case.
Fourth, in terms of funeral arrangements we are providing an exemption for interest earned on prepaid amounts under eligible arrangements entered into by individuals to cover their funeral and cemetery expenses. This is a combination of federal and provincial laws, rules and regulations that govern people who make such arrangements ahead of time.
Through trust arrangements at the provincial level those funds are protected but because of the high cost of property, particularly in major metropolitan areas, we found that the limits originally being considered were not sufficient. The change is to accommodate the reality of how people are purchasing plots in cemeteries. We do not feel we are suffering in any way, shape or form an unnecessary financial burden. We are
dealing with the reality of the high cost of property. We did not want to put Canadian taxpayers, the industry or the non-profit sector in the field at risk through unfair tax rules. These amendments address the issue.
Fifth, we are permitting publicly traded real estate investment trusts to qualify as mutual fund trusts for tax purposes.
Sixth, we are dealing with mutual fund reorganizations. It will allow a mutual fund corporation to convert into a mutual fund trust on a tax free basis and will allow tax free mergers of mutual fund trusts.
Members of the House will know that the mutual fund business is one of the fastest expanding businesses in North America. Every effort has been made at the regulatory level to keep in touch with the industry and keep up to date with its changes.
We have sought through the Income Tax Act several other initiatives in the securities industry to ensure the tax regime is fair to people in the mutual fund area and is current with established practices. As time goes on, if the industry continues to change as fast as it has, we will have to make future changes.
Seventh, we are dealing with objections and appeals. This requires large corporations to specify in notices of objection to income tax assessments the issues under dispute and the amount of relief sought.
The House may be familiar with the past practice of legal departments and taxation departments of corporations sending notices of appeal to Revenue Canada on a regular basis, indicating that they have an objection to the taxes being assigned by Revenue Canada. By making a general objection as they have in the past they have been able to wait for specific tax cases to come forward. Once the tax cases are registered they are able to re-examine their books to see if they apply. In theory that has caused the Government of Canada to have a great deal of liability each year in the corporate tax sector.
We are seeking to limit the liability in the future within a specified time that we think will give the corporation a lot of time to review its tax assessment. The notice of appeal should specify exactly what is being appealed. It is no longer suitable to have a general appeal against the tax assessment. The corporation must specify exactly what it is objecting to and proceeding with, if necessary, through legal action. That will give Revenue Canada and the Government of Canada an opportunity to proceed without having to worry about innumerable court cases in the future.
The eighth section deals with securities lending. This will permit investment dealers to deduct two-thirds of dividend compensation payments made in securities lending arrangements.
The bill has a fairly broad range of measures. It complements the original budget speech, the budget bill introduced last year and the changes to the Income Tax Act dealt with in the fall of 1994 that were finished in the spring of 1995. The bill introduces specific measures that are very compact including funeral arrangements. It establishes the principles of fairness long talked about by governments but rarely acted upon.
The objections and appeals, the opportunities to challenge tax rulings and deal with the tax payable by foreign affiliates, are fair measures. The Minister of Finance has done an excellent job. He stated quite often that the government would not let up on bringing more fairness to the tax system. Those measures will be benchmarks of the new fairness in the Income Tax Act dealing both with corporations and individuals.
When we have made major changes affecting an industry such as the insurance industry we have proceeded not only with a determination to make things fairer for the whole sector but we have been responsive to criticisms and to critiques. We have been willing to talk with these people and to talk to the executives of the different companies and to the associations and to respond when a point is well made.
To have good tax law we have to be determined to be fair but we also cannot be stubborn and in the face of obvious mistakes hold to a position which puts companies at a disadvantage. I have learned a lot about the insurance industry as a result of these measures and I am hopeful we will continue to have these discussions in other spheres.
The government welcomes the opportunity to open up this debate, to have second reading on Bill C-70, amendments to the Income Tax Act. We welcome comments from the opposition and its critique on what we are trying to do and its suggestions on how we can make the Income Tax Act fairer in the future.
We also welcome the opportunity to hear from witnesses in committee both in the House of Commons and later in the Senate so that the views of professionals in the field can be heard, taken seriously and government can continue to refine the Income Tax Act to be fairer and more just to more Canadians and as we proceed over the years to make further amendments to ensure every Canadian is paying his or her or corporate fair share and at the same time finds the system just in the way they are treated and in the way other people are being treated.