Mr. Speaker, I will be splitting my time with my colleague from Algoma.
My colleague from the Reform Party who made some negative remarks about the government's $6 billion infrastructure program forgets the almost 100,000 jobs that were created. He forgets the large majority of municipal officials throughout Canada would love to have that program continue. He forgets business people who are aware of it would also like to have it continue.
I find it rather strange that all of these people want it and the Reform Party does not. It says something about being out of touch. If one wants to talk about being out of touch, I assure the House it is not this government. Reform has not been popular. It was not popular at election time and has been even less popular since then. It has been dismembering itself member by member.
I am pleased to have the opportunity to address the House on Bill C-36, the income tax amendment act. I assure the House it is not tinkering. As the House is aware, these amendments implement certain measures announced in the budgets of February 27, 1995 and March 6, 1996 as well as Income Tax Act and Excise Tax Act amendments released on August 9, 1995 concerning the government's business under a number of programs.
The bill is very technical in nature and since there are those better qualified to address the technical aspects I take this opportunity to summarize points addressed by the bill. It talks about retirement savings. It reduces the limits on contributions to registered retirement savings plans, registered pension plans and deferred profit sharing plans and it reduces the allowance for RRSP over contributions.
[Translation]
On fiscal periods, it eliminates the opportunity to defer the taxation of business income by selecting an off-calendar fiscal period.
On family trusts, the bill eliminates the election to defer the 21-year deemed realization rule and the rules allowing the allocation of income to preferred beneficiaries.
The film tax credit replaces the capital cost allowance tax shelter incentive for certified Canadian productions with a new tax credit for Canadian film production companies.
On charitable donations, the bill eliminates the 20 per cent of income deduction limit for gifts of ecologically sensitive land.
On scientific research and experimental development, the bill eliminates inflation of SR&ED tax credits through non-arm's length contracts and introduces other measures improving the administration of the SR&ED tax incentives.
On corporate tax rates, the bill increases the refundable tax on investment income of Canadian controlled private corporations. It increases the rate of part IV tax on dividends received by private corporations and increases the capital taxes on large corporations and financial institutions.
On joint and several liability, the bill provides joint and several liability for unremitted source deductions and similar amounts where a person has influential control and causes taxable payments to be made without remittance.
On the old age security benefit, the bill modifies the structure of the recovery of OAS benefits to provide for tax to be withheld from benefits as they are paid.
On business numbers, the bill allows Revenue Canada to exchange business name and address information with other federal government departments and the provinces when they adopt the business number. I note here that the Bloc Quebecois' critic has commended the government for this initiative.
Interest rates provide for different rates of interest on amounts payable by the crown to taxpayers and amounts payable by taxpayers to the crown. How could one call that tinkering? If one had read that bill one would know it is not tinkering. It is dealing with affairs of the state in a substantial, meaningful and profound way.
More specifically, I would like to discuss the changes to taxation of family trusts.
Family trusts allow assets to be held for beneficiaries. Trusts are used for various purposes, particularly for business succession planning and for meeting the needs of beneficiaries in special cases such as old age and disabilities.
The 1995 budget proposed two changes to the taxation of family trusts: one, the existing election to defer the application of the 21-year rule eliminated effective January 1, 1999; two, to restrict income splitting, the preferred beneficiary election mechanism be repealed for taxation years of trusts that commence after 1995, except for elections with respect to persons with mental or physical disabilities.
On the 21-year deemed disposition rule, the existing provision relating to the taxation of trust generally require that assets are to be treated for tax purposes as if they were disposed of every 21 years. The measure accompanied the introduction of capital gains taxation in 1972 to prevent trusts from being used to void the taxation of capital gains on death.
The previous government passed a provision allowing a special election to defer the 21 year rule and the taxation of capital gains on trust assets until the last "exempt beneficiary" dies. An
"exempt beneficiary" essentially means a relative who is removed by no more than one generation from the person who established the trust.
Effective January 1, 1999 the bill proposes to eliminate this special election. Those trusts which have at any time before that date elected to postpone capital gains taxation will be subject to a deemed realization of trust assets at fair market value on that date. This would not apply where all of the trust property has been distributed to beneficiaries before that date. Where properties are distributed from a trust to an exempt beneficiary, capital gains would be realized when the exempt beneficiary disposes of the property or when the exempt beneficiary dies.
On preferred beneficiary election, the bill provides that, before it is distributed among the beneficiaries, the income from a trust fund is calculated in the same way as for other taxpayers. The interest, dividends and capital gains realizable are all included in the calculation of the income from the trust. The taxable income of a testamentary trust, and of some trusts created before 1972, is subject to the same progressive tax rate structure as individual income. The taxable income of other trusts is taxed at the maximum rate applicable to individual income.
The preferred beneficiary election currently allows trust income to be allocated to preferred beneficiaries defined to include the spouse, children and grandchildren of the settlor of the trust and taxed in their hands rather than at the trust level. This allows trust income to accumulate without the need to pay the income to beneficiaries. There is no requirement that the income allocated to a beneficiary ultimately be paid to that beneficiary.
The selection made by a preferred beneficiary is an exception to the general rule that the income from a trust is taxable as a trustee's income, except where this income is payable to the beneficiaries and thus taxable as their personal income.
The flexibility of the preferred beneficiary election and the potential to split income among large numbers of preferred beneficiaries make it a significant tax planning tool. The preferred beneficiary election allows trust income to be split among family members for income tax purposes without regard to the amount the beneficiary would ultimately receive.
For example, where trust income in the form of dividends is allocated to a beneficiary such as a young child with little or no other income, substantial amounts can be accumulated on a tax free basis because of the dividend tax credit. In addition, the entitlement to the $500,000 lifetime capital gains exemption can be multiplied because of the preferred beneficiary election.
This bill proposes to eliminate the preferred beneficiary election except as it applies to those beneficiaries who are entitled to a tax credit for mental or physical impairment, or who would be so entitled if amounts paid for the remuneration of an attendant or for care in a nursing home were ignored. The measure eliminates a tax planning technique and seeks to ensure a level playing field between property held in trust and property held directly. This measure is to apply to taxation years of trusts that commence after 1995.
The recent auditor general's report cited examples of tax avoidance and raised concerns about the administration of the Income Tax Act involving the movement out of Canada of assets held in family trusts. The department is undertaking certain specific initiatives to combat and deter avoidance. The finance committee is about to begin a study of the administration of the Income Tax Act in this regard.
Changes such as those made in the 1995 budget discussed earlier and including terminating the election to postpone capital gains taxation under the 21-year rule will ensure that family trusts cannot be used to defer capital gains taxation and ending the preferred beneficiary election limits the opportunity for family trusts to be used for income tax splitting purposes. The changes will help to further close the loopholes.
Bill C-36 is an important part of this government's fiscal agenda. As my hon. colleague noted earlier, it is the heart and soul of our program. It is another step toward our goal of getting government right.