Mr. Speaker, I welcome the opportunity to present Bill C-22, the Income Tax Amendments Act, 2000 for second reading today.
While the bill amends several sections of the Income Tax Act, more important, it implements key elements of the government's five year tax reduction plan which was introduced last year.
Briefly, this plan will provide $100 billion in tax relief by 2004-05, thereby reducing the federal personal income tax paid by Canadians by 21% on average.
Families with children will receive an even larger tax cut—about 27% on average.
The bill also includes many additional measures, including technical amendments that were introduced in Bill C-43 last fall but which died on the order paper when the election was called.
Many of these amendments are relieving in nature. Some correct technical deficiencies in the act while others lighten the administration of the tax system. Whatever the changes, one thing is certain, each is based on the principles of fairness and equity in the federal tax system to which our government has been committed since coming to office in 1993.
Once we eliminated the deficit in 1997-98, we began to cut taxes for all Canadians. The bill before us today is the biggest step forward in our tax cutting efforts to date and is based on four key principles.
First, our approach to tax reduction must be fair starting with those who need relief most, middle and low income earners, and especially families with children.
Second, we will focus initially on personal income taxes since that is where we are most out of line.
Third, we will ensure that Canada has an internationally competitive business tax system.
Fourth, we will not finance tax relief with borrowed money because that means an inevitable return to higher taxes in the future.
For the government, fiscal responsibility is fundamental and tax cuts are essential. At the same time, it is essential that an effective, fair and technically valid tax system be maintained, which is the thrust of the legislation before us today.
I will now discuss the main measures in the bill beginning with some of the personal income tax changes.
In 1999 the government promised Canadians that it would set out a multi-year plan for further tax reductions. The 2000 budget delivered on that commitment by making the most important structural changes to the Canadian tax system in more than a decade with a special emphasis on the needs of families with children. The bill provides for tax rate reductions at all income levels as of January 1, 2001.
The low and middle income tax rates fall to 16% and 22% respectively. The top 29% rate is reduced to 26% on incomes between about $61,000 and $100,000, which means that the 29% rate applies only to income over $100,000.
While tax burdens will fall for all Canadians, the decline will be felt substantially by middle income earners. In addition, the bill would eliminate the 5% deficit reduction surtax as of January 1, 2001.
One component of the five year tax reduction plan must be in place by July 1 of this year because it benefits Canadian children. I am referring to the increased support for families with children through the Canada child tax benefit.
As hon. members know, the Canada child tax benefit is a key element of federal assistance to families. It is an income based benefit with two components: the Canada child tax benefit base benefit for low and middle income families and the national child benefit supplement for low income families.
The maximum Canada child tax benefit for the first child will rise to $2,372 in July 2001, well on the way to the five year goal of $2,500 by the year 2004.
For the second child, the maximum Canada child tax benefit will increase to $2,308 in July 2004. Together with increases announced in previous budgets, annual Canada child tax benefits will exceed $9 billion a year in the year 2004, of which low income families will receive about $6 billion and middle income families about $3 billion.
The bill contains other personal income tax changes that are specifically designed to help those who need it most.
For example, the amount on which the disability tax credit, the DTC, is based is increasing from $4,293 to $6,000 effective 2001. This tax relief will increase over time, as the DTC is fully indexed to inflation.
The list of relatives to whom the disability tax credit can be transferred has expanded to make it consistent with the medical expense tax credit rules. In addition, speech language pathologists will now be able to certify eligibility for the disability tax credit with respect to speech impairments.
Another measure increases the maximum annual amount that can be deducted for child care expenses to $10,000 from $7,000 for each eligible child for whom the disability tax credit can be claimed.
The amounts on which the caregiver tax credit and the infirm dependant credit are calculated are both going up to $3,500. With full indexation, this tax relief will continue to increase over time.
At present, individuals with certain mobility impairments may qualify under the medical expense tax credit for renovation costs that enable them to gain access to, or be mobile or functional within, their home. Bill C-22 includes reasonable incremental costs relating to the construction of a principal residence to help these individuals.
To provide additional assistance to students, the annual exemption for scholarships, fellowships and bursaries received in conjunction with programs for which the education tax credit may be claimed increases to $3,000, up from $500.
I also want to mention that self-employed individuals will now be able to deduct one-half of their Canada pension plan or Quebec pension plan contributions on self-employment income. The remaining one-half will continue to be eligible for a personal tax credit at the lowest tax rate. Without the bill they would be entitled only to the credit on both the employer and employee contributions, which would put them at a disadvantage vis-à-vis owner-operators who can deduct the employer share.
The technical amendments in this bill are too numerous to mention in the short time allotted to me in this debate. However, I would like to highlight a few of them before moving on to the business tax changes implemented in this bill.
On the personal tax side, some of the changes ensure that the rules under which clergy can claim a deduction for their residence are clarified. They also ensure that Revenue Canada can release information about a former registered charity as long as it relates to when the organization was a registered charity.
They ensure that municipalities do not have to file T4s for volunteers to whom they paid not more than $1,000. They also ensure that the exemption applicable to reasonable travel allowances to part time teachers be extended to teachers who do not have other jobs.
The five year tax reduction plan also goes a long way toward making Canada's business income tax system more internationally competitive. This is important because business tax rates have a significant impact on the level of business investment, employment, productivity, wages and incomes.
With this in mind, Bill C-22 includes significant corporate tax rate reductions. Corporate tax rates will drop to 21% from 28% for businesses in the highest taxed sectors, such as high technology services, to make them more internationally competitive. These reductions begin with a one-point cut effective January 1, 2001.
By 2005 the combined federal provincial tax rate, including both income and capital taxes, will drop from the current average of 47% to 35%. This would put our businesses on a more competitive level with other G-7 countries.
Two measures in the tax reduction plan involve capital gains. The first provides a tax deferred capital gains rollover for investments in shares of certain small and medium sized active business corporations. It includes increasing the $500,000 investment limit, originally announced in the 2000 budget, to $2 million as announced in the economic statement and increasing the size of small businesses eligible for the rollover from $10 million to include corporations with no more than $50 million in assets immediately after the investment.
The second measure reduces the capital gains inclusion rate to one-half. This would reduce the tough federal provincial tax rate on capital gains in Canada from an average of about 31% to about 23%, lower than the typical U.S. combined federal state top rate of about 25%. Both measures would improve access to capital for small businesses with high growth potential. High technology industries would particularly benefit.
Consistent with this change to the capital gains inclusion rate, the deduction for employee stock options would increase from one-third to one-half. As a result, employees in Canada would be taxed more favourably on their stock option benefits than employees in the U.S. The bill defers the taxation for certain stock option benefits and allows an additional deduction for certain stock option shares donated to charity.
Another measure that I want to discuss relates to branches of foreign banks operating in Canada.
These new rules stem from the 1999 amendments to the Bank Act, which allow foreign banks to establish specialized, commercially focused branches here. Previously, foreign banks could operate in Canada only through Canadian incorporated subsidiaries.
The tax system for the new foreign bank branches would now be comparable to that for Canadian banks. These new rules would give foreign banks a time limit window to move their operations from a Canadian subsidiary into a Canadian branch without undue tax consequences.
As with the personal tax measures, the business tax changes are too numerous to discuss individually during today's debate. I would like to summarize a few of them.
The bill, for example, provides a tax deferred rollover for shares received on certain foreign spinoffs. It strengthens thin capitalization rules. It phases out over a three year period the special income tax regime for non-resident owned investment corporations. It treats provincial deductions for scientific research that exceed the amount of the SR & ED expenditures as government assistance. It ensures appropriate treatment of foreign exploration and development expenses in computing foreign tax credits. It introduces a temporary 15% investment tax credit for grassroots mineral exploration and it amends the corporate divisive reorganization rules.
Other technical amendments ensure that Canadian corporations that hold shares of non-resident corporations through partnerships are not subject to double taxation. The additional capital tax on life insurance corporations is extended until the end of 2000. Shares of one foreign corporation can be exchanged on a tax deferred rollover basis for shares of another foreign corporation. The tax treatment of resource expenditures and the rules governing gifts of ecologically sensitive land are clarified. In a chain of corporations, a corporation is controlled by its immediate parent, even where the parent is itself controlled by a third corporation. Replacement property rules do not apply to shares of the capital stock of corporations, and a member of a limited liability partnership under provincial law is not automatically a limited partner under the Income Tax Act.
Those are some of the more technical changes incorporated into the bill. There are three remaining measures that I wish to discuss briefly before closing. The first involves changes to the rules governing the taxation of trusts and their beneficiaries.
Bill C-22 addresses the tax treatment of property distributed from a Canadian trust to a non-resident beneficiary. It also introduces measures dealing with the tax treatment of bare, protective and similar trusts, as well as mutual fund trusts, health and welfare trusts and trusts governed by RRSPs and RRIFs.
For example, the existing rules whereby an individual can roll over property to a trust for the exclusive benefit of a spouse or common law partner would be extended to alter ego trusts and joint spousal or common law partner trusts.
Several new anti-avoidance measures designed to ensure that transfers to trusts cannot be used to inappropriately reduce tax are also included in the bill. For example, there would be limits on the use of rollovers where trusts were used to avoid tax when a beneficiary emigrates. Also, income allocations to beneficiaries could not be used by trusts to circumvent the rules ensuring that spousal or common law partner trusts, alter ego trusts and joint spousal or common law partner trusts would not allocate income to others before the beneficiary, spouse or common law partner dies.
In addition, rollovers to a trust would be denied if the transfer was part of a series of transactions designed to defer capital gains through the use of a trust as an intermediary between a vendor and purchaser of property.
A final anti-avoidance measure would prevent certain pre-1972 trusts from using graduated income tax rates if they received property from a trust not subject to these rates, and the beneficial ownership of the property had not changed.
The second measure I wish to highlight involves the new taxpayer migration rules, which are also part of the government's ongoing commitment to greater fairness in the tax system.
Since 1972 Canada has had special tax rules that apply when people give up Canadian residence. The basic entitlement of those rules is a deemed disposition that treats the immigrant as having disposed of property immediately before leaving.
For many years, questions have persisted as to the exact scope of this deemed disposition on departure from Canada and its interaction with Canada's international tax treaties. Under Bill C-22, Canada retains the right to tax emigrants on gains that accrue during their stay in Canada.
The bill would also clarify the effect of the new rules on various kinds of rights to future income and would allow returning former residents to reverse the tax effects of their departure, regardless of how long they were a non-resident.
In addition, former residents would be able to reduce the Canadian tax payable on their pre-departure and distribution gains by certain foreign taxes paid on the same gains. This is part of Canada's commitment to avoiding international double taxation, a commitment that is reflected in our network of tax treaties as well.
Since 1999, in anticipation of these rules coming into effect, Canada has been negotiating its tax treaties to reinforce protection against double taxation when immigrants' pre-departure gains are taxed.
A final measure, deals with amendments to the Income Tax Act that relate to the June 3rd, 1999 agreement between Canada and the United States concerning foreign periodicals.
Since the 1960s the Income Tax Act has precluded the deduction of advertising expenses unless a newspaper or a periodical is at least 75% Canadian owned and has at least 60% original Canadian content.
As a result of the Canada-U.S. agreement, this rule no longer applies to advertisements and periodicals. Instead, advertising expenses and periodicals with at least 80% original editorial content would be fully deductible and advertising expenses and other periodicals would be 50% deductible regardless of ownership.
In addition, after July 1996, the meaning of Canadian citizen will include Canadian pension funds and other entities that own Canadian newspapers to ensure that they qualify as citizens under the ownership requirements of the Income Tax Act. For periodicals, this amendment applies from July 1996 to May 2000, after which time nationality of ownership is irrelevant.
In conclusion, while the bill is lengthy, very detailed and technical in nature, its components are all very important and deserve to be passed without delay. Most are relieving or clarifying measures and a few are housekeeping measures.
As I indicated earlier, each measure is designed with the principle of tax fairness in mind and there are many taxpayers out there who will benefit from these changes. The measure with the highest profile of course implements the key components of our government's five year tax reduction plan. In summary, that plan reduces the tax burden at the middle income level, increases support for families with children and makes Canada's business income tax system more internationally competitive. As I stated earlier, the five year tax reduction plan will provide $100 billion in cumulative tax relief by 2004-05.
I urge all hon. members of the House to give the bill quick and speedy passage and, most importantly, to keep in mind all the Canadian children who will benefit from the increases to the Canada Child Tax Benefit on July 1.