Good morning to our committee members and our guests.
Pursuant to the order of reference of Monday, May 14, 2007, we are meeting on Bill , an act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that act.
Appearing this morning is our colleague, the , parliamentary secretary to the Minister of Finance.
I call clause 1.
Diane, do you have some opening comments you would like to put on the record?
Yes, I do, Mr. Chairman. Thank you very much.
To my colleagues, who will no doubt be hanging on my every word, good morning.
I'd just like to make a few comments to set the background on our study of this bill. I hope they will be helpful to my colleagues this morning.
Bill implements certain tax measures and amendments to the Income Tax Act. Specifically, this bill proposes measures regarding the taxation of non-resident trusts and foreign investment entities, otherwise known as NRTs and FIEs. It also contains a number of proposed technical amendments to the Income Tax Act.
The intent of this bill before the committee today is to help strengthen our tax system by ensuring its equity and integrity.
First of all, with regard to the non-resident trusts and foreign investment entities, the measures in this proposed legislation are intended to prevent tax deferral and avoidance through the use of foreign investment funds and trusts. Since we're studying this whole area, by the way, I think this will be of particular interest to all of us on the committee.
This type of activity has moderated substantially in recent years, but Bill will ensure that if someone tries to avoid taxes by using foreign investment funds, any income earned on that investment will be taxed as if it were earned in Canada. Bill C-33 does this by proposing to amend provisions of the Income Tax Act relating to the taxation of income earned from non-resident trusts and foreign investment entities to investment vehicles used sometimes by Canadian taxpayers.
I should note here that the amendments in this bill were developed in consultation with professional tax advisers and taxation authorities as well as with taxpayers themselves. These changes also respond directly to concerns raised by the Auditor General.
These proposals were released in draft legislation in June 2005, nearly two years ago now, giving ample time for input by stakeholders. So these provisions are not going to take anyone by surprise.
The amendments are important and necessary for a very good reason, and that has to do with the equity of our tax system. As you know, Canada generally taxes just the Canadian-sourced income of taxpayers who are not resident in Canada. There exists, therefore, an income tax incentive for Canadian residents to earn investment income using non-resident trusts and foreign investment entities based in a country other than Canada that impose no tax or a low tax. In other words, using these investment vehicles to earn investment income, residents of Canada could inappropriately defer or avoid altogether the payment of Canadian taxes.
Mr. Chairman, we cannot have a competitive tax system if it allows a way for Canadian taxpayers to avoid paying appropriate taxes. Not only would that erode Canada's tax base, but it creates inequities that undermine the very integrity of our tax system. And of course when some people avoid paying taxes, other taxpayers must contribute more to pay for the government programs that are valued by Canadians.
The bottom line, Mr. Chairman, is that these changes in Bill before us will level the playing field. They will also allow Canadian investment vehicles to compete on an equal footing with foreign-based investment opportunities.
Turning briefly to the technical amendments, as I mentioned at the outset, Bill also includes a number of proposed technical amendments to the Income Tax Act that are essentially housekeeping measures. The intent of these amendments is to correct or clarify the application of existing income tax provisions. They will also implement measures that have already been announced by this government and the previous one and deal with other income tax situations that require legislative response.
Technical tax bills are quite common. They come up every few years and are used to implement small changes that typically clarify provisions in the act so that they better reflect the policy intent. Most often these changes are pointed out by tax practitioners, who identify tweaks that are necessary.
These changes are not controversial. Most are relieving in nature and a few are neutral. They include things like expanding the RRSP rollover options available on the death of the parent or spouse of a mentally disabled individual. Providing income tax exemptions for corporations owned by municipalities or public bodies performing a function of government is another example.
Before I open the floor to questions, I would remind the committee members again that the intent of this proposed legislation is to improve the equity and integrity of our tax system.
I will now be pleased to answer any questions from committee members about Bill . I also welcome the assistance of our brightest and best officials from Finance Canada, Mr. Lalonde and Mr. Conway, who have joined us here today.
Thank you, Mr. Chairman.
Again, it is very difficult to come up with a number on this, and I'll give you an example of why.
We're starting off with a period of some eight years ago, with the lead-up to the 1999 budget. The government was seeing a problem becoming prevalent in those days. These measures put an end to that and curtailed that kind of activity. Where would it have gone if these measures had not been introduced? That's anybody's guess. While one can well imagine how innovative tax schemes are developed for clients who can afford very high-priced tax counsel, you were seeing back in those days that tax savings mechanisms were being marketed basically to the masses. Where that would have gone had the government not proposed changes back then and proceeded over the course of the years, that's a very good question. I can't give you a number on that.
Wally, perhaps you could give them some ballpark estimation of how these measures have curtailed the kinds of activities we were seeing back in 1999.
Might I also say that you're one of the most generous chairs I've ever met?
Thanks for the presentation.
A couple of things struck me in the bill. We've obviously had some discussions around tax havens and the offshore aspect, and what we're trying to work against or what we're trying to straighten out. I'm wondering how the tightening of these offshore havens, in terms of the technical amendments in this bill, will actually be viewed by either taxpayers or, quite frankly, the Auditor General.
As I mentioned, the Auditor General has raised concerns about this kind of tax avoidance. The measures in this bill are to some degree responsive to the Auditor General's concerns. The reason there are concerns, of course, is that if some Canadians are able to shelter or hide some of their tax liability, then other taxpayers have to pick up the slack. We all enjoy the same services, but if only some people pay for them and others who should be helping to pay for them are avoiding that, then you put an unfair burden on those who have not arranged their affairs to avoid tax. So it's very important for fairness.
Further to that, when we can achieve tax fairness, where everybody is paying what they ought to be paying--no more and no less, of course, as the taxpayers bill of rights now says--then we can start providing tax relief for everyone. For example, in our tax fairness plan we were able to increase the age credit amount for seniors by $1,000 a year; that's an additional $1,000. We were able to introduce pension income splitting for pensioners. We were able to make a further one-half percentage reduction in the corporate tax rate.
These are things we can do for everybody once we capture all of the tax revenue that should be coming into government and that may be improperly sheltered through these kinds of devices.
That one I can handle a little more quickly because I recall the particular circumstances.
The Tax Court of Canada, in a case called Otineka--the name's much longer than that, but it goes by the short name of Otineka--in 1994, came to the conclusion that a municipality, for the purposes of determining whether a wholly owned subsidiary corporation of a municipality could be tax exempt.... It took the position that a municipality could be determined such or not such based on the functions the particular entity exercised. In this case it had to do with an Indian band, as to whether they qualified as a municipality and were therefore eligible to have tax exempt municipal corporations.
The Income Tax Act was administered on that basis for some time, until another decision came down, Tawich Development Corporation v. the Deputy Minister of Revenue for Quebec, which came to a contrary conclusion. As a result, you now had a situation where some municipalities or some entities that thought they were municipalities--Indian bands or otherwise that were treated as municipalities based on the functions they performed--might not now qualify for that, and therefore their wholly owned municipal corporations would also not qualify.
The amendment here fixes it to reinstate the status quo ante such that the determination of whether or not an entity is a municipality or not for the purposes of being able to have a tax exempt municipal corporation as a subsidiary is determined based on the functions exercised by the entity.
I have lots of questions.
I'm going to start by saying that the fact that this, in large part, was a Liberal initiative doesn't give me a lot of comfort or satisfaction. In fact, I'm even more worried now.
My questions have to do with the ability, through this bill, to get at what this committee has identified as a very large and growing problem. We've spent a lot of time talking about tax havens and tax avoidance. We now have a bill, and we have a commitment through the budget to do some longer-term study on this matter.
Can you give me a concrete example of what this bill would do, what impact it would have on Canadian foreign direct investment? What's the likely impact?
Whatever government it would be, you would probably be getting the same act.
With respect to the impact on foreign investment, what it will do, in a nutshell, is that it will not encourage Canadians to try to shelter their money in foreign investment entities, because there will now be no tax advantage in doing so. That income would be taxed the very same way it would be if a Canadian invested in a Canadian investment entity. So it levels the playing field between the two and doesn't give preference to a foreign investment entity.
I don't know whether the officials have anything to add, but that's the bottom line.
Thank you, Mr. Chairman.
I would like to take this opportunity to welcome our clerk back from her vacation, on behalf of all members. I hope she had a wonderful time. I do not know if her return has anything to do with the beautiful unanimity that we enjoy today in this committee. Let us hope it will last.
Returning to our subject, I have a question that deals not so much with the bill as such, but more with tax avoidance in general. In previous meetings of this committee we had several presentations which discussed extensively the issue of double dipping. Members of the committee were told how this scheme works and what kinds of strategies are being used.
Officials also talked about a method called tower structure in English. I do not remember the word in French. Could one of you explain this instrument and tell us how it allows, on a practical level, a corporation to reduce the tax it pays?
Thank you. This is going so fast I can't keep up.
I have a couple of questions.
I'd like to take you back to the whole issue that went through to the Supreme Court regarding the Bronfman family and the challenge they faced after moving $2 billion out of the country. There was a group out of Winnipeg through Choices, a social justice coalition, and an individual by the name of George Harris, who took this right through to the Supreme Court. It didn't rule in his favour, but I think the court made very serious statements around problems within the finance department over this kind of development.
Is Bill and its predecessors a response to that kind of situation?
The odds of getting caught imply tax evasion rather than tax avoidance, I think, but maybe I'm getting that wrong.
These provisions don't deal with tax evasion. If what you are doing is hiding money offshore and not reporting it, that's already against the law. These provisions don't deal with that. That's what the Canada Revenue Agency does in terms of trying to track that down.
In the 2007 budget we have proposed other measures dealing with tax information exchange agreements with other countries and with the effects of not having either a treaty or a tax information exchange agreement, otherwise known as a TIEA. The proposals are very interesting in that they offer a carrot, if you will, to encourage countries to enter into TIEAs. They get effectively some of the same benefits they would have had they entered into a tax treaty. On the other hand, if they don't enter into the TIEA, then foreign affiliates of Canadian corporations that carry on business in those countries would have to report their income in Canada on an accrual basis.