FINA Committee Meeting
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CANADA
Standing Committee on Finance
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EVIDENCE
Tuesday, December 5, 2006
[Recorded by Electronic Apparatus]
[English]
Good morning, committee members. Welcome back.
Officials, thank you for being here.
Pursuant to the order of reference of Monday, October 30, 2006, we will proceed with clause-by-clause consideration of Bill C-28, a second act to implement certain provisions of the budget tabled in Parliament on May 2, 2006.
Consideration of clause 1 is postponed.
I call clause 2. You have your package of amendments in front of you. There are no amendments to clause 2.
Yes, Mr. McKay.
(On clause 2)
I'll ask the officials a couple of questions so that I know what I'm voting on.
Under clause 2, with respect to tools, is there already an existing definition of tools in the regulations with respect to this particular amendment regarding the tools?
In the regulations there's a previously existing provision for tools that cost less than $200. That will be changed to tools that cost less than $500 as a regulation change, and be clarified pursuant to the budget provisions to indicate that it doesn't include electronic devices like—
You're jumping your schedule from $200 to $500, but there's no definitional change of what constitutes a tool for the purposes of this deduction. Is that right?
The definition is expanded a little bit to ensure that it doesn't include things like BlackBerries and cellphones.
That's exactly what I wanted to get at, whether it included computers and things of that nature.
Thank you.
I was looking at the way they calculate this. I was going to ask officials for the dummies version of how you calculated subclause 2.(2), but I think if I ask that we'll be here all day trying to get it through.
On page 5, are we still on clause 2, or is that moved to clauses 6, 7, and 8? No, I'm sorry. That's it for clause 2 for me, because it starts clause 3 as the next one there. I do have a question about clause 3.
Well, proceed with your question about clause 3, unless another committee member has a question about clause 2.
We'll continue with questions here. On clause 3, you had a question, Mr. McKay.
On the issue regarding the election of a capital gain, can you give me a quick summary of what that actually means? I understand election of a capital gain, but I want to understand what it means to you.
Sure. This is a provision that deals with eligible capital property. Usually, eligible capital properties don't generate capital gains. They generate something that's taxed similar to capital gains, but technically it's not a capital gain. Eligible capital property is included in an eligible capital property pool and is subject to depreciation deductions, unlike most capital properties.
For the most part, the eligible capital property pool is intended to include intangibles, things that you would buy for your business--for example, goodwill, some licences of indeterminate duration; they would go into your pool and they would be depreciated. In many cases, for example, with goodwill, if you were to buy goodwill, continue to carry on your business and then sell your goodwill, you wouldn't know whether you're selling some new goodwill that's been generated, selling the goodwill that you bought--it's sort of an amorphous asset--and the “eligible capital property” rules work well for that.
There are other cases where you might buy a licence of an indeterminate period--for example, a taxi licence. You know what it is. You know what you paid for it. When it comes time to sell it, you know what it is and you know what you'll get for it. As a result, if it were a capital property you would have been in a position to figure out quite clearly what your capital gain was. In those circumstances, this provision allows you to elect, basically to ignore the whole thing, take it out of your eligible capital property pool and treat it as a capital property that will generate a capital gain for you at the end.
I'm have trouble thinking my way through. Let's take, for example, the case of a taxi licence. What is the relevance of the election there? Can you take the taxi licence out of the deemed disposition?
No. What happens is that instead of calculating a recapture of your eligible capital property pool, you just remove the cost of that taxi licence from the amounts that you've included in calculating the pool. That will adjust your pool. It may give rise to a recapture; it may not. But it ensures, with this election, that the gain on that licence is treated as a capital gain, and not as a recapture of eligible capital property amounts in the pool.
Okay, I follow that. Thank you.
If I still have the floor, Mr. Chair, you have a deemed capital gain over on page 8 here, and that triggered in my mind a related question with respect to income trust, which may or may not fit within this budget.
I'm on page 8, proposed subsection 5(1.2), to which this may have only tangential relevance, but I would like to get an answer to the question.
Am I correct in assuming that on December 31, those who converted from a corporation to a trust during the taxation year 2006 will have a deemed disposition and a taxable consequence?
No, that's not quite right. They may have an actual disposition if they disposed of their shares in the corporation in order to acquire an interest in an income trust. This bill doesn't have anything to do with that. The provision on page 8 deals with a recapture through the eligible capital property rules, but that recapture is generated in the context of a farming or fishing business. The portion of that recapture that represents the capital gain is deemed to be eligible for the farmers' or fishers' capital gains exemption. That's what this amendment is about.
I appreciate that there was only tangential relevance there. I'll come back on that and on a section that's possibly a bit more relevant.
Thank you, Mr. Chair.
Committee members, I would propose to use the same approach we have in the past, whereby if there are no amendments to clauses, I'll ask for your views on those clauses, absent the amendments, as a block. Unless there are further questions on clauses 2 to 9, do clauses 2 to 9 carry?
An hon. member: On division.
(Clauses 2 to 9 inclusive agreed to on division)
(On clause 10)
We're basically replacing lines 40 to 45 on page 27, line 46 on page 28, lines 36 to 39 on page 32, and line 22 on page 33. These are pretty straightforward amendments, and the explanatory notes are actually fairly detailed.
To assist you, Mr. Dykstra, a persuasive tactic that is often used by committee members here is to describe all these as technical amendments.
That's exactly what I was about to do, sir. Thank you.
(Amendment agreed to on division) [See Minutes of Proceedings]
(Clause 10 as amended agreed to on division)
(On clause 11)
I'll move the technical changes replacing the lines. We begin with family fishing corporations, of which I have none, so I have no conflict. They are technical amendments put forward by the finance department.
Thank you, Mr. Wallace.
(Amendment agreed to on division) [See Minutes of Proceedings]
(Clause 11 as amended agreed to on division)
(Clauses 12 to 20 inclusive agreed to on division)
(On clause 21)
Clause 21 has a series of amendments. I believe the bulk of them are consequential to the first one.
Mr. Pacetti, I am going to rule on your amendment. I'll let you move it, and then I'll rule it out of order, Mr. Pacetti.
Do you want to withdraw it, or would you like to move it?
I'm moving amendment L-1. I'm moving it in the sense that all I'm doing is changing the word “fitness” to “activity”.
Indeed.
Clause 21 of the bill creates two new sections to the Income Tax Act, the first for deductions for public transit, the second for deductions for “the cost of registration or membership of the qualifying child in a program of prescribed physical activity”.
The amendment pertaining to the fitness expense proposes to change this to “activity”. In my opinion, that would enlarge the category of individuals who could benefit from this deduction, and therefore it is beyond the scope of the bill. If you would like me to cite chapter and verse, I could go on. In my opinion, it is beyond the scope of the bill, and I am ruling it out of order.
We are allowed to expand deductions; we are not allowed to ask the Crown to spend more money. I believe those are the criteria we've been using up to now. I don't see what the problem is here.
House of Commons Procedure and Practice states at page 654: “An amendment to a bill that was referred to a committee after second reading is out of order if it is beyond the scope and principle of the bill.”
I'll rule this out of order. I should also mention that since amendments L-2, L-3.1, and L-3.2 are consequential to this amendment that I ruled out of order, they are also inadmissible.
I agree that they are all related, because what we're trying to do here is expand the fitness credit to include all activities—
—because we're not sure it should be prejudicial to just one sector of the Canadian population. I'm not sure we're expanding the scope of the bill, but in fact making it better. I'm not sure why you're ruling it out of order, because all we're trying to do is make it better for Canadians.
However, as chair I am obligated to rule your proposed amendments as beyond the scope of the bill, and therefore out of order.
Go ahead, Mr. McKay.
I just wanted to ask the officials how they are going to determine and who is going to determine how one qualifies for this fitness expense, and whether they have in fact costed the amount of money that will be required in order to be able to determine what's entitled to a fitness credit and what isn't entitled to a fitness credit. What will be the definition? How will they administer it? How much will it cost?
As the member well knows, I'm a word merchant from the Department of Finance, not an economist.
Yes, they were costed. If you look in the budget measures, you will see that the children's fitness tax credit was estimated to cost $40 million in 2006-07 and $160 million in 2007-08.
That is, though, the money that the government expects to lose, if you will, to use a poor term. What I'm talking about is the amount of money the government expects to spend in administration of this particular credit.
This credit would be administered by the Department of National Revenue—or the Canada Revenue Agency; I'm showing my age—and it would be folded in within the general, overall administration of the CRA.
Has there been...? Your definition is—how shall we say this—somewhat loose. How are you going to monitor what a taxpayer or say a camp...? I'll use that as an example, because it's probably easier. How are you going to know and certify that a camp that is a “fitness” camp is in fact doing the fitness activities it says it's doing and that it meets whatever the criteria might be, without in effect incurring huge costs in checking that out?
You've indicated that our definition is somewhat loose. We don't have a definition yet. We have a report from a committee that's been struck to provide recommendations on what would qualify as a prescribed physical activity. I expect our minister will be releasing a response to that report soon indicating the government's intentions with respect to a more formal definition of what a prescribed physical or education activity—
I read that report, and I thought that was going to be incorporated into the regulations. And it was loose.
Well, the regulations have not been released yet. I understand that the minister has accepted a number of recommendations of the report, but it remains to be seen when the draft regulations are released to give more guidance to taxpayers.
So we don't know the administrative cost to CCRA, we don't know the administrative cost to other taxpayers, and we have as yet no regulations for this credit.
With all due respect, none of the measures in the budget have been costed with respect to administrative costs to the CRA. The CRA is obligated to administer the Income Tax Act as amended and passed by the government of the day. They're a very professional organization, and they don't seem to have a lot of difficulty with these proposals.
Thank you, Mr. Chairperson.
I was going to ask about the three-person task force report that the minister had initiated, but I think I have the answer. You're saying that the minister will announce his response to the report at some point in the near future. Do you have any idea when?
I've heard lots of rumblings, but I'm not going to engage in spreading rumours here at the finance committee.
I have another question.
Let me approach it from another angle. This is supposed to be up and running by when?
It's supposed to be effective for expenses incurred after 2006; i.e., for the 2007 and subsequent taxation years.
When do people need to have access to the precise information and regulations in order to calculate for next year's tax year?
For the most part, the calculations are set out in the budget bill. It's more a question of what activities will qualify and what activities won't. Clearly, there are some core activities that one could reasonably assume, regardless of when the guidance comes out, will qualify. But I think certainly there's a desire to get the details out before the end of the year.
I didn't say when they would be ready. I said when they are passed they will be effective for the 2007 and subsequent taxation years.
It's a minimum of 30 days for part I. After that, we receive comments, if any, and it can be turned around and included in part II of the Canada Gazette at that point.
It would seem, based on all the different tax credits and changes in this bill, that there are a lot of regulations required on a number of different fronts.
We are responsible in the department for preparing draft regulations for approval by the minister. We're all working very hard on getting that done, as well as the other legislative initiatives of the government.
Right. So when people come to us and ask us for information about tools for tradespeople, transit passes, fitness credit, etc., when can we say they can expect to access the final information they need for calculating their income tax?
Well, in the context of the fitness, as I've indicated, the minister is aware of the issue and wants to get the regulations out as soon as possible. With respect to the other credits that you've mentioned, they're in this bill. So when the bill is passed, they'll know.
There are a number of changes in the bill that require regulations. I don't have them at the tip of my fingers right now.
Yes, very quickly.
Since I'm new and I know Mr. McKay's been here for a while, he was indicating that there's been a change in the way things have happened in terms of overheads for CRA. For any changes in previous budgets that required some minor credits or not credits that had to be administered by CRA, was there a dollar figure attached to those in terms of what the changes might be, or did they consider it part of work?
The CRA annually, as does every other department, makes a submission to Treasury Board indicating the funds they need to do their work. It's independent of the budget and there's no direct connection between the budget measures and the request by the CRA. There may or may not be a reference in the CRA--
But there's been no change to the process as between this government and the previous government on these kinds of things, has there?
Thank you, Mr. Chairman.
I'd like for us to reconsider that this amendment be now ruled out of order, because we have heard from the official that there is no definite costing and there's no definition that's tangible. All this amendment is doing is clarifying or making it more clear as to who can qualify for an activity. Again, “fitness” does not describe anything, whereas “activity” will—
--more aptly describe what is the intent of this bill, “activity” meaning not only hockey, not only soccer. My daughter does not play hockey. I don't see why my daughter, being in figure skating or in ballet or in gymnastics, cannot qualify for this activity, or some other person taking some other.... So I argue—
Mr. Pacetti, to review, your amendment says “prescribed activity”, and the bill says “prescribed physical activity”. Your amendment therefore broadens the definition. It's beyond the scope of the bill and is out of order. I've ruled on it already, so I would like us to move on.
Tthe finance officials haven't put a costing on it, so I don't understand how we can expand by changing a word, or expanding the scope of the bill. I don't see the link. All we're doing is changing the word “fitness” to “activity”. We're not expanding the scope of the bill.
That's correct, Mr. Pacetti.
Well, to clarify then, I believe the ruling would be based on the assumption that all activities are not physical but that a subset of those activities may be.
We'll move on. If you have an amendment you'd like to bring, I suggest Liberal-3 is in order. If you'd like to bring that—
Well, I'm not sure why we stopped at the age of 16. I thought kids were still active and I think the delicate age is between the ages of 16 and 18. I think we want to keep kids active not just until the age of 18, but I guess forever. The age of 18 is pretty—
Well, maybe it's the wrong wording, but you ruled him out of order previously because it expanded the scope of the bill. Does adding two more years not extend the scope of the physical activity?
—and so is not beyond the scope of the bill itself, although I'd be interested to know, Mr. Lalonde, if there's—you said there is—some pricing that's been done, based on some general estimates, at least, of the impact the 16-to-18-year change Mr. Pacetti proposes would have. If you could give us any indication of that, it would be appreciated.
But I guess, as I had indicated before, the government estimates that the costs would be $40 million in 2006-2007, $160 million in 2007-2008. If you assume an increase in the category of children who qualify from age 16 to age 18, that's two more years than the 16 so far. You can do the math, the same as the rest of us.
I would have liked to extend this to say 18 years or anybody who's still dependent, using the same criteria we use for the education or dependency rules under the Income Tax Act. I think I was quite generous in just proposing up to 18 years.
It's consistent with every other basic law we have in this country, where kids are known to be minors until the age of 18. I think it only makes sense to keep the age at 18 years old.
First of all, I have a question on that issue.
Was this discussed at all in the report by the three consultants?
There was some discussion about extending the credit to older children and to disabled children. That part of the discussion was beyond, of course, what the mandate of the committee specifically was, which was to provide information on programs and prescribe physical activity. The government is taking those representations under consideration, but those representations would have to be under consideration in a different process than through this bill.
What was the logic originally of the cutoff at 16? I think my colleague makes a good point. Usually 18 is the end of high school; you're in the full period of your youth and leisure activities. It just seems that it's hard to argue against extending to 18, other than from the sheer question of cost.
You mention leisure activities, and I think that begs some clarification. This credit is not designed to encourage people to take part in leisure activities. It's more, in part, to get Canada's youth into the habit of carrying on physical activities. Once you get into the habit, you don't need an incentive after that point to continue. That's part of the reason why age 16 was proposed in this measure.
Quite clearly, I could have learned to engage in some of that physical activity at a younger age myself.
The use of the word “leisure” is simply as a general descriptive for.... I have no problem with the word “fitness”. For many young people, a fitness program is their leisure program. It's their break away from school, and it gives them a lot of satisfaction to be involved in a gym program or some exercise regime.
I'm inclined to support the amendment, because it seems to me it's very hard to justify the cutoff at 16. I'm not so sure, and I'd love to see a study on this that shows the—
But I presume there's some review done before one makes legislative changes, especially in terms of income tax.
I'd like to see whether in fact it's true that habits are entrenched by the age of 16 and therefore that it's just extra to go beyond the age of 16. From what I can tell with young people, I think they're just at a formative stage at that age and that anything you can do to keep ingraining into them certain habits and regimes and regimented activity, the better.
Unless hearing otherwise, I'd be inclined to support the extension to 18.
I think I understand the logic of the government. I know the intent was for the Prime Minister's son to get a deduction while he played hockey.
It's probably because most players play hockey until the age of 16, the midget level, and then when they go on and play junior hockey, they wouldn't qualify because they think they're getting paid. But again, I think the most sensitive years of youth are between 16 and 18. And I think it's important we just don't think about kids in an activity such as hockey, but that there are other activities.
Okay.
On the amendment, you're all ready for the vote then, yes?
(Amendment negatived)
(Clauses 21 and 22 agreed to on division)
It's on page 72, the post-secondary textbook credit. I just wanted the official to march me through this.
Okay, good.
We have an amendment proposed on that from the Liberal Party.
I'll just verify, first, have we carried clause 22, or did I interrupt the proceedings to make sure Mr. McKay didn't have a question on that? Do you recall?
A voice: Clause 22 carried.
The Chair: Clause 22 was carried, okay.
Mr. McKay, we do have Liberal amendment 4.
Mr. Pacetti—
Yes, it's straightforward. I think the amount in the original bill was $100. All we're asking is to change it to $200. It's based on a monthly credit. Most students go to school full-time for a maximum, I would imagine, of 10 months. So on the original amount, it would be 10 months times $100, which would be $1,000 at a 15% tax rate, therefore only giving students $150. And that would obviously only give them the $150 the year after they'd spent the money, and not necessarily in the month they incurred the expense. So all I'm trying to do here is to make this deduction, which is actually a credit, useful by doubling the amount from $100 to $200 so that the—
No, $65 is for part-time students.
Sorry, it's $65, so it's even less. We're trying to make it so that students get at least $300 or $400 of actual money in their pocket after all the money they—
The scope of the bill is not expanding; the actual dollar amounts within the bill are within the realm of legitimate amendments, but expanding the scope of those dollar amounts is not.
No, if the government's intent is real and they want to make an impact, it's nice to say $65 a month, but $65 a month over a 10-month period is $650 times 15%, which I think is 25 cents and is not going to do anything for students. So all I'm trying to do here is actually to do something for the students who incur expenses to go to school. We heard from numerous groups during the pre-budget consultation that they need help. Any type of help is helpful. This is not the best type of help for them, because this is only going to come 12 months after they've incurred the actual expense, but at least it's a step in the right direction.
So $200 times 10 months is a $2,000 credit, and times 15% it is $300. That's nothing compared with what the students are actually incurring in purchasing books; sometimes they're incurring $1,500 to $2,000 per semester for books. So it's not a big deal. If we're going to actually do something, I think this is the right way to do it.
I thought this approach would fit right in with the Liberals' approach of band-aid, ad hoc measures to deal with a serious problem--that is, student access to a university education. The problem we have goes back many years. This is just one more band-aid, following zillions of band-aids by Liberals, so I don't know what their concern is.
Is the intention of this section on credit for the purchase of textbooks to get a certain portion of the cost of textbooks into the hands of students? Is it $65 that they end up with?
The intent of this measure is to provide added assistance to students. It's not intended to cover the full cost of education or the full cost of textbooks. It's intended to provide some assistance. As indicated, it is calculated as $65 per month, for those who qualify for the education tax credit.
There's an example in the budget documents of an individual spending eight months of the year at a Canadian university, claiming $3,200 in education amounts and $4,000 in tuition, for a tax savings of $1,116—and increasing the amount of that assistance by $80.60 as a result of this new textbook tax credit.
—from $65 up to $200.
It would also increase the tax expenditures, as indicated in the budget documents, by the same proportion. We're looking at some $135 million and $125 million per year in the budget documents. So you could look at thrice that.
Mr. Chairperson, I'll just say that since we're left with nothing to do but put band-aids on band-aids, I have to support it.
Mr. McKay, then Mr. Del Mastro, then Mr. McCallum, and then Mr. Savage.
I urge committee members to further the debate.
To make it fairly clear, so that Madame Wasylycia-Leis is clear on the Liberal position, this is a collection of the dumbest band-aids I've ever seen, and this is one of the dumber ones.
I have a daughter in first year at McMaster University.
Exactly, that's why I declared it.
I want to follow the bouncing ball here and actually figure out what her tax credit might be this year. I'm talking $65, multiplied by the number of months referred to in proposed paragraph (a).
Because she started in September, I take it that she gets four months. Is that correct, $65 times four months?
So I'm four months. We're doing her income tax return here as we speak. So four months is three times $65, is that right?
This is the kind of practical difficulty people are going to run into.
I just want to understand it for my own purposes here. Am I correct that I have $260?
Then you have a second proposed paragraph, where $20 is multiplied by the number of months referred to in proposed paragraph (b). So it's $20 times four months, is that correct?
Yes, because it's possible for a student to be a part-time student—for example, in January, February, March, and April—then go off for the summer and come back as a full-time student.
So you would calculate your credit based on the number of the months in the year in which you're in school.
In this particular example, yes.
Next year, presumably she'll be in university for the whole two semesters, and it would be eight months.
Mr. Chair, I think part of the confusion here is that we're looking at one part of our aid package for students in isolation. We know that there were significant measures in budget 2006 for students, and this is one of them. Students can earn up to $19,000 completely tax-free after Budget 2006. Scholarships are no longer taxable. Student loans are much more broadly available. A significant amount of money was invested by the government to do that. This is one step in isolation, and I think it's part of a very comprehensive package to assist students.
I also totally agree with you that this is a band-aid. The problem is that in our election platform we had, for example, the fifty-fifty plan, which would have put in billions of dollars--but we lost.
My only point is that when you're stuck with band-aids and that's all you have, you might as well make the band-aids a little better.
I do appreciate your support.
What we heard from students as we travelled the country doing our consultations for next year's budget was that taxes don't do the job for students, if you believe that the number one issue is access.
In fact, Mr. McKay spoke about his daughter. She's already in university. We're going to benefit, to a small extent, people who are already in university. If you really want to get at the issue of access, then we all, including Judy, should have supported the economic update of a year ago, in which there were billions for low-income students and many other students, as well as what Mr. McCallum mentioned. It's too close to Christmas for party politics, but let me—
I'm speaking to the amendment.
If we're going to do something in the form of taxes, $80, which is what I think it amounts to for a full-time student, is a pittance and a disgrace. What Mr. Pacetti is proposing is at least a step forward. It is a bigger band-aid, if you will.
Thank you, Mr. Chairman.
It's basically the same idea. We're trying to help part-time students. Instead of the $20 monthly credit, I was proposing $60. It was in the same proportion as the previous amendment. If we're not going to try to help full-time students, I'm not so sure this committee wants to help out part-time students. But if we're going to bother--and I'm just trying to do a calculation for $36--I would suggest that we delete the $20 rather than have it. So I would say we increase it to $60.
No. Perhaps you could just wait until I finish speaking.
I don't know what it is with the Conservatives.
The point is that $20 for part-time students represents—
Mr. Pacetti, order. Order.
Mr. Pacetti, you just said in your preamble that we may as well delete.... But that's not what your amendment says, so I'm asking you—
I'm in the middle of a sentence. I said that we may as well delete it because the $20 is representing $36 to a part-time student. By changing the amount, or amending the amount from $20 to $60, at least we're giving $100. Why bother doing all this for $36? That's provided a part-time student goes to school for 10 or 12 months. At least if we're going to do something, do something.
So all I'm doing here is trying to put it to a reasonable amount. Sixty dollars represents a hundred dollars to a student who goes to school part-time for 10 to 12 months a year. That's my point. So I suggest that we adopt my amendment.
Thank you, Mr. Chairman.
A recorded vote, please.
(Amendment negatived: nays 6; yeas 5) [See Minutes of Proceedings]
(Clause 23 agreed to on division)
(Clauses 24 to 34 inclusive agreed to on division)
Yes, thank you.
Amendment G-3.... We're actually going to insert a new clause into the bill on page 90. The new clause will be 34.1, a proposed subparagraph in section 127.52.
It's a technical amendment, Mr. Chair.
Yes, it looks like by adding this clause we're going to expand the scope of the bill. I'd like Mr. Del Mastro to explain it to me.
Sure.
The bill includes amendments to extend the $500,000 lifetime capital gains exemption to fishers. One of the existing provisions in the Income Tax Act dealing with the $500,000 lifetime capital gains exemption for farmers ensures that capital gains that are eligible for that exemption are not subject to the alternative minimum tax. This amendment would ensure, as well, that in the same situation for a fisher, their gains eligible for the $500,000 lifetime capital gains exemption would also not be subject to the alternative minimum tax.
Thank you, Mr. Lalonde.
(Amendment agreed to on division) [See Minutes of Proceedings]
(Clauses 35 to 38 inclusive agreed to on division)
(On clause 39)
This truly is a very technical amendment. It has to do with other provisions in the budget that allowed for pension funds to assist in their financing. One of the measures they're allowed is to obtain financing through a letter of credit from a bank. Only certain persons are allowed to contribute to a pension fund, so if the letter of credit were called upon a bank might have to contribute to the letter of credit. The existing words in the bill indicate that this bank would be paying an amount to the pension fund in the event of a default under the terms of the letter of credit, and it's turned out that since the bill was originally tabled, we've discovered that in some cases the terms of default under which a letter of credit would be called upon may not be in the letter of credit but may be in other associated documents.
This amendment ensures that the bank can make the payment into the pension fund under the terms of the letter of credit even where the.... It resolves the fact that the default provisions might not be technically under the letter of credit itself.
Is that clear?
My only confusion is that the only thing that's being removed here is the terms, so you mean it might not be under the terms of the letter itself. That's why the phrase “the terms” is being removed.
Okay, that's clear to me.
(Amendment agreed to on division) [See Minutes of Proceedings]
(Clause 39 as amended agreed to on division)
(On clause 40)
I have a question about clause 40. I'm not sure what it means exactly. I'd like to know what's defined as “taxable capital”, and how much this would actually cost the treasury.
As indicated in the budget documents, the minimum tax on financial institutions is being revised from a two-stage tax to a one-stage tax and the base amount that's not subject to the tax is being reduced. If you look in the budget documents you'll see that the tax cost of the changes to the minimum tax on financial institutions are $15 million in 2006-07 and $30 million in 2007-08.
Okay, just to go through it, we're changing the minimum tax, the rate before which taxes on taxable capital kick in, from $200 million to $1 billion. What you're saying is right now this would cost the treasury, for the next two years, $45 million.
My question is this. Was there a lot of pressure from big banks to do this? Where did it come from, when in fact we're looking at probably the most profitable time in the history of financial institutions.This year's profits are by far the record in the history of bank profits. Why are we doing this now?
The government has been moving, over the past several years, to try to reduce capital taxes. The general capital tax applicable to corporations overall has been eliminated. The tax on the taxable capital of financial institutions is still in place but it's being modernized and the base amount that's exempt from the tax has been increased to reflect that the original base amount was implemented some 20 years ago, when part VI was introduced.
That still doesn't account for why we would suddenly give this huge benefit to big banks. Why would the government suddenly change the level from $200 million to $1 billion? “Modernization”? Is that the euphemism for catering to the big banks' demands? I would assume that they want bigger and better profits so that they can—
I just don't understand why we are doing this at a time of tight resources, given the economic update. At a time when banks are more profitable than they have ever been, why would we do this now?
—an amendment of some kind, I'd invite you to do so. Otherwise, this is just by way of remarks and really not very productive.
I was hoping for some sort of explanation where I could see some light to this, but I don't. I won't move an amendment now, but I'll consider it for report stage.
I think it's fairly simple. Canada wants to attract investment capital to our country, and this tax puts a brake on that. What we're trying to do is stimulate our economy, our productivity, and our competitiveness, so that our standard of living and the quality of life that we've come to enjoy will continue. This is one of the impediments that the government is trying to remove.
On clauses 40, 41, and 42. We can do all three at once or one at a time, but I would like a recorded vote.
Yes.
(Clauses 40 to 42 inclusive agreed to: yeas 10, nays 1) [See Minutes of Proceedings]
(On clause 43)
I want to ask Mr. Lalonde a few questions with respect to part 2, “Amendments to the Income Tax Act (Dividend Taxation)”.
I read proposed subsection (1.1) and I'm not clear on what it actually means. What is the harm that you're trying to remedy by inserting this particular proposed subsection?
It's proposed subsection (1.1), on page 95, under subclause 43(1):
Notwithstanding subsection (1),
—I'm not sure where that is—
if in a taxation year a corporation has paid a stock dividend to a person and it may reasonably be considered that one of the purposes of that payment was to significantly alter the value of the interest of any specified shareholder of the corporation, the fair market value of the stock dividend shall, except to the extent that it is otherwise included in computing that person’s income under any of paragraphs 82(1)(a), (a.1) and (c) to (e), be included in computing the income of that person for the year.
I don't understand what that means.
That's an existing anti-avoidance provision that's being amended to reflect the fact that the dividend inclusion is being changed under the new high-rate dividends.
Well, that may be. I still am not too much further along in my understanding of what that actually means. What is the corporation doing and how is the person who is receiving the benefit from the corporation being taxed here? I'm not clear as to what you're going after.
This section references the stock dividend. If the purpose of the declaration might be considered that it was to alter the value of the interest of any specified shareholder, the fair market value of the stock dividend would be considered in computing the income of that person.
This is not an amendment. This is just a question about existing clause 43, with no amendment reference. He's just asking a question pertaining to clause 43 and proposed subsection 15(1.1), I believe.
Is that your question, Mr. McKay?
Your question is why is that particular reference in there?
The reference itself refers to where it may reasonably be considered that one of the purposes was to significantly alter the value of the interest of a specified shareholder, the fair market value of the stock dividend shall, except to the extent that it is otherwise included in computing that person's income, be included. So it would be deemed to be included in income if the purpose was to alter the value of the share.
—of any specified shareholder.
That's an anti-avoidance rule that comes into play when stock dividends are paid on certain shares in an attempt to, as indicated here, change the value of shares held by a specified shareholder. This ensures that this rule doesn't come into play if it's otherwise picked up as a dividend under the new dividend rules.
It's to limit the discretionary tax avoidance tactics available to corporate structures for structuring dispositions to favour one or another shareholder specific to their tax situation.
Am I going on with the wild, wild realm of speculation that a closely held corporation wishes to reward the most significant shareholder in the corporation and just simply give it shares, which to another shareholder would be worth x, but to this particular shareholder would be worth x plus?
I don't think that's a particular case of this, but the upshot of this amendment is to ensure that if it's otherwise picked up as a dividend, this rule won't apply.
It used to talk about paragraph 82(1)(a), which is where the existing dividend rules were for picking it up. Now it's adding a cross-reference to paragraphs 82(1)(a.1), 82(1)(c), and 82(1)(e) to ensure that it picks up dividends under the new dividend regime.
I don't want to beat this horse to death, but I just frankly don't understand it. Maybe other members understand what they're voting on, but I certainly don't.
You have a concept here called “excessive eligible dividend designation”, on page 99. What's that?
I was just asking questions with respect to the overall section, too, just so I understood what the point—
I will record an abstention on that particular clause. I've already said I don't understand it, so I'm not going to vote either for it or against it.
Then we need a recorded vote to record an abstention for Mr. McKay, do we?
(Amendment agreed to: yeas 6; nays 1; abstentions 4)
In all seriousness, if there is the concern that Mr. McKay has expressed in terms of clarity, would it be fair to ask the ministry to come back with a bit of an explanation to give him--
That might be fair, but we'll let Mr. McKay decide that and do it on his own time.
Now we'll move to amendment G-5, new clause 43.1. That's a government amendment.
Mr. Del Mastro.
Yes, thank you, Mr. Chair.
What we're looking to do here is amend, after line 9 on page 96, the following.... The French version of the act will be replaced in section 43 after article (ii), and in the English version paragraph 74.4(2)(f) will be replaced as indicated by the memo before you. They're both technical.
Any discussion on those?
(Amendment agreed to on division) [See Minutes of Proceedings]
(Clauses 44 to 46 inclusive agreed to on division)
(On clause 47)
On clause 47, there is an amendment, G-6, which is on page 21 of your package. I am hesitant to assume another technical amendment here, but—
Yes, amendment G-6 asks that in clause 47 we amend after line 21 on page 118, beginning with new paragraph 89.(1)(c), the following as indicated by the memo before you, Mr. Chair.
On the amendment, Chair, on subclause 47.(1) at page 99, the concept of “excessive eligible dividend designation”, could I have an explanation of what that means?
Simply, what does “excessive eligible dividend designation” mean? Could you explain it in the context of what you're trying to capture here?
Sure. Under the new dual rate dividend tax credit proposals that are included in this bill, dividends may be eligible for a higher rate of dividend tax credit in the hands of the individual shareholder, if those dividends are paid out of income that was subject to the high rate of corporate income tax.
Now, a shareholder doesn't need to go and find out from the corporation whether or not the dividend is paid out of income subject to the high rate of corporate income tax. The corporation will tell the shareholder by designating that dividend.
It may be possible, however, for a corporation to designate a greater amount of dividends as being eligible for the high-rate dividend tax credit than are actually eligible. If that's the case, then that corporation would have an excessive dividend designation.
So if I'm a shareholder and I have received this designation that this is an excessive eligible dividend, my credit is therefore higher?
No. You would receive a designation that you have an eligible dividend--that is, that the dividend is eligible for the high-rate tax credit.
The corporation would be the one to designate whether the credit was paid out of high-rate income or out of low-rate income. It's the corporation that designates the dividend.
If the corporation designates too much dividend, it's the corporation that would have an excessive eligible dividend designation.
So where does that shift the tax burden--onto the shareholder or onto the corporation? If in fact the corporation chooses to have an excessive eligible dividend, where is the tax burden being shifted--to the corporation or the shareholder?
The shareholder would see no impact as a result of that. They would continue to claim their dividend tax credit as if the dividend actually were eligible as a high-rate dividend. The corporation would have to pay a special charge--which is also included in this bill--to make up the difference.
It could be an error. It could be—
In the absence of some measure to stop you from doing that, it would be a way to generate excessive dividend tax credit to shareholders. You have to have some mechanism to ensure that a corporation doesn't designate dividends as eligible dividends when it doesn't have the—
I'm having trouble following the benefit here, though. Where is the tax benefit going? If it's not going to the shareholder, it has to be going to the corporation. If it's going to the corporation, then it has to have some good reason for doing that. What's the good reason for doing that?
There would be a tax benefit to the shareholder in having an eligible dividend. You'd get a higher dividend tax credit, so that would—
The tax benefit ultimately goes to the shareholder. It would be in a corporation's interest to ensure that their shareholders get the maximum tax benefits and that they designate the maximum that they can as eligible dividends.
In the absence of some mechanism to stop them from doing so, they might designate even more than they were eligible for, and that's what this is about. This is to calculate any excessive dividend designation that may have been made in order to ensure that the corporation then has to pay up an amount to reflect the additional cost of the higher-rate dividend tax credit being claimed, or claimable, by the shareholder.
Just for clarification, this is in part to prevent corporations, for whatever reason, from paying excess dividends out in a year beyond what they made that year to create a competitive advantage to themselves or to attract further investment to their company. Is that—
It's to prevent them from over-designating their dividends as being dividends eligible for the high-rate dividend tax credit.
If a corporation is being prevented from doing this.... What I'm driving at here is how do the activities of the corporation affect the credit of the shareholder?
If the corporation designates the dividend as an eligible dividend, the shareholder will get a greater dividend tax credit.
As just simply an eligible one. But if it's an excessive one, the shareholder doesn't get that benefit?
Suppose a corporation had the ability to pay dividends out of income that was taxable at the high rate of $1 million, but they had some other sources of income taxable at the low rate. They actually would have the capability of paying a $1.5 million dividend. Under these rules they should pay a half-million-dollar dividend as a regular dividend that is eligible for the low-rate tax credit, and they would have $1 million that they could pay as a dividend eligible for the high-rate dividend tax credit.
But it may be that they designate the whole thing as eligible for the high-rate dividend tax credit. Maybe it's a mistake, or maybe it's otherwise. If they do so, the shareholder will be eligible for the high-rate dividend tax credit. They don't have to look behind what the corporation has told them.
In this circumstance, the corporation would have had an excessive eligible dividend designation of a half million dollars because they designated half a million dollars too much, and they would have to pay a charge to offset the fact that the shareholder is getting a higher dividend tax credit on that dividend than is warranted.
This whole part 2 of the bill is new, to implement the dual rate dividend tax credit that was originally proposed a year ago November and was included in the 2006 budget.
Refresh my mind. Was this to do some equalization among corporations? Pull me to back to November 2005 and point me to where that issue came up.
That issue came up in response to certain pressures on the government of the day to deal with income trusts.
Thank you, Mr. McKay.
(Amendment agreed to on division) [See Minutes of Proceedings]
(Clause 47 as amended agreed to on division)
(Clauses 48 to 63 inclusive agreed to on division)
(Clause 1 agreed to on division)
Shall the chair report the bill as amended to the House?
Some hon. members: Agreed.
Some hon. members: On division.
Shall the committee order a reprint of the bill as amended for the use of the House at report stage?
An hon. member: If necessary.