[Recorded by Electronic Apparatus]
Tuesday, May 28, 1996
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[English]
The Chairman: Could we come to order, please.
The finance committee of the House of Commons is beginning its hearings on the issue of what constitutes taxable Canadian property within the international tax context.
We have with us today from the Department of Finance the Deputy Minister, David Dodge; the Senior Assistant Deputy Minister, Don Drummond; and the director of legislation, Len Farber. From Revenue Canada we have Deputy Minister Pierre Gravelle.
I understand, Mr. Dodge, you're going to be making a presentation. After that we'll go to questions.
Thank you very much. We look forward to your comments.
Mr. David Dodge (Deputy Minister, Department of Finance): Thank you, Mr. Chairman.
[Translation]
Thank you, Mr. Chairman.
[English]
Before I begin my comments, on behalf of both Minister Martin and Minister Stewart, I want to thank you and the members of the committee for having agreed to take on an examination of the important policy issues identified by the AG in his recent report.
This is a very important issue. It hasn't been reviewed by Parliament since 1971, when the legislation was put in, following the Carter commission. On behalf of the department, in fact both of our departments, I thank you for taking this on.
Before I start, let me introduce to you Don Drummond in his new role. You knew Don as the assistant deputy minister for fiscal policy, the architect of all the problems in the budgets. Now Don has moved over to become senior assistant deputy minister in charge of tax policy. So it's in this new role that he's here with us today.
With your permission, I would like to start off with a quick review of how Canada currently taxes capital gains, with special emphasis on the tax treatment of persons, including trusts, who cease to be resident of Canada. I'll have a few comments also on how other countries deal with this issue.
I thought it would be useful for the committee - at least I hope it will be useful - to set out the broad scheme we currently have and then leave you with some questions that I hope the committee will look at in this rather difficult area.
The issues you've been asked to look at make sense only against a background of understanding how we treat capital gains generally for tax purposes, and with your indulgence that's where I will start. As you know, capital gain is simply the difference between the acquisition and the sale price of an asset. For tax purposes we bring three-quarters of that gain into income.
We bring the gain into income only when the gain is actually realized. That has been an important part of our system since 1972, when we first started to tax capital gains, and accords, indeed, with the international system of treatment.
Let me take a simple example of this key issue of taxation on realization as opposed to accrual. Suppose yesterday morning I bought a share of a company for $10 and they discover gold and it's worth $20 today. So on paper I have an accrued gain of $10. That could disappear tomorrow, when they discover the gold is actually dross, and the price could go down. Indeed, we have a lot of fluctuations.
Moreover, many assets are not priced, as shares of common shares are, in the market every day, so we don't really know what those valuations are. So for very practical reasons, we in Canada, as in most other countries, tax capital gains only at the point where they're realized, where the taxpayer actually has the cash in his or her hand to pay the tax.
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There are two general exceptions to this rule and they both relate to when a taxpayer ceases to become a resident of Canada. The first one is very simple. Here she ceases to become a resident of Canada by reason of death, and we simply bring the accrued gains into income in the year of death and tax them.
When a taxpayer emigrates from Canada - and a taxpayer in this case could be a trust or an ordinary person - we in principle apply the same rule. However, there are some classes of property, and I'll come to this in a moment, where the property actually remains resident in Canada. In those instances, for those people who are emigrating, we say that no, we will follow the basic principle of the tax act and we will tax those gains on realization.
You should have a little handout. I'm trying to work through this reasonably simply. The second point on that handout lists the sorts of property on which we do not deem realization at the time a taxpayer emigrates. The two key elements of this are Canadian real estate and shares of private Canadian corporations.
As I said, the reason the act does not contemplate levying the tax on the accrued gain at the time of emigration is that first, we can still get our hands on these sorts of assets as Canadian tax authorities. Second, there are quite difficult valuation problems because these assets don't normally trade from day to day. So there are very practical reasons.
There are also some other reasons, clearly, that are important. If you consider the case of a person who leaves Calgary for Arizona because the person has arthritis or something, and the person has an apartment building in Calgary that is supplying the income of that person, it is reasonable not to apply a tax at the point the person leaves. Similarly, we have lots of Canadian businessmen who own private corporations and go abroad temporarily to do work. It would be unreasonable and impractical to deal with that at the point at which they emigrate. At least, that is the thinking underlying the act.
This is the really difficult issue that Minister Martin and Minister Stewart have asked this committee to come to grips with. Is it appropriate that we continue to deal with this sort of property in the way we have?
Let me go on with a couple more rules. As I said, trusts are in the main treated as individuals for tax purposes, and the rules that apply to individuals also apply to trusts. If you look at the fourth point on page 2 of the handout, it brings up a special rule. If a Canadian trust distributes property to a non-resident beneficiary, tax is payable on all gains except the gains on taxable Canadian property. Any gains on TCP will still be taxable in the non-resident beneficiary's hands when they are realized. So as with individuals, there is no apparent need to tax them prematurely.
For example, assume that a hypothetical company share is held not by a person but by a trust that has a non-resident beneficiary. Then if the trust distributes the share to the beneficiary, a share that is worth $20 and contains a $10 accrued gain, the gain will not be taxed at the time the payment is made unless the share is in fact taxable Canadian property. If it is TCP, then Canada will, subject to treaty of course, tax any gain the beneficiary realizes later on.
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There's one more rule I should mention, a rule to prevent what would otherwise be an easy form of tax avoidance. It's described in the fifth point on the second page of the handout.
If non-residents were taxed only on their gains on TCP, it's quite easy to imagine how a non-resident could avoid Canadian tax. The person owning a share of a private Canadian company could take advantage of the roll-over provisions of the Income Tax Act and roll that share over to become a public share. Since a public share is not taxable Canadian property, they could avoid all the Canadian tax. So we have a rule in the act that basically says if you take advantage of that roll-over provision to exchange a share of a private company for one that is public, then we look through it. If it was TCP to start with, it remains TCP. This prevents that sort of game from happening.
The Chairman: Excuse me, Mr. Dodge, which provision of the Income Tax Act is that?
Mr. Dodge: It is paragraph 85(1)(i).
This deeming rule was particularly relevant to the Revenue Canada rulings identified by the AG, but I should point out that in the total scheme of things it is a small part of the policy in the area designed to prevent tax avoidance.
Mr. Chairman, let me say a couple of words on treaties. In talking about emigration, it's really important that we deal with the issue of treaties. I do this at the top of page 3 of the little handout, in the sixth point.
It is important to bear in mind that questions that involve tax treaties are not generally matters of tax avoidance. Treaties ensure that taxpayers are not taxed twice by setting out the rules for which jurisdiction has the authority to levy the tax. In the case of an emigrant from Canada with taxable Canadian property, the treaty sets out a bunch of rules as to what Canada can tax and what the foreign authorities can tax.
It's important to note that this is not an issue of tax avoidance for the taxpayer. The taxpayer is going to end up paying tax. The question is whether he or she pays tax to Canadian authorities or to the foreign jurisdiction.
Canada taxes all residents on their gains, and non-residents on their gains on taxable Canadian property, and this does create a double taxation problem. What happens when Canada wants to tax a non-resident on a property that is TCP, and the non-resident's home country wants to tax the same gain? Or what if Canada taxes a Canadian resident on gains of property located in another country, and that country also wants to tax the gain? That's why we have tax treaties, to sort this out.
We in Canada generally follow the OECD model in this respect. It says that the country where a taxpayer lives gets to tax the taxpayer's gains. There are two exceptions to this.
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The first one is that gains on real estate situated in the other country can be taxed in that other country. A resident of the U.S., for example, who sells some Canadian real estate is subject to Canadian tax on any gain.
The second exception goes back to Canada's rule deferring tax on TCP. You will recall that if I emigrate with my hypothetical shares, I am not subject to any immediate tax on gains that have accrued on those shares to the time I emigrate. If I move to a treaty country, the basic treaty rule would say that only that country can tax my gains on that share when I eventually dispose of it. Canada would have forgone its ability to tax at the time of emigration and would then be barred by treaty from taxing.
So we have a second exception to the basic treaty rules - that is, that the gains are taxable in the country of residence - and that exception says that for a given period of time after leaving Canada - and it varies by country, but in the U.S. case it's ten years - a former resident remains taxable in Canada on property held while resident here. That tax is levied on the whole gain, the gain to the time of disposition, and not just the gain that accrued up to the point when the taxpayer left Canada.
Those are the basic rules. They're a bit complicated, but that is the system we have. First, we tax capital gains when they are realized. We have an exception, which is that most accrued gains are taxed when the taxpayer dies or when he or she emigrates from Canada. On emigration, because Canada retains the right to tax it, subject to treaty of course, taxable Canadian property is not subject to this deemed disposition rule. Instead, it's taxed when the individual actually disposes of it. That's the basic system.
Let me now turn to international comparisons, because I think it's fair to ask what other countries do to deal with this problem. Every country has its own set of rules. Let me focus on three, because our tax system seems to be aligned with these three countries in many ways.
The first is the United States. The U.S. taxes individuals on the basis of citizenship as well as residence. I think it is one of the only countries that does this. Therefore, a U.S. citizen who leaves the U.S. does not necessarily move outside the U.S. tax system. A resident alien of the U.S., in contrast, does generally cease to be subject to U.S. taxation on non-U.S. properties when the alien ceases to be resident. This would suggest that the U.S. should measure and tax a citizen's accrued capital gains, at least on non-U.S. property, when the citizen renounces U.S. citizenship; and that it should measure and tax a resident alien's gains when the alien leaves the country. That would be, you would think, what the U.S. should do. But until now it has done neither.
Under current U.S. rules an individual can leave the U.S. tax net with no taxation of accrued gain. The U.S. has been looking at our system as well as other systems and is likely to change its rules in the future. Both the present administration and the Congress have proposed a deemed disposition rule that in many respects is like Canada's, but so far the legislation has not been enacted. If it does get enacted it will be similar to ours, but unlike Canada's system it will include an extremely generous exemption. The first $600,000 of any gain resulting from deemed disposition would be fully exempt from tax.
So at the moment the U.S. has essentially no rules. They are looking at a set of rules, but a set that would apply only above a very high threshold.
Let me turn to the U.K. Unlike Canada the U.K. does not tax emigrant individuals, other than trusts, on unrealized gains that have accrued while resident. An individual can leave the U.K. with no immediate tax liability in respect of gains.
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Since 1991 the U.K. rule for trusts has been generally comparable to the Canadian rule. An emigrant trust is subject to a deemed disposition of all property leaving the U.K. tax base. Corporations that cease to be resident in the U.K. are treated as having disposed of all their property with no exceptions. This too is comparable to our approach.
The Australian system is probably nearest to ours. This close similarity extends to the treatment of emigrant individuals. Such taxpayers are treated as having disposed of all their capital property for proceeds equal to the property's fair market value. An exemption is made for taxable Australian assets - that's a class not dissimilar to our TCP - and includes real estate and shares of private Australian companies, certain trust interests and so on.
Thus, among the countries most like Canada in their tax system, only Australia has a well developed system such as Canada's for the taxation of persons whose residence changes. This doesn't mean our rules can't be improved. But it does mean that we need not think our current system is somehow much more porous or more leaky or more generous than those of our principal trading partners.
Mr. Chairman, if I could, I'd like to take the last couple of minutes to raise some of the policy issues with you. Then hopefully we can help you get started in your deliberations with a discussion.
As members know, this reference to the finance committee arose out of concerns expressed by the AG in his most recent report. That report focused on a particular transaction that included several complicated steps and involved wealthy taxpayers. This has tended to obscure the underlying policy issues. To extract these underlying policy issues, it may be helpful to you to mention them and then we can set aside some of the complications.
First, the property in question became TCP in a rather peculiar way. The property was shares of a Canadian public company. Such shares generally are not taxable Canadian property unless the shareholder, together with persons with whom the shareholder does not deal at arm's length, owns 25% or more of the class of shares. If the shares are not TCP, then any accrued gain would have been taxed on emigration.
In this case, however, the shareholder had acquired the public company shares in exchange for shares of a Canadian private corporation. As I've described, where such private company shares are taxable Canadian property and the exchanges occur on a roll-over basis, the Income Tax Act treats the public company shares as taxable Canadian property as well. That was one complicating thing in this particular transaction.
The second was that the original shareholder was a Canadian trust and the beneficiary of that trust was another trust resident outside of Canada. The beneficiary of this second trust was an individual who was also resident outside of Canada. As a result, the transaction's tax effect was determined by the rules applied to trusts. But it is important to understand that the results would have been the same, and the same issues might have arisen, even if it had not been trusts but individual taxpayers.
In policy terms these were particular complications in the transaction, but the underlying issue remains the same. First, ignore the exchange of private shares for public company stock. Second, eliminate the existence of the two trusts. You're down to the basic issue.
Since shares are TCP, the individual would not be treated as having realized any gains accrued at the time of departure, but would instead be subject to Canadian tax only when the shares were eventually disposed of. Furthermore, the individual might have been able to avoid the application of Canadian tax - not of tax altogether, but of Canadian tax - if he or she retained those shares for a long period following departure, and if the new country of residence had a tax treaty with Canada prohibiting either that country or Canada from taxing its former residents on certain types of property after a set period. In the case of the U.S., that's ten years.
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In other words, the simpler and more common example produces exactly the same result as the transaction that was the subject of the AG's report. The question really is whether in policy terms we are getting the right result at this stage. That throws up some very important questions for this committee.
The most general question is how the gain on TCP itself should be taxed. First, we could essentially maintain the current system under which the tax on the share gains, whether accruing before or after leaving Canada, arises only once an actual disposition occurs. That doesn't mean there can't be some changes in reporting rules and so on, but we can leave the basic system that we have in place. Or we could say no, what we ought to do is tax the accrued gains at the time the taxpayer leaves Canada. So we would treat the accrued gains on TCP exactly as we would treat accrued gains on Bell Canada or steel company shares.
That is the fundamental issue, at the broadest level, that this committee has to look at. I think you'll find as you dig into it that it's not quite as simple as this would indicate.
First, one has to consider how the treaty rules would operate in this case. If we tax accrued gains, for example, as taxpayers leave, then are taxpayers going to be taxed again in the country to which they move? If so, is that fair? If you tax the gains on departure from Canada, how are you going to value the property? Recall that these are shares in a private corporation or real estate, so all the valuation rules kick up. What happens if the taxpayer doesn't have enough cash to pay the tax? Could Revenue Canada accept security, for example, and defer actual collection until disposition? That might be another way to go at it.
There are a lot of questions surrounding this, and these are the issues that you as committee members will have to grapple with. While it looks like an A or B choice, in fact the choice turns out to be not quite so simple.
Mr. Chairman, there are some other issues which, while this issue is on the table, I think it would be very helpful for us if the committee would consider. In particular, are the rules appropriate that require emigrants to recognize any gains on property, other than TCP, at the point of departure? What about the rules to measure immigrants' gains on non-TCP -
[Translation]
Mr. Loubier (Saint-Hyacinthe - Bagot): On a point of order, Mr. Chairman. Our meeting is scheduled till 11:00 and, so far this morning, we've only heard about the technical aspects of the capital gains question. I'd like to go to questioning quickly because despite all the hearings held by the Standing Committee on Public Accounts and whose proceedings I've read, many questions still remain unanswered in this matter that is of particular interest to us, without mentioning the $2 billion in family trusts transferred to the United-States with not one cent paid in taxes.
Most of us are already familiar with the technical aspects and we can always refer back to them. A group of experts is working in cooperation with the Standing Committee on Finance with a view to clarifying this whole matter and making suggestions to the government in the fall. So I'd like to go to questioning immediately.
The Chairman: You know, this is the first time the Standing Committee on Finance is discussing this question whose parameters are rather complex.
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We're not all international tax experts and I'd like us to take enough time to ensure that all members fully understand our taxation system and this particular situation. I can assure you that we'll have lots of time to continue discussing this matter with the witnesses and amongst ourselves.
Mr. Loubier: Mr. Chairman, I'd like to try again. In two specific cases, $2 billion in family trusts were transferred under certain tax provisions or rather based on interpretations handed down by senior officials of the Finance Department, with not one cent paid in taxes.
I'd like us to restrict the area of our investigation and the comments of our witnesses with a view to getting a real clarification, this time, of the data and parameters that lead to the 1991 decisions and the tax provisions raised at that time. I'd like us to have a fresh look at questions that were not answered by these gentlemen when they appeared before the Standing Committee on Public Accounts.
It seems to me it would be more worthwhile for us and more fruitful in view of our mandate to go to questions right away. Our terms of reference were very clearly specified by the minister of Finance; to elucidate whatever lead to that decision and find the means to ensure it won't ever happen again, although I believe it probably has already happened again since these gentlemen created the precedent and recently made it public.
The Chairman: Another ten minutes and you'll have enough time to put direct and specific questions and proceed with your examination. I for one would like Mr. Dodge to continue.
[English]
Mr. Dodge: There are two other issues, Mr. Chairman, that I hope the committee will look at. One is the types of property treated as TCP in the hands of non-residents. Is the list that I gave you on page 1 the appropriate list? Should it be shorter or should it be longer? The final thing is the tax deferral opportunity currently provided to immigrants with foreign trusts.
So there's a constellation of issues surrounding the key issue that are difficult and that I hope the committee will look at.
In conclusion, Mr. Chairman, it will be obvious from my remarks that the committee's project will not be a simple one. A thorough review of the issue around taxpayer migration is a serious undertaking. Canada has more rules and more clearly defined rules than many countries. It's not going to be easy to find ways of refining those rules without some side effects that may be unduly hindering to mobility or unduly complicated.
Having said that, I should express my confidence that the committee will come to grips with these issues. As I've said, my colleagues and I will be fully available to you. I'm sure the same is true of Pierre and his colleagues at Revenue Canada. There are lots of private sector experts who can offer you advice and help. But at the end of the day, it's Parliament that has to decide, and it's this committee that will have to make the basic decisions that will affect taxpayers emigrating from or immigrating to Canada in the future.
Thank you very much, Mr. Chairman.
The Chairman: Thank you, Mr. Dodge.
I don't know whether or not you wish to deal with it at this moment, but the Auditor General has been very direct in his report. He has made two very scathing accusations about the transactions in question. He said they may have circumvented the intent of the law regarding the taxation of capital gains. Then he said they may have eroded the tax base by forfeiting a legitimate future claim to many millions of dollars in tax revenue. Do you want to deal with those issues now or later?
Mr. Dodge: I can offer two very short comments.
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First, according to our current law, the application was entirely appropriate in this case. It was exactly as the structure of the law applied...the law was applied exactly as the structure that I have outlined to you.
The second is indeed the question -
The Chairman: So in other words, you disagree completely when he says it may have circumvented the intent of the law.
Mr. Dodge: That's correct.
The second question, however, is that Canada under the current law does give up or may give up the right to tax gains when those gains are realized - in the case of the U.S., more than ten years after the taxpayer leaves Canada. So the Auditor General is absolutely correct. The current act does contemplate that in those cases Canada will forgo revenues.
The question that we are in a sense putting to this committee is whether the scheme of that current law is correct. That is one consequence of the current scheme, and there are ways to deal with it that have other consequences. It's these consequences, Mr. Chairman, that you and your colleagues are going to have to weigh.
The Chairman: I am sure you will have a unanimous report from this committee on what the solution should be, Mr. Dodge.
[Translation]
Let's start with Mr. Loubier.
Mr. Loubier: Mr. Chairman, at long last.
We've been working with the deputy ministers and assistant deputy ministers of the Finance Department for nearly three years. I remember quite well that a subcommittee was set up to examine family trusts a year and a half ago. We sat on it and the will was there to find ways and means of settling certain problems having to do with family trusts. Each and every time we undertook the exercise, the deputy minister and his assistant, Mr. Farber and also Mr. Drummond every now and then, would simply muddle the whole issue and say there were no problems with family trusts, that we shouldn't worry and just trust them. What I see now is exactly the same presentation. Mr. Dodge was saying earlier that the Canadian population didn't have to worry that our system was more generous or more porous than those of our trading partners.
When two billion dollars in family trust assets held by Canadian residents crossed over to the United States with not one cent collected in taxes, how do you expect us to trust the tax system and not have the impression that it's more porous or permissive than elsewhere? It just doesn't make sense.
Secondly, I was listening to Mr. Dodge show feeling and compassion for the hardships of Canadian millionaires and billionaires when he said that it was difficult for them to evaluate the value of their assets and to calculate a deemed disposition when the time comes to pay their taxes. I remember that last year, in another subcommittee, we put the question to Mr. Farber concerning a change in the Income Tax Act to eliminate the exemption on the first $100,000 of capital gains. We gave him examples of households earning $26,000 a year faced with the obligation of calculating a deemed disposition of an asset and having to pay $6,000 additional tax all at once even though they didn't have the money required to do so. That compassion wasn't there for them.
I've had it up to here this morning, because my colleagues and I have read the minutes of the proceedings when these gentlemen appeared before the Standing Committee on Public Accounts and we've seen that there again they muddled the issue and gave only vague and incomplete answers to the specific questions of committee members.
My first question is for Mr. Dodge. You were saying earlier that in both cases before the committee and arising from the 1991 decision, the provisions of the Income Tax Act were correctly applied. Could you specify which provisions of the Income Tax Act applied then and explain how the principle of the taxable property category applied to residents managed to influence the ruling of the Department of Finance and ultimately Revenue Canada and result in absolutely no taxation on the$2 billion in assets transferred to the United States? I'll have further questions later on.
[English]
Mr. Dodge: I thought, Mr. Loubier, that I had gone through the structure of the act. The current structure does contemplate that when a taxpayer, whether it be a trust or an individual, emigrates from Canada with taxable Canadian property, we do not tax accrued gains as the taxpayer leaves. We tax those gains, subject to treaty, at the time of realization. That is the principle.
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[Translation]
Mr. Loubier: That's what applies to non-residents, Mr. Dodge.
[English]
for foreign people.
Mr. Dodge: It applies because once the taxpayer becomes a non-resident of Canada, the taxpayer is treated as a non-resident. What's happening here is that the person or the trust is moving from Canada; in this case it was through the U.S. jurisdiction. Our law as it is written contemplates that we continue to tax those gains subject to the U.S. treaty. The U.S. treaty says that if it's real property, Canada has the first crack at the tax. If it's shares -
[Translation]
Mr. Loubier: Mr. Dodge, I'll stop you right there. I'm not talking about the tax treaty between Canada and the United States. I'd like to know which provision of the Income Tax Act led to$2 billion in family trust assets being transferred to the United States with not one cent collected in taxes in spite of the fact those trusts belonged to Canadian residents. Why did the taxable Canadian property rule apply in this particular case?
My two questions are precise: to which provisions of the Income Tax Act are you referring and why was the principle of taxable Canadian property applied?
[English]
Mr. Dodge: Let me go back one step into the particular transaction. The issue was whether the shares being transferred, which at the time of transfer were shares of a public corporation, were TCP or not. Those shares were deemed to be TCP because of a previous transaction that had taken place. That was the narrow issue at stake. Once it was clear that these shares were taxable Canadian property, then the normal application of the law took place.
[Translation]
Mr. Loubier: Back to my question, Mr. Dodge: which provisions of the Income Tax Act allowed this decision to be made? Why was it so clear that the principle of taxable Canadian property could be applied to trusts held by Canadian residents? That's my question to you and to which we still don't have an answer even after two weeks.
Why was it clear in your mind that such provisions existed and by virtue of which provisions of the Income Tax Act was that done? Why was it clear in your mind that the principle of non taxable Canadian property applied in this case to Canadian trusts? Why was it so clear? By virtue of what? Those are the questions we are putting to you, Mr. Dodge.
[English]
Mr. Dodge: I thought I had explained, but I'll turn to Mr. Farber to give you the precise sections of the act.
[Translation]
Mr. Loubier: No, absolutely not.
[English]
Mr. Dodge: No, you wanted the precise section numbers of the act, and I'll ask Mr. Farber for that.
Mr. Len Farber (Director, Tax Legislation Division, Tax Policy Branch, Department of Finance): Mr. Chairman, the particular transaction in question went to an advance ruling process because it dealt with many aspects of the Income Tax Act, including what Mr. Dodge has indicated this morning: all the provisions dealing with taxable capital gains, provisions dealing with trusts, provisions dealing with emigration, as well as a complicated set of exchange provisions that dealt with many of the provisions of the sections in the Income Tax Act. But the underlying policy question after one pulls away all the complicating aspects of the transaction boils down to a very narrow question of whether or not a Canadian can hold taxable Canadian property.
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Mr. Loubier is absolutely correct. When one looks at the various provisions of the Income Tax Act dealing with taxable Canadian property, it appears that most of the provisions deal with the taxation aspects of taxable Canadian property when it's held by non-residents. To a very significant extent that's what those provisions do. But the underlying question that came up was whether a Canadian can hold taxable Canadian property. When one looks at the scheme of the act and certain provisions within the Income Tax Act, particularly the partnership rules, it becomes very clear in policy terms that if a Canadian can't own taxable Canadian property, the scheme of the act doesn't work.
So in terms of the finance department's involvement in the context of the ruling, it boiled down to that very narrow question: can a Canadian hold taxable Canadian property? The answer -
The Chairman: Excuse me, by ``Canadian'' you mean a Canadian resident as opposed to a non-resident.
Mr. Farber: Exactly, a Canadian resident.
The answer was very clear and unequivocal at that point that in policy terms a Canadian resident can hold taxable Canadian property. Therefore, the transaction and the movement of those assets fell under the taxable Canadian property rules.
[Translation]
The Chairman: Is that all, Mr. Loubier?
Mr. Loubier: No, Mr. Chairman. That isn't all, because I still haven't been answered. Pursuant to which provisions was the principle of taxable Canadian property applied in the ruling concerning those two family trusts transferred to the United States without a cent in taxes being levied? What specific provisions made this ruling possible?
[English]
Mr. Farber: The specific provision of the Income Tax Act in 1991 that dealt with the TCP issue on emigration was section 48. With the renumbering and consolidation of some of those provisions, that is now section 128.1 of the Income Tax Act.
[Translation]
Mr. Loubier: I have one last question, Mr. Chairman.
You haven't convinced me concerning these sections, because section 48 applies to non-residents, and not to Canadian residents.
Secondly, in 1985, the Auditor General submitted an opinion to you which completely contradicts your interpretation of 1991. Why was this opinion overlooked? And if, as you mentioned two weeks ago, there were technical errors in this Revenue Canada opinion, I would like you to explain to me what these errors were and why you did the complete opposite of what you had done in 1991?
Mr. Pierre Gravelle (Deputy Minister, Revenue Canada): First of all, I'll discuss the structure of the Income Tax Act and the legal opinion we received from the Justice Department relative to the advanced ruling of 1991, which we tabled with the Standing Committee on Public Accounts. We would be very pleased to table this legal opinion with your committee, too,Mr. Chairman.
Mr. Loubier: Mr. Gravelle, I meant the opinion of 1985 which stipulated that for all intents and purposes, Canadian residents could not own taxable Canadian goods. Therefore, when $2 billion trust was transferred, you should have recovered the taxes. I meant the 1985 opinion, and not the 1991 opinion.
Mr. Gravelle: In 1985, we issued an advanced ruling, stating that a Canadian can hold Canadian taxable property. Subsequently - and this advanced ruling was completely in accordance with Mr. Dodge's presentation - , we received a request for a technical opinion on the same topic.
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I must unfortunately state - and this is what I was saying to the Standing Committee on Public Accounts - that the legal opinion given at the time was based on a fairly superficial claim, whereas the advanced ruling was based on a detailed presentation of the facts and proposed transactions, and was contrary to the advanced ruling. I recognized, and I confirm today, that the technical opinion given in 1985 was erroneous.
Mr. Loubier: From what point of view was it erroneous? What were the erroneous elements in this opinion?
Mr. Gravelle: The opinion was very simple. It stipulated that a Canadian could not hold taxable Canadian property. However, when the advanced ruling was given in 1985, a very thorough and detailed review had not been carried out.
Mr. Loubier: And you think that the 1991 ruling is based on clear evidence, even though you, and more specifically Mr. Dodge, have appeared before the Standing Committee on Finance, and haven't given specific answers to any specific questions we've asked you concerning the interpretation of the act, the sections supporting this interpretation and the clarity of these sections.
Mr. Gravelle: The 1991 ruling - which I do not want to address because it is more recent - has been very carefully reviewed by the department. You know that the advanced ruling process forces our department to be absolutely sure and clear when it comes to interpreting the act. We also must get accurate clarifications concerning legal opinions, legal advice or the intent of the law, which is to say clarification concerning tax policies. And that is exactly what happened. The legal opinion, which was tabled and made public, supports this thorough review of the interpretation of the Income Tax Act.
[English]
The Chairman: Merci, Monsieur Loubier. Mr. Williams, please.
Mr. Williams (St. Albert): I think I'll also try to direct my remarks to understanding the situation that has transpired rather than looking forward at what one should do under the circumstances.
Mr. Dodge, I think I'm quoting you more or less as saying that once the determination was made that the property was TCP, then the normal application of the law took place. The whole circumstances surrounding this particular transaction seem to be whether or not the property was TCP. Am I correct in saying that?
Mr. Dodge: That was the question Revenue Canada asked us, yes.
Mr. Williams: Mr. Farber, you went on to say that a Canadian can hold TCP, that it's clear and unequivocal. Am I correct?
Mr. Farber: Yes, that was our view of the intent of the law.
Mr. Williams: How does a Canadian resident acquire TCP?
Mr. Farber: I don't understand the question, Mr. Chairman. He acquires it as anybody else does.
Mr. Williams: I thought it was fairly clear, Mr. Chairman. Mr. Farber said it was clear and unequivocal that a Canadian can hold TCP. If a Canadian can hold TCP, he must have acquired TCP. How did he acquire it? How can a Canadian resident acquire it?
Mr. Dodge: In the simplest case, a Canadian resident buys an apartment building.
Mr. Williams: So all property owned by Canadians is TCP?
Mr. Dodge: No. Shares of public companies are not TCP.
Mr. Williams: Sorry, all real estate owned by Canadian residents is TCP?
Mr. Dodge: Conceptually, sure.
Mr. Williams: Is that in the Income Tax Act, Mr. Farber?
Mr. Dodge: No, but the relevance of TCP applies only in a case where a taxpayer becomes non-resident.
Mr. Williams: If you look at section 248 of the act, which defines taxable Canadian property, it says absolutely nothing about Canadians and real estate and private shares. So my question still is, how can a Canadian own TCP when section 248 of the act specifically defines it otherwise?
Mr. Dodge: The act lists a class of property which for non-residents will be defined as TCP, on which Canada retains the right, subject to treaty, to levy tax.
.1025
Mr. Williams: Therefore only non-residents can hold TCP.
Mr. Dodge: No, incorrect.
Mr. Williams: Why?
Mr. Dodge: The reason we set out for this is that the concept of TCP becomes relevant at a time an individual is emigrating or is non-resident -
Mr. Williams: But it says -
Mr. Dodge: Excuse me, Mr. Chairman. It becomes relevant at that point in time, and it becomes relevant given the scheme of the act.
Now, the narrow question, to get back to it, is whether a Canadian resident can actually hold TCP as defined under the act.
Mr. Williams: My question was acquire...
If I can quote the act, Mr. Dodge, section 248.1 says that ```taxable Canadian property' has the meaning assigned by subsection 115(1) except that, for the purposes only of sections 2...'' Section 2, as you know, deals with non-residents, and subsection 115(1) also deals with taxable income earned in Canada by non-residents and so on. There is absolutely nothing in the act that says how a Canadian can acquire TCP. But let's leave that question alone for the moment.
Mr. Gravelle, as a member of the public accounts committee, I have a copy of the legal opinion you had supplied to that committee. On January 13, 1992, a legal opinion was supplied by Mr. John Bentley. In the opening statement of the legal opinion he says: ``It is my understanding that there is no question'' - underline no question - ``that shares would have been TCP in the hands of a non-resident by virtue of subparagraph 115(1)(b)(iii) of the Act.'' When I look at subparagraph 115(1)(b)(iii), it says: ``a share of the capital stock of a corporation resident in Canada (other than a public corporation)''.
I understand that we're dealing with public corporation shares. So why would the lawyer whose opinion is being sought be told quite specifically that there is no question that he's dealing with TCP within subparagraph 115(1)(b)(iii) of the act when that subparagraph doesn't deal with public corporation shares?
Mr. Gravelle: Mr. Chairman, I have difficulty speaking on behalf of John Bentley and the -
Mr. Williams: I'm not asking you talk on behalf of Mr. Bentley. I'm asking you to explain the specific instruction he was given.
He says ``It is my understanding that there is no question that shares would have been TCP in the hands of a non-resident by virtue of subparagraph 15(1)(b)(iii).'' This was the directive he was given. Give us your opinion based on these parameters. This is a parameter that he has been given, and I want to know on what basis Revenue Canada feels that public shares are TCP within that subparagraph.
Mr. Gravelle: I think the issue is that they were private shares.
Mr. Williams: But they're public shares.
Mr. Gravelle: They were private shares initially, exchanged for public shares under the roll-over provision of section 85.
Mr. Williams: I don't see anything regarding roll-overs in section 85 in subparagraph 115(1)(b)(iii). It just says public shares. It doesn't qualify them as to how you acquired them.
Mr. Farber: Mr. Chairman, as Mr. Dodge said in his opening statement, there are deeming rules in the Income Tax Act. They were private company shares in the first instance. I think it's fair to say that we can all agree that in the first instance, the private company shares were TCP. I don't think there's any question about that.
Mr. Williams: I beg to differ, Mr. Farber.
.1030
Mr. Farber: Well, fair enough, Mr. Chairman.
They were private company shares; therefore, within the Income Tax Act they were taxable Canadian property. There is a rule that says that if you exchange those shares for other shares, or for some other property, if it was TCP beforehand it's TCP afterwards. In the absence of that rule, it could be exchanged for any other kind of property that would not be TCP when one becomes non-resident and avoid the Canadian tax net entirely. The deeming provision is there to ensure that under all circumstances, when that property is exchanged for some other kind of property that otherwise may not be TCP, it is deemed to be TCP and Canada extends its tax net over that property until it's disposed of.
Mr. Williams: Don't you think, Mr. Farber, it would have been an easier interpretation of the Income Tax Act that since the trust owned the shares in the form of public corporation shares, when they moved into non-resident hands they were taxable under section 48 - the capital gains accrued and were taxable and it was to be applied? Isn't that an easier interpretation?
Mr. Dodge: Mr. Chairman, the problem with that interpretation is that it makes an absolute mockery of the deeming rule. If what Mr. Williams refers to as an easier interpretation - and I don't know quite what the word ``easy'' means in this case - had been applied, then the deeming rule would make absolutely no sense and we would have an open-ended escape hatch.
Mr. Williams: I beg to differ, Mr. Chairman, because the deeming rule applies to Canadians.
I have no problem with the roll-over under section 85 that allows the ACB public corporation shares to be maintained on the original cost. But when these public shares are moved outside the Canadian taxation net, because they are public shares there is no question at that point, in my opinion, that taxation on an accrued basis would apply.
But let me ask a question, Mr. Chairman.
The Chairman: Excuse me. I think that's a legitimate policy issue for us to look at. I think you've raised it very clearly.
Mr. Williams: I'm changing to the tax treaty, and I'm looking at the Auditor General's exhibits 1.5c and 1.5d on page 1-20. The protective trust was resident in the United States and acquired the public company shares from the family trust. Do you agree with that?
Mr. Dodge: I'm sorry -
Mr. Williams: The protective trust was resident in the United States, and while it was resident in the United States it acquired the public company shares from the family trust.
Mr. Dodge: I'll just have to check, Mr. Williams. Yes, that's correct.
Mr. Williams: The protective trust, as a non-resident and while it was a non-resident, acquired assets, being the public company shares. How could a non-resident that is outside the Canadian tax net when it acquires assets, albeit Canadian assets, be deemed to hold TCP when it is not taxable as a Canadian entity, and when it acquired assets when it was not a Canadian entity?
Mr. Dodge: I'm sorry, Mr. Chairman. I may be thick, because the whole purpose is to ensure that the gains on this sort of property remain within the Canadian tax net. That's the whole purpose.
Mr. Williams: Let me rephrase the question, Mr. Dodge. The protective trust was a non-resident trust. It acquired an asset that it could dispose of at a subsequent date.
Mr. Dodge: Correct.
Mr. Williams: When it disposed of the asset at a subsequent date, taxation would apply.
Mr. Dodge: Correct.
Mr. Williams: Now, that entire acquisition and disposition would take place when it was a non-resident of Canada.
Mr. Dodge: Correct.
Mr. Williams: How can the Canadian Income Tax Act apply to a transaction that's totally outside Canadian jurisdiction?
.1035
Mr. Dodge: I thought I had gone through that structure. Canada retains the right to tax income on certain types of property.
Mr. Williams: On immigrants.
Mr. Dodge: Canada retains the right to tax the income and the capital gains on certain types of property, namely taxable Canadian property, even if they're owned by non-residents. So if somebody in New York acquires an office building in Montreal and subsequently sells that building and makes a capital gain on it, Canada retains the right to tax that capital gain, subject to treaty.
In the case of real estate, the treaty says it is solely in Canada's jurisdiction. In the case of private shares, however, the rule is different. The U.S. indeed would have first crack at the tax on private shares. We would then tax, and provide a credit for the amount of tax paid in the United States.
Mr. Williams: But your policy backgrounder states on page 3:
- gains on other property, where a taxpayer was resident of Canada for 10 (or 12) years, disposes
of property within 10 (or 5) years of becoming resident of other country.
- Since this particular trust had not been a resident of Canada for 10 years, was it then exempt
from Canadian tax by virtue of that point?
Mr. Williams: It was not exempt from Canadian tax because it had not been a Canadian resident for 10 years?
Mr. Dodge: No. What we have here is a disposition from a trust. On that, what would happen is that if that property were sold by the beneficiary - which was the other trust in this case - within10 years, the application of the treaty would say Canada has full crack at it. If it were after10 years - and this is the issue I raised earlier - the U.S. would tax it first and then we would tax it, but we would have to give full credit to the taxpayer for the amount of tax paid in his or her country of residence, in this case the United States.
Mr. Williams: And you are saying that the trust's residency in Canada for a period of less than 10 years is immaterial?
Mr. Farber: No, Mr. Chairman, it is material, but -
Mr. Williams: In what way, Mr. Farber?
Mr. Farber: In the transaction at hand there was a very clear intention in part of the rulings process that the underlying property would not be disposed of for 10 years. A waiver was given in regard to that. So there was a very clear intention on the part of the taxpayer not to use treaty protection with regard to any disposition of the property if it were to occur before the 10-year period, and at any rate to clearly undertake not to dispose of it.
Mr. Williams: My question, Mr. Farber, was on the fact that the trust had not been a Canadian resident for 10 years, not the fact that it would have to hold it for 10 years after it became non-resident.
Mr. Farber: Mr. Chairman, as I just indicated, Mr. Williams is correct in his point about the fact that the trust had not been a resident of Canada for 10 years and therefore in theory could have been taxable at that point in time. But undertakings and waivers were given in respect of the transaction to ensure the treaty protection was not claimed. Therefore, no tax would have accrued, because the property would not have been disposed of. Only after the relevant period of time would there have been any tax had it been disposed of after that period.
Mr. Williams: With your indulgence, Mr. Chairman, I have one final question for Mr. Farber.
.1040
You've said that because the trust had not been resident in Canada for 10 years it would have been taxable; however, a waiver was granted. You are now saying that the taxation did apply, but because they granted a waiver saying let's defer the tax until the property is disposed of at a later date, then the tax was a tax deferral rather than applied tax at the date it became non-resident, and the waiver was a crucial issue.
Mr. Farber: I don't have all the documentation, nor did we review all the documentation with regard to the ruling request. As we said earlier, we dealt with a fairly narrow policy issue.
But my understanding of the transaction, which included many complicated aspects, including treaty implications, was that for Revenue Canada to ensure that there was no disposition within any particular given point of time, and to ensure that claims of treaty protection were not put in place with regard to any disposition before the relevant period of time, waivers and undertakings were put forward in order to make it absolutely clear that this property was not going to be disposed of for the 10-year period of time and that the deferral would be there.
The Chairman: Thank you, Mr. Williams.
Mr. Campbell, please.
Mr. Campbell (St. Paul's): Thank you, Mr. Chairman.
I want to return to the issue of taxable Canadian property, because I think some members around this table are having some difficulty with this. It's the whole problem of holding two ideas in your head at the same time. I want to make sure I understand this correctly.
I think you are saying, Mr. Dodge, that something could become taxable Canadian property in the scheme of the act because somebody who owns that property, as a Canadian resident, emigrates from Canada to another country. Then the issue arises of how we will treat different classes of property once someone emigrates. Is that correct?
Mr. Dodge: That's correct. The purpose for defining TCP is to try to handle issues upon emigration, or issues for non-residents.
Mr. Campbell: Let me take a very simple example that comes up in both my and others' ridings quite often. An elderly couple who have come to this country originally from Italy, or Greece, work their whole lives and buy a duplex in the riding. It's not taxable Canadian property, it's a duplex. They decide in their retirement to return to Italy or Greece or wherever. On leaving the country, if they have no intention of returning to the country a deemed disposition occurs with respect to certain property, and other property is not deemed disposed of.
Let's go back to their duplex. What happens to their duplex in that situation?
Mr. Dodge: Any capital gains tax due on the disposition of the duplex will be paid at the time it is disposed of.
Mr. Campbell: So that is taxable Canadian property.
Mr. Dodge: That is taxable Canadian property.
Mr. Campbell: It wasn't taxable Canadian property the whole time they lived in it, or owned it, while they were in Canada. It is described as taxable Canadian property for the purposes, if I understand this correctly, of knowing how to deal with different categories of property when they decide to move, leave Canada, and return to Italy or Greece.
Mr. Dodge: It's a little bit like the man who didn't realize he had been speaking prose all his life.
Mr. Campbell: Okay. I just wanted to clarify that, because I think some members were left with the impression that Canadian residents couldn't have taxable Canadian property. That's right and wrong. The point is, you can have it and not know you have it until you leave the country.
I have a second question. I wonder if we can take advantage of the few minutes that remain to ask Mr. Dodge, since he's tempted us with some suggestions, if he could summarize the underlying policy questions this committee might look at with respect to emigration from Canada and the treatment of Canadians when they leave the country.
You hinted at a number of things we might look at, but there's a whole number of underlying policy issues. When we get bogged down in a particular case that is enormously complicated, even if you suggest that the underlying question at the end of the day was fairly simple, I want to make sure we don't lose sight of the particular policy questions that, given the responsibility that's been offered to us, we could look at and make suggestions on. So I wonder if Mr. Dodge could summarize some of the questions we might look at specifically.
.1045
Mr. Dodge: Mr. Campbell, I can only start you off.
Mr. Campbell: Of course.
Mr. Dodge: We live in a world in which international migration, in particular of business people, is becoming ever more important, certainly more important than when the Carter commission looked at this issue and the law was written. The basics of the law were written back in 1971. So I think the first and broadest question the committee should consider is whether the structure of our law at the moment is appropriate for facilitating that movement of people and assets. In the economics of it, I think one has to ask that question.
Then one comes to the subsequent question, which is whether Canada as a jurisdiction gets its fair share of taxation on migration, on emigration or indeed - and I think this is important for the committee - on immigration. There are two sides of this. It is a very important issue for the committee to look at.
Those are the two prime considerations. Unfortunately you then get into a conflict between those two considerations, and this is why it will become a very difficult issue. Obviously situations can arise. If I take the example of someone who's lived in Canada for many years and then emigrates, they will live in the country to which they emigrate for fifteen or twenty years before they dispose of the asset. At that point they pay tax to that jurisdiction and there may be very little room left over, after we give the credit, for Canada.
You have a principle that works well to encourage the free flow of people, but at the same time you have the other principle of whether Canada as a jurisdiction gets its appropriate share of tax. That is a very tricky issue you are going to have to wrestle with.
I would ask at some point for my colleague Mr. Gravelle to say something on this, but there are important issues. Suppose you decide that the basic scheme of the act as it stands is still a relevant and good scheme. Then you might well ask if there are things that could be done to improve Revenue Canada's ability to ensure that it collects all the tax owing to it under the scheme of the act as it stands. I mentioned earlier that the Americans are looking at things like posting bonds and surety and so on. There are ways to deal with some of these other questions, and I hope the committee will look at them. But that's much more the province of Mr. Gravelle, who has to make the act that you write work on the ground.
The Chairman: Mr. Loubier.
[Translation]
Mr. Loubier: I have many questions. That is why I would like you to assure me that...
The Chairman: Unfortunately, Mr. Loubier, we have only 10 minutes left - three minutes for each party.
Mr. Loubier: Could I suggest that our witnesses come back again soon, perhaps even this week, for a longer period, because so far most, if not all, of the points are still unclear?
The Chairman: That's a good idea.
Mr. Loubier: Before the meeting ends this morning, there is one question I would like to ask Mr. Dodge and his colleagues.
.1050
Since December 1991, representatives of very rich families, because we are talking about billions of dollars that were transferred to the United States, have become somewhat familiar with Revenue Canada's advanced income tax ruling under pressure from the Department of Finance.
To your knowledge, have there been any other cases since December 1991 - because this is now public knowledge - that were directly or indirectly influenced or steered by such representatives and in which the federal government and taxpayers generally had to put up with such transfers of capital to the United States or elsewhere, without a cent of income tax being paid on the capital gains?
[English]
Mr. Dodge: Mr. Chairman, inherently I cannot know that because -
[Translation]
Mr. Loubier: Mr. Gravelle, since the advanced income tax ruling of December 31, 1991, have you heard of any trustees or rich Canadian families - the Bronfman family was mentioned at one time, although it could be any other family - that might have benefitted from this somewhat twisted interpretation of the Canadian Income Tax Act and enjoyed the same favourable treatment by your department.
Mr. Gravelle: I can tell you that since 1991, we have not received any other requests for advanced income tax rulings or other similar transactions.
Mr. Loubier: Could anyone at all have taken advantage of this advanced income tax ruling to carry out a transaction identical to the one that lead this very rich Canadian family to transfer$2 billion to the United States without paying any income tax on the capital gains?
Mr. Gravelle: It is possible, but there is generally a request for an advanced income tax ruling in the case of such transactions, and there have been no such request to date.
Mr. Loubier: You say it is possible. On the basis of what is it possible? On the basis of the precedent that was created, which is well known by consultants and legal advisors who represent these rich families?
Mr. Gravelle: It is possible on the basis of this interpretation of the act and the application of the act that is in effect.
Mr. Loubier: Thank you.
The Chairman: Thank you, Mr. Loubier. Mr. Williams.
[English]
Mr. Williams: I have one question for you, Mr. Gravelle, dealing with subsection 48(1) of the act. You've been in possession of these advance tax rulings for some time, and you're also assessing other Canadian residents who have become non-residents, who presumably have taxable Canadian property within the normal meaning of the act and perhaps public shares too. What has been Revenue Canada's assessment policy on public corporation shares owned by Canadian residents who move abroad and become non-residents? Have you looked at the underlying acquisition of the public corporation shares, or have you just taxed them on an accrual basis?
Mr. Gravelle: I'd like to direct this question to Mr. Beith, if he could come to the table.
The Chairman: We would be happy to have him with us.
Mr. R.M. Beith (Assistant Deputy Minister, Appeals, Department of National Revenue): Mr. Chairman, if I understand the member's question, you're asking about a non-resident who has disposed of shares of a public company and whether we have gone behind that to see whether these shares were taxable Canadian property in that they had previously been exchanged for private company shares.
Our system is one of self-assessment. It's incumbent on the non-resident to file his return and report it correctly. He is the one who would have knowledge that this is the situation and he ought to report it accordingly, subject to the treaty.
Mr. Williams: Has anybody sought an exemption as taxable Canadian property on disposition of public corporation shares since these advance tax rulings were issued privately?
Mr. Beith: I'm not aware of any.
The Chairman: Thanks, Mr. Williams. Mr. Duhamel.
.1055
Mr. Duhamel (St. Boniface): Mr. Dodge, thank you for your presentation. You've described our approach, our system of laws and regulations concerning this particular issue, and you've done so for other countries and made comparisons. I think that's been very useful. We've discussed the particular situation that has caused some questions to be raised. You've raised some policy issues we need to address.
Having said all of that, do you acknowledge that there is a problem here, that there's a perception that the system is not fair? I go back to the comment you made, that if we look at the regulations in place, etc., and compare them with other countries, we look pretty good. But if my conclusion is correct that there is a problem and there is a perception that the system is not as good as it ought to be, do you have any sense of what needs to be done, some solutions? If we go on the way we are, it seems to me we're open to continued criticism, or potentially so. So what does one do?
Mr. Dodge: Let me say this: it's what one can do rather than what one should do, because that is up to you to decide.
One could take it the first stage and say that on immigration, for example, taxpayers who have taxable Canadian property, this class of asset, file an information return giving the adjusted cost base of that property. That would be quite simple. It would be quite a departure, because we don't generally demand of taxpayers anything about assets. We tax income, not assets. But you could do that.
You could go a step further and require those taxpayers to file an annual information return with Revenue Canada so that Revenue Canada would know right away if the asset had been disposed of. So you could go that far.
You could go further and say that for certain classes of taxpayers, for trusts, you might say, you would not allow the rules of taxable Canadian property to apply and you would deem valuation at the time the payment is made.
You could go further for emigrants and say that you have to post a bond on all emigrants at the time they leave to in some way give surety to Revenue Canada for the amount of accrued tax that would be exigible on the accrued value to that point in time.
I mean, there are various steps you could take. The only thing I would note is that once you begin to get into those latter steps, i.e., the ones that go beyond improved information reporting, the economic effect you begin to have becomes much more important. We as a country have benefited, and continue to benefit, from flows of capital both inwards and outwards. Our citizens benefit from that.
There's no right answer here, but one has to be careful to strike the appropriate balance.
Mr. Duhamel: Just as a clarification, it is your contention, is it not, that the points you've raised with us just now would possibly contribute to a sense of greater confidence in the system than exists?
Mr. Dodge: The information returns would contribute the confidence. Beyond that, you're actually changing the system itself.
The Chairman: Thank you.
Mrs. Finestone, who is chairing the committee that's supposed to take over at 11 a.m., has very graciously offered us another ten minutes of time if members wish to continue very brief questions.
In the interim,
[Translation]
as suggested by Mr. Loubier, maybe the same witnesses could come back tomorrow afternoon.
.1100
[English]
Tomorrow we are slated to have Mr. Gravelle before us on the main estimates at 3:30 p.m. If the witnesses are available, because of the necessity to have some continuity on this very complex issue, would it be convenient for witnesses to appear before us tomorrow at 3:30 p.m.? Maybe you could get back to us.
I take it we have consent from all members to switch our schedule.
Some hon. members: Agreed.
The Chairman: Thank you.
Would that be okay with you, Mr. Gravelle? Really, you're the key person. Thank you.
We have another ten minutes. Mr. Grubel, very briefly.
Mr. Grubel (Capilano - Howe Sound): I'll be brief, Mr. Chairman.
A Canadian resident wants to move abroad for the purpose of lowering his or her tax burden upon disposition of an asset: this is really what concerns people, that this is a vehicle for some people to end up paying lower taxes. I have just a very simple question. What has taken place in this case under dispute? If in fact the capital gains tax rate had been lower in Canada than in the United States, would you suggest that this might not have taken place at all, and that therefore the way to handle all of this is to make sure the tax rate in Canada is either identical to that of the United States' or lower?
Mr. Dodge: I can't answer the first part of the question, Mr. Grubel. The beneficiary in question, as I understand it, had become a U.S. resident, so there may have been very good reasons for this.
The issue you raise, though, is exactly the correct issue. To the extent that Canadian rates are considerably higher than foreign rates, there is some incentive for this sort of transaction to take place. I would point out that with respect to many, but not all, states of the United States, though - in fact, if we compare New York with Ontario, for example, there would be virtually no advantage to the tax grab. Texas is a bit of a different story.
But the ordinary taxpayer who then dies is subject to U.S. estate tax, which can, if you're not smart, be kind of punitive. So there's no real prima facie advantage in this case vis-à-vis the United States. There may be more advantage with respect to other treaty countries. Of course, with non-treaty countries, we retain the right to tax throughout.
So to answer your question, in general principle you're absolutely correct that if Canada had the lowest tax rates in the world we'd benefit from everybody wanting to come here.
Mr. Grubel: On the realization on capital gains on trusts in the United States, if the owner of a trust moved money from Canada to the United States, would that trust gain benefits that would not be available to an individual in terms of escaping the tax on property upon death?
Mr. Dodge: Deemed realization at death?
Mr. Grubel: Yes.
Mr. Dodge: I don't believe so, but here I have to turn to people who know more than I do.
Mr. Farber: I believe the case at hand was a protective trust. In a protective trust you can only have one beneficiary. So upon death or disposition the gain would be taxed in the hands of the beneficiary. So no tax advantages would come to mind.
Mr. Grubel: That would have been in both Canada and the United States.
Mr. Farber: I believe so, yes.
The Chairman: Thank you, Mr. Grubel.
[Translation]
Mr. Loubier.
Mr. Loubier: I'm just curious as to why it was so urgent to issue an advanced income tax ruling in this case of the family trust involving $2 billion that was transferred without any income tax being paid before December 31, 1991. Is it because starting on that date the 21-year rule for family trusts came into effect and the Canadian resident would have been required to pay income tax on the capital gains of the trust?
.1105
Mr. Gravelle: As far as I know, the 21-year rule was never a factor in this request for an advanced income tax ruling. We received the request in early November 1991, and the taxpayer's representative said clearly to our officials that he wanted us to proceed quickly, because the taxpayer wanted to complete his transactions before the end of the year.
Mr. Loubier: Why?
Mr. Gravelle: It was probably for personal reasons. We did not asked any questions about that aspect. I would like to emphasize that we generally receive many requests for advanced income tax rulings at the end of each year, because, for most people, it is important that these rulings be made before the end of the fiscal year.
Mr. Loubier: Do you always provide such fast and regular service to Canadian taxpayers as you did during that last week, when there was pandemonium at the Departments of Finance and Revenue Canada? Meeting after meeting was held in order to come up with a ruling. Was this case so urgent, given that according to the ruling, there was still some doubt about the whole matter?
Mr. Gravelle: The main purpose of the discussions in December was to ensure that the legal opinion and the intent of fiscal policy was clear. I personally was not involved in this advanced income tax ruling until very late, around December 20, when I was told that discussions involving the Departments of Justice and Finance and our department were in abeyance. We felt it was desirable and essential, in the interest of the taxpayer, to come up with a finding that was as specific as possible, whether or not the ruling was favourable.
Mr. Loubier: So the 21-year rule for family trusts played no role whatsoever?
Mr. Gravelle: As far as I know, Mr. Loubier, the issue was never raised in this case.
The Chairman: Thank you, Mr. Loubier.
[English]
Mr. Dhaliwal (Vancouver South): Thank you very much, Mr. Chairman. I presume we'll have an opportunity to ask more questions tomorrow. I'm willing to defer my questions until then if that's more convenient.
The Chairman: Perfect. Thank you very much.
On behalf of all members, may I thank you. In one hour and forty minutes our witnesses have made us all into international tax experts. I also want to thank Sheila Finestone and the Standing Committee on Human Rights and the Status of Persons with Disabilities for giving us this time.
We meet again this afternoon. Our witnesses will be present at that time, along with the Auditor General. It is obvious members are interested in two questions: were the rulings given in accordance with the current law, and what should that law be?
The meeting is adjourned.