FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 31, 2000

• 1705

[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order.

Does everybody have the report on the natural disasters plan? I will wait for a translated copy.

Since we have two items to deal with, I'm going to stand this particular report until we get the translated copy for Madame Girard-Bujold, and we will proceed to deal with clause-by-clause of Bill C-25.

I just want to draw the attention of the committee to the fact that there will be some amendments we'll have to deal with.

I ask, of course, for unanimous consent to deal with clauses in blocks.

Some hon. members: Agreed.

The Chair: So pursuant to Standing Order 75(1), consideration of clause 1 is postponed.

(Clauses 2 to 16 inclusive agreed to on division)

(On clause 17)

The Chair: Does everybody have a copy of these amendments in a document entitled “Government Amendments C-25”?

Do we have a mover for government amendment 1? Is it Mr. Szabo?

Mr. Paul Szabo (Mississauga South, Lib.): Yes.

The Chair: Some of these amendments are lengthy. We can all read them. Any time you want to dispense with that, you just raise your hand and we'll see if we can dispense or not.

Mr. Szabo.

Mr. Paul Szabo: Mr. Chairman, government amendment G-1 calls for clause 17 to be amended by replacing lines 30 and 31 on page 8 with the stated references. I would just indicate to the committee that this is an improvement on the determination of the amount subject to special tax averaging, because it's not appropriate that it be reduced by the deductions claimed in respect of repayments of unemployment insurance and old age security benefits under certain paragraphs. It is correcting a determination of an amount subject to special tax averaging calculation.

The Chair: Thank you, Mr. Szabo.

(Amendment agreed to on division—[See Minutes of Proceedings])

(Clause 17 as amended agreed to on division)

(Clauses 18 to 20 inclusive agreed to on division)

(On clause 21)

The Chair: Clause 21 has an amendment by the government.

Mr. Szabo.

Shall we dispense?

An hon. member: Dispense.

(Amendment agreed to on division—See [Minutes of Proceedings])

(Clause 21 as amended agreed to on division)

[Translation]

Ms. Jocelyne Girard-Bujold (Jonquière, BQ): He's not faster than I am. I am more than he is.

[English]

The Chair: Can we call on the finance officials to explain G-2?

First we'll hear from Mr. Szabo, and then we may have some technical questions to deal with.

• 1710

Mr. Paul Szabo: This particular amendment, Mr. Chairman, which affects a substantial section—pages 10 to 15—has to do with technical matters related to the 20% ownership restrictions and also to a turnover test.

Now it is my understanding that there is some concern that this motion is out of order. If that is the case—if that's what the clerk is advising—I do have a submission with regard to the admissibility of this amendment.

The Chair: Okay.

Mr. Paul Szabo: Is it the case that there is concern that it's out of order?

The Chair: Yes.

Mr. Paul Szabo: Well, Mr. Chairman, if I may, I'd like to submit that while this amendment amends the scope of the measure as outlined in the notice of ways and means motion and presented in the bill, it is not inconsistent with the motion because it is relieving in nature.

Mr. Ken Epp (Elk Island, Canadian Alliance): Which one are we on?

The Chair: We're on G-2, Mr. Epp.

Mr. Paul Szabo: If I may move on, this measure does not impose tax. It clarifies that no tax is payable by non-residents in certain situations. The amendment in essence expands the class of non-residents to which the measure applies. It is generally accepted that a tax bill or any amendment of such a bill may not exceed the limits with respect to taxation imposed in the ways and means motion that authorizes the bill.

The concern seems to be the principle expressed by Marleau and Montpetit, in House of Commons Procedure and Practice, as follows in their reference on page 760:

Neither the provisions of a Ways and Means Bill nor any amendment subsequently proposed to the bill may exceed the limits imposed in the Ways and Means Motion.

It is very important, however, to continue reading to determine the real extent of the principle. It says:

In particular, they may not increase the amount of a tax or extend the incidence of a tax or the applicable tax base.

The principle of non-deviation from the motion is not infringed here because the amendment does not propose any taxation in excess of the limits set out in the motion.

Again, Marleau and Montpetit, on page 760, indicate that the purpose of the requirement for a ways and means motion before the tax bill may be introduced in Parliament is to protect the “financial initiative of the Crown in taxation measures”. For this reason, only a minister of the crown can introduce a ways and means motion. Parliament on its own accord cannot enact taxing measures without concurrence of the crown.

Also, Marleau and Montpetit, on pages 758 and 759, indicate that a ways and means motion is required

before a bill which imposes a tax or other charge on the taxpayer can be introduced. Charges on the people, in this context, refer to new taxes, the continuation of an expiring tax, an increase in the rate of an existing tax, or an extension of a tax to a new class of taxpayers. Legislative proposals which are not intended to raise money but rather to reduce taxation need not to be preceded by a Ways and Means Motion before being introduced in the House.

Finally, Mr. Chairman, the proposed subsection 115.2 of the Income Tax Act does not impose tax but clarifies that no tax is payable in a particular case. Therefore, such a measure on its own does not require the authority of a ways and means motion.

This measure is nonetheless included in the ways and means motion for the 1999 budget because it is the government's practice to describe all tax-related measures in the notice of the relevant bill regardless of whether they impose tax or provide relief from a tax.

I submit, however, that an amendment of this kind, which extends the scope of a measure, which provides relief from tax, in no way infringes on the crown's prerogative with respect to imposing taxes. It is not in substance a derogation from the limits on taxation set out in the ways and means motion.

Those are my submissions, Mr. Chairman.

An hon. member: Paul, that was riveting.

• 1715

Mr. Paul Szabo: I wonder if the officials from the department could also address the specific concern that has been raised by the clerk.

The Chair: Go ahead, Mr. Lalonde.

Mr. Gérard Lalonde (Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance): I don't think I can improve on Mr. Szabo's explanation of parliamentary procedure. He's by far a greater expert on that than I. I think the basic message here is that this is not a tightening measure; it's a relieving proposal. Pursuant to the rules of parliamentary procedure, such an amendment at committee stage can be introduced by the committee.

It might be helpful if my colleague, Jim Greene, described what the amendments do. That might help resolve the concerns of the clerk.

The Chair: That's exactly what we'd like, Mr. Lalonde.

Mr. Green, would you like to explain?

Mr. James R. Greene (Tax Policy Officer, Tax Legislation Division, Tax Policy Branch, Department of Finance): Thank you, Mr. Chairman.

This measure proposes to introduce a new section of the Income Tax Act, 115.2, which addresses an uncertainty regarding the threshold for taxation in Canada that non-residents face. Specifically, our Income Tax Act does not provide any detailed guidance as to the situations when a non-resident carrying on business in Canada becomes taxable here. It simply has a very bald statement that a non-resident who carries on business in Canada is taxable on the income from their Canadian business.

Some uncertainty has arisen in the context of the provision of investment services. There's a concern about a non-resident hiring a Canadian firm to provide investment management advice and services, particularly in the situation where the Canadian adviser is, for example, managing a portfolio of investments owned by a non-resident. Because the manager may have discretionary authority to buy and sell investments, the concern is that the non-resident might be considered to be carrying on business in Canada through an agent, by virtue of having hired an independent unrelated party to provide these portfolio management services.

This rule is essentially a clarifying one. It specifies that a non-resident is not carrying on business in Canada and therefore would not be subject to Canadian tax simply because they engage a Canadian firm to provide investment management advice and related services. There are similar rules in effect in other major jurisdictions. Both the U.S. and the U.K. confirm the non-taxation of non-residents in this type of situation.

Members of the Canadian investment management community have argued that under the existing law, they have had difficulty attracting non-residents as clients because of a fear, perhaps a theoretical concern, that the non-resident might be subject to tax. We're not aware of any particular situation where a non-resident has been subject to Canadian tax in this situation, but there is a concern that the potential exists. The Canadian industry has argued that this concern in effect scares off foreign clients and denies them the ability to market to those parties.

• 1720

The notice of ways and means motion, which reflects the budget announcement, described a measure that would apply to a class of non-resident investment funds—pooled entities, essentially. The notice of ways and means motion proposed that the measure apply to non-resident funds having at least 150 unit holders, which is essentially the definition that applies in our domestic law to define a mutual fund. Indeed, this was initially the population of non-residents that had been identified by the industry as the relevant potential clients they wanted to market to.

Subsequent to the budget, and subsequent to the tabling of the bill, representations were received from the industry to the effect that the potential range of clients they would like to be able to attract included not only widely held pooled entities but narrowly held entities—even individuals and industrial corporations that had portfolios of investments. As a result, this amendment would expand the scope of the measure to deal with not only pooled non-resident entities, but a much broader range of qualified non-residents, which would include individual persons and corporations.

The second major change proposed is that the budget originally proposed, and the bill sets forward, a restriction that would apply in circumstances where the Canadian service provider did not deal at arm's length with the fund, its client. This was motivated by a concern that where the Canadian service provider had a relationship with the non-resident party, the terms of the engagement might possibly be modified or set out in a way that could potentially result in taxable income that would otherwise be reported in Canada by the service provider being shifted offshore to the non-resident entity.

So the bill set out a requirement that in those circumstances, the relief provided by the rule would only be available if the non-resident entity met a turnover test. Specifically, it was set out that the relief would only be available to a non-arm's-length fund if its rate of investment turnover were less than three times annually. In other words, it had to be a fund that had a relatively passive portfolio of investments that weren't turning over on a very regular basis. Low turnover, in a sense, is indicative that the fund is essentially passive in nature; it's not carrying on an active business. If it's not carrying on an active business anywhere, presumably it's not carrying on business in Canada; therefore we ought to be comfortable in providing this relief.

There have been concerns expressed that the turnover test may unwittingly impose, on investment entities for tax purposes, inappropriate investment guidelines; that funds might be tempted to make decisions to reduce the turnover they would otherwise have, in order to get within the provisions of this rule. In this way, it could have an impact on capital markets, where the tax system might result in inappropriate portfolio management decisions.

This amendment suggests a different approach to the non-arm's-length problem. It ensures that in situations where the Canadian service provider is non-arm's length from either the fund or the sponsors of the fund—which may be different legal entities—the relationship between the two parties would be subject to a general set of rules that are in section 247 of the Income Tax Act. They require that non-arm's-length parties transact on arm's-length terms. That ensures that the Canadian tax base is projected. It's an alternative way of seeking to address the same policy result and perhaps one that wouldn't be expected to influence portfolio decisions in the same way.

• 1725

There are in addition a number of smaller wording changes, which are outlined in the explanatory note to the proposed amendment. Because these changes, particularly the change to the scope of the non-resident parties to whom the measure applies, essentially follow throughout the measure, the amendment takes the form of simply replacing the whole text rather than replacing numerous lines throughout the amendment.

Mr. Paul Szabo: In essence the change to the turnover test ensures that under section 247, transactions between the service provider and non-residents take place on arm's-length terms, which is really the objective.

Mr. James Greene: That's correct.

Mr. Paul Szabo: Mr. Chairman, we're quite convinced that this is in order on the basis of the limiting nature rather than the tax expansion nature, and also on the basis of the improved propriety of the testing in terms of replacing the turnover test. The members will realize that the other amendments are substantial, but the texts of the amendments are really definitional and consequential to the changes that have been outlined in the first two items.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): May I ask a question?

I was just thinking I would go through this since we are waiting anyway. If the non-resident's family resides in Canada, they have income and they have investments. What kind of ruling would we have for them?

The Chair: Mr. Lalonde will answer that.

Ms. Sophia Leung: That's the case. A lot of businessmen do that and they don't contribute to our tax system. Their families have all the benefits.

The chair asked me to direct this question to you. For the non-resident's family who reside in Canada, what kind of tax obligation do they have? If they have income, investment, and property, what kind of obligation do they have? They enjoy all the benefits. Thank you.

• 1730

Mr. James Greene: Mr. Chairman, as I understand the question, if this non-resident had family members who were residents of Canada, those family members would be subject to the general provisions in the Income Tax Act. As residents of Canada, they're subject to tax on their worldwide income under the usual principles in the act. This measure would not in any way provide any relief from taxation for those individuals.

Ms. Sophia Leung: But if you don't have an income, you will not pay income tax?

Mr. James Greene: Yes, in the sense that the act only imposes tax on what is actually earned by residents.

Ms. Sophia Leung: But they do have the benefits of everything as a resident.

Mr. James Greene: Well, this rule only deals with the situation of non-residents. It confirms that a non-resident does not become taxable by virtue of hiring a Canadian firm.

Ms. Sophia Leung: You did not answer my question.

The Chair: We're going to move to the vote.

Did you get your answer, Ms. Leung?

Ms. Sophia Leung: Not really.

Mr. Gérard Lalonde: Well, maybe I could try again.

Ms. Sophia Leung: It's a different topic.

Mr. Gérard Lalonde: Yes, I think it's a different topic. This doesn't deal with the situation of a Canadian resident who has non-resident family. In that circumstance, the Canadian resident is taxable on their own worldwide income and the non-resident family is subject to the rules in whatever country they were resident in.

The Chair: We'll vote on the amendments. Shall G-2 carry?

Mr. Ken Epp: Well, just a minute. This is not being ruled—

The Chair: It's not being ruled out of order.

Mr. Ken Epp: It isn't? So the clerk changed her mind? What happened here? Can you just give us a little...? Paul made a plea. Do we not now have to say formally that the plea was accepted? Do we just—

Mr. Paul Szabo: We were made aware of the possible disallowance of the amendment being in order. Discussions were held with departmental officials to review the details and the facts. The department is satisfied that the motion is in order for the reasons I articulated. There certainly are points for debate, but the bottom-line analysis is that this is not inconsistent with the intent of the legislation.

Mr. Ken Epp: All right.

The Chair: Let's go to the amendment. Shall the amendment carry?

(Amendment agreed to)

(Clause 21 as amended agreed to on division)

(Clauses 22 to 49 inclusive agreed to on division)

(On clause 50)

The Chair: You all have the documents in front of you. Now we're dealing with amendment G-3 under clause 50.

Mr. Paul Szabo: I'd like to move G-3. Mr. Chairman, the members will know that as part of the testimony from a variety of witnesses, there was concern about the penalties imposed under this section. Ostensibly what G-3 does is set a ceiling on the penalty so that it will be the “lesser of”. The amount is lesser of $100,000, etc. So in fact, it is limiting the penalties prescribed. That is the fundamental purpose of that amendment.

It's also amended to add proposed subsection 163.2(15), which says that third-party penalty provisions “do not apply to an employee”. So I move that amendment, G-3.

The Chair: Shall G-3 carry?

Mr. Ken Epp: Whoa, whoa!

The Chair: This committee has to learn to slow down a bit.

Mr. Epp.

Mr. Ken Epp: I have a question with respect to this. We had some fairly strong presentations to this committee on the whole concept of there being a penalty at all. It's true that instead of letting $1,000 be the floor you've changed it to the ceiling, right? That's what this amendment proposes. Am I not right there?

• 1735

Mr. Paul Szabo: Yes, $1,000 is a starting point, but there is no ceiling under the legislation presently before the committee. This amendment establishes a ceiling of no more than $100,000.

Mr. Ken Epp: No more than $100,000?

Mr. Paul Szabo: Yes.

Mr. Ken Epp: Okay.

Mr. Paul Szabo: Under the current legislation it could be substantially more.

Mr. Ken Epp: Mr. Chairman, if you'll indulge me, please, I want to encourage the members of this committee to reject this particular clause because I think a professional person doing somebody else's accounting for him or her has, in a sense, a client-professional privilege, not unlike that of a lawyer, and is acting on the instructions of that person. If there is a false statement being made it could very well be that the practitioner is not even aware of that. Yet how is the court ever going to prove that he or she was not aware of something that was written?

I think we should really have some serious second thoughts about this, the whole idea of having a penalty at all. I'd like a little debate on that, and if I could be persuaded otherwise, I'll become a little softer on it, but otherwise I would like to persuade the members of the committee to say no to clause 50.

The Chair: Thank you, Mr. Epp.

Mr. Szabo.

Mr. Paul Szabo: I share Mr. Epp's concern in terms of a blanket. But in fact there are three types of conducts primarily that are covered by this penalty provision under the indifference test.

It's where someone passively participates in non-compliance, a wilful or reckless test is applied, and/or if someone actively disregards. So in reply to Mr. Epp's concern, the application of these penalties would be clearly where there was indifference, negligence, or active participation in a fraudulent act. That was made very clear in response to the concerns raised by the Canadian Institute of Chartered Accountants and other professionals who came before us—

Mr. Ken Epp: But that's what it said before and they came to the committee and objected to it. Why did they object to it?

Mr. Paul Szabo: On the principle alone, because there is a question. And I would submit to you as well that the cases under which culpable conduct would come up would in fact also be grounds for being removed from membership of the Canadian Institute of Chartered Accountants under its existing rules.

In other words, if you can get thrown out of the Canadian Institute of Chartered Accountants today, you also could be subject to these penalties, and that is the extent of it. This is participating in an offence by failure to act in a professional manner.

Mr. Ken Epp: My question then is, if there's a defence lawyer, say, in a criminal case, and that defence lawyer puts forward evidence clearly in order to defend his or her client, and that would help to exonerate the client, but that counsel may know that the particular evidence is on shaky ground.... I think this is under the same thing, and I think we should seek to preserve the professional-client relationship that exists with lawyers in this particular case. I think, in general, the same is true. I don't think an accountant can be required to provide evidence against his client, can he, in Canadian law?

Mr. Paul Szabo: The issue is not whether they can provide evidence; it is whether there is evidence that they have been culpable with regard to an offence, again, under the Income Tax Act.

Mr. Ken Epp: I think it's well worthy of us to say no to this particular clause. I would urge all of the members here to say a very hearty no to this clause.

Mrs. Karen Redman (Kitchener Centre, Lib.): Can we call the question?

The Chair: Will G-3 carry?

(Amendment agreed to on division—[SeeMinutes of Proceedings])

(Clause 50 as amended agreed to on division)

(Clauses 51 to 58 inclusive agreed to on division)

(On clause 59)

The Chair: G-4?

• 1740

Mr. Paul Szabo: Mr. Chairman, I'd like to move G-4. Amendment G-4 basically deals with a situation where a share of a new company replaces a share of an old company. What it allows to happen is that for purposes of the five- or eight-year rule, under the holding period under the labour-sponsored venture capital corporations rules, that the date of the issuance of the original shares would apply, or be deemed to be applied, to the new share. It's basically allowing a continuity of a transaction even though one set of shares replaces another. It's moved on the basis that this is in connection with the issue of a replacement share. It just clarifies and it provides for that eventuality.

(Amendment agreed to—[SeeMinutes of Proceedings])

(Clause 59 as amended agreed to on division)

(Clauses 60 to 69 inclusive agreed to on division)

(On clause 70)

The Chair: Now we have G-5.

Mr. Paul Szabo: I'd like to move G-5, Mr. Chairman, and in fact this flows from the penalty, G-3. Again, it's a repetition of the same provisions of that. It parallels the changes proposed for the GST and HST, and, in addition, it's for consistency.

The Chair: Thank you. Shall G-5 carry?

(Amendment agreed to on division—[See Minutes of Proceedings])

(Clause 70 as amended agreed to on division)

(Clauses 71 to 73 inclusive agreed to on division)

The Chair: Shall clause 1 carry?

Some hon. members: Agreed.

Some hon. members: On division.

The Chair: Shall the title carry?

Some hon. members: Agreed.

Some hon. members: On division.

The Chair: Shall the bill carry?

Some hon. members: Agreed.

Some hon. members: On division.

The Chair: Shall I report the bill to the House?

Some hon. members: Agreed.

Some hon. members: On division.

The Chair: I don't know how many minutes we have before the vote. Three minutes? That gives us plenty of time to go over another report. I'll suspend.

The meeting is suspended.

• 1742

• 1825

The Chair: I'd like to resume the meeting. We'll now deal with some motions to approve the draft report, entitled “Prevention Today...Savings Tomorrow”.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Should I make the motion, then?

The Chair: Yes.

Mr. Roger Gallaway: I don't know if this is a one- or two-step process, but I would move that the committee approve the report as presented and that the committee authorize you to report this to the House.

The Chair: Can I also have a motion that says that the chair, researchers, and clerk be authorized to make such typographical and editorial changes as may be necessary without changing the substance of the report?

Mr. Roger Gallaway: Absolutely.

The Chair: Thank you.

[Translation]

Ms. Jocelyne Girard-Bujold: On division.

[English]

The Chair: Everything is on division here, yes.

[Translation]

Ms. Jocelyne Girard-Bujold: Fine, Mr. Chairman.

[English]

The Chair: We're not going to have any dissenting opinions, apparently, is that true? All the members of the opposition, is that right?

[Translation]

Ms. Jocelyne Girard-Bujold: No, no. I meant on division.

[English]

The Chair: But on division, of course.

[Translation]

Ms. Jocelyne Girard-Bujold: Right.

[English]

The Chair: So it is that the seventh report of the committee be adopted and that the title of the report be “Prevention Today...Savings Tomorrow”; and that the chair be instructed to present the seventh report of the committee to the House. Thank you very much.

[Translation]

Ms. Jocelyne Girard-Bujold: Is that it?

The Chair: Yes.

Ms. Jocelyne Girard-Bujold: On division.

[English]

The Chair: On division, yes, that's right.

(Motion agreed to on division)

The Chair: This meeting is adjourned.