Dissenting Opinion of the Bloc Québécois
Finance Committee Report
Subject: Taxable Canadian Property
Introduction:
Never could the Bloc Québécois have imagined that the Finance Committee's Liberal majority would go so far in its shameful attempt to bury one of the worst scandals ever to see the light of day in the Finance and Revenue Departments. On one hand, the majority report harshly attacks the credibility of one of our parliamentary system's most important institutions, the Office of the Auditor General of Canada. On the other hand, the report comes up with a twisted interpretation of the Income Tax Act in order to justify the incoherence of Revenue Canada and the Finance Department, in blindly relying on the testimony of six private-sector experts who are in obvious conflict of interest.
The first part of this minority report deals with the attempt to undermine the credibility of the Auditor-General, while the second part deals with the technical aspects concerning the changes to the Income Tax Act.
Part One: The Auditor General's Report
A) Outright attack on the Auditor General
In its report, the Finance Committee's Liberal majority threw itself behind an unprecedented attack on the Office of the Auditor General of Canada, one of our democratic system's most respected institutions. In an underhanded and roundabout manner, the Liberal majority is trying to denigrate an institution whose primary purpose is to ensure government reckoning in the carrying out of its functions. The Committee has gone so far as to question the expertise, the role and the very mandate of the Auditor General.
Already, during Committee hearings, we have been present at disgraceful scenes where, for more than one and a half hours, the Finance Committee Chairman excessively and outrageously attacked the Auditor General's credibility. Much more conciliatory with the government's deputy ministers, the Committee Chairman was obviously advised by the army of experts from the Finance and Revenue Departments, who were attentively present at all of the committee meetings on the Auditor General's Report concerning family trusts.
Thus, it is obvious that failing to kill the message, the Liberal majority decided to attack the messenger. However, despite the majority report's claims that « in the Committee's view, it is not the role of the Auditor General to settle whatever technical ambiguities or uncertainties may arise in a given field of work » (majority report, p.3), a sustained analysis of the role and mandate of the Auditor General quickly demolishes the limits that the Liberal majority wants to impose on him.
B) The mandate and role of the Auditor General
The Office of the Auditor General has a role of primary importance in the government's « obligation of accountability » by conducting an independent evaluation of the information that the government presents to Parliament. In this way, as is stipulated in an information document from the Office of the Auditor General: « The Auditor General aids accountability by conducting independent audits of federal government operations. »
(Auditing for Parliament, Office of the Auditor General, p.4).
Furthermore, the Liberal majority's claims do not stand up to an in-depth study of the mandate given in the Auditor General's Act (AGC, Chapter A-17, 1977). In effect, Section 7(2)(b) reads:
- « Each report of the Aufitor General under subsection (1) shall call
attention to anything that he considers to be of significance and of a
nature that should be brought to the attention of the House of
Commons... »
Does a Revenue Canada decision that seems to go against the spirit of the Income Tax Law, which was hurriedly made without any written record one December 23, and which could cost « Canadian taxpayers hundreds of millions of dollars », according to the Auditor General, deserve being brought to the attention of the House of Commons? To ask the question is to answer it.
The Act is even more clear in specifying in paragraph b) of the same section that the Auditor must make a report « particularly in cases where he has noted:
- b) essential records have not been maintained or the rules and
procedures applied have been insufficient to (...)secure an effective
check on the assessment, collection and proper allocation of the
revenue(...) » (authors' underlines)
The Act from which the Auditor General draws his mandate is unequivical. Nevertheless, the Liberal majority attacks it by trying to discredit the Auditor General's role for the most obscure reasons.
C) Precedents from previous years
The Auditor General has reported many times on the technical application of the Income Tax Act. In his 1984, 1985, 1987, 1989, 1990, 1992 and 1993 reports, the Auditor General allowed himself to analyse the Act's application without anyone questioning his mandate, his expertise or even the relevency of his intervention. To the contrary, the Liberals, while in Opposition, did not hesitate to make use of the Auditor General's Report in order to attack the Conservative government.
In fact, on November 24, 1992, upon the release of the Auditor General's Report during their last year in Opposition, the Liberals' first six questions where on a chapter of the Report dealing with the application of the Income Tax Act. Minister Martin even changed the Act in his 1994 Budget in order to apply some of the Auditor General's recommendations. This about-face by the Liberals gives us a glimpse of the potential influence of partisan and petty interests in reaction to a scandal which strikes home for senior bureaucrats and probably those close to the Liberal party.
D) The attempt to stifle the family trusts scandal
So how can this outright attack by the Liberal majority against one of the pillars of our system of parliamentary reckoning be explained? A look at all of the events that followed the tabling of the report reveals the « partisanship » apparent in the Liberal government, which is trying to smother the entire affair. A few days after the tabling of the report, Liberal MPs promised to shed complete light on this scandal. The Member for Brome-Missisquoi even issued a communiqué entitled: « The Auditor General has done an excellent job ». (press release, May 16, 1996)
Nevertheless, that same day the Liberal government completely changed its attitude towards this issue when the Globe and Mail revealed the identity of the holder of the family trust in question. And, contrary to what the Liberal report claims, it is because of a source inside the federal government itself that the names where divulged, and not because of details contained within the Auditor General's Report.
Following the Globe and Mail's revelations, the government muzled the Public Accounts Committee by transferring the family trusts issue to the Finance Committee where the chairman is not from the Opposition. For the Bloc Québécois, it is obvious that this change in attitude represents an obvious bad faith seeking to stifle this scandal through delay tactics and to undermine the credibility of the Auditor General through unjustified attacks.
E) Conclusions to be drawn
Faced with such a deplorable attitude and flagrant lack of political will, we cannot help but come to the conclusion that the government is seeking to protect individuals who are close to the inner political circles, having benefited from Revenue Canada's largesse. A possible conflict of interest could even be seen in the shamefull manner in which the government has behaved in the face of such an evident scandal. How else can these decisions be explained?
By these actions and by the tabling of its report, the Liberal majority shows the little respect that it has for parliamentary institutions, and brilliantly succeeds in perpetuating the public's cynicism in the face of politicians who devote more to the interests of their party than to good government.
That is part of the reason why the Bloc Québécois disassociates itself from the Liberal report. The other part of our minority report presents technical arguments which show that, even at the level of their interpretation of the Income Tax Act, the Liberal majority is blinded by the justification of incoherent decisions taken by Revenue Canada.
Second Part: The technical risk of the transfer of family trust assests outside of Canada
A) Context
As is known, the Auditor General examined two early decisions concerning the transfer to the U.S. of property worth at least $2 billion, previously held in Canadian family trusts. The Standing Committee on Finance was given the mandate by the Minister of Finance to study the ambiguous clauses of the Income Tax Act (hereafter referred to as the Act) raised in the Auditor General's Report. In order to analyse and correctly interpret the Act, the Finance Committee called as witnesses a series of tax experts.
In its report, against all expectations, the Committee wholeheartedly endorses Revenue Canada's interpretation in relying solely upon the testimony of 6 to 8 experts, without even expressing its opinion on the relevency of the witnesses heared. The Liberal majority only retained the comments of practicing tax experts, themselves able to make this type of tax preparation, but never thought it necessary to include the comments of a neutral person like the eminent Professor Brooks of York University in Toronto.
B) Principal risk submitted to the Finance Committee
It is an extremely technical issue, which refers to many clauses in the Act. Despite everything, the technical risk can be summed up in one relatively simple question. The basic question that the Finance Committee should have examined was to know if the legislater's will was clear. Yes or no, can Canadian residents own TCP. The Liberal majority's document also mentioned that the essential question on which the decisions depended was, upon final analysis, to know whether property could be a Canadian resident's TCP.
If the answer is yes, it is therefore possible for a Canadian resident to transfer property abroad in avoiding the immediate Canadian taxation. In the case in question, taxes would be collected by the American government rather than the Canadian government if the transfered property is sold more than ten years after the transfer. If, on the other hand, the answer is no, as we believe, then the capital gains would be considered taxable as soon as the property leaves the country.
C) Just what is a TCP?
According to the Act, all trusts located in Canada and which transfer property abroad are generally considered to have earned capital gains accumulated since 1971 relative to this property. However, certain categories of property called « taxable Canadian property » (TCP) are exceptions to this rule. TCP was, up until Revenue Canada's early decision, the prerogative of non-residents. In this regard, the intent of the legislation was, in all likelihood, to structure the taxation of capital gains earned by non-residents.
This early decision is mainly aimed at determining if paragraphs 107(2) and 107(5) of the Act apply when shares in a public limited company are allocated by a trust to a non-resident beneficiary. In this specific case, the public company shares were obtained several years prior by the trust in exchange for private company shares. It must be noted that TCP includes shares in private Canadian companies but generally excludes shares in a public company. However, line 85(1)i) of the Act indicates that public company shares constitute TCP when they are acquired in return for private company shares. This is what the trust emphasised in its request for an early decision.
However, according to the Act, this clause only applies when public company shares are received by non-residents.
D) Use of the notion of TCP within the Income Tax Act
The Act is structured in such a manner as to separate the subjects into different sections. Thus:
-
capital gain is treated under sub-section C (art. 38-55);
- trusts and their beneficiaries are covered by sub-section K (art. 104-108);
- the definition of the notion of « taxable Canadian property » if found in paragraph 115(1) of section D dealing with taxable income earned in Canada by non-residents.
In the Act, when the use of the notion of TCP becomes relevant for a resident, it is usually precise. The following examples demonstrate this:
-
- line 48(1)a):
-
« ...any property that would be taxable Canadian property if at no
time in the year he [taxpayer] had been resident in Canada... »
- - paragraph 107(5):
-
«(...)or property that would, if at no time in the taxation year of the
trust in which it is so distributed the trust is resident in Canada, be
taxable Canadian property(...) »
E) Revenue Canada's interpretation
The paragraph used by the taxation authorities in 1991 to justify the transfer of a family trust's property, tax free, outside of Canada, is paragraph 97(2). This paragraph is found in sub-section J dealing soley with partnerships. It makes no reference to the notion of TCP prior to the 1981 changes. Now, it must be stressed that the notion of TCP has been in existence since 1972, and according to the explanatory notes provided the Finance Department at the time, the change to paragraph 97(2) was aimed at applying the same operating rules to companies as paragraph 85(1) sets out for tranfers of property to a corporation. At no time was this change to paragraph 97(2) seen as a change in the concept of TCP. It must be concluded that, when the notion of TCP was introduced in article 97, the legislation's intention was in no way aimed at the utilisation of the notion of TCP by residents.
Revenue Canada's decision does however mean that residents can own TCP, which constitutes a precedent based soley on paragraph 97(2) of the Act. Now, as we have previously emphasised, the paragraph on which the Finance Department relies only deals with companies. Why has the implied meaning of an article limited to companies been used to say that, throughout the Act, Canadian residents can own TCP? The Finance Department's claim is that this article implies, giving it validity, that residents can own TCP, even though this is not expressly mentioned. The entirety of the early decision rest on this claim.
F) The Liberal majority's position
The Liberal majority's report never called into question the use of a single line of article 97 limited to the taxation of partnerships to resolve, over the lawmaker's intent, such important stakes. The Liberal members never answered the essential question which they themselves had raised in their report. Instead, the Liberal majority was content to blindly rely on the analysis of 6 to 8 invited experts, all of whom came from private firms. In doing so, the Committee's Liberal MPs failed in their parliamentary duty by refusing to speak out on the relevency of the experts' remarks or on the possible conflict of interest since these experts advise the very clients who are able to carry out this type of transaction.
G) The position of the Bloc Québécois
Even if the heart of the matter rest entirely on the holding of TCP by residents, this point was not studied in the majority report. Never was the use of paragraph 97(2) in determining that residents can hold TCP called into question.
Yet, it seems obvious to us that the use of an article dealing with the taxation of partnerships in the determination of the taxation of offshore transfers of family trust property goes against the lawmaker's intent concerning the notion of TCP. Only non-residents should be able to make use of TCP. Consequently, line 97(2)c) of the Act should be repealed, which would eliminate this type of fiscal planning, which the Auditor General justly denounces.
Our position agrees with that of Professor Neil Brooks, an expert of unquestionalble impartiality. Contrary to the opinions of other experts who testified before the Finance Committee and who earn their living by advising their clients in fiscal and legal matters, Professor Brooks rejected the application of the notion of TCP to residents. His eloquent commentary goes to the heart of the matter:
- « My position is that the ruling the taxpayer received in this case is
wrong in law, in policy and in common sense. The whole ruling
turns on whether or not a Canadian resident can have taxable
Canadian property. It seems to me for three good reasons, the
answer is absolutely not. First of all, Canadian residents are taxed
on their on their world wide income. Why would you ever need a
concept like taxable Candian property to apply to them since they
are simply taxed on all their gains no matter what type they
own?...it simply makes no sense to slice kinds of property since
they're taxed on all their property...Secondly, every section of the
act that applies concept of taxable Canadian property is
absolutely clear....The only exception to that is an obscure section
97(2)c) which applies to the partnership rollover section... »
The other expert witnesses never questioned this argument of Prof. Brooks. The will of the lawmaker is evident. Only a small ambiguity arises from line 97(2)c). The Auditor General concluded as well that the Act, specifically paragraphs 107(5), 115(1), 128(1) and 85(1), is relatively clear on the will of the lawmaker to ensure that Canadian residents cannot have TCP. And once again, none of the witnesses questioned this conclusion. Why does a category exist for property called TCP, if not to structure the taxation of capital gains of non-residents?
Conclusion:
Following the facts established in the previous sub-sections, we make the three following recommendations:
The MPs of the Bloc Québécois, September 18, 1996
Yvan Loubier, Richard Bélisle