[Recorded by Electronic Apparatus]
Wednesday, May 29, 1996
.1530 
[English]
The Chairman: Could we come to order?
The finance committee of the House of Commons is again looking into the question of taxable Canadian property. We have with us officials from the finance and national revenue departments to respond to our questions and concerns.
Were there any things you wanted to bring up before we go into questions, Mr. Gravelle?
Mr. Pierre Gravelle (Deputy Minister, Department of National Revenue): Mr. Chairman, yesterday I shared with the clerk of the committee the December 19 draft legal opinion as well as the formal legal opinion that was given to Revenue Canada by the Department of Justice, which allowed us to arrive at the decision for the tax ruling. If it would be of interest to members, Mr. Ian MacGregor from the Department of Justice would be pleased to take you through the legal opinion. This would to a great extent answer many of the technical questions that were asked of us yesterday.
[Translation]
The Chair: That's a good idea. Mr. Loubier, would you like the Department of Justice to make a presentation on its legal opinion?
Mr. Loubier (Saint-Hyacinthe - Bagot): Yes, thank you.
The Chairman: You may begin.
Mr. Loubier: Are we talking about the same opinion?
The Chairman: The one given by the Department of Justice to the Department of Revenue.
Mr. Loubier: In December 1991?
M. Gravelle: In December 1991 and...
Mr. Loubier: And in January 1992.
Mr. Gravelle: That's right. The official legal opinion.
[English]
Mr. Loubier: Okay.
Mr. Ian S. MacGregor (Assistant Deputy Attorney General, Tax Law Services, Department of Justice): Mr. Chairman, I believe you have a copy of the statement provided entitled ``Legal Advice Provided by the Department of Justice''. Is that before the committee?
[Translation]
Mr. Loubier: Mr. Chairman, I have a lots of documents in front of me and I'd like to check on something if you don't mind. Are you alluding to the document titled "Traduction de l'opinion du13 janvier" from Mr. Read to Mrs. Toussaint?
[English]
Mr. MacGregor: No, sir. It's a document prepared by me regarding the legal advice provided by the Department of Justice. This was prepared quite recently.
The Chairman: Is that dated January 15, 1992?
Mr. MacGregor: No, sir. My statement entitled -
[Translation]
Mr. Loubier: On a point of clarification. That is the translation of the legal opinion from Justice, the statement prepared for the Standing Committee on Public Accounts? That is what it is?
I have a question for Mr. Gravelle before beginning. I'd like you to tell me how the memo titled "Opinion of January 13, 1992: Memorandum from Mr. Read for the attention of Mrs. Carole Toussaint" ties in with this file.
Mr. Gravelle: If I'm not mistaken, the date on that memo is December 19?
Mr. Loubier: No, January 13, 1992.
Mr. Gravelle: The memo with the date January 13 is the legal opinion from Justice. It had been discussed before the advance ruling and was confirmed in writing on January 13, 1992.
.1535
Mr. Loubier: So it's a more explicit clarification of the analysis which led you, in December 1991, to make the decision you rendered in the case we're concerned with.
Mr. Gravelle: Exactly, Mr. Loubier.
You have before you three documents: the draft legal opinion of December 19, the formal opinion of January 13, 1992, and Mr. MacGregor's presentation.
Mr. Loubier: Does the presentation that is going to be made flow from the opinion of January 13, 1992?
Mr. Gravelle: Exactly.
Mr. Loubier: That means that later on we'll be able to put questions to you using the explanation based on the document from Justice as well as the January 13, 1992, document. Is that right?
Mr. Gravelle: Absolutely.
Mr. Loubier: Perfect.
[English]
Mr. MacGregor: Thank you.
Starting with the issue, the issue that faced counsel was whether a Canadian resident disposed of taxable Canadian property, TCP, for purposes of the deeming provisions of paragraph 81(1)(a) of the Income Tax Act, when the resident transferred shares of a private corporation to a public corporation in exchange for shares of the public corporation pursuant to a subsection 85(1) roll-over.
The statement is divided essentially into two areas, one being process and the other being substance. I understand that the committee's concern today is more with the substance than the process, so let me deal very quickly with the process just by pointing out that initially and without any consideration of subsection 97(2), counsel advised Revenue informally that it appears that a Canadian resident cannot have TCP. Subsequently, however, upon consideration of 97(2), counsel advised that the better view of the law was that a Canadian resident can have TCP. Counsel advised that there was an arguable position to the contrary, and this view was expressed in the draft opinion dated December 19, 1991, and I believe you have a copy of that.
However, with the exception of the initial discussion where 97(2) was not considered, counsel advised throughout, in discussions both prior and subsequent to the provision of the draft opinion, that the better view was that the shares of the private corporation held by the Canadian resident in the circumstances would constitute TCP.
This position that a resident could hold TCP in the circumstances - which represented the better view of counsel - was reinforced by the stated policy views of Finance, was confirmed by counsel to senior Revenue officials on December 23, and was reflected in the final legal opinion provided to Revenue Canada, and I believe you have a copy of that.
Let me just add that the release of legal advice is a rare step which is considered only in exceptional circumstances. Legal advice is provided in the context of the relationship of solicitor and client and is maintained in a confidential basis so as to ensure the full and open provision of legal advice without reservation, which is essential to the proper functioning of government. Because, however, the report of the Auditor General raises concerns regarding the integrity of the Revenue administration in the circumstances of this ruling, we are of the view that there is a significant public interest that the communication between Revenue and Justice be understood in this ruling's process, and it is in this context that the legal advice in question is being made available.
Let me turn to the substance. In the written advice discussing the statutory provisions, counsel began by referring to provisions which established that non-residents are taxed in Canada only in gains from the disposition of TCP. When TCP has relevance for a resident, it was noted that the act is generally specific, and two of the provisions referred to in the written advice were subsections 48(1) and 48(3).
.1540
For example, when counsel refers to subsection 48(1) in this regard with respect to the exclusion of TCP from the deemed dispositions mandated immediately before a taxpayer ceases to be resident in Canada, the relevant statutory provision referred to reads as follows: ``any property that would be taxable Canadian property if at no time in the year the taxpayer had been resident in Canada''.
As previously explained by the statement of the Deputy Minister of Finance, Canada only taxes a former resident's gains on TCP - as with other non-residents' gains on TCP - on realization. In the situation under consideration, the question was whether a Canadian resident with shares of a private corporation, which themselves would be TCP in the hands of a non-resident, could maintain that such shares were TCP to the resident, with the result that the shares of the public corporation taken back on the section 85 exchange are deemed to be TCP pursuant to paragraph 85(1)(i).
What was the ruling's concern? Given that paragraph 85(1)(i) does not contain a clause similar to that set out above - that the property would be TCP ``if at no time in the year the taxpayer had been resident in Canada''; that is, a clause similar to that usually found elsewhere when TCP is to have application to residents - concern was expressed that 85(1)(i) would apply only to non-residents. The suggestion was that 85(1)(i) is an anti-avoidance provision intended to prevent a non-resident with TCP from using the roll-over provisions of section 85 to convert TCP into shares that would not be TCP, and so avoid any Canadian tax in the disposition of such shares.
The Deputy Minister of Finance in his statement has confirmed that 85(1)(i) was intended to prevent a non-resident from escaping tax in this manner. The problem area is subsection 97(2). Section 85 provides for a roll-over under certain conditions when property is disposed of to a corporation for shares of that corporation. Subsection 97(2) provides a similar roll-over in respect of the transfer of property to a partnership in exchange for a partnership interest. The provisions of paragraphs 85(1)(a) to (f) apply with the appropriate changes to the section 97(2) roll-over. As with 85(1)(i), the deeming provisions of 97(2)(c) simply refer to a situation where the property disposed of is taxable Canadian property of the taxpayer.
Under 85(1)(i), the shares of the corporation received as consideration for the property shall be deemed to be TCP of the taxpayer. Under 97(2)(c) the interest in the partnership received as consideration for the property shall be deemed to be TCP of the taxpayer. However, 97(2) by its terms can only reasonably be interpreted to apply to taxpayers resident in Canada. Why is that? Section 97(2) speaks of the transfer of taxable Canadian property to a partnership that immediately thereafter is a Canadian partnership of which the taxpayer is a member. So the transfer is to a Canadian partnership of which the taxpayer is a member.
Section 102 defines Canadian partnership: all members are resident in Canada. So the partnership interest taken back, which is deemed to be TCP by definition, is taken back by a Canadian resident. Therefore the conclusion again that 97(2) by its expressed words leads to the conclusion that TCP can be held by a resident. Again, the partnership interest taken back is taken back by a resident, and that is deemed TCP by 97(2)(c).
.1545
No other reasonable conclusion lies in the language of that provision, so this provision would be used to interpret other provisions, the statutory assumption being that plain words must be given their ordinary meaning. You simply cannot ignore a provision. Again, this provision leads to what counsel said was the conclusion, without question, that a Canadian resident could hold TCP. As the concluding sentence in that paragraph indicates, counsel thus concluded that the expression TCP as used in 97(2)(c) can only have meaning if it applies to a resident.
Counsel also suggested that subsection 85(2) may also support the position that paragraph 85(1)(i) was intended to have application to resident taxpayers. Subsection 85(2) deals with transfers from a partnership to a corporation in exchange for shares of the corporation, and provides as follows: paragraphs 85(1)(a) to (i) - recall that 85(1)(i) is the paragraph under consideration - are applicable, with such modifications as circumstances require, in respect of the disposition as if the partnership were a taxpayer resident in Canada who had disposed of the property to the corporation - again, the clear suggestion that those provisions are applicable to the transfer or who is a taxpayer resident in Canada.
In addition, tax policy considerations were taken into account. In referring to the parallel provision in subsection 97(2), Finance tax policy provided unequivocal advice that paragraph 85(1)(i) was intended to apply to both resident and non-resident taxpayers.
Counsel, in his final opinion, set out the following excerpt from Mr. Short's December 23, 1991 letter to Revenue. I should add that at that time and since, Mr. Short has been the policy guru of Finance. He said:
- In our view, paragraph 85(1)(i) was intended to apply to both resident and non-resident
taxpayers. As we have discussed, a parallel provision in 97(2) by its terms applies only to
taxpayers resident in Canada. The policy intent was to have gains with respect to such property
continue to be subject to Canadian tax except to the extent provided otherwise by a tax treaty,
irrespective of the residence of a taxpayer at the time such property is disposed of by the
taxpayer.
- The Deputy Minister of Finance has confirmed that this remains the appropriate view in policy
terms.
Mr. Chairman, in this statement I have not dealt with what I understand are the additional concerns of the committee, that being the undertaking and the waiver provided. Mr. Beith would be willing to certain speak to that at this time.
.1550
The Chair: Is it the pleasure of the committee to hear from Mr. Beith on the issue of the waiver?
[Translation]
Mr. Beith will explain what a waiver is.
Mr. Loubier: Agreed.
The Chairman: Could you tell us about the waiver if you please?
Mr. R.M. Beith (Senior Advisor and Assistant Deputy Minister, Appeals Branch, Revenue Canada): Thank you, Mr. Chairman.
[English]
In his discussion yesterday the Auditor General made much of the waiver and undertaking. I'd like this opportunity to explain why they arose and why they were taken by Revenue Canada in the context of this ruling.
The waiver was offered by the family trust, which was the trust that remained in Canada. The waiver is to the effect that Revenue can apply subsection 107(5) to the family trust for the 1991 taxation year. That is in respect of the public company shares that were distributed to the non-resident trust. In effect, this would allow Revenue to assess the family trust for 1991 on a deemed distribution of the shares at their fair market value.
This was offered and accepted due to a concern that the protective trust that had moved to the United States could return to Canada and take the position that the public company shares were not TCP. In that event, under the operation of the Income Tax Act, it would be an increase in the cost base of the shares to fair market value. In our minds, that possibility could occur.
As the Auditor General has pointed out, taking the waiver and implementing it would require Revenue to take a position opposite to that taken in the ruling. However, there was a risk or a possibility that the protective trust might move back to Canada, and there was a degree of uncertainty as to the law. So we didn't want to get caught, and we've given a ruling with the better view. Nevertheless, the taxpayer might take a different view and the matter may wind up being litigated. Many years down the road, who knows what the courts will say about the whole matter?
In our view this was a prudent step to take, despite the fact that we considered the ruling to be sound in law and tax policy. Nevertheless, there was a degree of risk. From the point of view of the representatives, the waiver was offered as evidence of the bona fide intention of the taxpayers not to undertake transactions that would harm Revenue contrary to the proposals made.
Briefly, that is why we took the waiver. The Auditor General has suggested that it's a limited waiver, but it's not, it's an open waiver. A waiver can be revoked on six months' notice by the taxpayer, otherwise that waiver is open.
Let us moving on to the undertaking. The protective trust that moved to the United States provided an undertaking not to claim an exemption from Canadian tax under the Canada-U.S. treaty on any gains they might realize in a sale of the public company shares within ten years. It was not required to do this under the treaty. In fact, the trust was entitled to exemption under the treaty since it had only existed since 1987.
The Auditor General states that he cannot see how the undertaking and waiver can accomplish the policy objective of continuing to have the protective trust subject to tax in Canada for ten years. This was not the intention. They were offered by the taxpayers to deal with concerns that had been raised. They were not demanded by Revenue.
The Auditor General also has suggested that the effect of the waiver and undertaking was to allow the taxpayer to circumvent the intent of the law, and to replace the rules of general application with a set of special rules for one taxpayer. This is not the case. The issue was that a Canadian resident can hold TCP. This was found to be the case in law and policy. No special rules were applied.
.1555
We were aware that the undertaking might not be enforceable - the Cohen case has been mentioned at the Federal Court of Appeal - but in our view a taxpayer can choose to self-assess and not claim the exemption under the treaty. However, if he does not honour that and claims the exemption, Revenue can do little to redress that.
The undertaking was offered by the taxpayer, it seemed prudent to accept it, and there was no risk or downside in doing so. The Auditor General also noted that the published version of the 1991 ruling does not mention an undertaking and waiver. He is concerned that this omission implies that future rulings will be given without an undertaking and waiver. Revenue Canada is satisfied that the shares in question are TCPs through the distributing trust, and it was not necessary to state in the published ruling that a waiver and undertaking would be required.
Thank you, Mr. Chairman.
The Chairman: Thank you, Mr. Beith.
Thank you, Mr. MacGregor.
Would it be convenient to go to questions?
[Translation]
Mr. Loubier, if you please.
Mr. Loubier: The 1985 legal opinion mentioned by the Auditor General said, and I'm quoting part of it:
- In this context, we do not agree that paragraph 133(1)(c) of the Act contemplates the ownership
of taxable Canadian property by a resident of Canada. It clearly contemplates two situations: the
one to which you refer contemplates a corporation not resident in Canada (presumably a
pre-April 26, 1985, incorporation).
[English]
Mr. Beith: Perhaps I could speak to the 1985 opinion. That opinion was given onMay 31, 1985. The facts of that ruling, put forward in the request for an opinion, were whether or not on an exchange of shares under paragraph 85(1)(i) - what was being exchanged was more than 25% of a public company's shares, which were TCP, for less than 25% of public company shares...whether they would also be TCP by the operation of paragraph 85(1)(i). The opinion was that the shares would not be taxable Canadian property. This opinion was apparently provided without knowledge of the prior advance ruling that had been given to the contrary. That advance ruling had been given in January 1985.
The nature of opinions, as opposed to advance rulings, is somewhat different. Advance ruling are with respect to real proposed transactions. Detailed submissions are made, accompanied by documentation, and a thorough, rigorous process is followed in dealing with all of the issues raised in the ruling. An opinion is put largely as a hypothetical question, with few facts, and does not get the same priority in the rulings operation as rulings.
In our view, that opinion is incorrect. As I say, the parties were apparently not aware that a contrary ruling had been given several months earlier.
[Translation]
Mr. Loubier: Yesterday, Mr. Gravelle talked about a technical error in the 1985 opinion. Were you referring to the conclusion of that opinion which said that based on paragraph 133(1)(c) of the Act, a Canadian resident did not have to avail himself of the provision on taxable Canadian property?
Mr. Gravelle: Actually, what I had in mind was the explanation Mr. Beith just gave about the nature of the 1985 opinion.
Mr. Loubier: Is the technical error in the passage I have just quoted on paragraph 133(1)(c) to wit:
- ...we do not agree that paragraph 133(1)(c) of the Act contemplates the ownership of taxable
Canadian property by a resident of Canada.
.1600
[English]
Mr. Beith: No, I don't believe our response is based on the submissions made under section 133. Our view is that under 85(1)(i) the exchange would result in the taxable Canadian profit continuing through to the shares that were exchanged. That's our opinion today.
[Translation]
Mr. Loubier: Yes, but in view of the fact that in the 1985 opinion paragraph 133(1)(c) was mentioned, and that the fundamental question being asked is whether a taxable Canadian property may not be attributed to a resident, the conclusion is self evident. If this principle concerning taxable Canadian property had not been applied to the December 1991 decision, then we would not have seen $2 billion in family trust assets transferred to the U.S.A. without a single penny's income tax paid on capital gains. That's what Mr. Gravelle referred to yesterday when he said the technical error was to be found in the interpretation of paragraph 133(1)(c). Who is right? I must say that I'm slightly puzzled.
[English]
Mr. Beith: I must say I've not put my mind to 133(1)(c). It's certainly not one of the provisions that were advanced as being relevant in the context of the 1991 ruling. I remain with the position that -
[Translation]
Mr. Loubier: Just a minute, Mr. Beith. In referring to your legal opinion and your memo, I asked you, at the beginning of our exchange, if the opinion of January 13, 1992, was consistent with the legal opinion you were presenting. The answer being positive, I'm questioning you on that. On page 4, in your analysis and legal opinion, you refer to paragraph 133(1)(c) which, in the case of the 1985 opinion, was used to reject Revenue's reasoning that concluded that taxable Canadian property could be held by residents. Now you're telling me that this is not relevant in the case of the 1991 decision confirmed by the January 1992 legal opinion, when that provision appears explicitly in your analysis which finally led to a contradictory opinion because you had decided that it was possible in view of can other legal provision.
Mr. Chairman, I think it's important to clarify this. Yesterday, Mr. Gravelle said there was a technical interpretation error in his 1985 opinion. I'm putting the question again today: Mr. Gravelle, did the technical error concern paragraph 133(1)(c)?
Mr. Beith, you are saying that paragraph 133(1)(c) was not relevant to your January 1992 legal opinion which confirmed the one you got in December 1991, whereas in your legal opinion explicit reference is made to paragraph 133(1)(c). I must say that this is not a very strong argument or approach. We're going to need clarification. So, is it paragraph 133(1)(c) that was relevant for that decision? Was Mr. Gravelle talking about the interpretation of paragraph 133(1)(c) when he alluded to a technical error in interpreting the Income Tax Act? If that is the case, say so. If it is not the case, I think there's a serious problem because it is relevant to the 1992 legal opinion, which says the opposite, and it is relevant to the 1985 opinion. We have now arrived at the conclusion that a Canadian resident cannot hold taxable Canadian property. There's an awful mishmash here. It's unbelievable.
[English]
Mr. MacGregor: I will be frankly not able to comment on this, because I'm not as familiar as I should be with the 1991 or the 1985 opinion.
.1605
[Translation]
Mr. Loubier: Mr. Chairman, I think something isn't right here. We've called in people from Justice who have written opinions. In the case of the 1992 opinion, they seemed quite sure of themselves, but it now seems that we're putting simple questions that are making them contradict themselves.
[English]
Mr. MacGregor: Can I just clarify one thing? Correct me if I'm misunderstanding. The 1985 opinion - and I stand to be corrected by my colleagues - is not a legal opinion. This is an opinion issued by Revenue. What we're referring to when we look at the January 13, 1992 opinion and the draft that proceeded from it are legal opinions from Justice. The 1985 opinion, although it uses the word opinion, really should be qualified to reflect a Revenue opinion.
[Translation]
Mr. Loubier: Yes, but in the 1985 opinion, whether it's from Justice or Revenue Canada, reference is made to paragraph 133(1)(c) of the Act to say that apparently a Canadian resident would not have the right to avail himself of the provision on taxable Canadian property. Before, when I asked Mr. Beith if that was relevant in the context of the other opinion, he answered that it was not and that we did not have to analyze that section of the Act.
I'm looking at the legal opinion itself. It refers to paragraph 133(1)(c), which has not changed between the time of the 1985 opinion and the 1992 opinion. There is a reference to the same paragraph, which seems relevant, because it is mentioned in the 1992 legal opinion, contrary to what Mr. Beith said. Finally, after going through all the sections and subsections of the Act that uphold or invalidate the December 1991 decision, the conclusion is that the best analysis is that taxable Canadian property may be used by residents. So this provision can be used for Canadian residents.
That is why I am raising the question. Yesterday, there was a technical error, today, there is legal ambiguity, and I prefer not to think about what might happen tomorrow.
Mr. Gravelle: Mr. Chairman, Mr. Farber would like to comment while Mr. MacGregor studies the contents of the 1985 opinion.
[English]
Mr. Len Farber (Director, Legislation, Department of Finance): Mr. Chairman, in reviewing some of the notes dealing with that opinion at that time, my understanding is that section 133 was used as an example. It is a section that relates to NROs - non-resident owned investment corporations. In that context, that particular section deals with taxable Canadian property in an NRO situation. Mr. Loubier is absolutely correct. That particular section does not provide for taxable Canadian property being owned by a resident corporation in Canada. It was used as one of the examples in that opinion, which at that time concluded that a Canadian couldn't hold taxable Canadian property.
In the same situation, when one uses other examples, the example of 97(2)(c) within the Income Tax Act, in the context of the ruling in 1991, was used to display what the structure and intent of all of those provisions are. While it may not have provided for the conclusion - and I believe Mr. Gravelle discussed this in his opening comments as being a conclusion that was in error and that was regrettable in the opinion at that time...
The paragraph 97(2)(c) example with respect to a Canadian partnership is a much more relevant example in concluding that a Canadian resident can hold taxable Canadian property. That was the context in which section 133 was utilized.
The Chairman: Also, do you have to
[Inaudible - Editor] three hours to explain to us the difference in taxation between a partnership and an NRO?
Mr. Farber: Mr. Chairman, those lectures are not gratis.
[Translation]
Mr. Loubier: Mr. Chairman, given the way in which the 1985 opinion was used, I must say I disagree with Mr. Farber. Paragraph 133(1)(c) is cited to call into question a previous analysis which said that a resident could take advantage of the provision on taxable Canadian property. This is not mentioned as an example, but rather as the basis of an analysis excluding Canadian residents from using the provision on taxable Canadian property.
.1610
Moreover, the 1992 legal opinion refers to exactly the same provision and to other sections of the Act. It sets out the sections that favour applying the concept of taxable Canadian property to residents. It also mentions other sections which state that residents cannot make use of this provision. Finally, they come up with a decision that, on the basis of everything that has been said, the best analysis would be that a Canadian resident can make use of the provision.
In my view, there was far too much ambiguity in the provisions of the Act you relied on to determine, in December 1991, that the $2 billion could be transferred out of the country without any income tax being paid on the capital gains.
I will go to my second question now, and give the legal experts time to sort through the material and provide us with a reasonable answer a little later. From the beginning, there has been nothing but ambiguity. I attended some of the meetings of the Public Accounts Committee, and I read the proceedings. Yesterday morning, you appeared before that committee with the Auditor General. Today, we are faced with a mass of contradictions, and we are having trouble understanding the logic of the ruling.
The ambiguity existed back in 1991. Did the departments of Revenue or Finance inform their political masters of this, either orally or in a written? Did you inform the Minister or the responsible departmental officials that the tax law was ambiguous as regards use of the provision on taxable Canadian property by Canadian residents?
Did you inform any elected official of this problem in any way whatsoever? The question is for Mr. Dodge, and them Mr. Gravelle.
[English]
Mr. David Dodge (Deputy Minister, Department of Finance): Mr. Loubier, I wasn't there at the time so I cannot answer that question. I don't know if Mr. Farber can answer it or not.
Mr. Farber: No, I was not aware of the opinion that was being issued in 1985.
[Translation]
Mr. Loubier: No, that is not what I asked. I asked you whether you people at the departments of Finance or Revenue had informed your Ministers that there was ambiguity regarding the use by residents of the concept of taxable Canadian property. Did you inform your Ministers of this ambiguity in the Canadian tax law in any way whatsoever?
[English]
Mr. Farber: From a policy perspective, Mr. Chairman, as we indicated in testimony the other day and repeat today, in tax policy terms we don't believe there is ambiguity with regard to a Canadian resident holding taxable Canadian property. But the issue at hand is exactly whatMr. Loubier says. The legislation is ambiguous. Were it not for ambiguity in the legislation, an advance tax ruling would not have been sought. The extent of the ambiguity has only become relevant in the context of the Auditor General's note. That is where the ambiguity has been publicized and has come to our attention, but in 1985 we certainly were unaware of that.
[Translation]
Mr. Loubier: Just a second, Mr. Farber.
You are telling us that the ambiguity is only in our heads, or in the Auditor General's documents. I would like to tell you that you're not talking to children or novices in government operations and tax law.
Yesterday, the Auditor General expressed an opinion that is exactly the opposite of what you have been saying since this matter was uncovered. I will quote what he said. If you find that his opinion is not credible, that is a different matter.
The Auditor General said, and I quote:
[English]
- So it does not appear to us that paragraph 97(2)(c) was meant to change a fundamental principle
on which the act is based. We're not convinced that this paragraph is meant to ensure that
taxable Canadian property could be owned by a resident of Canada...
Don't tell me that there is no ambiguity when we have two completely different interpretations - one from the deputy ministers of Revenue and Finance, and one from the Auditor General.
In addition, you still have not answered my question. Did the officials, and I believe you were among them, inform Parliament in the person of their Minister about the ambiguity in the interpretation of the Act?
.1615
If the interpretation of the Act had not been ambiguous, you would not have needed all these meetings with the Department of Revenue. You were meeting almost night and day during that last week to come up with an advanced income tax ruling on December 31, 1991.
My question is to you and to Mr. Gravelle: Did you tell Ministers or other representatives of Parliament about this problem in any way at all?
Mr. Gravelle: The debates that occurred within the Department's advance income tax rulings directorate showed that the Act is very complex and could give rise to different interpretations. There was an internal debate, and that is why we decided to require a legal interpretation, a clarification of the intent of the tax policy before we issued a ruling.
Mr. Loubier: But did you tell the Minister about the problem, particularly the Minister of Finance?
Mr. Gravelle: The discussions with Finance clearly showed that, from our point of view, there was an a priori problem. After we got the legal opinion and the clarification from the Department of Finance, we were able to issue the advanced ruling, and subsequently we did not pursue the issue of the clarity of the legislation within the Department.
Mr. Loubier: So no elected political figure concerned with the Department of Finance or Revenue was informed about the problem with the interpretation of the Act?
Mr. Gravelle: In cases involving ambiguities in the legislation, it is customary to discuss them directly with the Department of Finance.
Mr. Loubier: Yes, but I'm talking about politicians, elected representatives of the people. Were any of them informed about this problem?
Mr. Gravelle: I can tell you that my Minister was not informed about it.
Mr. Loubier: And the Minister of Finance of the day was not informed about the problem with the interpretation of the provision on taxable Canadian property when applied to residents?
[English]
Mr. Farber: Not to my knowledge, Mr. Chairman.
[Translation]
Mr. Loubier: That means that in interpreting the Act as you did, you assumed Parliament's role, because you clarified the ambiguity yourself.
Mr. Gravelle: I would just like to add a comment. We did not usurp Parliaments role. The letter we received from the Department of Finance was certainly not equivocal in defining this tax policy.
Mr. Loubier: But you do acknowledge that the main message Mr. Dodge gave the Finance Committee was to amend the Act, or at least clarify some aspects of it regarding the application to residents of the provision regarding taxable Canadian property. That is the message we got.
The message might have been the same in 1991. As Deputy Minister, why did you not act quickly to point out the problems this ambiguity could cause and the harm it caused for all taxpayers, who had to pay the income tax that was not being paid by certain individuals?
Taxpayers are going to have to pay for the $2 billion in family trusts that went across the border without paying any income tax on capital gains. That is the result of your decision. There are elected officials who take their responsibilities seriously, but if you do not tell them about the problems an act may cause, they will not be able to do very much.
[English]
Mr. Dodge: Mr. Chairman, let me clarify something here. What we have referred to the committee is an important issue in policy, one that is well worth Parliament's looking at again in light of the changing world. That is why I said earlier that I thought it perfectly appropriate that the Auditor General has raised the issue of what this policy ought to be. It is important that the committee look at it and decide whether the policy as it stands is the one Parliament wishes to carry forward into the 21st century.
.1620
That is quite a different thing from the question of whether the law reflected the policy. The issue that was at stake in 1991, as put to us by Revenue Canada, was what the policy was behind the law. In our view, that was very clear. While the statute is silent in some places and ambiguous in others, the policy intent behind it was very clear. So when Mr. Loubier asked if we pursued that further and raised to the minister's attention the lack of clarity and so on, I believe, although I stand to be corrected by other officials around at the time, that our view was - and it certainly is - that the policy intent of the law is reflected in the interpretation that was given by Revenue Canada.
That's not to say that it's not appropriate to look at the policy once again.
[Translation]
Mr. Loubier: In any case, we will come back to these issues, because I have still not had any clear answers, and I'm still waiting for a legal interpretation of the two opinions. In 1993, the Auditor General told you that it was important that advance income tax rulings issued by Revenue Canada be made public as quickly as possible.
He states in his most recent report, and I quote:
- 1.61 In 1993, we recommended that Revenue Canada release, in severed form, issued advance
income tax rulings. Revenue Canada has released some rulings, although it chose not to release
the rulings discussed in this observation at the time they were issued.
In these two family trust cases, there were two groups involved. First, there were tax experts, who know about advance rulings and can cause others to benefit from them, for example a small group or a few individuals who have benefitted from the ruling in the past, who know it exists and who can continue to tell others about it. The second group is made up of taxpayers, who could have taken advantage of this provision but were unable to do so, because only a limited number of people knew about the advance income tax ruling.
Why was there this delay in releasing the advance ruling, given that you knew very well that a small group of individuals, the tax specialists, plus their friends and clients, would benefit from it?
[English]
Mr. Beith: Mr. Chairman, Revenue has not published many rulings over the years and has been publishing them on a selective basis. Out of the total population of rulings issued, I think that proportionally not many have been published. That policy changed as of January 1996, and all rulings will now be published.
I can speculate that the reason the 1991 ruling was not published at that time was that it was not considered to have a wide application, in terms of being information to the public at large.
[Translation]
Mr. Loubier: You are telling me that since this ruling was about a very wealthy Canadian family that had already transferred $2 billion in assets to the United States without paying any income tax, this was no longer in the public domain. You are telling me that this was a private matter, that these people and their buddies could take advantage of this ruling. Is that it?
You seem to be telling me quite calmly that it is quite reasonable to transfer $2 billion in assets to the United States without paying any income tax on the capital gains!
[English]
Mr. Beith: I'm telling you that the judgment that was made might point out that the 1991 ruling...the assets in question are $1 billion. I believe for 1985 it's $1 billion. That's where the$2 billion comes from.
I was going to mention that the July 1995 opinion raised by the Auditor General yesterday was published in 1995.
[Translation]
Mr. Loubier: I should perhaps add that the Auditor General said that the advance ruling had been issued in December 1991 and made public five years later, in March 1996. He also said that this was prejudicial to all taxpayers and that at the same time, a small group of people would have benefitted from this advance ruling, in addition to another small group that we might call the millionaires' club.
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Do you find that reasonable?
Mr. Gravelle: I think the Auditor General's recommendation to publish all advance rulings is a good one. I must acknowledge that, traditionally, the Department has been very circumspect about publishing advance rulings, because these rulings have a bearing on very specific transactions relating to individuals.
We were always very reluctant to compromise the confidentiality of information related to a taxpayer. However, I should say that a considerable number of requests for advance rulings or for technical, rather than legal opinions have over the years meant that we could pass on information, by publishing the opinions electronically or by issuing information circulars and technical interpretation bulletins.
In the past, the Department's policy was to make greater use of interpretation bulletins, information circulars and access to technical opinions rather than publishing advance rulings. Now, however, it has been decided that in the future all advance rulings will be published.
Mr. Loubier: You are referring to specific transactions, and you should understand that this type of specific transaction led to the transfer of $2 billion without a penny of income tax being paid. As I was saying earlier, the income tax that was not collected on this amount will have to be made up by other taxpayers. This is true of all the other cases that may have happened since that time, because you said yourself that the 1991 advance ruling may have resulted in similar situations.
Furthermore, Mr. Gravelle, this is not just one specific case. We're talking about the interpretation of an important provision - the one on taxable Canadian property. This is no longer a private matter, but an issue involving the interpretation and application of Canadian tax law. Why did you wait so long to publish this notice, certainly longer than you waited to publish other notices? That is the question. Even the Auditor General is still wondering about that.
Mr. Gravelle: The interpretation given in the 1991 advance ruling was subsequently repeated in the 1994 notice, which was published during the year. That means that the information was known to the public and certainly to tax specialists as of that date. However, I do acknowledge that the 1991 advance ruling was not published until very recently.
Mr. Loubier: You have no explanation for that.
Mr. Gravelle: I cannot speculate on a decision made at the time by certain officials about whether to publish or not to publish these advance rulings. These decisions are made by officials at the branch level.
Mr. Loubier: I have another question.
Mr. Gravelle: If you would like to come back to the question about the 1985 opinion,Mr. MacGregor could provide the information you requested.
Mr. Loubier: With your agreement, we could come back to the 1985 opinion on the second round. For the time being, I would just like to ask a brief question.
You said yesterday that the December 1991 advance ruling could have created a precedent even though there had not been any other advance rulings in similar cases. You also said that other cases could have resulted from it and have been subject to the 1991 advance ruling, without your Department necessarily doing any further analysis.
In other words, those who knew about the ruling in December 1991, and who benefitted from your interpretation, could have told other people they knew and ensured that there would be other cases even though they would not necessarily come to your attention through another request for an advance ruling.
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Since we have to make recommendations to the Minister of Finance, what can our Committee do to ensure that the 1991 interpretation does not apply to any other cases starting now, given that we know that some of the cases that were dealt with probably occurred because of the precedent set in December 1991? What can we do to stop that?
Mr. Gravelle: I will ask my colleague David Dodge from the Department of Finance to answer the question. However, I would say that we issued the 1991 advance ruling on the basis of a legal opinion and a tax policy opinion from the Department of Finance. They supported us in giving a positive decision in the case before us. That was the appropriate interpretation of the Act, according to the opinions we received. If we want to avoid a recurrence of the type of situation dealt with in the advance ruling, the Income Tax Act will have to be amended.
Mr. Loubier: It's not the Act that needs amending but rather the interpretation you gave regarding the provision on taxable Canadian property as it applies to residence. The problem is with the interpretation, not the Act.
Mr. Gravelle: Mr. Loubier, we implemented the Income Tax Act in accordance with the legal interpretation we received.
Mr. Loubier: Yes, but if we conclude that the interpretation was incorrect and we don't want this situation to recur in the future, what can we do to stop the haemorrhage that resulted from your 1991 advance income tax ruling?
Mr. Gravelle: The best suggestion I can make to the Committee is to ensure that the Act is absolutely clear on this subject, that it does not allow this type of transaction or that it provide for a different tax treatment for taxable Canadian property.
Mr. Loubier: Or else the Act could simply state very specifically that the provision on taxable Canadian property does not apply to residents. This seems to be clear in the Act but it seems less clear to the legal experts.
Mr. Gravelle: That's one opinion.
Mr. Loubier: Thank you.
The Chairman: Thank you, Mr. Loubier.
[English]
Mr. Silye, it's so good to have you here. Would you like to explain to us whether a non-resident alien can hold taxable Canadian property both before and after departure from Canada?
Mr. Silye (Calgary Centre): Yes, I will clarify that for you. If they are from the planet Mars, there's trouble.
I would like to ask you, as chairman, a couple of questions on the objective of this standing committee, because I just came from the public accounts committee, which is also looking at chapter 1, which is family trusts, and there seems to be a debate as to whether or not we're over-utilizing the departmental officials' time by having them appear here and then appear there. To clarify this, I wanted to know to what end and for what purpose are we questioning witnesses in the Standing Committee on Finance?
The Chairman: Our main intention is to look at the law as it stands and to see if there are alternatives that we would like to suggest to the minister and the government.
Mr. Silye: The opinion I gave at the public accounts committee is that you're looking at the present law and then looking forward - looking to the future - to see whether there is a loophole there that we wish to close, leave in place, or whatever once we find out how these complicated capital gains really work. Is that correct? If the public accounts committee then wants to take the Auditor General's comments and look into the past, that would be still under the purview of the public accounts committee. You won't be doing that here. You're looking at what happened and why.
The Chairman: Mr. Loubier is taking a different tack on this, and he definitely wants us to be able to look into what happened. We also have the difficulty of how you get the airplane onto the landing strip without going through the air. I guess this one transaction is the catalyst that brought it before us. I hope our major emphasis is substantive.
Mr. Silye: Now can I proceed with the...? Thank you.
Gentlemen from both departments, I know that Mr. Gravelle wanted to amalgamate Customs, Excise, and Taxation. I hope he doesn't want to add Finance to it now too.
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I have some quick questions about the past. Apparently in 1986 and 1991 there were some advance tax rulings. I don't care about the names, but some advance tax rulings were given. A certain transaction was deemed to be at first disallowed by National Revenue and Taxation, denied, from my understanding, when first applied for.
Is that correct, Mr. Gravelle?
Mr. Gravelle: First a 1985 ruling request was granted. Subsequently, several months after, there was a request for a technical opinion from the department. There was a response that did not take account of the 1985 advance tax ruling. It was delivered by a separate rulings officer who did not have access to the advance tax ruling.
Mr. Silye: So the 1991 ruling that allowed this transaction contradicted the 1985 ruling.
Mr. Gravelle: No. The 1991 advance tax ruling was consistent with the 1985 advance tax ruling.
Mr. Silye: Was this transaction by the individual or individuals then denied by your group or was it approved?
Mr. Gravelle: If you're referring to the 1991 transaction -
Mr. Silye: Yes.
Mr. Gravelle: - the rulings request was received in early November. In all rulings requests a very extensive process is put in place. The ruling request is assigned to a rulings officer. He or she has to do complete research in terms of precedence, past tax rulings, advice and technical opinions, and they have to research the law. When there is disagreement within the rulings section, legal and policy advice is sought from Justice and Finance. So the whole series of reviews - extensive discussions internally - lead to the advice from those two departments.
Mr. Silye: So this transaction then was approved and allowed to go forward and the advance ruling was given consent, and the individual did their business, did their deal.
My understanding with the taxation department is that when there's an advance ruling and a decision is made by Revenue Canada or Department of Finance, or a new interpretation is given, a tax bulletin is issued to all chartered accounting firms, tax lawyers, etc. Why was this not done in 1991?
Mr. Beith: In 1991 I don't believe we had the electronic system in place. In 1995 there was a subsequent opinion, and that was published electronically and distributed at that time.
Mr. Silye: So four years later it was published.
Mr. Beith: Yes - essentially the same principle.
Mr. Silye: In 1995, last year, people became aware they could do this if they wanted to.
Mr. Beith: That was when it was publicly disseminated by Revenue.
Mr. Silye: Prior to 1991 how did you communicate your interpretations and advance rulings to the professionals in the private or public sectors? Did it take three years, prior to 1991, for all advance rulings or all interpretations to get to the people?
Mr. Beith: There's been a policy of publishing rulings over the years. More recently, I would say, as of January 1996, based on the Auditor General's recommendation, there's been a commitment that all rulings will be published. Over the years, until then, there has been selective publication, based on exercising the ruling and obtaining understanding of the person who obtained it, that conceals their identity. They have been selected on the basis of judgment as to the general interest to the public at large.
I might say that proportionately, not many were published annually.
Mr. Silye: Prior to 1990.
Mr. Beith: Prior to 1996, essentially.
Mr. Silye: Because I am aware of a service where CAs always get these bulletins.
.1640
Mr. Beith: Of course, I was talking about advanced rulings. In addition to that there's a series of bulletins, in excess of 200 or 300, on different subjects, kept up to date with changes in legislation. Rulings and technical opinions requested are coded and find their way into these bulletin files. As they're updated, possibly because of a change in legislation, a database, essentially, of other things that have come to our attention may get incorporated into a bulletin.
Mr. Silye: Do you feel badly here? Do you feel some Canadians were denied the opportunity to look at their financial portfolios and handle their assets in a similar fashion to these people by your taking three years to let it be known in the public domain?
Mr. Beith: Perhaps not only that ruling; as I say, traditionally we had not been publishing a significant proportion. It was brought to the attention...by the Auditor General in his 1993 audit. We have committed to now publish all rulings.
Mr. Silye: So the tax system does favour those people who do a little more research and do a little more digging and hire really good tax lawyers to get the benefit of the complicated rules.
Mr. Beith: Not everybody has complicated affairs. There's no question that the Income Tax Act is complex and those with complex affairs have more complexity to deal with.
Mr. Silye: Mr. Dodge, I read some of the testimony you gave previously. I forget which blues I was reading, or from which committee. Nevertheless, you indicated that the incident here, what has happened, and the law as it is now is legal. The interpretation is valid. In what has happened - and I might be paraphrasing here; I don't want to put words in your mouth - nothing was done wrong and everybody acted appropriately, both departments. The whole process is being explained here. Everybody acted appropriately. Why, then, has the revenue minister put a freeze on this type of transaction?
Mr. Dodge: The Minister of Finance has asked this committee to look into whether the current policy is appropriate going forward. In the context of having asked this committee to do that, the Minister of Revenue thought it appropriate that in this context, that the committee is studying this, to not give any further rulings in this particular area until this committee reports to the minister and a decision is made whether or not to modify the existing law.
Mr. Silye: Further to your testimony, you indicated that the ruling still allowed for tax to be paid should the asset be liquidated within ten years. I seem to get the impression that some tax would be due and payable in Canada if something triggered within ten years; if after ten years, then no tax.
Mr. Dodge: Let's be very careful here. The taxpayer, upon disposition of this capital property, will pay tax on the capital gain. The taxpayer is now resident in the United States. Normally under our treaty what would happen is that during the first ten years of residence in the United States, such liquidation would trigger capital gains payment, and that tax would be paid to Canada.
Following that period, what happens is that the Americans, the country of residence, would have the first crack, and Canada would levy tax but would have to give full credit for the amount of tax paid in the United States. So to the extent that the tax paid in the United States was less than the tax that would be payable in Canada, then indeed some revenue would flow to the Crown.
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Mr. Silye: I have one last question. You gave advice to this committee to consider as it looks at whether this is a loophole that should be closed or left in place, and you said to be careful not to restrict mobility of capital. Does that mean a capital sum or capital assets? What did you mean by that?
Mr. Dodge: I mean capital in its broadest sense.
Mr. Silye: So it includes everything?
Mr. Dodge: Yes. Let me give an illustration of why this is important.
If we have a number of small private drilling companies in western Canada that are going abroad in search of very good activity, the owner of those private companies may end up being resident abroad for a period of time. As soon as he ceased to become resident of Canada, if these sorts of provisions were not there and there were no taxable Canadian property, it would immediately trigger capital gains tax as he went out.
I think that is not necessarily in the interest of Canada. Clearly it's important for this committee to judge that. But that is the sort of typical transaction that these rules are designed to allow to happen without immediately triggering a deemed realization on emigration.
All I was saying was that it's really important as the committee considers this question to take into consideration the economic effects of what is done. When you change the rules, you do change the flows that take place. They may be potentially good for the Crown or they may be potentially bad, and one has to consider that carefully. The world is changing. That's why I said to the committee yesterday that we at the department think it's entirely appropriate to think about whether the system we have is the right system for the 21st century.
Mr. Silye: On the freeze, something just came to light. I said I had a last question, but as the typical politician I'll add one more. I need an explanation of this freeze the minister announced. Does this freeze apply only to advance tax rulings or advance rulings on family trusts? Or does it apply to all the other transactions that can be supported by the 1991 decision?
Mr. Gravelle: What the minister announced was simply our collective decision that while this committee reviews the subject provisions, we would not issue advance tax rulings if we were to receive such requests -
Mr. Silye: Put them on hold.
Mr. Gravelle: - on this matter, pending the review of this committee. But the advance tax ruling program is still in place and will continue.
Mr. Silye: It will just continue after this.
Mr. Gravelle: Yes.
The Chairman: I don't know how you feel about this, Mr. Silye, but I think that when it is under active review it would be inappropriate for people to pre-empt the outcome of our decisions.
Mr. Silye: I was a little confused on that freezing statement, so I didn't think it was fair. Now I understand and I can see the common sense in it.
[Translation]
Mr. Loubier: Could I make a comment on this?
The Chairman: If you wish.
Mr. Loubier: Thank you. You're being very nice today, Mr. Chairman.
The Chairman: I am always nice.
Mr. Loubier: I would just like to ask for some clarification from Mr. Gravelle. The Minister announced yesterday that there would not be another advance ruling in this type of transaction, but you said yesterday, Mr. Gravelle, that because of the 1991 advance ruling, some future cases might still be able to use your interpretation of the provisions on taxable Canadian property. So there is still a possibility that there could be a flight of capital in this way.
Mr. Silye: That's a good question.
Mr. Gravelle: I believe, and the Minister said this in the House a week or two ago, that we applied the Act, that the Act remains in force and that Canadians can organize their financial affairs in accordance with the positions taken.
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Mr. Loubier: And the precedents.
Mr. Gravelle: Because of certain discussions that are underway, we chose to delay the advance ruling process for immediate issues being studied by the Committee.
Mr. Loubier: Yes, but the 1991 ruling exists, and could be used as a reference for other cases.
Mr. Gravelle: Yes, it still exists. However, I would point out that we had a request for an advance ruling for transactions of this type in 1985, that we had a second one in 1991, but that we have not had any others since then.
An honourable member: But you did issue a notice in 1994.
Mr. Gravelle: We issued a notice which was published in 1995.
Mr. Pomerleau (Anjou - Rivières-des-Prairies): Since the Auditor General told us that he did not research the matter, there may be other similar cases. At the moment, no one seems to need your opinion. You have given an enormous power to a group of individuals who no longer need your opinion, because it is now available in writing.
Once a ruling is made, is put in writing and approved, anyone can read about it and use it whenever they like. And no one can stop that.
Mr. Gravelle: I would like to say something, if I may.
Mr. Pomerleau: That is the whole problem!
Mr. Gravelle: We did not give an enormous power to an individual or a group of individuals.
Mr. Pomerleau: But what could happen if they've worked on this?
Mr. Gravelle: We simply confirmed the intention of the Act.
Mr. Pomerleau: By not publishing the ruling, you gave a small group of individuals who knew about it the power to use it and to help others use it without having to tell you about it.
That's a fundamental problem about which you did not even inform your Ministers. Today, you say that the Act must be amended. You say there is a basic ambiguity, but your Ministers are not aware of it. The Auditor General does not agree with you. We're talking about billions of dollars that are leaving the country. But you are taking it upon yourselves, and upon yourselves alone, without talking to anyone, to make a decision that involves all Canadians.
You know very well that billions of dollars are leaving the country, but you are not talking to anyone and you are issuing ambiguous opinions that are not published anywhere! And you find all that reasonable! It's incredible!
Mr. Gravelle: The policy before 1996 about the publication of advance rulings applied in the vast majority of cases. I told you that we now have a new publication policy.
Mr. Pomerleau: Yes, but now the damage has been done.
Mr. Gravelle: But the fact remains. All we did in the 1991 advance ruling was to recognize the application of the Act. I would just like to add one comment. My technical experts and specialists tell me that for greater accuracy and certainty, there should normally be a request for an advance ruling for transactions of this type.
Mr. Pomerleau: That's what you say, but I would like to ask you a question, since you are the official in charge of this. We have a case before us where the ambiguity is clear from the beginning to the end. From 1985 to 1991, notices and opinions have been invoked and contradicted, and rulings have been handed down and contradicted. The Auditor General commented on this ambiguity. In 1992, the ruling referred to a letter from Finance which said that section 85 was supposed to apply to resident taxpayers and non-resident taxpayers. It contradicted a letter that had been issued earlier. That's where the fundamental ambiguity lies.
This is a case in which billions of dollars left the country because of this ruling, and there was nothing about it in the newspapers, which is not the case in matters that are much less important. This gives the individuals involved special knowledge that they can use as insiders, without referring to anyone.
You say today that the Act is ambiguous and that it should be amended, but when something happens, you don't even let your ministers know. What are you doing? The Minister should have been informed.
Mr. Gravelle: I told you that the internal discussions we had about this request for an advance ruling caused a real internal debate.
Mr. Pomerleau: Did it involved the Ministers? Did it go all the way to elected officials?
Mr. Gravelle: Normally, these requests from...
[English]
Mr. Campbell (St. Paul's): Would the hon. member opposite allow the witness to answer the question and respond to the diatribe instead of being interrupted every time he tries to respond?
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The Chairman: [Inaudible - Editor]
Some hon. members: Oh, oh!
[Translation]
The Chairman: Excuse me. Would you like to continue, Mr. Gravelle?
Mr. Gravelle: I would just like to say that the internal debate about the request for the 1991 advance ruling simply indicates the rigorous internal discussion that takes place when such a request is made. The advance income tax ruling section was set up in 1970 specifically to give taxpayers somewhat more certainty about the tax consequences of a future transaction.
It is clear that the questions referred to us for advance rulings are, by definition, complex. Since we wanted to be absolutely sure that our ruling would comply with the Act and the intention of tax policy in all regards, we always have an intense internal debate before coming up with the final ruling.
I would just like to tell you that in the case we are discussing here, after getting a legal opinion from the Department of Justice and an opinion from the Department of Finance, we were sure that we could make the advance ruling, knowing that it was in accordance with the Act.
The Chairman: Thank you.
[English]
The long-patient Mr. Dhaliwal, please.
Mr. Dhaliwal (Vancouver South): Thank you very much, Mr. Chairman. I hope you'll be as good to me as you have been to my colleagues across the floor -
The Chairman: Of course. You can have as long as you wish.
Mr. Dhaliwal: - and give me the time I need to ask the questions.
I would like to thank the witnesses for their diligence and for being willing to answer the questions to make us more aware. I would like to ask some questions to make myself more aware, and I may be repeating some of the questions, but I hope you'll be patient. I hope I can get to the facts and to the real issue.
Mr. Gravelle, obviously this was an important decision made by your department in consultation with Finance. Would you not agree?
Mr. Gravelle: Yes.
Mr. Dhaliwal: When decisions of this nature are made, obviously the more important the decision, the higher the level the decision is made at. Could you perhaps tell the committee at what level this decision would have been made in terms of the interpretation of the Income Tax Act to allow this trust to move to the States?
Mr. Gravelle: This ruling request followed normal procedures. The request arrived and was referred to a rulings officer. That rulings officer had to research the law, research our opinion files and past rulings requests, and had to debate it internally. That eventually reached a review committee. Then that was brought to the attention of the DG for rulings, who wanted to ensure that there would be proper legal and policy advice to resolve some of the internal debates about whether or not the present transactions could warrant a positive tax ruling.
This was brought to my attention probably - because we received the ruling request in November 1991 - around December 19 or 20, simply to give me a status report on this outstanding request, noting that the taxpayer had expressed the wish to have this ruling before the end of the year. I mentioned, I think it was yesterday, and I also mentioned at the public accounts committee, that it is normal practice for the department to receive a great number of advance tax rulings requests at the year-end because of the number of transactions that have to be accomplished by taxpayers at that time.
.1700
My advice to my senior managers in the rulings division was that we should not rule and we would not rule unless we had a confirmed Justice opinion and a Finance opinion noting that counsel had been involved throughout and there had been discussions with Finance going back to early November 1991.
I simply asked on December 20 and again on December 23 at a meeting that discussions with Finance and Justice be concluded. When I was informed that the discussions had been concluded, that we had received an unequivocal letter from the Department of Finance, and that we had received a legal opinion that supported the application of the law to these particular transactions, the decision was made to grant the ruling. So it was a very thorough process.
The AG mentioned yesterday, Mr. Chairman, that he was quite satisfied with the way in which the whole review was documented, but he lamented the fact that the series of meetings that took place on December 23 was at such a pace that no minutes were taken of the deliberations during that day. The fact of the matter is that at the end of the day we wanted confirmation of the legal view and confirmation of tax policy, and we got that in the legal opinion and the letter from Finance.
Mr. Dhaliwal: Mr. Gravelle, obviously you would not very often get a trust situation in which you're talking about such huge amounts of money or a portfolio worth billions, so this is the reason it was brought right to your attention. You were the deputy minister at the time, Mr. Gravelle?
Mr. Gravelle: Yes, I was, and I frankly don't recall having discussed the amount involved in the transactions. When it was brought to my attention - and Mr. Beith was party to these discussions on December 20 and December 23, which he can confirm or corroborate - we were more concerned about the need to make the right decision and to make the right call. Given that we had not had final, formal, written communication from the two sister departments, we decided we would not rule until we got it.
Mr. Dhaliwal: My point is that you surely don't come across portfolios that are worth a billion dollars, so obviously you had some special considerations. You wouldn't be involved or obviously it wouldn't have come to your attention if it were a $500,000 situation. Obviously the huge value of the portfolio was an important factor, and you, as deputy minister at the time, were personally involved in the decision-making process. Before it even gets to you, a lot of work obviously has to be done in terms of review, research, and approval all the way up the line before it gets to your desk. I presume one of the reasons it got to your desk is that it's not very often that a portfolio worth a billion dollars or more comes forward. Is that not correct?
Mr. Gravelle: It's true. On the other hand, many other issues come across my desk that do not involve those significant amounts, I can assure you.
Mr. Dhaliwal: Considering the fact that this was a very important matter to deal with, you as deputy minister would then have tried to consult with the people at the same level in the Finance area or in the Justice area - people at a very high level - to ask their advice and to consult with them. Because it was a very important matter, you as deputy minister would deal with those people in the equivalent positions, would you not?
Mr. Gravelle: I did not deal with my counterparts in Finance or in Justice on that issue. I was satisfied. It is normal practice that these decisions and these interdepartmental consultations have to take place among the responsible managers and officers handling these requests.
Mr. Dhaliwal: Since the matter at Revenue Canada was given the attention at the highest level, surely you'll agree that it would have got the same level of attention both in Finance and Justice as it did in Revenue. Would you not agree, Mr. Gravelle?
Mr. Gravelle: I would like to have a comment from my colleagues from Finance and Justice, because we were seeking a policy interpretation or clarification and we were seeking legal advice. Normally legal advice on matters such as these will come from counsel, but will not necessarily involve the deputy minister of justice or the deputy attorney general.
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Mr. Dhaliwal: Perhaps the finance and legal people can tell me if the matter got the same attention at the highest level as it did in Revenue Canada. If it didn't, perhaps they have an explanation. Mr. Dodge, perhaps you from Finance can make me aware of what you know as to the level of attention this matter got.
Mr. Dodge: This matter got the attention of both the director of the legislation division andMr. Al Short, who is the chairman of the legislative committee and the most senior officer in Finance responsible for tax legislation.
Mr. Dhaliwal: Would you say the deputy minister was also informed, was aware and involved in the decision-making?
Mr. Dodge: I do not know, Mr. Dhaliwal. If the same sort of thing came along today I would not normally be informed about this type of thing. It would end at the most senior level where the individual has the fine technical capacity to deal with the issue.
Mr. Dhaliwal: So you would not even be made aware of a situation where a billion-dollar portfolio is brought in and where they're seeking your advice in Finance as to how to deal with it from Revenue, particularly when you have a deputy minister from revenue involved in it. You don't think you would even be made aware of it. Is that correct?
Mr. Dodge: The type of case I would be made aware of probably doesn't...this doesn't necessarily cover it. The type of case that Mr. Farber or Mr. Drummond would bring is where the letter of the law and the spirit of the law seem to be wildly out of line and we have a real case where a major policy decision has to be made and we probably have to move very quickly with some sort of press release to change the law, or whatever. Clearly in those sorts of situations it would come right away to my attention.
A second case would arise if there was deemed to be a need for a technical change but it is not absolutely urgent. It would then go into the process to produce a change in the technical bill, which this committee sees periodically, then at the time that bill was finally being prepared the issue would come forward.
Those are the two cases where normally one -
Mr. Dhaliwal: Would your assistant deputy minister be involved in such a decision?
Mr. Dodge: I think the answer is that we have two types of skills involved in the tax policy branch and they're represented by the two gentlemen who are sitting here: the analytical skill - i.e., what impact is the tax policy having on the economy, on the way things operate and so on, where do we want to go, what is the social policy implication - and the more technical side, which is represented here by Len.
This was a more technical issue, narrowly defined, and so it would normally stop at that level. That doesn't say it would do so every time.
Mr. Dhaliwal: But, Mr. Dodge, excuse me. This is a portfolio that I've been told is maybe billions of dollars and could have ramifications of billions of dollars. In terms of your own budgetary or revenue to the government it could have a huge effect, and you're telling me that as deputy minister you would not be involved in a case where a huge amount of financial impact to your budget, to your revenue, could happen from making a decision, an interpretation of a law and changing the policy on it. You're telling me that you would not be involved and possibly not your assistant deputy minister either. Is that so?
Mr. Dodge: Mr. Chairman, there is no policy change involved here, and what comes right to the top -
Mr. Dhaliwal: Now, hold it, hold it. Excuse me. There's no policy change. Have you had trusts in the past of this nature that have carried out this transaction before, in the past?
Mr. Gravelle: In 1985.
Mr. Dodge: Yes. To my knowledge there was one in 1985.
Mr. Dhaliwal: Yes, one transaction.
Mr. Dodge: Right.
Mr. Dhaliwal: But it was considered that it could not happen because the ruling was not in their favour.
Mr. Dodge: No.
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Mr. Beith: No, there was a 1985 favourable ruling, followed by a 1985 technical opinion that didn't take into account the favourable ruling.
Mr. Dhaliwal: So what I'm saying is that it's very rare. There may be just one before it, is that right?
Mr. Dodge: Yes.
Mr. Dhaliwal: So this could have huge impacts on your own budgetary matters and other matters if this is a decision that other people would then try to emulate by moving funds out of the country through a trust process.
Mr. Dodge: I'd really like to take a minute to answer that question, if I could.
What's important to understand in this issue is that you have to look at this also from the taxpayer's point of view. We are extraordinarily concerned when a taxpayer can avoid paying tax and where that avoidance of paying tax is not within the spirit of the law. Those are the sorts of issues that come up.
The taxpayer per se does not avoid paying any tax here. Indeed, the taxpayer who is a resident of New York could well end up paying more tax. So the issue here is not a tax avoidance issue. The issue here is a question of to which jurisdiction and under what conditions the tax would be paid.
The general rule is that upon immigration the tax on this sort of taxable Canadian property would revert to the Canadian Crown for ten years. After that, we still tax it, but we have to give credit for whatever tax would be paid abroad.
But this is not a tax loophole for the individual. It's when those sorts of loopholes are identified - and this precisely comes to your point - and we have something that's providing an escape hatch that is absolutely contrary to policy, that we clearly have to move very quickly. Those things come right to the top very quickly, and it certainly doesn't take a $1 billion case or a$100 million case to bring that up to the top.
Mr. Dhaliwal: Perhaps I'm not understanding this clearly. Mr. Beith earlier testified that one of the reasons they wanted an undertaking or a waiver is that if those assets in the trust were brought back into the country, they could have a higher cost base. If you have a higher cost base, obviously you have a lower capital gains tax to pay to the government if those assets were brought back. So how is it that this does not have implications in terms of tax collected?
Mr. Dodge: Be very careful. It was an absolutely appropriate question for Revenue Canada to ask us. The question was whether or not it is contrary to the policy that a Canadian could actually be able to hold taxable Canadian property. The answer is that it is not contrary to the policy. Indeed, there are parts of the law where that must be the case in order to prevent a taxpayer actually escaping tax. So as it is structured, the policy is absolutely correct.
Now, the minister has put a question to the committee. Do we want to be in a situation going forward where a taxpayer can leave Canada with shares in a private company, can be able to roll those into shares of a public company, and we do not tax on accrual at the point when the person actually leaves the country? And there are pros and there are cons to this. That's what's extraordinarily important for the committee to debate, because there are situations one can certainly think of where one is perhaps not so happy with the result if you didn't allow the roll-over, or if you taxed this sort of property on an accrual basis as a person leaves Canada.
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That is appropriate to look at, but certainly within the policy here it fitted. I just have to repeat that the reason I said it would not come right to the top is because this is not a case where a taxpayer can walk away without paying tax.
Mr. Dhaliwal: Let me go one step further.
The Chairman: Mr. Dhaliwal, I just want to try to get some idea of how long you would like to go on. I know Ms Brushett has some questions. Maybe Ms Brushett and Mr. St. Denis could also give me some idea. I'm just trying to plan the affairs for everybody here.
Mr. Dhaliwal: I didn't start asking questions until 4:45 p.m.
The Chairman: I'm going to give you all the time you want, Mr. Dhaliwal. I asked you how much time you would like.
Mr. Dhaliwal: I would probably need about another 10 to 15 minutes. It depends on how long the answers are, Mr. Chairman. I can't predict the answers, and I have some questions I have to ask. But give me another 10 to 15 minutes.
The Chairman: Okay.
How long would you probably like, Mr. St. Denis?
Mr. St. Denis (Algoma): I could probably do mine in less than five minutes.
The Chairman: Ms Brushett?
Mrs. Brushett (Cumberland - Colchester): Less than five minutes. I have to return to the House, Mr. Chairman.
The Chairman: I don't want to cut you off, Mr. Dhaliwal. But maybe out of courtesy to the other members who just have short questions and who have to leave, we could come back to you. Would you mind that?
Mr. Dhaliwal: All right, I'll defer to my honourable colleagues. I know they'll have very good questions, and they may even ask some of the questions I'm going to ask.
The Chairman: Thanks very much, Mr. Dhaliwal.
Mrs. Brushett: Thank you, Mr. Chairman.
I want to return to the more parliamentary process of where this legislation should or might be taken in the future. I want to ask first about the TCP concept. Does that arise from the Income Tax Act or from the treaties?
Mr. Dodge: No, that arises from the act.
Mrs. Brushett: So having said that, wouldn't we conclude that it would therefore only apply to emigrants or non-residents of Canada? Wouldn't that be an automatic conclusion?
Mr. Dodge: No.
Mrs. Brushett: Why not, if it's designed to serve those people who leave this country...and how to get taxed on those capital gains somewhere at a later date?
Mr. Dodge: There's a short answer and there's a more technical answer. I'll give the short answer.
Take a residential building that a person owns. This is the sort of property that we define as being TCP. You've seen the list I gave out yesterday. As long as one is a resident of Canada, whether that is classified as taxable Canadian property or not doesn't matter a damn. It only matters at the point one leaves Canada.
So the answer is that we define it in the act. We define what's in it in the act. Where it triggers, where it matters, where it becomes really important is at the time one leaves...or, of course, for non-residents. That's the short answer.
Len, you might want to give a more technical one.
Mr. Farber: I think what Mr. Dodge has just said is the general application in the act. But just to take your point one step further, it's also relevant for purposes of the treaties, because the treaties deal with real property and we reserve our right to tax real property at any point in time.
Mrs. Brushett: I would like to put some kind of logical sense to this. By saying that TCP arises from the Income Tax Act in Canada and that it only takes effect when you become a non-resident, it would seem to me that we've gone an extra length to try to define this particular case as a resident case and to let it apply to a resident case. It seems as if we've gone the extra mile to bring it into this category when I would have believed from what we're learning that the legislation would have been written and designed as part of the act only in situations where the taxpayer leaves this country for whatever reason. Having said that, I'll proceed to the next question.
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When you talk about having to go through these great dialogues and discussions when you make these advance rulings, would you not have looked for references to previous case rulings such as the 1985 case? We've made the appeal here that there was no knowledge of the 1985 case. If you go through a great dialogue, discussion and research, wouldn't that be part of that research and review?
Mr. Beith: Yes. With respect to the 1991 ruling, we were aware of the 1985 ruling and the 1985 opinion that was to the opposite effect. I think we've said that at the time the 1985 technical opinion by Revenue Canada was issued, the drafters were not aware of the advance ruling that had been given earlier.
Mrs. Brushett: Perhaps I misunderstood, but only this afternoon you indicated that the 1991 ruling was given without knowledge of the 1985 decision. I wrote it in my notes from a few minutes earlier. Perhaps I've misunderstood, but we can check the reviews tomorrow.
Mr. Gravelle: If I used the wrong year, I apologize.
Mrs. Brushett: No, it was Mr. Beith.
Mr. Gravelle: What I remember saying, either in this committee or in the other committee, was that when the 1985 technical opinion from the rulings officer was given four months after the 1985 ruling request -
Mrs. Brushett: Mr. Gravelle, I'm not referring to your testimony. I'm referring strictly toMr. Beith. In his remarks from earlier today I wrote down that the ruling in 1991 was given without knowledge of the 1985 decision.
Mr. Beith: I think I was trying to say that the 1985 opinion was given without knowledge of the 1985 ruling. I'm not sure what I said.
Mrs. Brushett: Thank you.
Finally, there are many questions, but in the name of time... In terms of the waiver, it seems that this was defined as a side arrangement, a side deal. If we have to make side deals on our legislation, I think something is very inadequate here. I stated that this waiver seems to be not worth the paper it's written on, and the Auditor General has said that Canada is clearly forfeiting potential tax.
Do you agree that we are forfeiting potential tax? Would it not have been wiser to ask for a bond or some real collateral so that we might have some assurances in this case under the routine procedure, as this case was indicated to be?
Mr. Beith: First, I don't agree that we are forfeiting any tax. Second, on the facts of this case there's no basis for us to seek a bond or security. The waiver is certainly of value. The waiver allows Revenue Canada to assess the family trust, which is still here, on a full disposition of the assets that moved to the U.S.
Mrs. Brushett: I think a legal opinion might say otherwise.
Mr. Beith: Not with respect to the waiver. The legal advice, that there was possibly a problem with the undertaking, went to the enforceability of the undertaking. The undertaking was in respect of the protective trust, now in the States - that it will not claim treaty protection for the ten-year period. In other words, it will report in Canada, capital gains arising from any dispositions of these shares in a ten-year period.
Mrs. Brushett: I have one final comment or question. If that protective trust should return to Canada - it is my understanding that it is not taxable - what would we do then?
Mr. Beith: This really goes to the waiver. We sought the waiver because we were concerned that the protective trust might return to Canada and take the position that the shares were not taxable Canadian property. So there was an element of uncertainty about that.
Mrs. Brushett: You believe the waiver would hold up in that case?
Mr. Beith: The position they would then take is that the cost base would increase to the fair market value. If they take that position on a protective trust, we're in a position to assess not the protective trust, but the family trust - that it had a deemed disposition at the time the protective trust moved to the U.S. We would be taking the position, in effect, that it not transfer TCP at that time, which is the inconsistency the Auditor General has observed. We did that to protect ourselves from the uncertainty and element of risk that might have involved.
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Mrs. Brushett: Thank you.
The Chair: Mr. Bélisle.
[Translation]
Mr. Loubier: Before yielding the floor to my colleague, Mr. Chairman, I would like to say that after listening to the presentations made by Deputy Ministers and the Auditor General since yesterday, the members of the Finance Committee have quite a bit of information. We could suggest some amendments to tax policy, but there is still ambiguity about the 1985 case and the 1991 case.
I suggest therefore that the 1991 case be referred to the Public Accounts Committee, which has the power to investigate and even to become a commission of inquiry. Its job would be to try to shed some light on this case and even on the 1985 case, because this situation does not make any sense.
As for amendments to the Income Tax Act, we have some idea of where we are going, but there is appalling ambiguity in the decisions that led to a transfer of $2 billion in family trust funds without any taxes being imposed on their capital gains. That makes no sense to me.
The Public Accounts Committee has the authority to turn itself into a commission of inquiry and continue what it has begun. Personally, I am not convinced that the decision made was a good one, nor am I happy with the process relating to that decision. For the moment, things are not any clearer than they were before.
I yield the floor to my colleague.
Mr. Bélisle (La Prairie): I just have a few questions.
Mr. Gravelle, can you tell me what mechanism you have in place that would make it possible for you to suspend the application of the 1991 ruling to other cases until the Act can be amended over the autumn for example?
I believe you said you were deferring examination of other cases submitted, but this may not be the best way of answering taxpayers' question. Isn't there some mechanism - other than an amendment of the Act - that could be applied this coming autumn to defer the impact of the 1991 rulings in new cases?
Mr. Gravelle: All we said was that we would not be issuing any advance rulings on cases relating to the provisions under study by the Committee. Everyone knows that the interpretation of the Act doesn't prevent any taxpayer from applying the provisions in question to his own case, and to the same effect. However, if a taxpayer wants the certainty of an advance ruling from us, we will not issue that ruling. We are suspending the advance ruling process until such time as the Committee submits recommendations to Parliament and the government.
Mr. Bélisle: I see.
With regard to the provisions governing the taxable canadian property of non-resident, how could we correct the precedent established by the 1991 ruling and the canon of interpretation? Is amending the Act the only way, or do you see other options?
[English]
Mr. Dodge: Mr. Chairman, the law stands until the law is changed. The only way this sort of situation, which involves a roll-over from a private company to a public company - that's the distinguishing feature... The law would have to be changed to say that in the case of taxable Canadian property, in the case of a private company, for this purpose the provisions of section 88 would not apply - i.e., if you're a non-resident you cannot take advantage of the provisions of section 88 to roll over a private company to a public company.
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I cannot tell the committee what all of the real world implications of doing that would be, but if Parliament were to deem that this sort of transaction should not take place, that would be a way to deal with it. If Parliament should deem that Revenue Canada be given the power to demand a declaration of assets upon emigration, then Parliament can give us that power and the committee could ask the Minister of Finance to do so. The committee could ask the Minister of Finance to do that and to demand an annual information return.
There are a lot of things that you might decide are appropriate things to do, but that would be a change in the law. You cannot suspend the law in the intervening period. You've got to say what change you're going to make to it so that the taxpayer knows what he or she faces.
I'm sorry to have been so long, but it's an important point.
[Translation]
Mr. Bélisle: Mr. Gravelle or Mr. Dodge, under the Act as it now stands, would you have considered the ruling unusual in any way if the Auditor General had not expressed concern about it?
Mr. Gravelle: I will answer your question in the context of the advance ruling process. Once the legal opinion and tax policy interpretation had been received, the Department was convinced that it could indeed issue the advance ruling requested.
The issue of whether provisions governing capital gains and taxable Canadian goods should be amended is much more important, and is well beyond the scope of our immediate concern back in 1991.
Mr. Bélisle: We do not know what may happen in the future, and the funds in question have already been transferred to the United States. However, I would still like to ask you a hypothetical question.
In a best-case scenario - or perhaps a worst-case scenario for the Consolidated Revenue Fund - what could happen to such investments in the future? This is not an easy question to answer, but I suppose that in a best-case scenario, Canada would get a certain amount back in taxes. In the worst-case scenario, would Canada get nothing because of the ruling that was issued and because of the way in which such cases are processed? So what do you think the best-case scenario and the worst-case scenario might be for the Consolidated Revenue Fund?
[English]
Mr. Dodge: Mr. Chairman, that question is almost impossible to answer because we're talking about a potential capital gain or capital loss. If indeed there were a very large gain on these assets over the next ten years and they were disposed of in year eleven, the Canadian treasury would not have received tax on the accrued gain until the taxpayer left Canada, subject to treaty. We get the share of the future gain only after the taxpayer, who is then resident in the United States, subject to the treaty, which would say that the U.S. tax authorities get the first bite...
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How much that could be, one cannot know. In fact, if things perform extremely well over the next ten years it could well be that the Canadian treasury ends up better off than it would have had there been a deemed disposition at the time the transaction took place. The problem is that had the ruling not been given, the transaction would not have taken place, it would not have been a deemed disposition at that point in time, and we would not have gotten a tax. So unfortunately, one inherently cannot give the answer to your question.
Mr. Bélisle: Okay. Merci.
The Chairman: It's up to you, Mr. Dhaliwal, whether you want to finish off beforeMr. St. Denis.
Mr. Dhaliwal: I'll be quick, Mr. Chairman.
Let me quote to Mr. Gravelle or Mr. Dodge paragraph 1.31 of the Auditor General's report. One section of it says:
- The law allows an individual and a corporation resident in Canada who leave Canada to elect to
have public company shares become ``taxable Canadian property'' upon giving satisfactory
security to the Minister of National Revenue.
Mr. Farber: I believe, Mr. Chairman, that this particular provision allows for an election where it's not taxable Canadian property so that appropriate security is taken at that time with regard to the accrued gain. So it's an election, allowing him to elect so that they get the proper security. It otherwise is not taxable Canadian property.
Mr. Dhaliwal: My question is, why do you believe the Minister of National Revenue requires security? What's the main purpose of that security? You didn't answer my question.
Mr. Farber: The main purpose, I believe, would be to get security with regard to the tax on the underlying gain that has not been paid. It's a special election provision for property that is not otherwise taxable Canadian property, where they allow it to be such provided they post the relevant security. That would be - and my colleagues from Revenue Canada can correct me if I'm wrong - a level of security coincidental with the appropriate level of tax that would have been generated on the gain.
Mr. Dhaliwal: So if I'm moving out of the country and I have properties here, there's some control by Revenue Canada so that I can't sell my assets without paying taxes. Isn't that why the security is required?
Mr. Beith: My understanding is that this provision, which doesn't apply to trusts, allows corporations and individuals to elect that public company shares, which are not qualifying as TCP, are TCP upon security. The effect of the election is that there's no deemed disposition at that time, and Canada would have the right to tax, subject to treaty, any future dispositions. So the security has to be linked to the future dispositions.
Mr. Dhaliwal: This goes on and says that trusts are specifically prohibited from making this election. Do you agree with the Auditor General's view when he says that trusts are specifically prohibited from making this election?
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Mr. Beith: That's correct. That's what the provision says. You have the answer as to the why.
Mr. Dhaliwal: Do you also agree with the Auditor General's report and his comments on paragraph 1.38? Let me read the part that I particularly want to understand. It says:
- In this instance, however, the trust leaving Canada had been in existence for less than 10 years.
Because of a provision in the tax treaty between Canada and the United States, this meant
Canada would have no right to tax the accrued capital gain on the shares that moved to the
United States when that gain is realized by the Protective Trust.
Mr. Beith: It's correct that the taxpayer would have treaty protection, not having been a resident of Canada for the required ten years.
Mr. Dhaliwal: To get around that, is this why we required a waiver as well as an undertaking?
Mr. Beith: We didn't require the undertaking. It was offered because there had been a concern in considering this ruling as to whether or not we would get taxed in the future. There's maybe a debate as to whether that's relevant.
Mr. Dhaliwal: So in future cases you wouldn't require it?
Mr. Beith: That's correct.
Mr. Dhaliwal: Not an undertaking or a waiver?
Mr. Beith: It might require a waiver.
Mr. Dhaliwal: Maybe you did explain it, but I wanted to maybe clarify one point on the undertaking. You are in fact saying, by taking the undertaking, that this trust was deferring or waiving its legal right. Is that not correct - by giving an undertaking?
Mr. Beith: It was undertaking -
Mr. Dhaliwal: To waive the legal right it has.
Mr. Beith: - its right under the treaty.
Mr. Dhaliwal: If you have a legal right, can you give an undertaking to waive that?
Mr. Beith: There was at least one case in the tax world in which you were able to waive your appeal rights. That went to the Supreme Court and was found to be all right.
Mr. Dhaliwal: Let me ask you one final question, and I just want to apologize to my colleague.
One final question is that one of the purposes of having the security is to have some control. When these shares are gone out of the country, do you believe, Mr. Gravelle, that you still have the control to collect any tax? Do you have any control? One of the concerns of the Auditor General was that the undertaking and the waiver really don't give you control to be able to tax if there is a taxable capital gain or other taxable benefit they receive from Revenue Canada. This is one of the crucial issues here. Mr. Gravelle, maybe you can answer that.
Mr. Beith: I can respond. We had no right to seek security, because the shares were not classified as TCP under the elective provision. They were found to be TCP as a result of the various sections that Mr. MacGregor has talked about. So we had no right to seek security. What control do we have over whether or not the trust reports gains? We do have a waiver that is sitting there open. We have an undertaking. We believe the parties are acting in good faith and would report any such gains.
Mr. Dhaliwal: I will defer to my colleagues, Mr. Chairman. Thank you very much.
The Chairman: Thank you, Mr. Dhaliwal.
Mr. St. Denis.
Mr. St. Denis: Thank you, Mr. Chairman. I give credit to my colleague for some excellent questions there. Thank you, gentlemen, for being here.
In this business, perception is reality, and I think what we're trying to do here is deal with a public perception that rich people can get away with things. Whether that's true or not in this case is irrelevant. It's the folks we represent... You've possibly seen other examples of people getting away with things, and I think in your questions to us through your testimony, Mr. Dodge, that seeking the help of this committee in dealing with the whole idea of emigrating taxpayers, be they trusts or individuals, is a fair question.
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In response to one of Mr. Dhaliwal's questions, you said that you thought in this particular case that the motive for the machinations, if you want, wasn't tax avoidance. Now, in my mind tax avoidance is kind of a bad thing. If you're avoiding taxes, you can do it illegally... To me, if you wanted to reduce your taxes legally... Is that tax avoidance?
Mr. Dodge: Yes.
Mr. St. Denis: Okay, tax avoidance legally is okay. But this wasn't a case of tax avoidance because when this property went to the United States it would be subject to U.S. taxation. In the global picture these assets would be taxable somewhere at some point in time.
Do we know what the motivation would be, then? Is it strictly a business decision, wanting to invest in ABC corporation in the United States? Do we know what the motivation would be if it's not tax avoidance?
Mr. Dodge: My understanding is that the beneficiary of the protective trust is resident in the United States.
Mr. St. Denis: Do we have the sense that in the long run there would be a better tax universe for these particular assets in the United States than in Canada? Would they fare better there in the long run?
Mr. Dodge: That would depend on the state. Generally speaking, one might think that if it were New York the taxpayer might fare, if anything, slightly worse, New York being a relatively high-tax state. If it were Texas, which is a relatively low-tax state, one might expect the taxpayer to fare better.
Mr. St. Denis: If we accept that tax avoidance wasn't the driving issue, that there were other personal or business reasons driving it, that would be fair.
So I guess the concern for Canada was really, what if this came back? That's really where the problem was. If these assets came back to the country as public shares and the cost base was up, then the potential for loss was there. Am I understanding it correctly? Was the real reason for the response by the departments to try to avoid a loss in the case of these assets coming back?
Mr. Beith: That's why we sought the waiver.
Mr. St. Denis: Are there other scenarios in this area of tax law that we should be looking at? Here's one rat's maze. Are there others? Do you have a list somewhere of things that fall within this general section of the tax law that we should look at as well if we want to avoid these kinds of problems in the future?
Mr. Dodge: That is an extraordinarily good question. Both sides of these transactions are important. There's the question of whether we treat the immigration of people and capital to this country appropriately. That's one broad class of issues we've raised.
The second broad class of issues is whether it continues to be appropriate, particularly with respect to private companies, to provide a capital gains tax treatment that is essentially the capital gains tax treatment the owner would face were he or she to remain resident. That is, there is no deemed disposition under any circumstance when he or she emigrates, and full access to all the provisions of the act.
Obviously that has the positive benefit we talked about earlier, that an entrepreneur in a young company here can go abroad and take on work for a couple of years and come back without a lot of tax jiggery-pokery to go through. That's obviously a benefit. That's what we were talking about earlier in terms of the flow of capital. But it could well be deemed that the risks to the Crown are too high in terms of revenues. So you want to circumscribe that somehow, either by information reporting so that we know absolutely what's going on or by denying the person who becomes non-resident, and who owns this class of share, full access to all other provisions of the act.
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I think those are reasonable questions. Clearly, as one gets to the other end of the spectrum I don't think one would want to be in a position where every person who departs and owns Canadian real estate or owns a few shares in a private company in Canada faces deemed realization at the time that person moves for perhaps health reasons or whatever. So there's an end of the spectrum where I would have thought reasonable people looking at this would say, gee, we surely don't want to go that far in making changes.
Then there's the grey area in between, where maybe we should be making some changes given the fact that as time goes on there's likely to be more rather than less migration of people and capital, and that this is beneficial to us. But I would hope the committee would have a look at whether our provisions on the immigration side are appropriate as well.
Mr. St. Denis: Thank you, Mr. Chairman.
The Chairman: Mr. Silye, I know you had a question.
Mr. Silye: I have a couple of them, thank you.
Whatever happened to the 15% withholding tax? If you have a private company, whether it's in private shares or whether you have a building or whatever, and you trade that off or something in the States for public shares, you're actually moving assets from one country to another. You're actually leaving. Aren't you supposed to pay a 15% withholding tax? When I leave this country and I liquidate, am I not supposed to pay a tax to Canada for leaving?
Mr. Dodge: The withholding tax is levied on dividend and interest income of foreigners. So if a resident of the United States owns shares of a Canadian company and is paid dividends or interest, that's what withholding tax applies to.
Mr. Silye: Okay. Departure tax: what if I want to pack up and move to the States? I sell my house, I sell my private company and I move to the States. Don't I have to pay a departure tax?
The Chairman: Vancouver - $10.
Some hon. members: Oh, oh!
Mr. Dodge: Or $15 if you're going abroad.
The answer is no. It's like death; the departure tax at death is deemed realization, so the departure tax on all assets - other than this class of TCP - is that we deem any realization of capital gains. But there's no departure tax as such.
Mr. Silye: Okay.
If I have a private seismic company and I want to move those assets down to the States to avoid taxes, it seems to me there's a loophole here in that if I know of a public seismic company in the States, I can transfer my private shares into public shares. No?
Mr. Dodge: No. The issue is whether you want to move and you continue to hold a private Canadian company. There are lots of cases where that happens. This goes to the question you raised earlier. There is a lot of movement of people. What the law tries to do, and what we have tried to do since 1971, is to be pretty neutral with respect of that movement, not to put up a lot of barriers to impede movement out and not to put up barriers to impede movement in. Basically, that is what we've tried to do and that is why we have this special class of property where we don't deem disposition at the time of emigration, but allow capital gains to be taxed only upon realization, as we do for Canadian residents.
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Mr. Silye: Would this transaction have been likely if the capital gains tax was equal to or lower than that in the U.S.? Is this trust something that people look at and want to transfer to a resident in the States? Did the different rate factor have something to do with this?
Mr. Dodge: No. As I understand it, the resident here is a resident of New York, and in New York state the effective rate of tax on capital gains is slightly higher than in Ontario. That was what I was saying - the raison d'être does not appear to be at all tax-motivated here, but because the beneficiary of the trust was resident in the United States.
Mr. Silye: The Auditor General said this could be some slippage and seepage and could cost Canadian taxpayers or Revenue Canada some money. On the value of this size of trust - $2 billion - if it's after the ten years, are we losing 50% of that?
Mr. Dodge: I was trying to answer that question earlier. Inherently, the amount of future tax is unknowable. The only thing one could say is that as of today there has been no realization of those assets, so whether the trust had moved or not moved, there would -
Mr. Silye: I understand.
Mr. Dodge: - be no taxable gains under any circumstance, so the treasury is not out one penny.
Mr. Silye: Thank you, Mr. Dodge.
The Chair: Thank you, Mr. Silye.
I'm in the hands of members. Are there any other questions you wish to ask of our witnesses?
Mr. MacGregor, did you just write an article entitled ``Income Tax Litigation''? Are you the co-author of that article?
Mr. MacGregor: Yes.
The Chairman: Congratulations. Thank you very much.
On behalf of all members, I would like to thank our witnesses. In my experience it's been very unusual for us to have two deputy ministers and so many other top officials for such a long period of time. All of us are grateful to you and we know what this sacrifice means in terms of your own schedules. We look forward to working with you in the future.
The finance committee's subcommittee will be meeting tomorrow, chaired by Mr. St. Denis, with Mr. Wolfensohn of the World Bank. Our next meeting will be next Tuesday at 9:30 a.m. with the Auditor General.
This meeting is adjourned.