EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, June 12, 1996

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[English]

The Chairman: I am pleased to call to order this meeting of the Standing Committee on Finance of the House of Commons. We are looking into certain references made in a report by the Auditor General to a ruling made by Revenue Canada.

At the outset let me say this, and I think all members would agree: the Auditor General plays a valuable, critical and essential role in scrutinizing the actions of government and in reporting thereon to Parliament.

On May 7 the Auditor General tabled his latest report to Parliament. By letter to me as chair of the finance committee the next day, the Auditor General stated as follows:

In the past, your Committee has shown an interest in the taxation of family trusts. Our audit observation on the administration of the Income Tax Act deals with this issue. In the observation, we discuss transactions that may have circumvented the intent of the Act regarding the movement of certain trust assets offshore and the taxation of capital gains. The government has already announced its intention to have your Committee review the relevant sections of the Income Tax Act...

With regard to this reference to us, the committee has already had hearings with the Auditor General, on the one hand, and officials from Revenue Canada, Finance and Justice on the other hand. I think we can safely conclude at this preliminary stage that the tax issues are, to say the least, complex. This complexity is heightened by the fact that, as I think both sides will admit, the law is silent in places and ambiguous in others.

To help members of the finance committee come to a decision, we decided to hold today's hearing to which we would invite outside tax experts. Members of all parties were asked to suggest who these tax experts might be. On Monday I received a letter from the Auditor General suggesting that the following two experts might be invited: Professor Neil Brooks from Osgoode Hall Law School, and Mr. James M. Parks of Cassels Brock and Blackwell in Toronto. Mr. Parks said he could not be with us. I understand Professor Brooks will be attending.

Submitted to us as the witness by the Reform Party is Mr. Ken Laloge, CA, from MacKay and Partners in Kelowna, B.C. We also have with us Mr. Allan Lanthier from Ernst and Young, Montreal; Mr. Wolfe Goodman of Goodman and Carr, Toronto; Mr. David Smith from Davies, Ward and Beck, Toronto; Mr. R.B. Sirkis of Bennett Jones Verchere, Calgary; Mr. Scott Wilkie of Stikeman Elliott, Toronto; and Mr. Rob Spindler, Coopers and Lybrand, Toronto.

I am delighted that you people would take time out of your busy lives at such short notice to be with us on an issue that is critical to us and that we find very difficult to resolve on our own without your assistance.

To assist in our deliberations, in finding our way through this maze of complex tax issues, I asked Finance at the last minute to prepare a list of the issues, with their best efforts at summarizing what the Auditor General's position and the government's position might be with respect to the tax ruling in question. If you do not have a copy, photocopies are being prepared right now and will be distributed to you. We have just received this.

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In order to aid us in our deliberations, I thought we could look at this ruling in terms of four issues. First is the tax ruling itself. Does it, as the Auditor General suggested, circumvent the intent of the law? Second, what is the impact on the entire advance ruling process adopted by government of this particular ruling? Third, there's been a lot of controversy in terms of the confidentiality of advance tax rulings. In this particular case a taxpayer has been identified, fairly or unfairly, from the information that was made public.

Last and perhaps of most concern to this committee, we should look ahead. Is the Income Tax Act as it relates to people leaving Canada the way it should be? Is there a tax treaty? Can we make improvements to create more fairness among Canadian taxpayers, to protect even more Canadian revenue? Looking to both our own law and international conventions, should we be adopting different standards in dealing with these issues?

Enough preliminary comments. I would like to start off with the tax issue itself, the issue of this ruling, and ask our experts whether it circumvents the intent of the law. Perhaps Professor Brooks, who just joined us, would like to start this off.

Professor Neil Brooks (Osgoode Hall Law School, York University): Sure.

The Chairman: I would suggest that we limit our remarks to a maximum of five minutes.

Prof. Brooks: Yes, I could take less than that. Is this on just the first question, Mr. Chairman?

The Chairman: Yes.

Prof. Brooks: On the appropriateness in terms of law and tax policy of the ruling, my position is that the ruling the taxpayer received in this case is wrong in law, policy and common sense. The whole ruling turns on whether or not a Canadian resident can have taxable Canadian property. It seems to me that for three good reasons, the answer is absolutely not.

First, Canadian residents are taxed on their worldwide income. Why would you need a concept like taxable Canadian property, since they are taxed on all of their gains, no matter what type of property they own? It makes no sense to slice up Canadian residents' property in terms of taxable Canadian property and other kinds of property because they're taxed on all their property. So as a policy matter, it would make no sense to draft a tax system that applied a concept like taxable Canadian property to Canadian residents.

Second, every section of the act that applies the concept of taxable Canadian property to a Canadian resident when they're leaving the country is absolutely clear. In effect those sections say that property that would be taxable Canadian property if the person had been a non-resident - and then they apply the rule...all of those sections clearly imply that a Canadian resident cannot have taxable Canadian property. The only exception is the obscure paragraph 97.(2)(c), which applies to the partnership roll-over section, and I have a couple of comments about that.

First, it was inserted in the act in 1982. Since all of the other sections that were in the act in 1972 are absolutely clear that the concept of taxable Canadian property can't apply to Canadian residents, why would we assume that a section inserted in 1982 would change the meaning of that concept? No one knows why that paragraph was put in the act, particularly in light of the fact that whatever mischief it was trying to get at is covered in paragraph 115.(1)(b)(v). That paragraph should have been amended if the department thought it ought to be amended.

Second, it was just a drafting mistake, which happens all the time. The paragraph makes no sense. The drafter or someone should have caught the fact that they didn't modify Canadian taxable property with this little phrase that they use in every other section - namely, Canadian taxable property - if the person had been a non-resident or words to that effect.

Third, in terms of why the ruling is wrong in law, policy and common sense, think of the bizarre results it leads to in both logic and policy. If the ruling is correct it means that it would distinguish between a Canadian owning publicly traded shares that they had purchased and were now leaving the country, and a Canadian who owned publicly traded shares when they were leaving the country but had acquired them earlier through an exchange for private company shares. In logic, why would you ever distinguish between those two cases? It makes absolutely no sense.

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If it's allowed to stand, in policy it means that you can transfer property to a trust in a tax haven, for example, and in many cases escape Canadian tax entirely if you're becoming a non-resident. In other words, the ruling creates an enormous loophole in our act without any justification. Those are my comments on the first question.

The Chairman: Thanks, Professor Brooks.

Scott Wilkie please.

Mr. Scott Wilkie (Stikeman Elliott (Toronto)): I think the ruling was properly given and its conclusions are sound within the law as written in the Income Tax Act and within the context of Canada's international tax relations, which in part are reflected in the tax treaty network to which Canada is party.

I think this question, which in part is a technical question about the interpretation of the act and in part a larger question about Canada's residual entitlement to tax gains realized by Canadian residents who expatriate, has to be answered from the standpoint of Canada's overall interest as expressed in the act. In retaining a jurisdiction to tax departing residents, which except for three countries, I think, is a unique jurisdiction that Canada retains... A fundamental aspect of the jurisdiction to tax, which is reflected in this taxable Canadian property rule, is the degree of connection that a resident, now a non-resident, needs to have or has shed in order to preserve Canada's ability to tax.

In terms of the tax concept of taxable Canadian property, these rules define the circumstances and the property in respect of those circumstances in which Canada may tax gains after a resident has left the country. On the narrow point, it's not unusual within the law as it is written for residents who leave the country, and who leave the country in favour of a country with which Canada has a tax treaty, to be relieved of tax after a period of time. By way of international consensus it has been conceded that after that period of time that person's connections are closer with somewhere else than with Canada. In effect Canada is ceding tax jurisdiction in favour of another country, so it is not a question of the taxpayer and Canada debating whether or not the taxpayer has defeated the Canadian system.

On the narrow point of taxable Canadian property, the act defines taxable Canadian property clinically. It doesn't define it with any significance for residents or non-residents. It defines a class of property that, when a resident ceases to be a resident, Canada retains jurisdiction to tax. The ruling dealt with a circumstance in which property, had it been owned as originally owned - private company shares - when it was expatriated, would have been relieved of tax and the present debate wouldn't be taking place. The only question was whether that property, remanifested in the form of public company shares, was somehow exposed to a charge to tax it wasn't exposed to in the original form - private company shares - that property took. That's the only question the ruling addressed.

That this discussion has taken place in the context of trust planning for wealthy individuals has nothing to do with the tax policy question that underlies the determination that was made and reflected in the ruling or in the rules in the Income Tax Act, or their inter-relationship with treaty rules that in certain circumstances preserve and in certain circumstances consistently relieve taxpayers from being taxed by Canada in favour of another country.

Those are my first comments.

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The Chairman: Thank you, Mr. Wilkie. Mr. Sirkis, please.

Mr. Ronald B. Sirkis (Bennett Jones Verchere (Calgary)): Mr. Chairman, I agree with the points made by Scott. I think the ruling was correct on the basis of the provisions of the act and the scheme of the act.

In my view, in summary, what Canada has brought forward in this portion of the Income Tax Act is the right to tax certain property, whether owned by a resident or a non-resident, in this category of properties labelled taxable Canadian property. Canada has retained the right to tax that property, subject to provisions of tax treaties, and has retained the right to tax the full gain on that property. To come to a conclusion other than the one brought forward in the income tax ruling would have meant that with respect to taxable Canadian property, a former resident of Canada would be taxed on a different basis from a person who was a non-resident of Canada who had bought the property. It would then be taxable Canadian property, and hence subject to the full gain on its eventual sale.

The ruling protects Canada, subject to a treaty, in taxing the full gain on the sale by treating the property as taxable Canadian property for the purposes of residence and non-residence. So on an eventual sale the entire gain on this category of property is subject to tax in Canada, subject only to the terms of a treaty.

With respect to treaties, I think that for commentators to pick apart certain aspects of a treaty is incorrect. A treaty is the result of long negotiations between treaty partners, and it's somewhat similar to someone picking a clause out of a 30- or 40-page contract and asking why they said that. The reason they said that is that in negotiation there's give and take on both sides.

Underlying most of the negative commentary on the ruling is the fact that Canada has a treaty with the United States, which provides that after some duration of time, the gain on the stock would not be taxed in Canada. That is done by convention, by agreement between states. I thinks it's incorrect for this to be visited upon the taxpayer or the department as a reason why the interpretation of the statute, which is fairly clear in my mind in reviewing the scheme of the act, ought to be treated as a negative aspect of the ruling. If there is a drafting error in the statute - and I'm not sure there is - it may well be in paragraph 85(1)(i), not elsewhere in the statute.

Those are my comments.

The Chairman: Thank you, Mr. Sirkis. Mr. Smith, please.

Mr. David Smith (Davies, Ward and Beck (Toronto)): Thank you, Mr. Chairman.

I've reviewed very carefully the analysis of this question, and I would agree with the opinion of the justice department that the better view is that the shares in question were taxable Canadian property at the time the trust was prepared to distribute them. I arrived at this conclusion by looking at a variety of provisions of the act.

When one is trying to identify taxable Canadian property, one has to do more than just look at the nature of the asset. One also has to look at the circumstances in which the taxpayer acquired the asset. There are at least four provisions in the statute that I would describe as roll-over provisions, where an asset that is owned by a taxpayer is part of a reorganization and a new asset is acquired. Those provisions say that if the old asset was taxable Canadian property, the new asset is also taxable Canadian property. In each of those provisions, they're equally open to residents and non-residents. They're completely neutral as to whether the rule that deems the replacement property to be taxable Canadian property is only available...they're neutral on being available to a resident and a non-resident.

When I look elsewhere in the statute to try to discern a scheme or a purpose to the overall provisions, I think the provisions of section 97 dealing with partnerships that have been referred to are very important. They clearly indicate an intention that taxable Canadian property can be held by residents.

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I would also point to another provision, subsection 85(2), which deals with partnerships transferring property to a corporation, where there's a similar indication, and to a third provision, dealing with non-resident-owned investment corporations, which are residents for many purposes of the statute. It is a resident corporation and in some places it's deemed not to be resident, but it is basically a resident, and in section 133 it clearly talks in terms of a non-resident-owned corporation owning taxable Canadian property.

Those, in my opinion, are clear indicators as to the scheme of the statute, and I would agree that the better view is that these shares were taxable Canadian property.

In terms of the policy analysis, these reorganization rules that I referred to are essentially anti-avoidance provisions, and I think it's important that they continue to apply, to prevent an abuse of the system.

This trust had to look at whether these public company shares were taxable Canadian property, and I believe that history is relevant. Canada has chosen to tax the full accrued gain for certain types of property where it has gone through a reorganization and a replacement property is held, and I think it's consistent with that policy that this interpretation would be taken. So I would support both the conclusion of the Department of Justice and the conclusion of the Department of Finance in the matter.

I think what this has done, however, is pointed out that there are some inconsistencies. I think there is a particular deficiency in subsection 107(5) that deals with the transfer of the property out of the trust, and I think there is room for some of those what I might call technical deficiencies or anomalies to be corrected.

I think a review of the whole package of rules dealing with taxable Canadian property needs to be undertaken, independently of whether there will be a fundamental change in policy direction.

Thank you.

The Chairman: Thank you very much, Mr. Smith.

Mr. Goodman, please.

Mr. Wolfe Goodman (Goodman & Carr (Toronto)): Thank you, Mr. Chairman.

I'll try to avoid talking about the technicalities of the matter.

The Auditor General considers that this ruling circumvented the intent of the law, and with respect, Mr. Chairman, members, I think the ruling properly applied the policy of the legislation.

The ruling really doesn't have that much to do with trusts as such, and it's very important to recognize that the principle is a very simple one. If an individual resident of Canada leaves Canada at a time when he owns, for example, shares of a private Canadian company, he is not subject to tax at the time he leaves, because those shares will ultimately be subject to tax if, as, and when he disposes of them as a non-resident.

Because his new country of residence is likely also to tax the disposition of those shares, we have rules, through our tax conventions, by which there are taxing powers allocated. In the normal case in respect of taxable Canadian property other than real property, if disposition takes place within ten years and the individual is now resident in the United States, Canada has the first right to tax - it has the first crack at the taxpayer - and the United States has to grant a foreign tax credit. After ten years, the connection with Canada is more tenuous and therefore Canada gives up its right to tax and the United States has full taxing rights.

This seems to me a perfectly reasonable arrangement, and it works equally well when an American resident comes to live in Canada. If that American resident owns shares which have appreciated in value, then the United States is not going to give up its taxing rights, typically, because the individual is a U.S. citizen.

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In those circumstances the United States retains the right indefinitely in respect of what are called U.S. real property interests, and after ten years it cedes its right to tax to Canada. It's not surprising, then, that the first crack at the taxpayer in those circumstances will go to the United States for ten years in the typical situation, and after ten years it will go the other way. So I don't consider that there is any ``escape'' from taxation.

With respect to the Auditor General and to Professor Brooks, it seems to me that this is not an unduly complicated matter. I think the ruling that was given might have been better - with the benefit of hindsight, which makes geniuses of all of us. I think that I would probably, if I were a rulings officer, not have accepted a mere undertaking, although I'm sure the people who gave it are honourable people and would honour their undertaking. I'm not at all concerned about the ``unenforceability'', so-called, of the undertaking.

In the United States, both for convention purposes and under their internal revenue code, undertakings are frequently given where people agree that they will not claim their rights under certain provisions. Very recently, in our protocol to the Canada-U.S. convention, the rights of Canadian estates to benefit from a credit in lieu of the marital deduction in computing the U.S. estate tax liability was predicated upon a waiver being given not to claim the benefits of what they called ``Q-DOT'' - the qualified domestic trust legislation.

Similarly, when an individual in Canada wants to transfer U.S. rental real estate into a Canadian company - which he can do on a roll-over basis for Canadian tax purposes - for U.S. tax purposes he's allowed to do so provided he and the company agree that they will not claim the benefit of the tax convention between Canada and the United States.

So I don't find anything particularly peculiar about this, Mr. Chairman.

The Chairman: Thank you very much, Mr. Goodman.

Mr. Lanthier.

Mr. Allan Lanthier (Ernst & Young (Montreal)): Thank you, Mr. Chairman. I'll try not to repeat points that have been made by others, or get overly technical. The ruling was, in my view, clearly correct in its interpretation of the law. This whole issue seems to have become much more complex and convoluted than it need be, from the viewpoint of legal interpretation. I say this as an accountant, hoping I won't be sued by any of my legal colleagues around the table.

From a viewpoint of legal interpretation the ruling involved a very narrow point, which has been referred to - is the concept of taxable Canadian property only relevant in respect of property held by non-residents, or is it equally relevant and does it also extend to property held by resident taxpayers?

It's a very narrow point. Professor Brooks said there are sections that imply - he said ``clearly'' imply, and I'm not sure what that means - that the concept only applies in respect of property held by non-residents, while this ``obscure'' section, 97(2)... Nothing could be less obscure than 97(2). It is a very simple, black and white, straightforward provision that applies on transfers of Canadian resident partners to a partnership. It's black and white; I don't think there's any other construction that can be made. There is some ambiguity in the act, which is why we're meeting with respect to the issue - this narrow point of taxable Canadian property. It's my view that the ambiguity is demolished by 97(2), which clearly points out what the scheme of the act is on this narrow point.

But that's the narrow point. With regard to the general policy, and with respect, I think the Auditor General and perhaps Professor Brooks have been missing the forest for the trees. If we look at the underlying policy and we reverse the steps here, and we have a taxpayer - whether it's a trust or an individual - owning shares of a private company that emigrates from Canada, clearly there's no tax charged at the time of leaving. I don't think there's any debate on that. The taxpayer then exchanges his or her shares, or the trust exchanges its shares, for shares of a public company; again, there's no tax. As Wolfe Goodman and others were saying, the shares are deemed to be taxable Canadian property and remain subject to the Canadian tax jurisdiction.

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This ruling involved a somewhat obscure set of facts where the steps were reversed and the share-for-share exchange had occurred first. And the question was, should we nail the taxpayer on this point? They did the steps in the wrong series. They asked, is there a chance to nail them? In fact, in law there is not, for the reasons pointed out by the Departments of Finance and Justice and in the ruling that was given.

Mr. Chairman, my view is that the ruling was correct in law and under tax policy. I do have some comments with respect to changes that might be considered. I'm not sure I agree with David Smith's comment on subsection 107(5) - I think that's towards the end. Canada has one of the tightest systems, as most of the people in the room know. Australia and Denmark are the only other countries in the world to impose an exit tax.

As you all know, the Americans are debating at this time an expatriation tax. Issues have been raised as to whether the introduction of an expatriation tax by the United States would violate international law, which bans restrictions on freedom of movement and freedom to emigrate.

Up to now, Australia, and to a lesser degree Denmark, because Denmark has a very limited exit tax... Australia has an exit tax that's paralleled right on Canada. When you leave Australia, you have a fair market value disposition on non-Australian assets, not on taxable Australia property, if I can coin a phrase. The American expatriation proposal is exactly the same. They do not propose to tax U.S. real property interests. In fact the United States doesn't tax non-residents on capital gains on any types of assets other than real estate, and the United States seems to be doing quite well economically, nonetheless.

Those are my comments, Mr. Chairman.

The Chairman: Thank you very much, Mr. Lanthier.

Mr. Laloge.

Mr. Ken Laloge (MacKay & Partners (Kelowna)): Mr. Chairman and members of the committee, I'm in a rather strange position of having benefited from listening to a number of the other guests and finding myself agreeing with certain policy statements, particularly, but also finding myself opposed to a number of the more specific statements, almost to a point where it's not going to be possible to stay out of some of the detail to describe why, in detail, the decision was an error.

The policy point of view that is out there is the movement of these funds out of the country and possibly out of the Canadian tax net. As a number of my colleagues have mentioned, there are tax treaties, there are other rules that apply to this and very likely the loss that takes place there could have been achieved other ways, or is achieved over time, and it should be a focus of this committee in looking to the future. The whole area does have to be looked at, as was mentioned by one of my distinguished colleagues.

As for the ruling itself, in working with the tax system every day we face problem areas where the act doesn't achieve what it should in policy. In that sense, I think I'm in the professor's camp, and I have to get into the detail to explain why I'm in the professor's camp.

I think quite a bit has been made, both by the Department of Justice and by some of the specialists here, that subsection 97(2) is one of those determining factors that says yes, this quite clearly could be the case and the ruling could be issued. Subsection 97(2) has been around for a limited period of time. It's been around since 1982. So prior to that time, if the decision is based on that, this opinion could not have been given. If this were the factor that turned it over in terms of whether taxable Canadian property could be held by an individual, that would turn it over.

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In regard to the policy intended by subsection 85(1), as Allan noted, is it realistic that the order something is done in overturns what a natural outcome should be? Earlier there was a statement that nobody really knew why paragraph 85(1)(i) was put in there. I look to my learned colleagues for some more comments in this area, but that section was put in at a time when the roll-over provision was extended from 80% or more of the shares of a corporation to it applying to all types of roll-overs. It goes back to 1974. At that point in time the act we're working under was very new, but it was added at that point in time because, in my view, if it hadn't been added the 25% rule for taxable Canadian property - there's a rule that says taxable Canadian property has to be at least 25% or more of a public company - if the rule hadn't been introduced it would appear that one could turn any public or private company shares into taxable Canadian property, or it would certainly erode that particular point. As I said, I look for some comments on that issue.

Is there a policy need for paragraph 85(1)(i) to cover residents? I guess we're all agreed that it's an anti-avoidance rule, but I don't think, other than this question of fairness that has been raised by my colleagues and is raised by the summary from the Department of Finance, that there's any other policy need for that.

Does a Canadian have taxable Canadian property? The professor spoke about how there are various sections that support that position, and those sections include rather unique wording related to the former clauses in section 48, which is on immigration. They include the sections on non-resident-owned investment corporations and they include subsection 107(5) on trusts. Rather than using a plain wording in all of those sections that basically says taxable Canadian property is whatever it is, it doesn't really matter whether you're here or not, all of those sections refer to an emphasis on at no time in the year had the taxpayer been a resident in Canada, or something along those terms. Had the draftsmen in 1972 or earlier felt that section should cover property whether or not somebody was resident in Canada, they went an awful long way to make it obscure.

So I look at those sections, particularly in the absence of subsection 97(2) before 1982, to have some considerable weight; and that is pointed out in the Department of Justice findings.

The anti-avoidance rules that we speak of here include 85(1)(i), which was a great deal of the focus of the efforts by Justice, Revenue Canada and Finance, but there are five or six other sections that have been pointed out by my colleagues that also use that relatively plain language. They all relate to specific problems about after you've left Canada. They don't relate to problems while you are resident in Canada.

As I said, the conclusion of Justice weighed heavily on subsection 97(2), and I think that if it weighed heavily on 97(2) then it could not have been given prior to 1982. It could not have supported that in these circumstances it could have been taxable Canadian property. That's different from reaching an opinion that I think it's good policy. It's merely a matter related to the technical detail of what Finance and Justice were determining.

The Chairman: Could I ask that maybe you could summarize what your conclusions are?

Mr. Laloge: Yes.

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There's one other group of sections I wanted to point out. Another thing that supports this conclusion that taxable Canadian property doesn't exist when you're in Canada is a specific wording of the former subsections 48(3) and 48(2). In one case, it requires an election that gives you taxable Canadian property only after you've left Canada, and in the other case it goes so far as to crush that election on your return to Canada.

If taxable Canadian property for residents existed both before and after you were a resident in Canada, why would they have introduced that section? In paragraph 48(3)(b) of the old legislation, why would they bother to say your taxable Canadian property ends when you return to Canada?

So it's a very complex issue. We have seen a situation where a series of anti-avoidance rules have been used to extend an interpretation that arguably is vague.

My conclusion is that only for the purposes of subsection 97(2), when a non-resident has the possibility of taxable Canadian property, does the phrase ``taxable Canadian property'' have any meaning to a resident. Even in that section it only has a meaning to the interpretation of the tax statute when you're out of Canada.

It's likely that paragraph 97(2)(c) is ineffective because of the vagueness of the wording. If we turn the question around and ask how Justice could enforce this rule of subsection 97(2), they're going to have some problems.

The Chairman: Thank you, Mr. Laloge.

Mr. Spindler, please.

Mr. Rob Spindler (Coopers and Lybrand (Toronto)): Thank you very much, Mr. Chairman and members. I guess I'm in the clean-up position here.

These are all very interesting comments. I think my conclusions are that Revenue Canada was technically correct in issuing this ruling. Revenue Canada took every measure to ensure its ruling was consistent with the intent of the act - as that intent is discernible from the words of the act - by seeking advice from the Department of Finance and the Department of Justice. This may have a bearing on subsequent discussions.

It's interesting to see a collection of tax advisers trading sections of the act back and forth. As Wolfe Goodman said, and as demonstrated by the conversation, it is both a simple matter and a complex matter.

It seem to me the Income Tax Act is a dynamic creature that grows and changes, and it's changed considerably since 1972. When confronted with a variety of provisions and with trying to determine whether taxable Canadian property can be held by a resident, you have to look at the current state of the Income Tax Act. A number of provisions in there have been sited by a variety of people, including section 248, which I think on better view would lead one to conclude that taxable Canadian property can be held by a resident. Thus, all of the consequences that flow out of the ruling flow naturally and would seem to be entirely in keeping with the intent of the Income Tax Act.

I think it's important to separate that. I think some of the commentators in this area confused that with what they feel the results of the act should be, as opposed to what they are and what the discernible intent is. That's another discussion the committee may want to take up.

I agree with David Smith that there's probably a need to review the legislation and determine if it's internally consistent and whether changes need to be made to remove anomalies. I also agree it may be an appropriate time for Canada to review how it taxes capital gains on immigration and emigration. That's in the context of its international treaties and its need for capital.

The Chairman: Thank you very much, Mr. Spindler.

Would any of our experts like to have a chance to comment now on what their colleagues said?

Mr. Brooks, I knew you couldn't resist the opportunity.

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Prof. Brooks: I must congratulate you, Mr. Chairman, on your newfound sense of fairness. I think the second-last time I was here we were debating whether we should abolish the GST. You had a panel of 20 experts, and I think one of them was in favour of abolishing it and 19 were in favour of the GST. On this issue in front of you, you have one on one side of the issue and seven on the other, so I guess that's progress.

The Chairman: Yes, two to -

Prof. Brooks: Oh, there are two? One was ambivalent.

There's no ambivalence about my position, Mr. Chairman. I was only speaking to the legal issue, incidentally; I wasn't speaking to the policy. I would like to speak to that when it comes up.

The Chairman: We'll be dealing with the policy later and with any changes we might contemplate to the law. We'll try to close up on that.

Prof. Brooks: On the legal matter of interpreting the meaning of ``taxable Canadian property'', again, I think the legal interpretation of that is absolutely clear. Applying it to Canadian residents leads to bizarre policy results, peculiar illogics, and, it seems to me, an affront to common sense.

The one section that is being interpreted here, Mr. Chairman, which some have spoken to, is paragraph 85(1)(i). That's the section that says if you convert private shares, which in effect are taxable Canadian property, into public shares, the public shares shall be taxable Canadian property. That section was put in the act to prevent avoidance by non-residents. The peculiar interpretation the department gave is to allow avoidance by residents. It seems to me that's ironic. It was put in there because the department didn't want non-residents who held private company shares, which were going to be subject to Canadian tax because they were taxable Canadian property, to avoid that Canadian tax simply by exchanging those shares for public company shares. They would not be defined as taxable Canadian property in the act. Therefore, the section says if you convert private company shares or taxable Canadian property into public company shares, they shall be taxable Canadian property.

It was clearly intended to prevent avoidance by non-residents. There's absolutely no reason in the world why you would need a section like that to apply to Canadian residents. I'll challenge anyone to give me an argument that's even slightly reasonable.

The Chairman: Could I make that?

Some hon. members: Oh, oh.

The Chairman: Go ahead, Allan.

Mr. Lanthier: If you follow Professor Brooks' argument to its remorseless conclusion, paragraph 85(1)(i) discriminates against non-residents of Canada in favour of residents. If the provision is so black and white and straightforward, as Professor Brooks suggests, I question why paragraph 85(1)(i) doesn't say that in the case of shares held by a non-resident, the shares received in transfer shall be deemed to be taxable Canadian property.

I am not a draftsman, Professor Brooks. It would have been extremely simple and straightforward to draft it in black and white, as we find in subsection 97(2). I think this demolishes your argument.

So that would be my response on this very narrow technical point that we're all getting hung up on here.

Prof. Brooks: That response doesn't pass your test, with respect, Mr. Chairman. It doesn't go to the policy at all. It just says this is how we should interpret the wording because this is how it's drafted. In fact, in paragraph 85(1)(i) they explicitly used the words ``taxable Canadian property'' because they understood, given the language they used in the other section, that people would understand that it can apply to a Canadian resident.

The Chairman: On a point of order here, Mr. Loubier would like to ask questions. It was my intent that

[Translation]

we would give each of our witnesses one last opportunity to question the others and then go on to the questions from members.

Mr. Loubier (Saint-Hyacinthe - Bagot): Mr. Chairman, we have heard the views of each of the specialists, and the arguments raised on both sides seemed quite clear to me. For almost a month we have been hearing from specialists in the Department of Finance, the Department of Revenue and the Office of the Auditor General.

I would like us to go around the table now and put some questions to the specialists, because we have some very specific questions. I want us to get into a debate here but I would like us to be participants in that debate. We are not here simply to watch the train go by and wait for the replies without being able to ask our real questions.

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[English]

The Chairman: Mr. Williams.

Mr. Williams (St. Albert): Thank you, Mr. Chairman. I understand what Mr. Loubier is saying, but I would hope that since we have brought these gentlemen here today - they're experts in their field and some have come a long way - we wouldn't just be bound by a 5:30 closure of the meeting. We may want to continue.

If that is the case, Mr. Chairman, I would think that the questions being posed by the experts among themselves to discuss in detail certain subjects - and perhaps they can take one issue at a time and move forward and discuss them among themselves - might be more relevant than the questions posed by us, as we are perhaps less well tuned in to this particular situation. After we have heard that, Mr. Chairman, I think we could have questions by the members.

The Chairman: Let me say, Mr. Loubier and Mr. Williams, that as far as I'm concerned, we have a vote around 5:30 or bells at 5:30, but we have this room until an undetermined time tonight. I think our witnesses have been alerted to the fact that we do not know when our meeting can end tonight, and I am prepared, with the permission of all members, to carry on until we have to leave for the vote, return, and continue our deliberations. We can have food brought in for dinner if necessary. That way our witnesses can fully debate the issue, every member will have the opportunity to ask all of the questions of our witnesses that they may wish, and no one will be short-changed.

Mr. Loubier.

[Translation]

Mr. Loubier: Mr. Chairman, I come back to my earlier observation. I would like to be able to put questions to the witnesses. They are here to answer our questions. I am ready to continue through the evening, even to midnight if you so wish. That doesn't bother me. However, from the technical details in their opening statements, and from what we have learned since the deliberations on this issue began, I would like to ask them some precise questions in relation to the topic of our concerns. That is what I was saying to you, Mr. Chairman.

I am prepared to sit all evening, and all night if you so wish. The subject is very interesting. But I would like us to proceed forthwith to the question period. We have some questions to put to the specialists and Mr. Williams has some, too. They did not come here solely to debate amongst themselves. They also came to respond to our questions.

[English]

The Chairman: Mr. Campbell.

Mr. Campbell (St. Paul's): Thank you, Mr. Chairman. I'm just recalling our procedure at these round tables. We have convened a number of these, Mr. Chairman, over the last three years, and many members, including Mr. Loubier, participated. The normal format has always been thus,Mr. Chairman: we have opened with short statements, and we have then provided our guests with an opportunity to comment on the statements they have heard. That's the process we're involved in right now. We then move to questions from members, which stimulate further discussion, and at the end we offer our guests a chance to make some concluding remarks. That's always the format we followed.

I'm enjoying the repartee, if I can use that word, between our guests, as it does shed some light on the issues. I also look forward to asking questions. I think in light of the availability of our guests, the room, and our interest in this topic, we can let them comment on the opening remarks and then move fairly quickly to questions, but I wouldn't want to prevent them from having the opportunity to engage among themselves. That's one of the reasons, Mr. Chairman, we adopted this format three years ago and are using it almost consistently.

[Translation]

The Chair: Mr. Loubier.

Mr. Loubier: I have a compromise to propose to you. Are you surprised? I would be prepared to agree that our guests debate amongst themselves until 4:45 p.m., and that the question period begin at that time if Mr. Campbell, Mr. Shepherd and the others agree to this as well. They would discuss until 4:45 p.m. and then we would begin our questions. I think this is not too much to ask of you.Mr. Campbell seems to agree on this proposal.

The Chairman: Frankly, I do not want to impose any limit on our witnesses. They are our guests. I would like to benefit from their expert opinions, their experience and whatever they have to offer us. Let us continue and we will see.

[English]

Mr. Smith, you were the one, I think, who had an intervention to make.

Mr. Williams: I have just one point. I appreciate that we want to proceed, but is it possible for us to deal with section by section - bring some order to the discussion - rather than just float all over the place?

The Chairman: I think we can do that, in summarizing very quickly.

Mr. Williams: Thank you.

The Chairman: Mr. Smith.

Mr. Smith: Thank you, Mr. Chairman.

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I'd like to respond to Mr. Brooks' point. What he's overlooking is that this scheme also deals with emigration from Canada as well as how one taxes non-residents.

Imagine the situation where a person who has been a resident of Canada owns shares of a private company and foresees that their company is likely to increase in value substantially in the future, which might be the situation with a technology company that's developing and emerging, and the person also sees that the markets for their services or product are largely outside of Canada.

Under Mr. Brooks' interpretation, they would be able to, not too long before they decided to depart Canada, transfer the private company shares to a public company in some kind of business merger or combination, carefully keeping their interest under 25%, and depart Canada. On departure they might pay a small tax on the gain that had accrued to that point, but the result would be that Canada would give up the right to tax any gain in the future.

The way I believe the act was intended to operate would allow Canada to continue to tax in those circumstances, because the public company shares received in return for the private company shares serve as a proxy for the former private company shares, and Canada has determined that it wishes to continue to have the right to tax that accrued gain in the future. I believe that's why the policy that I described and that others have described is an appropriate policy and that the interpretation was consistent with that.

The Chairman: Mr. Sirkis.

Mr. Sirkis: I'd like to respond to the energetic comments of Professor Brooks, who's laid down the gauntlet that we should present one reason that the policy should be thus or that the statute should be interpreted thus. I think the reason is fairly straightforward, and that is to provide transparency of treatment for residents and non-residents.

If a resident of Canada owns shares of a private company, he will be taxed on the same basis whether he remains a resident or was a non-resident to start with. Similarly, if a person has public company stock, he will be taxed in the same fashion whether he was a resident and became a non-resident or was always a non-resident. In either event, if he started off with private company stock and transferred that stock into public company stock, he'll be taxable on the full gain when that stock is finally sold.

That's the principle that provides transparency of treatment for residents who become non-residents and for non-residents.

The Chairman: Mr. Wilkie.

Mr. Wilkie: I have two quick points following on those two comments.

The first one I'd like to make is I think it's interesting to refer to the partnership rule that's been discussed here today, in previous deliberations and in the Auditor General's report, but the reference to the partnership rule is no more than the validation of a determination under the act that is otherwise available in its absence on this point. If the discussion carries too far from recognizing that, the discussion is going to be diverted by a technical point that is less significant than it in fact is.

Following on those two previous comments, the rule in paragraph 85(1)(i), like other rules in the act, as has been pointed out by other guests here, is a rule designed to preserve Canada's ability to tax property that is already within the Canadian tax net and would escape that tax net if it were permitted to be transformed into the kind of property that isn't in the net. Simply, private company shares generally are taxable upon disposition by non-residents. Public company shares, other than major holdings, are not.

As Mr. Smith and Mr. Sirkis point out, in the absence of a rule that provided, in effect, a route of characterization from the original property, manipulation of the act would be available. It's an odd result to suggest, however, that this kind of anti-avoidance rule creates, as I think Mr. Goodman mentioned, an opportunity to invoke a charge to tax that the system doesn't otherwise require.

Finally, to put those two previous comments in a practical context, I'll give a couple of examples. If a Canadian resident owns private company shares and departs Canada and sells those shares later, Canada can tax the gain, but for the intervention of certain limitations in tax treaties. If a non-resident sells public company shares, Canada generally does not tax that gain. If the Canadian resident leaves Canada with private company shares, then Canada relinquishes immediate taxation of the gain on that property until the property is disposed of. If a Canadian leaves Canada with public company shares, then the act permits any gain on those shares similarly to be deferred until the realization takes place.

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There is symmetry in the act. There is symmetry in all of the cases but for possibly a technical anomaly, which Mr. Smith referred to earlier. To look at the interpretation of the phrase ``taxable Canadian property'' as if it had some larger significance of creating additional charges to tax I think is giving it more significance than it has and is in fact causing incorrect inferences to be drawn about its significance for residents and non-residents.

The Chairman: Thank you, Mr. Wilkie.

Are there any other comments on this? Mr. Goodman, please.

Mr. Goodman: Mr. Chair, since we are dealing with a trust that became resident in the United States, I think it's very important to recognize that if the Auditor General and Professor Brooks' thesis were correct, Canada would collect a massive amount of tax in respect of the appreciation in the value of the public company shares since the shares were acquired or 1972, whichever last occurred. But when those shares were disposed of, the United States would also levy tax, and its tax, unlike Canada's, is based simply upon the difference between the proceeds of disposition at the time the shares are disposed of by the U.S. resident and their original cost.

We have provisions in what used to be section 48 that when someone becomes a resident of Canada he gets a stepped-up cost basis. The United States doesn't have such provisions, and they don't have provisions on expatriation either.

To take a very simple example, let's suppose the shares of the private company cost nothing when they were acquired in 1973, after the new act came into effect, and the shares are worth$2 billion at the time the trust becomes a non-resident of Canada. Let's suppose that at some later date they are sold for $2.1 billion. The United States at that point is going to tax the whole $2.1 billion as a gain realized by a resident of the United States. It would be entirely inappropriate for Canada also to levy a tax on that $2 billion without any concern about double taxation.

I don't believe we have arrived at a sensible position when there are two different times at which tax is imposed, one by Canada and the other by the United States. The end result is total confiscation of the proceeds.

It seems to me that recognizing this particular asset as one which is taxable Canadian property and which Canada is entitled to tax for the first ten years after the cessation of residence is a perfectly realistic approach. The tax will be levied by Canada if disposition takes place within ten years. The United States will be asked to grant a tax credit at that time. The timing of the two taxes makes a considerable difference. Thank you.

The Chairman: Thank you, Mr. Goodman.

Do you have a further comment on this issue, Mr. Brooks?

Prof. Brooks: Let me just make three quick responses.

I don't understand the example about rolling private company shares into public company shares as being a justification for applying the concept of taxable Canadian property to Canadian residents. If you roll your private company shares into a public company and you elect to roll them in at the fair market value, we'll collect the tax on that accrued gain. Then a few years later, if you leave the country with your public company shares, we'll collect the tax on that gain. That is what should happen, because it's gain that accrued while you were resident in Canada.

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If you elect to roll your private company shares into a public company and take back public company shares, those shares will have a basis equal to the basis in your private company shares. When you leave, we'll collect the whole tax. Again, it's exactly what should happen, because that's a gain that accrued while you were here.

In Wolfe Goodman's example, if you apply the rule that when you leave the country you have to pay tax on the fair market value of your public company shares, and you're deemed of disposing them at fair market value, then the Americans are going to tax you again on all of that gain. They'll take your adjusted cost base to be your historical cost. That's an American tax problem. I'm not sure if it's right or wrong, but it's their problem, not ours. The fact is that the gain accrued while you were a resident in Canada, and we're entitled to collect the tax.

Furthermore, it goes much beyond the specific problem in this case. The act fundamentally distinguishes for this purpose, for the purpose of the people who are emigrating, between private company shares and public company shares. I appreciate that there are some exceptions for public company shares, but generally when you emigrate you're deemed to have disposed of your public company shares at their fair market value, and we quite correctly collect the tax.

My point is that the fact that you acquired those public company shares ten years earlier in some kind of exchange for private company shares should be totally irrelevant to how much tax we collect. Mr. Wolfe Goodman's argument is that we shouldn't be collecting the tax on those public company shares. Maybe that's right. Presumably he's going to suggest that the law ought to be changed so that all shares are taxable Canadian property when a person leaves. Indeed, I'm going to suggest it's the opposite, that you should have to pay tax on the value of all your shares when you leave, whether they're private or public.

But it raises a much broader issue. In resolving the legal issue here - and this is a peculiar forum to debate legal issues, I'm more comfortable debating the policy issues - it seems to me we have to accept that the act distinguishes between public company shares and private company shares generally for the purposes of imposing the departure tax.

The Chairman: Wolfe Goodman.

Mr. Goodman: I will not take too much of the committee's time. I merely point out that if I as an individual owned shares of a public company, it wouldn't necessarily follow that when I ceased to be a Canadian resident and became a resident, say, of the United States, I would be subject to deemed realization at fair market value. That is the ordinary rule, but I have the right to make an election as an individual to have these shares treated as taxable Canadian property.

To avoid tax at the time I leave Canada, all I have to do is provide security to the government that if I dispose of those shares and incur a liability to Canadian tax, the government will know where the moneys are going to come from. If, on the other hand, I've retained my Inco shares, to take a very simple example, until I have been a resident of the United States for eleven years and dispose of them at that time, I'll be subject to no Canadian tax under the terms of our treaty. No doubt at the end of the tenth year I would have requested return of my security.

We do have this right to convert shares that are not taxable Canadian property into taxable Canadian property. This right happens not to be available to a trust, but I don't think that's critical as a policy question. Notwithstanding the vigour of Professor Brooks' remarks, the policy question seems to be a perfectly reasonable one, which negotiators on behalf of various countries have arrived at over many years in many, many tax conventions.

The Chairman: Mr. Spindler.

Mr. Spindler: At the risk of repeating, I think we continue to drift from the technical issue to the policy issue, and what the law does say versus what the law should say. I think the question originally asked was whether Revenue Canada was technically correct in issuing the ruling and whether it violated the intent of the act.

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The intent of the act is only discernible from the words of the act and related materials. As I mentioned earlier, it's a dynamic creature. With respect, Mr. Brooks, a number of provisions have been brought into the act that do not qualify the character of taxable Canadian property in the context of only relevant or applicable to non-residents. There are a number of provisions that would clearly imply that taxable Canadian property can be held by a resident. One of the guiding provisions there is section 248, which seems to have general application for all purposes of the act.

I think one has to look at that, look at those additions to the act, and see that Department of Finance officials probably were very cautious and very concerned about how they were drafting, as they usually are. It's unlikely that they would consistently make the same mistakes. It seems to me that a reader of those provisions - and this was the question that was asked, the reader being Revenue Canada - could conclude that the better view is that a resident of Canada can own taxable Canadian property. Then there are certain results that flow from that.

The whole policy issue of whether Parliament should decide to change the law and tax residents and non-residents on some different basis is another issue entirely.

The Chairman: It is one we will get to hopefully before midnight.

David Smith.

Mr. Smith: I'd like to ask Mr. Brooks a question. Subsection 107(5), the particular section we had to deal with here where a trust transfers property to a beneficiary, says - and I'm sureMr. Brooks is familiar with the wording - that you make a notional assumption that the trust would be a non-resident. Then you ask whether the assets of the trust would be taxable Canadian property.

Let us assume that in January 1996 the trust transferred the private company shares to a public company. It seems to me that if you make the analysis on the basis that the trust is a non-resident, public company shares would clearly be taxable Canadian property. The view Mr. Brooks is putting forward is that if you did this in December 1995, the shares of the public company would not be taxable Canadian property because the section says that you make the assumption that the trust was non-resident in the year it distributed the property. That's 1996. What is the logic in saying that if you do it in January 1996, Canada retains the right to tax future gains on the public company shares, but if you do it in December 1995, Canada gives up the right to tax future gains on the public company shares?

Mr. Williams: I don't understand the significance of the dates. I wonder if you could go over that analogy again. My apologies.

Prof. Brooks: I don't either. Did the exchange take place before and after the property left the country?

Mr. Smith: Let me go over it again then.

The section says that you are to make an assumption that the trust had not been resident any time in the year in which the trust distributed the property. I'm going to make an assumption that it's in 1996 that the trust distributed the property. You then ask yourself, if this trust had been non-resident throughout 1996, how would you categorize this property?

Let us assume it was in January 1996 that the trust transferred the private company shares to a public company and made the election that brings paragraph 85(1)(i) into play. So now the public company shares are deemed to be taxable Canadian property. Because the assumption here is that the trust in non-resident, I think even Mr. Brooks would agree that they are taxable Canadian property.

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I'm saying that if you changed the facts a bit and said let's suppose in December the transfer of the private company shares to the public company shares was made, the public company shares, under Mr. Brooks' interpretation, would not be taxable Canadian property and Canada would give up the right to tax future gains. If it was done in January 1996, they would be taxable Canadian property and Canada would retain the right to tax future gains.

I think Mr. Brooks is focusing on the gains that have accrued up to the date of emigration, but he's overlooking the fact that our system seeks to tax future capital gains on certain kinds of property, even after a person has left Canada. I don't understand his logic between the two situations.

The Chairman: Mr. Brooks.

Prof. Brooks: The logic is absolutely clear. I guess I don't understand the question. When you're a resident, we want to collect the tax that accrued, in effect, while you were a resident of Canada. When you became a non-resident, therefore, we deemed you've disposed of that property and we collect all the tax that accrued.

The only reason we give people the right not to have a deemed disposition, if it's taxable Canadian property, is not necessarily that we want to keep collecting the gain when they're a non-resident, although if it remains Canadian taxable property we'll collect it when they're a non-resident, because we want to collect the tax that accrued while they were resident in Canada.

I guess I just don't see why the example is troubling. Indeed, the section, it seems to me, is absolutely clear. This is one of the sections that indeed was an issue in the case, and it clearly talks about Canadian taxable property as being property that would be taxable Canadian property if the trust in effect hadn't been resident in Canada.

So you can ask why that phrase would have been put in there if Canadian residents can own Canadian taxable property, but it's superfluous. It makes no sense. I think to achieve the objectives of the act, you don't have to apply the concept of taxable Canadian property to Canadian residents. I don't understand why the example is troubling, frankly, unless I'm just missing the point.

What you have to begin with is the assumption that the act, for the purposes of taxing non-residents, does distinguish between private and public company shares. We say we make the judgment, but if the margin is clearly arbitrary, the private company shares generally have a sufficient nexus with Canada that we can justify. We tax non-residents when they dispose of it. With respect to public company shares, we can't, unless you own at least 25%. It's not hard to come up with examples that make that margin appear arbitrary. Of course it does, but that's the nature of all tax rules. You can always find examples that appear arbitrary at the margin.

The Chairman: Mr. Loubier wanted to start questioning at 4:45, as I understood. Do you want to interrupt this dialogue among our experts? There are at least three hands up now, and some new points have been raised.

Mrs. Brushett (Cumberland - Colchester): Go to questions, please.

The Chairman: Mr. Campbell.

Mr. Campbell: I think Mr. Loubier had said 5:15, Mr. Chairman.

[Translation]

Mr. Loubier: A quarter to.

[English]

Mr. Campbell: I'm sorry, you're right, Mr. Chairman; it was 4:45.

The Chairman: What I'm going to suggest is... I saw three more hands there. We'll go very quickly, because a whole new point, which I think is critical, has been raised. I saw Mr. Lanthier's hand.

Mr. Lanthier: Mr. Chairman, Mr. Brooks may have trouble understanding the example. I have no trouble understanding the example. I think David Smith's point is quite compelling. Paragraph 85(1)(i) is drafted on the basis that Canada will not give up the jurisdiction to tax by reason of a share-for-share exchange. Had Canada wanted to give up the jurisdiction to tax... There are people in Finance who are extremely bright - perhaps not as energetic as Mr. Brooks - who would have said ``and where the transferee is a non-resident of Canada, the property received and the transfer of property tax to obtain property shall be deemed to be taxable Canadian property''. It's very simple drafting. If the transferor is a non-resident of Canada, it doesn't say that. It doesn't say that for a very compelling reason, which David Smith and others have pointed out.

The Chairman: Thank you, Mr. Lanthier.

Mr. Laloge.

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Mr. Laloge: I have three comments, one to follow on something Rob Spindler had mentioned.

I wanted to confirm that the information I've reviewed does not suggest that Revenue Canada Taxation reached an improper conclusion in its advanced tax ruling. However, the information they were given from the Departments of Finance and Justice to provide that ruling was incorrect and should not have been given. That is, the information that said this was taxable Canadian property was wrong, and wrong in law.

Mr. Lanthier: I'm sorry, Ken. Is that your statement or is that a question?

Mr. Laloge: That's a statement. That's a conclusion of mine.

The Chairman: We understand that. It still leaves us with the question of whether a resident of Canada can own taxable Canadian property.

Mr. Laloge: Yes. To come forward on that point, we have been faced with a two-part decision. Can a resident of Canada own taxable Canadian property, yes or no? When you look at these sections, there is a third possibility.

We know non-residents can own taxable Canadian property. We know that when non-residents move back to Canada they have taxable Canadian property taken off them. Is it not also possible that these various sections that are perhaps more narrowly worded have no application while you are a Canadian resident and then only have application when you're a non-resident? That's something in between this question of whether you can have it when you are. It doesn't mean anything, anyway.

The Chairman: Well, what if you were an alien?

Mr. Laloge: We haven't discussed taxable Canadian property to non-resident aliens or to people from outer space. But to go one step further, there has been some confusion brought up here because taxable Canadian property is used in two totally separate contexts. What we have been discussing here really has nothing to do with people who are aliens or non-residents throughout.

The Chairman: Are there any more comments? Mr. Wilkie has a last one before we go to questions from members.

Mr. Wilkie: I have two quick ones.

I don't think it's correct to draw the inference from the statute that Canada's interest in delineating property as taxable Canadian property is simply to preserve its ability to tax accrued gains to the date of expatriation or gains that accrued while a non-resident was a resident of Canada. In fact, the characterization of property as taxable Canadian property but for the intervention of a tax treaty is quite comprehensive.

The second point is that while we talk in terms of taxable Canadian property as if it were some special category that somehow unlocks the answer to the tax rule, what we're really talking about here is the application of the act, the dispositions of property. The notion of taxable Canadian property is a jurisdictional notion. I believe it's intended to preserve Canada's ability to tax property and assets in the form of property which have substituted for the original property, regardless of how the individual or the person organizes their affairs.

I think to lose sight of that notion in the context of a discussion like this and to find some more metaphysical significance in the notion of taxable Canadian property makes it far too easy to conclude that some of these technical rules, this tax bingo, have more significance than they do. What we're really talking about here are the mechanics in the Income Tax Act and, overlaying them, the mechanics in Canada's bilateral relations with other countries, that set out the circumstances in which Canada can tax gains arising from property that has a connection with Canada. We call that delineation of jurisdiction, taxable Canadian property, when we're talking about property.

Thank you.

The Chairman: Thank you, Mr. Wilkie. With the permission of our witnesses, then,

[Translation]

we will go to questions from the members. We are going to begin by hearing from Mr. Loubier.

Mr. Loubier: Thank you, Mr. Chairman. I am pleased that you have come round to our arguments.

I would like to take a few seconds to talk about the case that interests us. We are confronted with an advance tax ruling that was made in December 1991 and that, based on an analysis of the tax provisions denounced by the Auditor General, enabled a trust to transfer two billion dollars to the United States without one penny in tax being levied on that amount of capital.

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In a case like that, normally, you conduct a fairly precise analysis. You also ensure, in the case of a precedent such as the one created in 1991 - that was made public only in March 1996, and that could have been used by those who were aware of it - that the witnesses are in no way linked to this advance ruling and were not able to get other trustees elsewhere in Canada to take advantage of it, through your firms, for example.

I ask the question because we are well aware that the relations between the financial community and Revenue Canada and the Department of Finance make up a small world; everyone knows each other, everyone has worked together. There are even some people who were with Revenue Canada or the Department of Finance before becoming specialists in operations such as those you represent.

I would therefore ask someone who has diligently defended the 1991 ruling, Mr. Wilkie for example, whether he has worked at Revenue Canada or at the Department of Finance in any capacity, given that there are exchanges between your operations. Have you or anyone to your knowledge employed by Stikeman Elliott worked for either Revenue Canada or the Department of Finance? That is my first question, and I will have two more, Mr. Chairman.

[English]

Mr. Wilkie: Mr. Loubier, I think your question has three elements about it; I'll answer each one of them separately.

You've asked whether or not any members of my firm have a vocational connection with Revenue Canada and the Department of Finance, or if historically they have had such a connection. The answer to that question is yes. In fact, one of my partners in Montreal is the former Minister of Finance.

The second element of your question, which I would like to answer with respect, is that my personal relationships with Revenue Canada and the Department of Finance, and those of my colleagues at Stikeman Elliott, and indeed those of any professionals I care to call my colleagues, are entirely professional. We're getting into the second area raised by the Auditor General, but all of us here at this table have been faced with denials of propositions that we put to both departments, just as frequently as we have been provided with rulings or opinion ``comfort''. That -

[Translation]

Mr. Loubier: Mr. Chairman.

[English]

Mr. Wilkie: Excuse me, excuse me!

[Translation]

Mr. Loubier: Just a second, Mr. Wilkie. I think you have misunderstood my question.

You know that in order to be credible as specialists in a case such as the one that interests us, in order to provide an interpretation that is valid and credible in relation to the Income Tax Act and the denunciations by the Auditor General, the witnesses have every reason, it seems to me, not to be connected in any way to anybody, be it you or your present colleagues, who may have worked at Revenue Canada or the Department of Finance at the time when the 1991 advance ruling was made. This person might have enabled your company to benefit, for example, from information that remained privileged until March 1996, since the advance ruling was not published until March 1996. No one shoots himself in the foot or bites the hand that feeds him, which means that your interpretation -

[English]

The Chairman: Maybe I could intervene on this one. Let me say this. Both lawyers and accountants - which all but one of you are, and the one is in academic - are subject to extremely strict codes of discipline in terms of being regulated by their own bodies, and always, in my experience, have observed the utmost probity in ensuring that they do not have conflicts of interest. The number of people I asked to be here who turned us down because they felt they had conflicts of interest is a credit to the people in those professions.

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I'm sure that Mr. Loubier would not be implying that any witness would come with a conflict of interest. We have some of the most pre-eminent individuals in our country in their professions. I don't know how many of them you know, Mr. Loubier, but we could not be more fortunate with the experience and the degree of probity we have before us. I hope there is no implication there would be a conflict of interest among any of these witnesses.

Mr. Campbell: Mr. Chairman, I would like to add a comment to this. I don't think we have ever, in the three years I've sat on this committee, and I'm sure Mr. Loubier is not intending to, attacked the credibility or integrity of witnesses before us.

I know that Mr. Brooks was retained by the finance department in the 1980s to advise on tax reform. I know that from time to time members of the firms represented here have been retained or seconded. It makes for a better department. It makes for a better private sector. I think it is quite out of order for our committee members to suggest that anyone, as you said, would appear here while having some undisclosed conflict. I think it is really unacceptable. I'm anxious to hear these people's opinions.

[Translation]

Mr. Loubier: That's not what I meant, Mr. Chairman. I would like us to find out what happened in the 1991 case, as you know. There are some specialists around the table. I am not saying to you that there is a conflict of interest. Here is what I am asking. If, by chance, Mr. Wilkie, for example, were working with someone who had participated in the 1991 ruling, would he accept being put in conflict with his colleague?

[English]

Mr. Campbell: That is not the question you asked, Mr. Loubier. If that was the question, that's what you should have asked.

[Translation]

Mr. Loubier: Yes, I have a question. I am going to go on, because I have some questions.

The Chairman: Mr. Loubier, in your questions, would you please not insult the witnesses?

Mr. Loubier: How can you treat as credible a witness who works with a colleague named Hemant Tilak, who was in the Advance Rulings Division until recently and participated in the 1991 advance ruling? This colleague could then have done everyone a favour, from your firm, for example, because the 1991 advance ruling was not made public until March 1996. That is what I mean, Mr. Chairman.

When you have some witnesses who are too closely connected with some decision-makers who were able to participate directly or indirectly in a ruling of this nature, it is appropriate for the public to know this, Mr. Chairman. The analysis presented by Mr. Wilkie does not raise a question as to his credibility. However, if he is too closely connected to some people who have a direct relationship to the 1991 ruling and all the other cases that may have arisen and have become precedents - because the 1991 ruling is a precedent - it is important that people know this.

The Chairman: What does "too closely connected" mean? If he was a separatist, would he be too closely connected to you?

Mr. Loubier: Mr. Chairman, is Mr. Neil Brooks a separatist? Is the Auditor General a separatist? Are all the Auditor General's specialists and all those challenging the 1991 ruling, at this time, separatists? You are really pushing it when you engage in such demagogy. I would put the question to Mr. Spindler, as well.

The Chairman: Mr. Wilkie would like to reply to your question.

Mr. Loubier: Well, there you are! People should know those things.

The Chairman: Perhaps you could be civil to our witnesses.

[English]

Mr. Wilkie: For the record, I had no personal, and as far as I know my firm had no professional, involvement in the 1991 ruling. Members of my law firm, as with other firms here, for better enforcement and understanding of the tax system cross the lines from time to time to serve in the Department of Finance or the Department of National Revenue, subject to the privilege and confidentiality limits they have to observe as principals. I know that when they join the department they're under an obligation to the Government of Canada to retain private any special information they receive in the course of their professional duties there. Neither that individual nor any other in my firm, to the best of my belief, has profited in any special way.

I also think it is important for this committee to know that there is necessarily, as a professional matter, a regular exchange of views between members of the tax and accounting professions and Revenue Canada and the Department of Finance. In the course of those exchanges of views - and I think every one of your guests today would concur with this - no favours are expected or returned. We deal with the law as we find it and the policy as we understand it, and we as much disagree as agree.

.1705

[Translation]

Mr. Loubier: Mr. Wilkie, that is the question I was asking you. What are the rules that would, for example, prevent Mr. Hemant Tilak, who was employed in the Revenue Canada Advance Rulings Division and who was in a position to know about the December 1991 advance ruling, which was made public only in March 1996, from helping other people in your firm benefit from that ruling?

Secondly, what are the rules that would ensure that a witness we invite can be objective in relation to such a ruling, which is very useful to his firm?

Those are the two question I was asking you.

The Chairman: You don't have to answer that.

Mr. Loubier: Oh, yes? He doesn't have to answer?

[English]

The Chairman: What are the rules, Mr. Wilkie?

Mr. Wilkie: The first rule is personal and professional integrity. The second rule is the balance of professional responsibility to the Government of Canada on the one hand, for the period of tenure there, and professional responsibility to the governing body of lawyers in Ontario on the other hand. If it's the consensus of this committee that I leave to ensure that this discussion is as constructive as possible for the purpose intended, I am more than prepared to do so.

The Chairman: Do not leave. We need you.

[Translation]

Mr. Loubier: What I want to bring out is that, as a specialist on this issue, you are both judge and judged. You are presenting analyses that sometimes go completely counter to common sense, because this 1991 ruling is very useful to firms like Stikeman Elliott or Coopers & Lybrand. We could also talk about this with Mr. Spindler, who worked with Mr. Dancey, who was assistant deputy minister in the Tax Policy Branch at the Department of Finance until 1994.

What I mean, Mr. Chairman, and what it is important to bring out, is that the experts' analyses mustn't be taken too seriously.

I am not saying that, basically, there are no arguments that are any good. However, in terms of some conflicts of interest and in terms of some relationships that these people may have had with others who were directly or indirectly involved in the advance ruling or in other cases that may have occurred because the 1991 ruling served as a precedent.

It is important that people know this, Mr. Chairman.

The Chairman: We are dealing with someone who does not want to question the witnesses concerning their ideas but prefers to attack them personally.

Mr. Loubier: Oh, no! It is clear, Mr. Chairman, that you are unwilling to find out what happened in the 1991 case, but want to duck the issue as usual on behalf of your government.

The Chairman: [Inaudible - Editor] prevent certain personal attacks against one of our witnesses.

Mr. Loubier: These are not personal attacks, but clarifications concerning precedents, antecedents, contacts that these people may have with Revenue Canada, with the Department of Finance and, directly or indirectly, with the 1991 advance ruling. I think people are entitled to know all the obscure aspects of the question.

The Chairman: Perhaps you know some lawyers or other top experts who have never had any contacts with the Department of Finance and Revenue Canada.

Mr. Loubier: No, but I know some experts who are objective, Mr. Chairman, such as the Auditor General, such as Mr. Minto, such as Mr. Elkin, who brought to light the 1991 case, notwithstanding your refusal to bring out all the facts.

The Chairman: I am really sorry that our experts have to suffer these personal attacks of a McCarthyite nature. I cannot prevent it, because I don't have the power to do so, but I will advise each member to come back, if possible, to the fundamental questions and put them to the witnesses: was what Revenue Canada did

[English]

in accordance with the law?

Mr. Lanthier: Without being presumptuous, I was wondering whether Mr. Loubier is really trying to ask whether any of the witnesses or their firms were personally involved in obtaining the ruling while working with Revenue Canada, Finance, or subsequently the Auditor General in his criticisms of this matter. Perhaps that's what Mr. Loubier is trying to get at, rather than making a personal attack on particular individuals.

[Translation]

Mr. Loubier: That's the half of it, Mr. Lanthier.

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What I want people to know is that some of you - and these are not personal attacks, contrary to what Mr. Peterson has just said - were, directly or indirectly, in contact with some of the people who made this advance ruling, with some people who were able to get others to benefit from it subsequently.

I named Mr. Hemant Tilak, who was in the Advance Rulings Division in recent years, who was even one of the few to know about the 1991 advance ruling because it was made public only in 1996.

I am asking you if we should be careful when some of you present analyses, because, without mentioning conflict of interest, you do maintain some relationships. Now, we don't know what your code of professional ethics is, which might have prevented someone - I cite Mr. Hemant Tilak and his employer, Stikeman Elliott, as an example - from transferring privileged information from one person to another until March 1996, because it was on that date that the advance ruling was made public.

That is my question. I think we are entitled to know this kind of information, because we are trying to shed some light on this case. We are also trying to find some ways to prevent such things from recurring in the future.

One has to be very careful about what one hears.

[English]

Mr. Lanthier: Mr. Loubier, so that what doesn't recur in the future?

Mr. Loubier: Pardon?

Mr. Lanthier: So that what doesn't recur? You said you'd like to shed some light on the information to ensure that this does not recur in the future. So that what does not recur in the future?

[Translation]

Mr. Loubier: What I mean is that the Auditor General put his finger on the 1991 advance ruling. So far, we have had no answer concerning the process that led to this advance ruling. Fifty percent of the people we have met and with whom we have discussed it, the majority of the people, think this ruling is unjustified; while for others, it is justified.

What is certain is that we have a case of two billion dollars in Canadian resident assets being transferred without a penny of taxes being levied on it for the Canadian federal coffers. In the future, it will probably be the Americans who will benefit from collecting the taxes that will be made on the capital gains. Would you think it normal, Mr. Lanthier, if we did not look into this issue? If we didn't try to uncover what has happened since 1991, as well as what happened in 1985, because there is another case that was raised? Would you consider it normal that we let things go by without asking ourselves any questions, without trying to curb or at least mitigate these kinds of rulings which are made to the detriment of all Canadian taxpayers?

The Chairman: Thank you very much, Mr. Loubier. The last word will go to Mr. Wilkie and to Mr. Spindler, who would like to reply as well.

[English]

Mr. Wilkie: Mr. Tilak swore in here, as well as the rest of the members of my tax group... At no time has it been made known to me that he or anybody else who may or may not have had connections from time to time with either department has shared privileged or special information with partners of Stikeman Elliott. I would suspect that you would find other members of firms who have also served the public in similar capacities and have had similar opportunities to be dishonest but haven't been dishonest in the use of government information.

I don't have any information for the record, and as far as I know my firm doesn't. As far as I know, we had nothing to do with that ruling. I hope that will allow us to continue with the discussion we're here for.

The Chairman: I'm not sure it will, but I hope so too.

Rob Spindler.

Mr. Spindler: Mr. Loubier, I'd like to make a couple of points. I think you're quite right that it's very important to explore all aspects of this process and find out exactly what happened. It's perfectly legitimate.

I think I understand the question you were starting to direct towards me, which was whether I or my firm benefited from the knowledge of the ruling during the period 1991 to 1996. I can speak definitively only for myself, because I have quite a few partners and quite a few members in my firm. I had no knowledge of this ruling before it came out in the Auditor General's report.

You referred to Kevin Dancey, who was the Assistant Deputy Minister of Finance. I have no knowledge of whether he was involved in the process. He's never discussed it with me, other than to discuss my trip down here.

I think that starts to address your question, Mr. Loubier.

.1715

The Chairman: I feel you've gone much further than you had to. So that leaves only one culprit who could have devised this whole plan, and that's Neil Brooks.

Some hon. members: Oh, oh.

The Chairman: Mr. Williams, please.

Mr. Williams: Thank you, Mr. Chairman. I have a few prepared questions and some others that have come along in the course of the discussions.

First of all, I presume that everybody has acquainted themselves with the legal opinions that Justice made available for the public record. Am I correct that they have been distributed to the witnesses, Mr. Chairman? They all have them.

Talking about the legal opinions and the positions stated in there, the position of MacGregor, Short and Bentley has been that subsection 97(2) implies that paragraph 85(1)(i) applies to a resident during the time of residency. Subsection 97(2) was introduced in 1982. Does that mean that the interpretation of paragraph 85(1)(i) could not have been applied to residents prior to 1982? If so, how could it have been applied without the support of subsection 97(2)?

Mr. Lanthier: Perhaps I could start, Mr. Chairman. I think we discussed it, Mr. Williams, at some length. Taxable Canadian property is defined in section 248 for all purposes of the act. Paragraph 85(1)(i) talks about transferring taxable Canadian property. It says that the property received shall be taxable Canadian property.

The issue we've been talking about is whether that applies only in respect of non-residents or whether it also applies in respect of residents. I think Rob Sirkis, David Smith, and Scott Wilkie have given some compelling reasons and examples as to why Canada would not want to give up its jurisdiction for tax, in the case of a share-for-share exchange, simply based on the timing of the transactions that took place.

Mr. Williams: I'm not interested in the amount of tax that we would or would not collect. That's not the relevant question.

Mr. Lanthier: My position would be that paragraph 85(1)(i) in and of itself, standing alone - and I think Scott Wilkie said it more eloquently than I can - tells us that it applies in respect of residents and non-residents.

If the Department of Finance and if Parliament in passing legislation did not want that to happen, four words had to be added: ``Property held by a non-resident.''

Mr. Williams: But you're saying that paragraph 85(1)(i) stands by itself.

Mr. Lanthier: Yes, sir.

Mr. Williams: Do any of the witnesses disagree with that statement?

Mr. Smith: I'm not disagreeing with it, but I think in 1991 you had to deal with the law as it was written in 1991. If you asked hypothetically how I would have interpreted the law in 1980, I would have had to look at all the provisions of the act as they stood in 1980. I have not gone back and looked at a copy of the act as it stood in 1980 and decided whether I could find other indicators of the statutory intention. My view of it is the same as Allan's. I believe the neutrality of paragraph 85(1)(i) and what I see as the scheme of the act would be consistent whether or not you had subsection 97(2).

Mr. Williams: Thank you.

Mr. Laloge, did you say that paragraph 85(1)(i) as it's currently worded - I think somebody said, but I think it was you, Mr. Laloge - was introduced in 1981 or 1982? Am I correct in saying that?

Mr. Laloge: Paragraph 85(1)(i) was introduced in 1974. I don't feel that paragraph 85(1)(i) stands on its own. I think it has to be interpreted in view of section 115, which is the section that defines taxable Canadian property. My belief is that it is not possible, on the merits of the words that are there, for it to be a stand alone section. I think it was brought in very specifically, and the Department of Finance people agree that it's an anti-avoidance section, which works in conjunction with section 115.

.1720

Mr. Lanthier: But that doesn't answer anything, Ken. I mean it's -

Mr. Williams: Just a second, gentlemen. I'm looking at the ruling that was granted in 1985, exhibit 1.1 of the Auditor General's report of May 7, 1996. Let me quote what he said:

Our ruling is that the trust will not be deemed by subsection 48(1) of the Act to dispose of its shares in the public corporations which it acquired as a result of an exchange of its ownership in shares of a private corporation when it ceases to be a resident in Canada because those shares will constitute taxable Canadian property within paragraph 85(1)(i) and subparagraph 115(1)(b)(iii) of the Act.

Mr. Laloge, you tell me that this 85(1)(i) came into being in 1974. Why wouldn't the tax ruling make reference to the fact that the shares had been converted from private to public after that section came into being, or do we just assume it doesn't matter when you made the roll-over from private to public, even if it was before 1974 and that section wasn't even in the act? Does it seem reasonable that Revenue Canada would do that?

Mr. Laloge: We're in a little bit of a circle here, Mr. Chairman. The amount of information we have on the application of the first advance tax ruling in 1985 is much less than the information we have on the one that was given in 1991.

Mr. Williams: My point is that they've just said, to repeat:

Our ruling is that the trust will not be deemed by subsection 48(1) of the Act to dispose of its shares in the public corporations which it acquired as a result of an exchange of its ownership in shares of a private corporation when it ceases to be a resident in Canada because those shares will constitute taxable Canadian property within paragraph 85(1)(i) and subparagraph 115(1)(b)(iii) of the Act.

My point is that there's nothing in the ruling that says dates are important, but you're telling me that prior to 1974 this particular section of the act did not exist.

I'm talking to Mr. Laloge.

Mr. Laloge: There's a nine-year period between the time the law was changed and the first ruling was given.

Mr. Williams: That's correct, yes. We don't know when the transaction from private to public was given, and in the ruling one would think Revenue Canada would have said that since the shares were rolled over subsequent to 85(1)(i) coming into being...

Mr. Laloge: I think that was -

Mr. Sirkis: Can the panel answer the question, or do you want to narrow the -

Mr. Williams: Well, I was going to get Mr. Laloge's opinion and then I'll get your opinion. Let me get his first and I'll come to you.

Mr. Sirkis: It appears the witness doesn't have the answer.

Mr. Williams: Give him a chance and he may have the answer.

The Chairman: We'll let Mr. Laloge try to answer this one. I don't have the answer on my fingertips I can assure you, Mr. Laloge.

Mr. Laloge: The answer is that the Auditor General and the level of work they were able to disclose to us didn't provide that information. We just don't know.

Is that a fair comment, Rob?

Mr. Sirkis: The only point I'd like to make is that the act speaks as of the date you read the act. The fact that a transfer took place 100 years ago would be irrelevant. If the act spoke and treated that transaction as taxable Canadian property, unless the coming into force rule with respect to that particular provision said it was applicable only with respect to dispositions after a certain date... I don't believe it has that wording.

The Chairman: Are there those who would agree with that answer?

Mr. Williams: The point I'm trying to make, Mr. Chairman, is that on page 4 of the legal opinion granted on the date of January 13, 1992, signed by Mr. Bentley to Revenue Canada - and I hope I'm not taking this out of context - it might suggest that paragraph 85(1)(i) was intended to have application where the transferor was a Canadian resident. It seems that Revenue Canada doesn't make any... Their suggestion that paragraph 85(1)(i) applies to Canadian residents because paragraph 97(2)(c) talks about Canadian residents, so they go back and justify paragraph 85(1)(i)(b) as 97(2)(c)...

.1725

You gentlemen are saying that 85.(1)(i) is a stand-alone clause that does not require 97(2)(c) to support it. Legal opinion says perhaps that is the case, and we find that Revenue Canada doesn't concern itself about when the shares were rolled over before 85(1)(i) came into existence - or an act.

It seems to me that the legal opinion, what these gentlemen are saying, and what Revenue Canada is saying are three separate things, Mr. Chairman.

The Chairman: Mr. Lanthier and Mr. Wilkie.

Mr. Lanthier: Mr. Williams, I don't know how familiar you are with the rulings process. Normally there's a statement of facts. The date the shares were disposed of was probably disclosed in the statement of facts and form part of the private and confidential ruling that was given to the taxpayer. The Auditor General has reproduced the ruling without reproducing the facts and assumptions on which the ruling was based, and of course the ruling is only as good as the facts and assumptions that are given.

So notwithstanding the lengthy analysis given in the Auditor General's report, he doesn't talk about the process, the ruling or the underlying facts in enough detail to answer your question. Normally they would be clearly set out in the statement of facts.

Mr. Williams: Okay, let's look at the 1990-91 ruling by Revenue Canada. To me it seems to be a rather convoluted type of ruling. I'll quote:

We confirm that Family Trust will be deemed to dispose of the distributed Public Co. shares for an amount determined in accordance with paragraph 107(2)(a) and Protective Trust will be deemed to have acquired such shares at a cost determined pursuant to paragraph 107(2)(b).

- which is the disposition and acquisition at the original cost. We all basically agree with that statement, I presume.

Then it goes on to say:

Subsection 107(5) will not be applicable to the distribution of the Public Co. shares by Family Trust to Protective Trust.

Why would one issue a ruling in the negative? Why would that section, which deals with the disposition of public company shares and with taxable Canadian property - and we're debating whether this is one or the other - be excluded by Revenue Canada?

Mr. Lanthier: Because it's a charging provision. The taxpayer asks whether he is subject to tax under this provision, whether we can give him a ruling The answer was that he was not subject to tax, the same as in every ruling, where we ask whether we are subject to tax under the general anti-avoidance rule. Sometimes we're turned down and sometimes we get the ruling, which is that section 245 does not apply. It's not perverse to get a ruling that a certain tax provision does not apply to you.

The Chairman: Mr. Goodman.

Mr. Goodman: Mr. Williams, subsection 107(2) applies generally in respect of transfers of capital property from a trust to a capital beneficiary, and it provides for what we call a roll-over at the adjusted cost base. Subsection 107(5) is an exception that says where the beneficiary to whom the property is distributed is a non-resident, then there is a deemed realization at fair market value at the time of distribution, unless the property is taxable Canadian property. It seems to me that in those circumstances we have a perfectly valid reason, as Mr. Lanthier said, to ask for a confirmation that subsection 107(5) wouldn't apply.

Mr. Williams: But if paragraph 107(2)(b) allows the shares to be rolled over at the cost of the private company shares, why would they specifically exclude 107(5)?

Mr. Goodman: Because subsection 107(5) is an exception to subsection 107(2) and overrides it where it is applicable, and it was held not to be applicable in those circumstances.

.1730

The Chairman: Mr. Smith had a comment as well.

Mr. Smith: Mr. Williams, I think the most important ruling here is the ruling that subsection 107(5) does not apply. The general rule is that property rolls out of a trust. That's the basic rule. When you transfer it from a trust to a beneficiary, it passes at cost, not at fair value. Subsection 107(5) takes that roll-over away in certain circumstances. The issue in this ruling and the debate that's ensued is whether subsection 107(5) should apply to take away the roll-over. It's really the key ruling here.

Mr. Williams: I'm going to look at the process by which this transaction -

The Chairman: Before you go on, Mr. Wilkie and Mr. Sirkis had something to say on the same issue.

Mr. Wilkie: This goes back to the previous question, but also bears on the question just asked.

The conclusion on paragraph 85(1)(i) doesn't depend on subsection 97(2) for its validation. Subsection 97(2) is illustrative of one circumstance among many, we would suggest, indicating that the conclusion taken on paragraph 85(1)(i) and these other provisions was in fact the correct contextual conclusion. I think it would not be correct to infer from the law that somehow the conclusion on paragraph 85(1)(i) depends upon an inference about the significance of subsection 97(2). I don't read Mr. Bentley's legal opinion to suggest otherwise. He leaps to one among many examples that help him explain the conclusion that's otherwise available to be taken.

Mr. Williams: I'll take a look at that during the break, Mr. Chairman, and revisit that issue.

Looking at the transaction, the Auditor General's report indicates that considerable time... I think it was prior to 1985 that there was a conversion from public to private shares. I think we all agree that it was some time prior to 1991.

The Chairman: It was from private to public.

Mr. Williams: From private to public, okay.

That was a historical fact. At that time the trust was resident in Canada. If the company made an election under the Income Tax Act -

The Chairman: The company?

Mr. Williams: If the trust made an election under the Income Tax Act to avail itself of the tax deferral, what section of the act would it have used to claim the deferral and maintain the original adjusted cost base of the shares?

Mr. Laloge: This is not an elective approach when the advance tax ruling is received.

Mr. Williams: No, I'm talking about the time at which the shares were converted from private to public, which was a number of years prior to the advance tax ruling on the shares being given. It's a fairly normal transaction, I think, to convert private to public. It happens perhaps not every day, but frequently. What section of the act allows an owner of private shares to roll them into a public share company where he owns more than 25%?

Mr. Goodman: Subsection 85(1) provides specifically for that.

Mr. Williams: Subsection 85(1) or paragraph 85(1)(i)?

Mr. Goodman: Subsection 85(1) generally.

Mr. Williams: The entire subsection 85(1)?

Mr. Goodman: The entire subsection provides that certain types of property - virtually every kind of property in the case of a resident - can be transferred into a Canadian company on a tax-deferred basis.

Mr. Williams: If you use one paragraph of subsection 85(1), does that mean all paragraphs of subsection 85(1) are deemed to pertain to that transaction?

Mr. Goodman: Different kinds of property are dealt with under the various paragraphs.

Mr. Williams: I know that. I asked whether each paragraph of subsection 85(1) applies to every transaction, every roll-over?

Mr. Goodman: Not necessarily.

Mr. Spindler: I think Wolfe was starting to answer the question by saying that subsection 85(1) is broken into a number of paragraphs that are relevant in particular specified circumstances and with respect to particular property. It currently runs from paragraphs 85(1)(a) to 85(1)(i). That many paragraphs have potential application in a variety of circumstances. I'm not sure -

Mr. Williams: You say potential applications. My point is that if you use subsection 85(1) on a particular transaction, whatever transaction it is, it's a roll-over and you claim an exemption under subsection 85(1). Does every paragraph in subsection 85(1) apply to every transaction, or do you pick the paragraphs that apply?

.1735

Mr. Lanthier: Paragraph 85(1)(i) automatically applies. As Rob was saying, there are certain provisions -

Mr. Williams: Why does it automatically apply?

Mr. Lanthier: Because that's what it says. There are certain provisions that give you limits to what you can elect. If you elect the wrong amount, it bumps you down to another provision. If you elect the right amount, obviously that particular paragraph of subsection 85(1) doesn't apply because you haven't elected the wrong amount; you've elected the right amount. So there are certain provisions in subsection 85(1) that -

Mr. Spindler: The answer lies in the various provisions that have no application at all to a particular type of property as opposed to others.

Mr. Williams: My point, Mr. Spindler, is that we have a trust resident in Canada that does a conversion from private shares to public shares. There's nothing on the horizon, we presume, that says the trust is going offshore. Why would paragraph 85(1)(i) apply to that transaction when the trust is Canadian, stays Canadian and does a fairly normal transaction?

Mr. Lanthier: For this type of circumstance -

Mr. Williams: You're telling me that everybody who has availed themselves of the roll-over provisions under subsection 85(1), no matter who they are or what the circumstances are, paragraph 85(1)(i) applies to them too.

Mr. Spindler: Yes. It's actually at times been the subject of some discussion that it's automatic.

Mr. Williams: Therefore, every trust -

The Chairman: Could I intervene here? I don't mean to cut off the train of thought, but it's very difficult, with the bells going, to continue any type of concentrated questioning. If you had one brief question maybe we could end it, but otherwise we'd better defer it until after the bells.

Mr. Williams: I think we've just heard the recognition, Mr. Chairman, based on what they've just told me, that if paragraph 85(1)(i) under this basis applies to anybody, individual or trust, who has rolled over shares from private to public, they can go abroad and defer tax because it's taxable Canadian property. They can avoid the provisions of Canadian tax the way that a trust can.

Mr. Lanthier: If they go abroad they continue to be subject to tax. You can view this as a charging provision. Canada retains its tax jurisdiction over that asset because of the preamble to your question.

Mr. Spindler: It retains that right forever if the person goes to a tax haven. Canada retains that right to tax well into the next century. It's the treaty that's the issue.

Mr. Wilkie: We can answer the narrow question by reading the rule. The rule says where a taxpayer - anybody - disposes of property, the following rules apply: (a), (b), (c), (d), (e), (f), (g), (h) and (i). They may or may not have effect in a particular circumstance, but they all apply.

The Chairman: I suggest we adjourn until immediately after the vote. My best estimation is that we'll be back around 6:15 to continue, with your good graces.

.1739

.1834

The Chairman: Could we come back to order again.

When we adjourned so that we could go to the House and vote, Mr. Williams had the floor. He's indicated to me that he has a maximum of about five more minutes of questions to ask of our experts. After that, if there are no other questions, I was thinking we could maybe have a very quick summary of the one question we're dealing with, and move on to the next questions that are before us.

I have assured witnesses who have come here from Toronto that they will be able to make their last plane at 10 p.m. We really appreciate your indulgence.

Mr. Williams.

Mr. Williams: Thank you, Mr. Chairman.

Just before our break, I think we came to the realization that any individual or trust that had private shares that were rolled over into public shares under subsection 85(1) had the capacity to take these shares with them if the owner left the country, without having to pay tax or without having to post security, because they would be designated taxable Canadian property.

.1835

Now, section 48 of the act, which deals with the taxation of public company shares by someone who is emigrating and leaving the country - I don't have the exact quote at my fingertips - makes no reference to, and no qualification of, the public shares that are taxed on the accrual basis when the person leaves the country. There's no qualification.

Therefore, why do public shares that have an ACB going back to the time that they were private shares have special dispensation under section 48, even though section 48 does not grant that special dispensation?

Anybody can answer. Mr. Spindler.

Mr. Spindler: I just finished my pizza.

Mr. Williams: Sorry about that, my apologies.

A voice: Oh, oh.

Mr. Spindler: Well, I guess it's a difficult question to ask.

Mr. Williams: It was easy to ask.

Mr. Spindler: Or answer, rather. It was easy to ask.

I think you're saying that is the clear result. The question really goes to why Parliament decided to achieve that result with the legislation at the time those laws were enacted. It's fairly difficult to get into at this table, at this time without researching any of the discussion that might have taken place at the time. You have to go back to the question.

Mr. Williams: My point is that you're quite able to express an opinion on 97(2), 85(1)(i) and 248, and so on. Here we're talking about section 48. And I'd like to have a candid opinion as to why public shares, without qualification, are taxed on the accrual basis. Yet we find that because of this one anomaly - it's not even an anomaly - because of this one particular circumstance, where the only thing different is that the ACB goes back to the previous style of the property...Why would it have an exemption under section 48?

Why don't we start with Professor Brooks?

Prof. Brooks: I'm sorry, I was just preoccupied for a minute. I didn't get the question. I thought I was on your side, so I wasn't expecting a question.

Voices: Oh, oh!

Mr. Williams: I was hoping you would reaffirm what I was trying to say.

The Chairman: Of course he does.

Prof. Brooks: Of course, I agree.

Mr. Williams: Okay, thank you.

Maybe we could just close the meeting on that statement, Mr. Chairman.

Prof. Brooks: I thought you had these people on the run, so I thought you wanted to keep them that way.

The Chairman: I think Mr. Goodman...

Mr. Goodman: It isn't true that in all circumstances there is a deemed realization in respect of public corporation shares, leaving aside the question of shares that were acquired in a section 85 roll-over. If you're an individual you still have a right of election to treat those shares as disposable Canadian property.

Mr. Williams: You can either pay the tax, you can put up the security, or they're taxable Canadian property. These are the three categories. You could either pay the tax on the accrual basis -

Mr. Goodman: Right.

Mr. Williams: - you can make the election and put up the security, or it's taxable Canadian property, which means the tax is deferred to some subsequent point.

You're telling me that by virtue of a previous transaction, this is taxable Canadian property. But section 48 says public shares are taxable when they leave the country. Without an exemption, public shares are taxable either on an accrual basis or by posting a security to cover that off at the subsequent date.

But you're telling me these things don't apply because it's TCP by virtue of another section. Yet section 48 does not allow or recognize that designation.

Mr. Goodman: Doesn't it?

Mr. Spindler: No, I think that section 48 does.

Mr. Goodman: Why does it not do so?

Mr. Spindler: It's in the context of the act.

Mr. Goodman: If it refers to taxable Canadian property, then surely -

Mr. Williams: But it says public shares are -

Mr. Spindler: No, section 48 doesn't say that. Section 48 refers to taxable Canadian property and other property. It doesn't specifically refer to public company shares.

Mr. Williams: Okay.

Mr. St. Denis (Algoma): It's your imagination, John.

.1840

Mr. Spindler: No, it's one of the consequences of applying section 48. Section 48 has to be taken in the context of the act as a whole. It says that you address taxable Canadian property and property other than taxable Canadian property in three different ways.

Mr. Williams: Let me quote section 48, whose heading is ``Deemed disposition of property where taxpayer has ceased to be resident in Canada.'' The preamble for subsection 48(1) reads:

For the purposes of this subdivision, where a taxpayer has ceased, at any particular time in a taxation year and after 1971, to be resident in Canada, the taxpayer shall be deemed to have disposed, immediately before the particular time, of each property, other than

- and then it lists ``taxable Canadian property'' and so on.

Mr. Spindler: Right. And the meaning of ``taxable Canadian property'' is as defined for the purposes of the act, and as other provisions might deem it. Section 85(1)(i) deems public company stock or any stock received in exchange for taxable Canadian property to itself be taxable Canadian property.

Mr. Williams: Well, I guess you might be right, and maybe I am wrong, but I had thought that it was the other way around.

The Chairman: Mr. Smith wanted to make an intervention on this one.

Mr. Smith: Mr. Williams, are you asking this question in the context of the 1991 ruling?

Mr. Williams: No, I was actually just asking in the context of the fact that I was of the impression - maybe I'm just interpreting it wrongly, and I thought I had read it - that public shares were taxable when a person left the country, except that Canadian taxable property was eligible for the deferral, and a person could either pay or put up security; you had a choice.

A voice: Put it in reverse.

Mr. Smith: I just wanted to make the point that section 48 was not involved in this ruling; other sections of the act were involved. So the question of putting up security wasn't at issue here.

I think the relevant sections are 107(2) and 107(5), the ones mentioned in the ruling. Section 48 wasn't relevant; it wasn't the question being asked of Revenue Canada.

In terms of the broader issue we've been debating all afternoon - that is, when you're trying to decide what is taxable Canadian property - when you come to one of these sections in the act that says you have to decide whether something is taxable Canadian property, either when a person leaves the country, as in section 48, or when a trust distributes property, as in 107(5), what is taxable Canadian property? That's been the whole subject of the debate, and the opinions have been expressed on both sides of the question.

Some people are of the view that it clearly was taxable Canadian property, and others are of the view that it wasn't. That was the question of law to be determined in the application and in terms of the views expressed at these committee hearings.

Mr. Williams: Thank you, Mr. Chairman.

The Chairman: We will have some brief comments from Mr. Goodman.

Mr. Goodman: I didn't really think this committee was a court of law. It seemed to me that the proper function of the committee is to consider the policy issues, which may be of a technical nature. In this connection, I would certainly pay particular attention to the material at tab 7, which is a very brief letter from Alan Short, dated December 23, 1991.

No one in the Government of Canada knew more about tax policies than Alan Short. And if, with the wealth of experience he had, he could say categorically that he considered this question was closed, and that taxable Canadian property could be held by a resident as well as by a non-resident, I see no particular reason to doubt it, particularly when one hears the additional technical comments that have been made around this table.

The Chairman: I would certainly agree with you, Mr. Goodman, but not everybody at this table would.

A voice: Oh, oh.

Mr. Pomerleau (Anjou - Rivière-des-Prairies): No, I won't.

[Translation]

Mr. Loubier: Mr. Chairman, when the Auditor General denounces one thing, when we are mandated to clarify another thing, when Mr. Goodman comes and tells us that Revenue Canada was right to stop asking questions, there is a problem.

You are saying that you agree with what is being said by Mr. Goodman, who simply tells us to go home, that Revenue Canada was right to apply the ruling as it did and that the Auditor General's report should be ignored. There is a limit. You are really something.

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The Chairman: Are there further questions concerning the first, the one concerning

[English]

the tax ruling that said there was a breach of the intent of the law?

Mr. Williams: It seems, Mr. Chairman, that we do have a split between the witnesses as to whether there was or wasn't. Professor Brooks was perfectly clear and unambiguous regarding -

The Chairman: Which he always is.

Mr. Williams: And I appreciate that very much.

Mr. Grubel (Capilano - Howe Sound): In this context.

Mr. Williams: And I believe Mr. Laloge was also stating quite clearly that he felt the designation that Canadians could hold taxable Canadian property was absolutely, fundamentally wrong, too.

Am I correct, Mr. Laloge?

Mr. Laloge: You are correct. I believe the finding by Mr. Short -

The Chairman: I'll give witnesses one minute to summarize before we leave this subject.

Is that okay, Mr. Williams?

Mr. Williams: Yes, as long as we don't just leave the subject. I'd like to hear what questions other members have to ask.

Mrs. Brushett: Thank you, Mr. Chair. Just very briefly and if we can come back to the fundamental premise, was TCP devised, did it originate, under the Canadian tax act, or was it devised out of tax treaties and for the purpose of dealing with other countries? I ask this question of you: was it a creation of our Canadian Income Tax Act, or otherwise? I would like to have everybody's view on that.

The Chairman: I think one will suffice. Mr. Wilkie.

Mr. Wilkie: As we've said, it's a creation of the Income Tax Act. It's a way of describing property so that Canada can continue to tax it after a resident has left the country, or if it's held by a non-resident.

Mrs. Brushett: Then having said that, do you not think it would apply only to those people outside the country -

Mr. Wilkie: No.

Mrs. Brushett: - Canadians who have left? Was it not devised as part of our Income Tax Act, to serve when someone exited, either through emigration or non-residency, from this country?

Mr. Wilkie: No. As I've said and all the other members of this panel have suggested, it is there in effect to delineate a jurisdiction to tax, and in the case of residents, it anticipates circumstances in which those residents may not be here.

Mrs. Brushett: How many people in Canada who still continue to live here in Canada do you estimate would use this TCP ?

Mr. Wilkie: Well, TCP is simply a way of delineating or describing a certain tax characteristic of property.

Mrs. Brushett: Right, but I understood basically it's a means of Canada gaining taxes from those people who have exited the country.

Mr. Wilkie: Well, they don't use it. It is what it is.

Property is taxable Canadian property if it has certain characteristics that the act describes. Then if the property has those characteristics and a non-resident sells that property, Canada can continue to tax it.

Similarly, if a Canadian resident has that kind of property and leaves the country with it, then certain consequences follow.

Mrs. Brushett: But my question was how many Canadians like me, living in this country, don't pay tax, use TCP at the disposition of property under this... How many would you estimate, being in your business?

Mr. Wilkie: I have no way of measuring that statistically. They don't use it to avoid tax. Tax is avoided because of what it is in certain circumstances.

Prof. Brooks: I do think the concept was developed to apply to non-residents. That is, what we tried to define...

In thinking about how this area should be reformed, the committee should keep this in mind: the policy judgment you have to make is to determine under what circumstances property held by non-residents has a sufficiently strong economic nexus with Canada that we can justifiably tax it when they dispose of it?

Then, having put that in the act, we had this other rule that said when Canadians become non-resident they're deemed to have disposed of all their property.

Then someone said that's a fairly harsh rule; maybe we shouldn't deem them to dispose of their Canadian taxable property, because we'll collect it when they eventually sell it.

Then we started playing around with that rule, and at the time of tax reform the government was very concerned about executives moving back and forth across the border.

If I may editorialize, I think that in drafting that departure rule they made it much too liberal. I mean, they began with kind of a sensible premise, but made it much too liberal.

.1850

So I think it's fair to say now, in response to your question, that lots of people who leave the country use these rules, which allow them to avoid the deemed disposition by having it declared to be taxable Canadian property, as a way of avoiding Canadian tax. My guess would be that lots of people who retire abroad use these rules to pay substantially less tax than they otherwise would.

Mr. Laloge: Dianne, there is a split here between the witnesses, and my response to your question would be closer to Neil's - that is, that this taxable Canadian property concept really only has value to the average Canadian when they are leaving the country, or have left the country.

It would apply to anybody who owns shares of a private Canadian corporation, anybody who has real estate in Canada, and anybody who has public shares. Otherwise, for the great majority of Canadian taxpayers, it has no relevance.

Mr. Lanthier: I find this a very perverse discussion, because this is not an avoidance of tax by having taxable Canadian property. With the exception of Denmark, which has a very general and very limited exit tax, Canada was the single country... The U.S.S.R. put in controls for a while, and Germany did so a few years back. Besides that, Canada was the only country with an exit tax until Australia patterned themselves exactly along our rules. So Canada and Australia are the only two countries that seek jurisdiction to tax when someone leaves the country.

To characterize this as some type of tax avoidance, or how much tax is being avoided, we've turned the question around. Canada is either taxing gains as people leave the country, or retaining its jurisdiction to tax. Those are what the Canadian rules do. Canada and Australia are the only countries that do it. The U.S.A. is looking at it now. It's being criticized as a possible restriction on international conventions with respect to freedom of individual mobility and capital mobility.

This is not a tax avoidance. This is a charging provision that Canada gets tax out of either when we leave or when the non-resident ultimately sells the asset.

Mr. Goodman: Under subsection 107(5), when a Canadian resident trust that remains resident in Canada distributes property to a capital beneficiary, who is a non-resident, then the normal rule is that there is a deemed realization of that property in the hands of the trust. However, that doesn't apply to distributions of taxable Canadian property. That's a situation in which no one is leaving Canada. The disposition is not by a non-resident. So some of the comments that been made are clearly incorrect.

The Chairman: Thank you, Mr. Goodman.

Mr. Smith.

Mr. Smith: Well, having had some discussions with Mr. Brooks at the break, I think there is a fundamental difference of view here. I think Mr. Brooks views these provisions solely as a means to tax non-residents while they're non-residents. I view them as having a broader policy purpose. What Canada is trying to do is to decide the appropriate nexus to Canada, for Canada continuing the right to tax in the future, continuing to have the jurisdiction into the future. I think that these rules are intended to deal with non-residents, and are also intended to serve the purpose of saying that if you start with private company shares, we want to retain the right to tax in the future.

You start with the nexus to Canada private company shares, and it doesn't matter whether you convert them to public company shares; we want to tax them in the future. Mr. Brooks takes the different view. He says no, you should just look at this question at the time you leave; you shouldn't look at where you started in terms of deciding this issue.

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I think it's just a difference of view on what the act was trying to accomplish, and what the drafters of the act were trying to accomplish in 1971, when they drafted it.

Thank you.

The Chairman: Thank you, Mr. Smith. Thank you, Ms Brushett.

With your permission, I would like to very briefly sum up on this first question we've asked. The question is, did the ruling given by Revenue Canada circumvent the intent of the law? From what I have heard, Professor Brooks says yes. Mr. Laloge says the ruling given by Revenue Canada was fine, but it was based on a faulty opinion, a faulty opinion that said that a resident of Canada cannot own or hold taxable Canadian property.

Our other six witnesses - Mr. Spindler, Mr. Lanthier, Mr. Goodman, Mr. Smith, Mr. Sirkis and Mr. Wilkie - disagree with our first two to whom I referred and believe that under the law a resident of Canada in these circumstances could be considered as owning taxable Canadian property, and that the ruling granted by Revenue Canada did not breach or circumvent the intent of the law.

If there's any disagreement with how I've summarized your positions, to their bare bones, would you tell me?

Mr. Lanthier: Mr. Chairman, if I could just add this, the Auditor General, of course, didn't say that the ruling had circumvented the intent of law. He said it may have -

The Chairman: Right.

Mr. Lanthier: - circumvented the intent of the law.

Mr. Pomerleau: Not in French.

Mr. Lanthier: And Mr. Loubier said that the ruling was denounced by the Auditor General. It wasn't denounced. The Auditor General said you can argue this or you could argue that. We think that if you took this interpretation of the law, we would get a different result, which quite clearly you could. He said it may have circumvented... He raised the question.

The Chairman: You're absolutely right. He said it may have -

Mr. Pomerleau: Not in French. In French, he said it did.

The Chairman: Okay.

Understood, Mr. Williams?

Mr. Williams: Before they summarize, Mr. Chairman, I do -

The Chairman: I'm not going to ask them to summarize, because I think we've covered this.

Mr. Williams: I have two questions left I'd like to get some answers to.

The Chairman: How long will it take?

Mr. Williams: Hopefully not very long.

The Chairman: Could you give me some indication, because we have to think of - -

Mr. Williams: They're simple questions, and I would hope that -

The Chairman: Okay.

Mr. Williams: - we could get some fairly straight answers.

Mr. Laloge said that subsections 48(2) and 48(3) had been replaced at some time in the past, but they specifically said that TCP was an election on leaving the country.

Am I right in saying that, Mr. Laloge? Could you tell me what subsections 48(2) and 48(3) used to say?

Mr. Laloge: For certain types of property, there is an election, in which you can include such items as shares in public companies as taxable Canadian property after you've left. That was the old subsection 48(1).

Mr. Williams: When did that disappear?

Mr. Laloge: It hasn't disappeared so much as it's been changed into the new section 128.1.

The law hasn't disappeared. I didn't intend to convey that the law has changed dramatically. The wording has changed, but the section remains the same.

The other sections I was quoting, subsections 48(2) and 48(3) of the old legislation, were the subsections where I found the greatest difficulty dealing with Mr. Short's opinion.

Mr. Williams: Does anybody else want to comment on that?

The Chairman: No.

Mr. Williams: If not, section 54 of the act, which deals with the disposition of property, talks about the disposition of property other than a transfer of a trust resident in Canada, a trust not resident in Canada, or a transfer of a trust, and so forth.

Did we have a disposition under paragraphs 54(c) and 54(e)?

Mr. Brooks, do you have any comment to make on that?

Prof. Brooks: Well, if there was a disposition, they took advantage of a roll-over that's explicitly provided for in the act, in subsection 107(5). One way of saying it is that there was a disposition, but the act provided for non-recognition of the gain in these circumstances.

.1900

Mr. Williams: So there's a disposition but no disposition?

Prof. Brooks: No, there was a disposition, but it wasn't recognized because of a specific subsection in the act, namely subsection 107(5).

Under general principles, there's been a disposition. Property has changed hands. But in some circumstances the act doesn't recognize that disposition, usually for some policy reason, or because the judgment is made that there's not a sufficient degree of change in the beneficial ownership of the properties.

The judgment they make when you transfer property from a trust to a beneficiary is that there's not a sufficient degree of change in the beneficial ownership of the property. Therefore, they won't recognize the gain on the disposition. That's subsection 107(5).

Mr. Williams: But they made a specific reference to a resident trust to a non-resident trust -

Prof. Brooks: Yes.

Mr. Williams: - and you're saying that was specific, and subsection 107(5) takes precedence -

Prof. Brooks: Section 107(5) contemplates that, and says, we won't recognize the gain in this circumstance.

The Chairman: Thank you, Mr. Williams. Having so concluded -

Prof. Brooks: And the issue then is... Sorry, Mr. Chairman, but just to be clear, the interpretive issue then arises in that exception, whether or not the exception was available to them, because it was Canadian taxable property or not. So the issue was whether that exception was available to them, and it was only available to them if it was Canadian taxable property. That's the question.

Mr. Williams: I know what you're thinking.

The Chairman: Thank you very much, Mr. Williams.

Okay, let me just wrap up this one section then. With respect to the Auditor General's statement that this ruling may have circumvented the intent of the law regarding the taxation of capital gains, certainly there's no unanimity among our experts except on one issue: the law is not all that clear, and it is fraught with ambiguity.

In many cases the meaning has to come from the context of the law. It is not unreasonable that people of good faith may disagree on what that law is, but the opinion of the overwhelming number of our experts tonight is that the ruling granted did not circumvent the intent of the law.

Could we go on to our second question then. Could I call on Rob Spindler to make the brief presentation to us on this. I asked Rob to do it because he's not only with Coopers & Lybrand, but he's the chair of the taxation committee of the Canadian Institute of Chartered Accountants. He's also the chair of the joint committee on taxation of the Canadian Bar Association and the CICA.

Mr. Spindler, you have expressed concerns to us about the issue of the effect this ruling may have on the whole advanced ruling process that has been adopted and expanded by Revenue Canada under previous urgings from the Auditor General himself.

Mr. Spindler: Thank you very much. I guess, Mr. Peterson, the committee and committee members - and speaking for the joint committee, I'm also speaking for Don Watkins - had two principal concerns.

They were very concerned about the Auditor General's report and the manner in which it was being dealt with. They were particularly concerned that the report did two things that could fundamentally damage a very valuable process for both the government and taxpayers.

I think the issue of confidentiality is going to be discussed in a little while.

The Chairman: If you wish to discuss the issue of confidentiality with the impact on the ruling process, I leave that up to you.

Mr. Spindler: Okay. I guess we'll leave it alone.

I think practitioners across the country are very concerned that the rulings process not be damaged. It's a process that's functioning well right now. Like any other process, there are opportunities for improvement, but the ability to communicate openly and freely with Revenue Canada and obtain their views on very, and increasingly, complex legislation, is an essential part of the smooth functioning of the tax system.

It's important for the government and it's important for the taxpayers. The taxpayers obtain certainty of treatment, and the government obtains certainty of taxation and a window on to what's transpiring in the business community and the investment community. That's a process we value very highly. It's one that could be damaged through this process. The possible concern there is that rulings officers would become increasingly unwilling to address any but the most straightforward issues, for which one doesn't require a ruling.

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I'm not suggesting for a moment that there shouldn't be a full review of this matter, but I think one has to look very carefully and recognize as being revealed here that Revenue Canada did conduct itself in an appropriate fashion. That's about it.

The Chairman: Thank you very much, Spindler.

Mr. Laloge.

Mr. Laloge: I share the concerns Rob has raised. I also have a concern in this particular case that the impact in terms of how things have been raised is very damaging to the public's perception of our tax system. It is important that the finance committee be seen to be dealing with the issues.

When you described impact as the second question, were you referring to financial impact of the ruling on the tax system as well as the other impacts?

The Chairman: I welcome any comments you might wish to make, but the major concern that I seem to derive from what I've read and heard is what happens if a ruling granted by Revenue Canada first of all is subject to public attack by some body other than a court. Will Revenue Canada enter as readily into the process of granting advanced tax rulings to taxpayers who are seeking relief from uncertainty in the system and who have a right to ask the tax authorities how they will perceive and treat a future deal, whether it will be taxable or not or how it will be taxable?

If these rulings are going to be subjected to this type of criticism, is is healthy for the system? Is it unhealthy for the system? Should we be encouraging more advanced rulings, as the Auditor General seemed to suggest? Should we be making them public, which was his suggestion a couple of years ago and which I think is a very -

[Translation]

Mr. Loubier: Point of order, Mr. Chairman.

I have three questions to ask you about what you just said, Mr. Chairman.

First, are you here to justify the actions and the ruling by Revenue Canada, and not to clarify what happened in the 1991 case? That is my first question.

Here is the second: when you talk about harm, there was some, according to the Auditor General, that was caused to all Canadian taxpayers. There may have been more, subsequently, based on the precedent created in 1991, which means there may have been several hundred million more or billions of dollars that left Canada free of tax.

The other Canadian taxpayers, the middle-income taxpayers who have been bled white over the last fifteen years or so in Canada by taxes that increase almost annually, they too are entitled to some justice. They too are entitled to some enlightenment. They are the ones who pay. It is the others who haven't paid, Mr. Chairman.

So, when you talk about harm, talk about the real harm, the harm that is caused by decisions such as those, which you are refusing to really clarify within the Public Accounts Committee, and which are harmful to Canadians.

Thirdly, are we ultimately going to analyze the situation objectively, or are you here solely to justify the government's inertia, to protect some people?

You must be careful, Mr. Chairman. If you want to continue to conduct inquiries of this sort in terms of the case and the terms of reference given to us by the Minister of Finance, you will have to be a little more objective than you have been during the last few minutes.

The Chairman: Mr. Loubier, we will have an opportunity, a half-hour or an hour from now, to propose some amendments. Are Canadians not being taken? Could we have a fairer, more efficient and more balanced system? I eagerly await your suggested amendments.

.1910

Mr. Loubier: For my part, Mr. Chairman, I am eagerly waiting for you to act in complete objectivity, so we can fully illuminate that case instead of trying to sidestep the issue by calculating an arithmetical average and saying there is no problem since the majority of the specialists agree with Revenue Canada. That is not how one should proceed when conducting a real investigation and when one has the political will to shed some light on a ruling that has been considered harmful by the Auditor General.

The Chairman: I am ready to begin again, but someone asked me what the specific question was. This is one aspect of the question. The other aspect is what the Auditor General actually said. You have before you some notes which remind you that what he did actually increased Revenue Canada's authority to present opinions.

Mr. Loubier: It is possible that the Auditor General has drawn attention to one very important case among others, a tax avoidance involving two billion dollars in assets. Maybe that will open your eyes or open the taxpayers' eyes about the system that exists, about some advance rulings that the Auditor General, back in 1993, in the interests of fairness, was asking be made public rather than left in the hands of certain initiates who may have learned, for example, about the 1991 ruling.

How is it that the Auditor General has been asking since 1993 that all of these advance rulings be made public and that, in this particular case of a two billion dollar transfer, the ruling was made public only in March 1996?

Aren't these questions of some interest to you, as a member of the government?

The Chairman: They interest me greatly.

Mr. Loubier: Oh yes?

The Chairman: That is why we have convened this round table and invited, as you were given the possibility of inviting, the real experts that we have here and who are universally respected.

Mr. Loubier: I don't doubt that, Mr. Chairman.

The Chairman: That is why we asked them their opinion concerning this situation.

Mr. Loubier: Mr. Chairman, I never questioned the expertise of the people who are before us. Never. What I did question was the possibility that they might give us an opinion while being connected directly or indirectly with an advance ruling made in 1991 which created a precedent, and which may have been used in other cases. I never questioned the competence of these people. On the contrary, Mr. Chairman, I said that these people were so expert that they earned their living by proposing ways to avoid paying taxes. And that's it.

The Chairman: I hope we can get to the fundamental question: should we amend the tax law?

Mr. Loubier: Absolutely.

The Chairman: Mr. Laloge.

[English]

Mr. Laloge: I think I'll break the question of damage to the system into three areas. Revenue Canada does provide negative rulings; that is, they receive requests that they reject on various grounds, although I don't know that it would be as high as the 50% that was described earlier. Revenue Canada should continue to have no concern about issuing them. As it is now, they're criticized roundly by the representatives of the taxpayers for issuing them.

Second, there are the rulings that Revenue Canada, in a sense, withholds, that is, where they informally advise the taxpayer that they will not rule favourably, and the system grinds to a halt. Quite simply they're not worth worrying about, because the cost of advanced tax rulings is borne by the taxpayers.

There are the cases where rulings are published for the public good, and to the extent that all rulings are published, then the members of Parliament, the members of this committee, would have the opportunity to consider whether the process is working.

Mr. Spindler's specific concern that these rulings may be of less commercial value or less personal value to the taxpayers because the department ceases to be as responsive, because of a burden of proof being much higher, is something that will have to be balanced.

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Certainly if the ruling process becomes significantly more expensive for medium-sized Canadian taxpayers, businesses or Canadian taxpayers who are not of the scale of this particular ruling, the process will be cut off for us, and it is a legitimate concern.

Mr. Spindler: Ken, I just wanted to pick up a point there. It's not so much that I'm concerned - although this is a possible result - about a slowing down of the process or an increase in the cost. What I'm more concerned about is that Revenue Canada will be inclined simply not to rule.

To decline to rule in a wide variety of circumstances, where they're concerned that if they did rule favourably for the taxpayer - notwithstanding that it's a correct interpretation or their best view at the time - they would be continuously second-guessed through similar processes as the Auditor General's report. This would cause an individual to say ``Why would I do this? Why would I expose myself to this? Why don't I just decline to rule, and let the taxpayer go; he can do what he wants.'' That's what I'm concerned about.

The Chairman: Thank you, Mr. Spindler.

Mr. Lanthier.

Mr. Lanthier: Mr. Chairman, I have a brief comment. There's a comment on the 1991 ruling that has been made many times today and this evening: how many firms could have profited, have passed it on, have used it?

The 1991 ruling is of no value whatever. If the trust had left Canada, it's holding shares of a private company, it's taxable Canadian property. There's a share-for-share exchange; paragraph 85(1)(i) applies. I don't think anyone around this table, down to Mr. Brooks, would disagree with that.

This ruling is just a very peculiar fact, and because of the large amounts involved it has created a lot of controversy. But the ruling has no value. It's not marketed by any firms that might have been privy to it, because it is of no value. The taxable Canadian property rules in and of themselves are relatively straightforward, notwithstanding how convoluted they might seem after some of the discussions.

Mr. Chairman, on the effect of the report on future rulings and the confidentiality issue, I think it is universally held throughout the tax community that there's a very real danger that the ruling system has been seriously damaged by the Auditor General's report.

The Auditor General's report focused on two rulings. There are about 500 rulings a year. He went from 1985 to 1991, so we're talking about 3,000 rulings, and the Auditor General concentrated on two rulings.

The report lacks objectivity, it lacks balance, and it came to a position based on a very questionable technical interpretation of the provisions. As a result of that, Revenue Canada officials have been criticized very severely and quite unfairly. And as Rob and Ken have said, the very real concern is that there's going to be a siege mentality where rulings will just not be able to...they'll be looking over their back all the time for the Auditor General to come in and challenge a position.

If an issue is simple, there's no reason to go to rulings. The rulings department is there to deal with complex issues, and it's there for the benefit of Revenue Canada and for the benefit of the taxpayer.

In addition to the other benefits experts here have talked about, it reduces compliance costs by taxpayers. It reduces compliance costs by Revenue Canada because the results of the transactions are known ahead of time.

It does provide certainty to taxpayers in the face of increasingly complex legislation, and it also protects the Canadian revenue base by rulings that are refused, that are declined, that are pulled back, those Ken was talking about.

With respect to confidentiality, my only comment would be that I agree with Mr. Loubier. We want transparency; the Auditor General suggested that in 1993.

My understanding is that the program has bogged down for a couple of months. Last November at the annual conference of the Canadian Tax Foundation Mike Hiltz announced that, effective January 1, all rulings would be published in sanitized form. There have been some bureaucratic delays on that, but my understanding is that, as is the case in the United States, all rulings will be published starting in the very near future.

The Chairman: That was a suggestion of the Auditor General, that they be made public?

Mr. Lanthier: That's right.

The Chairman: Thank you, Mr. Lanthier.

Mr. Goodman.

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Mr. Goodman: Mr. Chairman, I'm very shocked that the Auditor General's report seems very specifically to have identified a particular family. By elimination there cannot be that many with assets of that amount who happen to have beneficiaries in the United States. I think it is very detrimental to the process of issuing rulings and publicizing rulings that the Auditor General should have taken a step that could easily have been avoided by sanitizing his comments in a more discreet fashion.

Second, I suggest - and here I agree with the comments that were made previously - that in general the Auditor General should refuse to second-guess the operations of Revenue Canada in connection with its rulings. Of course in the more egregious cases where he suspects improprieties, or where the ruling is very clearly wrong, he has a duty to bring that to the attention of Parliament and of the public. In this particular case, it appears that he relied upon his own internal experts.

I have been consulted by the Auditor General, although I'm ordinarily in an adversarial position in relation to government. But I have been consulted from time to time in connection with a draft of chapters of a report that is to be published by the Auditor General.

I have to ask, in this particular case where the matter was of some delicacy, to put it mildly, would it not have been appropriate for the Auditor General to have consulted somewhat outside government before arriving at a conclusion that is then broadcast in such a deleterious manner?

The Chairman: Thank you, Mr. Goodman.

Mr. Smith.

Mr. Smith: Thank you, Mr. Chairman.

I think we have here an exercise in trying to balance off two considerations. On the one hand, we have the role of the Auditor General and the role of members of Parliament in trying to ensure that the government officials are doing their jobs appropriately. On the other hand, we have Revenue Canada that's charged with administering and enforcing the Income Tax Act. Their role - at least as I see it - is not to be arbitrary. In carrying out those duties, they're supposed to be reasonable in their judgment, and exercise judgment. They're not to be capricious or arbitrary. So they're fixed with the role of trying to be objective and reasonable.

The questions that are put to them are questions of judgment. They're not the easy questions; the difficult questions are put to them. You don't go for a ruling if it's an easy question. You go for a ruling if it's a difficult question. By its very nature it involves exercising judgment.

We've heard this afternoon some people suggesting that poor judgment was exercised by the different groups of people involved in the ruling. And others have thought that appropriate judgment was exercised.

So the concern I think I and others have is how you balance off the need for a watchdog like the Auditor General and members of Parliament to be sure that Revenue Canada is carrying out its job properly, and the need for Revenue Canada to be objective and to exercise good judgment in what it did?

Now, just speaking from my personal experience, asking for a tax ruling is like going through an audit. Every day Revenue Canada audits many taxpayers in the field.

But when you go for a ruling it's like going for a pre-audit. You give them all the facts, and you ask them to do their audit ahead of time, and form their judgments ahead of time.

When you apply for a ruling, the people you're dealing with are, in my experience anyway... Some of the brightest and the best in Revenue Canada find their way into the rulings directorate in Ottawa. So my experience is they challenge you all the time. They don't take anything for granted. You have to make your case. They ask you to back up every argument you put to them.

.1925

My experience is that frequently they go to Department of Justice lawyers for a legal opinion. Frequently they will go to the Department of Finance to try to discern the policy, where it's not evident from other public sources. My experience is they are very rigorous in their assessment of the process and they work very hard to exercise their best judgment.

I guess the difficulty is when an issue like this attracts so much public attention, being only human, the reaction on the part of the individuals is to want to withdraw and say ``Hey, if I'm going to be put through this scrutiny, it's a lot easier to say no than it is to form a judgment on the matter, trying to balance everything off. It's a lot easier just to say no.''

If that dampens the process in the sense that they stop doing what they're doing, we will have lost a lot, because having the opportunity to get certainty on some difficult questions is very valuable in carrying out transactions. It's also a very valuable window for Revenue Canada to see at an early stage what's going on in all facets of the business and other lives of Canadians as they affect taxes. That's a very important function.

Those are my comments.

The Chairman: Thank you very much, Mr. Smith.

Mr. Sirkis.

Mr. Sirkis: Thank you.

I'd like to underline what the others here have said in terms of the dampening effect on the rulings division that the Auditor General's report would have.

In the way the report is presented, it says one thing to people who are constantly under negotiation with outside lawyers and accountants, that is, the rulings division. It says where there's ambiguity, don't take a position that's in favour of the taxpayer. It says that in bold letters, and it's something we in the profession now anticipate will be the result in dealing with Revenue.

The Auditor General's report is, I would say, terribly unbalanced. The language in it is probably inflammatory. The release of the number of $2 billion I think was calculated simply to get attention, because had that number not been released, there would not have been nearly the attention provided to the transaction. Yet if he had difficulty with the process or the procedure, he ought to have had the same result in dealing with Parliament and in dealing with the departments.

From the profession's perspective, at least from our perspective, our advice now generally will be to be very slow to move to ask the rulings division any questions.

I think there's a misunderstanding of the role of the rulings division. It is to help where there's ambiguity. It's to help where there are commercial transactions as well as transactions such as this. The commercial transactions that often come to the rulings division are transactions that are for the benefit of the country and not simply to provide for private gain.

There are people who have the notion that all that's happening at this side of the table is we seem to develop methods for persons to avoid paying tax. The rulings division is there for a purpose, and the purpose is to make the system work. The beneficiaries of the system working are all of us in the country.

The Chairman: Thank you, Mr. Sirkis.

Mr. Wilkie.

Mr. Wilkie: I can't say what I was going to say much more eloquently than Mr. Smith and Mr. Sirkis have said it.

I'd just like to recognize one other aspect of what they have said that ought to be made clear and that I think isn't clear. In particular it isn't clear because of what I perceive to be a suggestion of sorts that somehow, through the rulings process, the rulings directorate of Revenue Canada spent public resources improperly in offering this ruling.

.1930

The rulings process is not a process by which legislation is somehow created outside of the legislative process. Neither is it a process by which largesse is somehow dispensed to those who seek it, and the Revenue authorities are persuaded that they deserve to have it. It is, as Mr. Smith said, what amounts to a system of pre-audit or pre-assessment in which taxpayers and tax authorities together anticipate what the hard questions are, and what the hard questions will be, in the course of time with respect to their transactions or affairs. They seek to resolve them in a constructive and thoughtful manner in advance, before commitments are made, either by the taxpayers or the authorities, that are difficult to resolve. It is no more than that. I think it's important to keep that in mind.

Thanks very much.

The Chairman: Thank you very much, Mr. Wilkie.

Last but not least, Neil Brooks.

Prof. Brooks: Maybe I'll speak to the confidential concerns as well. Should I, or -

The Chairman: Let him do that, because only one person -

Prof. Brooks: Okay, fine, if we're going to come back to that.

The Chairman: We're going to come back to that.

Prof. Brooks: Let me just speak then to the ruling process.

Again, I think the ruling process serves a really useful function, and generally achieves those functions well. However, I also don't have any concern with the Auditor General's report in this case. It seems to me that Revenue Canada is charged with administering the act.

Parliament is surely entitled to make a judgment about how well they're doing that job. It's not only the role, but it's the responsibility of the Auditor General to tell Parliament how well a job Revenue Canada is doing of administering the act.

I think that this chapter and this ruling reveal a number of concerns with the process of administration, and Parliament has a right to be informed about it. It seems to me that we can't shield the process because it might discourage some people from pursuing an advance ruling.

Aside from the substance, which we've dealt with, whether it's right or wrong - and I think that certainly raises a concern in itself, that Revenue is giving rulings on these kinds of cases - let me deal with two other issues. But I think there are even other issues that are raised about the ruling process in this particular ruling. Let me just mention two of them.

One is that this was a very peculiar case, because it involved not a Canadian resident becoming non-resident, but a Canadian resident transferring property to a non-resident, both of them trusts in this case. What makes that very difficult is that even on the assumption that it was Canadian taxable property - I don't think it was, but even on the assumption that it was - the non-resident who acquired this property in this case could have disposed of it the next day.

Under the treaty Canada would have collected no tax, because, first, this non-resident trust hadn't been resident in Canada for ten prior years. Second, the non-resident trust didn't own the property when it became a non-resident. So our provision under the treaty that protected Canadian jurisdictional tax did not apply. Therefore -

The Chairman: Excuse me, I don't mean to interrupt you, but we will be coming to the issue of what changes should be made in the law.

Prof. Brooks: No, no, I know that. I just have a better idea. This relates to the ruling process.

So what Revenue Canada did in this kind of difficult circumstances, and it obviously shows that they were concerned about the consequences of what they were doing, is get an undertaking and a waiver from the taxpayers. Now, that deeply troubles me.

It seems to me that means that Revenue Canada thinks it can in effect bend the law so long as they get an undertaking and a waiver that achieves what they regard as being the correct result. I don't think that's their responsibility. Their responsibility is to administer the law as it's stated in the act and in the treaty, and not to make side deals with taxpayers to achieve a result they think they could live with even though the law says it's not the case.

Indeed, probably that undertaking course was unenforceable. It required this taxpayer in effect to give up a claim they had under the treaty. Frankly, I can't imagine it was enforceable.

So that's one aspect I'm troubled with in this ruling, the use of undertaking and waivers in the ruling process, and I think the committee ought to have a look at that.

Second, I'm deeply troubled by the role of the Department of Finance in giving advice on these rulings. Revenue's role is to administer the act, and they have structured that process in a way to try to shield their judgment from politics.

Finance's job, on the other hand, is to formulate tax policy. Now, that's a job that's just shot through with tax politics, and I worry therefore when the Department of Finance gets involved, not in making policy, but in administering the act by giving advice to Revenue Canada.

At some level, indeed, who cares what Len Farber or anyone else thought they intended when they drafted the section? The legal question is, did they do it? That's the question Revenue has to deal with. That's a legal question. I wouldn't have thought that you got much assistance by asking someone in the Department of Finance what they intended when they drafted it. That's not how you resolve interpretive problems. And because of the enormous opportunities that there are in a process like that for political influence, I think it looks very bad for the integrity of the process.

.1935

I would have thought that another thing this committee wants to think about is what role the Department of Finance should have in advising Revenue in giving advanced rulings. I think there's at least an appearance of an opportunity there for political influence where there ought not to be any appearance of political influence.

The Chairman: Thank you, Mr. Brooks. Are there any comments from members?

[Translation]

Mr. Loubier: I scheduled another meeting a long time ago and I would like to make two small comments before leaving and yielding to my colleagues, who will be continuing.

The Chairman: Mr. Loubier, we can't function without you.

Mr. Loubier: I don't know about that. In any event, Mr. Chairman, I have another meeting that is just as important.

Earlier, I heard Mr. Goodman saying that the Auditor had struck a direct blow at the credibility of the process. That has to be done!

The Auditor General is someone who is very respected and very respectable, who reports to Parliament, and each official is accountable for the decisions he has to make, the administration rulings or the influence rulings, as Mr. Brooks noted earlier, in relation to the Department of Finance in the process that led to the 1991 ruling.

You were saying that Revenue Canada would feel it was under siege. Excuse me! I have never heard such a deplorable thing. Because someone has put his finger on a dubious ruling we shouldn't talk about it, we should keep people in ignorance and, as Mr. Goodman and Mr. Smith said, leave the future of rulings involving billions and hundreds of millions of dollars in the hands of your brilliant officials in the Department of National Revenue and the Department of Finance?

That's really pushing it! There is a system, and I am not certain it should be kept the way it is. There is a handful of insiders, tax specialists and very wealthy Canadian families, who avail themselves of advance rulings, rulings that are not even made public in the interest of fairness in the weeks following Revenue Canada's decision, and you say the Auditor General was very wrong in denouncing these dubious rulings.

You say the Auditor General should not do his job, which is to ensure that public funds are well spent and that the expenditures of each department are made in terms of the general public interest, and not in the interest of a limited public, as in the case of the trust that transferred two billion dollars to the United States.

That's really pushing it. If you do not agree on accountability, we have one heck of a problem. Because you have interests that are completely different from the general public interest.

If I were in your position, I would be careful, because you are the ones who are blemishing the credibility of the process, by saying it is so complex that nothing should be made public.

It reminds me of the old stories of my grandmother, who said you shouldn't ask too many questions because the more you knew the worse off you became. That's really pushing it.

If we have to challenge the system, we will challenge it. We were elected to do that. We are accountable to the people. You can laugh, Mr. Smith, but I will tell you there are more and more people who are aware of the processes that are going on at Revenue Canada and the Department of Finance, and of the very close relations between your tax experts and Revenue Canada.

I think people have had enough. They are being asked to make sacrifices and tighten their belts, but when you are full of compassion for a trustee who has transferred two billion dollars and hasn't paid a penny in tax and you are more concerned with the interest of those people than the general interest of the Canadian public, well, there is a problem.

If there was a blot somewhere, it is not the Auditor General who should be blamed, since he did his job and will continue to do so. We have a lot of respect for him, although you seem to have somewhat less.

Thank you. My colleagues will continue. They have some excellent questions to put to you. As for me, I am a little disappointed with your appearance.

[English]

The Chairman: I'm not sure that was a topic we were discussing but I'm sure somebody would like to respond to it. Mr. Smith.

Mr. Smith: I think Mr. Loubier must have confused me with someone else, because I made no comment about the Auditor General's report. I think he's overlooking something. Let's suppose there had not been a ruling here, that this transaction had taken place and Revenue Canada officials had come along and examined it. In my opinion, they would have gone through exactly the same process in terms of studying the transaction, getting the facts, trying to interpret the law, seeking the advice of Justice lawyers, and trying to understand the intent behind the law. They would have gone through exactly the same process as they went through in the rulings division.

The only difference is that they went through it ahead of time as opposed to after the fact. Despite the fact that it was a ruling, it still involves judgments on the part of Revenue Canada officials. I'm in complete agreement with the proposition that the government officials are accountable.

.1940

The Chairman: Thank you very much.

Mr. Williams, and then Mr. Pomerleau.

Mr. Williams: I would like to comment on the remarks the witnesses have made,Mr. Chairman.

First, I'd like to congratulate Professor Brooks on the points he made regarding the treaty, which we didn't have time to discuss earlier, and the involvement of Finance in a realm that one expects has traditionally been the job of Revenue Canada - the issuing of these rulings.

When they have been condemning the Auditor General I have to say that I feel they are crocodile tears, Mr. Chairman. I have no sympathy for them whatsoever. I'd like to review what the Auditor General has told us. Remember that he is our accountant and we are the people the Auditor General reports to - the House of Commons.

Looking at a synopsis of the situation as presented, on December 3, 1991, Revenue Canada advised Finance of the proposed transaction and that it intends to refuse to grant a favourable ruling and if necessary to bring the matter before the general anti-avoidance rule committee. Revenue Canada did not like the deal in any way, shape or form and said they could apply the anti-avoidance rule and shut this whole thing down - December 3. On December 6, Revenue Canada and the Department of Finance officials met to discuss the issues in the December 3 letter.

The Chairman: Just a second. I thought the public accounts committee had looked at a lot of these issues. We don't have the testimony before us as to every step that was taken by the people leading up to it. I'm not sure this an issue that is before us, but I'm not trying to stifle debate.

Mr. Williams: I do want to go through and show how the case was built and did a complete turnaround, because on December 12 Revenue Canada's ruling review committee decided that a favourable ruling should not be provided. So they have said they backed away from anti-avoidance; they were just not going to rule.

It then goes to December 19: a draft legal opinion is received, at which time the legal opinion was requested on whether taxable Canadian property could be held by Canadians. He finished his ruling by saying in the conclusion that ``While it was ambiguous, I share the views that an argument is available that only non-residents can dispose of taxable Canadian property''. Then it goes on.

December 23 is the crucial day, Mr. Chairman. Presumably it was the morning. A revised memorandum was prepared for the deputy minister advising that the taxpayer proposal is not acceptable because of the department's views and so on. And it goes on to say that a tax would have been triggered.

The Chairman: Again, I don't mean to cut you off, and members are free to pursue any line of questioning, but how can these witnesses respond to this question?

Mr. Williams: I'm not asking them to respond to these points. What I'm saying is that they have been critical of the Auditor General. This is the lead-up to December 23. Revenue Canada takes a hard position, saying no, we will not rule; in fact we disagree entirely.

On December 23, all of a sudden the meetings take place, but no minutes are taken. Senior officials met twice, but no minutes were taken. On December 23, senior officials met with the Department of Finance officials - no minutes taken. Senior officials met again the same day, December 23, and there was a total, absolute and complete reversal and a ruling was made with no justification.

We have had the Auditor General's staff in front of this committee, Mr. Chairman, saying he was an auditor. These are lawyers, accountants and auditors and they know that an auditor has to do his job. When he finds a file that represents a large amount of money, a very significant amount of money, and all the documentation in the files says no, no, no, and then on one day with no documentation a complete and absolute turnaround reversal takes place and a ruling is granted, did the auditor do his job to advise the people who are paying him to report? He did his job.

.1945

That's the point, gentlemen, and that's why I have no sympathy with the complaints you have that the rulings process is damaged.

Had Revenue Canada documented their file - put in place the rationale completely for what they did - the Auditor General would have said the process was completed. It wasn't for him to say whether the answer was absolutely right, but he said, as an auditor, that the process they followed was completely and absolutely flawed. We, as the shareholders and taxpayers of Canada, are potentially at a great and significant loss, and that is why it is in here. He did his job and did it well.

Mr. Sirkis: I think if that's all he had said, we wouldn't have any quarrel with what he'd said, but his language went far beyond that. If you look at the language when he speaks of what Revenue Canada had said, he says a provision of the act suggests this, and then he says other provisions strongly suggest the reverse.

His language throughout the piece is clearly that of an advocate, and not of an auditor making a report. I think that those who have seen audit reports know what audit reports look like, and they don't look like that - they don't advocate.

Mr. Williams: Mr. Chairman, the Auditor General realized that this was an ambiguous case, but the file was leading to an absolute and definitive conclusion, and they're files of Revenue Canada. That answer was completely and absolutely turned around, with no documentation whatsoever. He, as an auditor, had to do his job and advise the House of Commons that these things were taking place and that we, as the House of Commons, had to do something about it. He did his job.

The Chairman: Mr. Lanthier and Mr. Goodman.

Mr. Lanthier: Just a couple of points. It's very common, as a tax ruling moves up the chain, for more junior rulings officials to come to incorrect conclusions. Ultimately, the correct conclusion is arrived at when more senior people get involved. The fact that the more junior people, over a long period of time, were coming to the incorrect conclusion and blocking the transaction doesn't seem to tie in with other comments that the rulings people have been operating as patsies.

With respect to documentation, I'm not sure what else the... We have a letter of opinion. I disagree entirely with Mr. Brooks with respect to interpretation of statutes and what policy intent has to bear on that. It has a lot to bear on it, as he well knows. So I'm not sure what additional documentation was required, other than a letter from Finance supporting the policy intent. This is how Revenue Canada views the interpretation. Is it supported by the policy intent? Yes. A letter from the Department of Justice? Yes.

I'm not sure how much more documentation the Auditor General wants. I haven't taken minutes of this meeting. Was I supposed to? Is the Auditor General going to file a report on me?

Mr. Williams: Mr. Chairman, there are two points I would like to clarify. One, when he talks about junior officials...let me dispel that myth. We are talking assistant deputy ministers and deputy ministers who are writing these memoranda. Number two, on December 12, Revenue Canada advises Finance that it will not rule, and requests Finance to leave the interpretation of the act to them, telling Finance to butt out.

The Chairman: With all due respect, I'm not sure how these witnesses - because they were not part of that process - are going to bring great light to the matter. I suggest that these might be issues that we bring to the officials involved. But far be it from me to stifle freedom of speech on this one. I'll even take notes to make sure I'm doing it properly.

Mr. Williams: Thank you.

[Translation]

Mr. Pomerleau: I have a question.

The Chairman: All right. Excuse me a moment.

[English]

I think we have less than an hour and fifteen minutes left, if my promise to get you on your ten o'clock plane is to be respected. Is it possible, from the members' point of view, that we could finish this section and go on to confidentiality and then go on to what we should do to fix the law if the law is broken?

Mr. Smith: Mr. Chairman, could I just correct one statement that was made about the treaty? Mr. Brooks said there were two problems with the treaty. One was that the trust wasn't resident for ten years - the new trust. I would agree with that. But the second point he made about ownership I don't believe is correct, because the new trust owned the capital interest in the old trust, and when it received the shares that was in substitution for its capital interest. The treaty expressly says that substituted property is covered, and they owned the capital interest when they left Canada.

.1950

Prof. Brooks: That might be right; I haven't looked at the treaty for a long time. But my main point was that that provision did not apply. The fact is that they could have sold this property the next day and Canada would not have collected any tax.

The Chairman: We'll come to that in terms of how we can clean up the system and get more tax revenue for Canadians out of this thing, which is what I really want to get to.

Prof. Brooks: Sure, that's fine. Mr. Smith and I disagree about how to read the act, apparently. But my main point is simply that the problem is that we gave up tax on this. The next day they could have sold it and we wouldn't have collected a penny.

The Chairman: Well, let's look at the law and see if the law is good. But I think Mr. Smith makes a very valid point about that capital interest existing.

Mr. Lanthier: Mr. Chairman, I'm sorry, but it's completely wrong, what he's saying, and he knows it's wrong.

The taxpayer provided a waiver to keep the year open. If the taxpayer had done what Mr. Brooks suggests - turned around the next day and sold the property - the waiver would have been invoked, the taxpayer would have been assessed, this would have gone to court, and effectively the taxpayer would have said ``Okay, I'm going to do this without a ruling and go to court. Let's fight it out in court.'' That's exactly what would have happened, and Mr. Brooks knows that.

Prof. Brooks: No, no, Mr. Chairman.

I resent you imputing what I know and what I don't know, for one thing. But let's just be very clear about this.

Mr. Lanthier: All right, but perhaps it's because you haven't looked at the treaty -

Prof. Brooks: My main point is the treaty did not apply. They could have sold the next day and wouldn't have paid. That's why they got the undertaking and the waiver. I don't think they could have enforced the waiver. That's what I said, I don't think they could have enforced. I don't think they could have enforced the waiver, and in order... No, pardon me, I don't think they could have enforced the undertaking where they would have collected the tax against non-residents. I don't think that's enforceable. But that's a legal question and I think reasonable people might disagree about that.

As for the waiver, for them to go back and in effect assess by in effect invoking this waiver would have required them to assess on the grounds that these shares were not taxable Canadian property, which they had implicitly said they were in the ruling.

Mr. Lanthier: And you're saying they're not, so why do you disagree with that?

Prof. Brooks: Well, no, no. I'm just saying that it would be a bizarre position for Revenue to be in. They'd have to take a position that was exactly contrary to the implicit position they took in the ruling.

Mr. Sirkis: No, I think if they exercised the waiver they would have used the general anti-avoidance rule, saying ``You guys did a cute move and what you did was you went to sell the stock in a second transaction by stretchering and ordering the transaction so you wouldn't be subject to the treaty rule''. And they would come at them not on taxable Canadian property, but on the basis of the general anti-avoidance rule.

Prof. Brooks: Well, that's right. I guess they had two grounds they could have gone after them on. It would have been bizarre to go on -

Mr. Sirkis: That's the reason they got the waiver.

Prof. Brooks: Oh, I don't think that's why they got the waiver.

The Chairman: In the interest of preserving our witnesses from...

The last word on this, please, Mr. Wilkie.

Mr. Wilkie: On this point, one might well argue that in the circumstances, for the greater protection of the system, having judged the substantive point already, Revenue Canada in fact exacted something that the law might not otherwise have permitted them to exact, in the form of a good faith undertaking of this particular taxpayer to behave as if it were an individual.

The other point that I think is material to this debate is that when you go to get a tax ruling, you're under an obligation to disclose to the department all material facts - you have to undertake to do that. To the extent that you don't disclose all material facts, your ruling isn't worth the paper it's written on. I would suggest to this committee that if this taxpayer had gone and got this ruling and then the next day, a week later, a month later, or a year later, said ``Oh, by the way, I just sold the property'', I would suggest that would be a material fact. Revenue Canada would be well within its rights - and in fact it doesn't happen often, but it has happened - to disavow the ruling.

The Chairman: Anything else on this issue, Mr. Pomerleau, before we wind up?

[Translation]

Mr. Pomerleau: I would like to ask a question and make a comment. My question will be toMr. Brooks.

We heard earlier that the case we're talking about had created a precedent and that this precedent couldn't be used by other persons in the same situation. What do you think of that,Mr. Brooks?

[English]

It couldn't be used.

Prof. Brooks: It's true this was a very unusual circumstance and it's unlikely that the ruling would be used in these precise circumstances, I would think. These folks would know better than I do, but my point is that implicit in the ruling is the legal holding, in effect, that Canadian residents can own taxable Canadian property. That interpretation of the act certainly could have been used in numerous circumstances to avoid the departure of tax where it otherwise wouldn't...

.1955

M. Pomerleau: J'ai maintenant un commentaire étant donné que nos experts en ont fait un sur le vérificateur général du Canada.

Il est bien entendu que le vérificateur général joue un rôle très particulier au gouvernement. Il est nommé par le Parlement. Il est le vérificateur du Parlement. Il est censé n'être lié à personne.

Le cas présent en est tout à fait particulier. Je ne veux pas savoir qui est impliqué là-dedans. On ne publie pas les décisions. On ne nous fait part d'une décision que cinq ou six ans plus tard. On prend des décisions extrêmement nébuleuses et controversées. Dans les derniers jours, on a tourné dix fois avant de prendre une décision.

On a créé un précédent important susceptible de changer l'assiette fiscale à long terme. Plusieurs milliards de dollars étaient en jeu, et les fonctionnaires qui ont pris cette décision n'ont même pas avisé les ministres du problème. C'est ce qu'on nous a dit. Il y avait un problème et on devait en rendre compte, mais on n'en a même pas avisé les ministres. Qu'est-ce que cela veut dire? Cela veut dire que dans ce pays, il y a des hauts fonctionnaires qui ne sont pas imputables de leurs décisions. C'est ce que cela veut dire.

Le travail du vérificateur général du Canada - il l'a très bien fait - est d'amener cela sur la place publique pour qu'on puisse interroger ces gens-là.

Comment peut-on penser que Revenu Canada et le ministère des Finances jouent bien leur rôle quand il n'y a pas de communcation entre les deux?

Mr. Lanthier: Mr. Chairman, could I just...?

Mr. Pomerleau, it's a very thoughtful question, and I just wanted to respond. It's probably beyond the mandate of this committee, but there have been in fact proposals that... You referred to the bureaucrats not reporting the situation to the minister, and it's not unusual that ruling after ruling is not reported to the minister. Suggestions have been made by some very thoughtful people, and papers written, to de-politicize, to give Revenue Canada the appearance of being under less political influence, that it should not be under a minister - that perhaps as in the U.S., where the IRS reports to Treasury, Revenue Canada should be reporting to Finance. But under some type of revenue commission, it should not be reporting to a minister. It's a broader question and it gets into some interesting issues you're raising.

[Translation]

.1955

Mr. Pomerleau: I now have a comment, since our experts made one on the Auditor General of Canada.

It is clearly understood that the Auditor General plays a very special role in the government. He is appointed by Parliament. He is the auditor for Parliament. He is not supposed to be tied to anyone.

This case is quite exceptional. I don't want to know who is implicated in it. The rulings are not published. We are not informed of a ruling until five or six years later. Some extremely vague and controversial rulings are made. In recent days, they have turned around ten times before making a ruling.

An important precedent was created that is likely to change the long-term tax base. Several billion dollars were at stake, and the officials who made this ruling didn't even notify the ministers of the problem. That is what we have been told. There was a problem and they should have realized it, but they didn't even notify the ministers. What does this mean? It means that in this country there are some senior officials who are not accountable for their decisions. That is what it means.

The job of the Auditor General of Canada - he had done it very well - is to subject this to public scrutiny so that we can question those people.

How can one think that Revenue Canada and the Department of Finance are doing their job when there is no communication between them?

[English]

Mr. Goodman.

Mr. Goodman: I am puzzled by the comments that this ruling set a precedent. I have seen hundreds of rulings in the course of my review of the published rulings. Some of them I thought were wrong at the time I read them; some of them I have seen reversed subsequently by Revenue Canada. A ruling can be relied upon only by the person to whom it's addressed. We have no right to assume, as a matter of course, that Revenue Canada is going to follow a 1991 ruling, or indeed a ruling that was made yesterday in respect of a different taxpayer. As a matter of principle, if they think they're still right, obviously they will continue to do so. But I have personal knowledge of a massive reversal in connection with the transfer of property to certain kinds of revocable trusts, where Revenue Canada had issued rulings a few years ago to the effect that these were not to be treated as dispositions for tax purposes. This was in a purely domestic context.

Mr. Hiltz, at last November's Canadian Tax Foundation conference, confirmed some information that I had received, namely that the department had reversed its decision and in future they would rule that transfers to such a trust were a taxable disposition. Nobody is terribly surprised by that.

The Chairman: Mr. Goodman, even governments - it's very seldom - could make mistakes and have to reverse themselves.

With your permission, could I sum up?

.2000

[Translation]

The Chairman: Thank you, Mr. Pomerleau.

[English]

I have heard... On the second section, is there a possibility that a ruling such as that given by the Auditor General could cause either a diminution in the number of rulings coming out of Revenue Canada or problems? I think most commentators here tonight suggested that we have to make sure this doesn't happen.

The question of confidentiality -

[Translation]

I have something to propose. There is only one hour left and we still have two essential questions. I am going to give you as much time as you wish, but I would like to end with that.

[English]

The Chairman: We finished that. Can we go to the question of confidentiality now?

[Translation]

Mr. Rocheleau (Trois-Rivières): Mr. Chairman, my question bears on that.

[English]

The Chairman: I'm in the hands of the committee.

[Translation]

Mr. Rocheleau: No. I have one last question on the Auditor General.

[English]

The Chairman: I would like -

[Translation]

Mr. Rocheleau: Mr. Chairman, most of the witnesses have suggested that the way in which the Auditor General conducted himself in disclosing this kind of information could undermine the credibility of our tax system.

If, as a result of this disclosure by the Auditor General and the research you are doing here, in the Standing Committee on Finance, and which will be done in the Standing Committee on Public Accounts and perhaps elsewhere on these two cases of advance rulings that have deprived the taxation authorities of several hundreds of millions of dollars, we were to find out - as was suggested in the Standing Committee on Public Accounts - that the tax authorities were deprived not of millions of dollars but of several billions if not tens of billions of dollars since this measure was instituted by Mr. Trudeau in the 1970s, would the witnesses say, as a majority again, that it is our tax system that is in danger of being undermined or would they instead give some thought to the public interest, according to their way of thinking?

I would like to know what your position would be if ever it was discovered that it involved a process that deprived the Canadian tax authorities of money from people who would normally be called on to contribute to the Treasury and who had found some stratagems to evade it, on a much greater scale than what is now observable. I would like to have an overall reaction.

[English]

Is there tax avoidance involved? Should we be changing the law?

[Translation]

Mr. Rocheleau: From Mr. Goodman, in particular.

The Chairman: This is the fourth question:

[English]

Mr. Goodman: I was listening very carefully to the question. I'm still not exactly sure whether it is as simple as the chairman has stated. Was there tax avoidance involved? In my view, there was not. In my view, the provisions of the act are relatively straightforward in this case, and I think the results are straightforward. Was there tax avoidance? No. It was tax deferral, and as the deputy minister pointed out to this committee, if disposition of these shares takes place within the next ten years, the Government of Canada will collect the funds. If it takes place in more than ten years, the American government alone will collect funds. That doesn't surprise me, because when the shoe is on the other foot, it works exactly the same way - when Americans are coming to Canada.

[Translation]

This is our fourth question. Could I defer your question for the time being?

Mr. Rocheleau: If there are some who want to respond, How far do we go in the present tax system?

[English]

In the last hour, Mr. Goodman touched briefly on the question of breach of confidentiality, the possibility of confidentiality being breached in the future, or whatever. Do any of our other panellists have a comment to make on this question of confidentiality - our third question? Mr. Spindler.

Mr. Spindler: Maybe I could just try to sew together a couple of things that Mr. Rocheleau... It may clarify at least my own views on the Auditor General and the rulings process.

I wholeheartedly agree with you that the Auditor General has a very important role in reviewing the rulings process and reviewing particular rulings. He's there to help protect the average Canadian taxpayer. My main concern really crosses the two thresholds: the first point about the rulings process and the second of confidentiality. It was the way the Auditor General disclosed and what the Auditor General disclosed that was of great concern. The manner of disclosure and the nature of the disclosure made it very clear, and it made it very easy to identify who the taxpayer was, who was involved, the amounts involved, and what not by a process that was supposed to be highly confidential.

.2005

One of my grave concerns is that taxpayers will, in looking at this and finding that other taxpayers have found themselves on the front page of newspapers and are being discussed on a daily basis for having gone to the government and asked for rulings and not having obtained favourable rulings... That could act as an extreme disincentive for taxpayers to approach the government - or, more dangerously, it could limit the amount of information they disclose.

I think it's incredibly important to the whole process that there be full, open, and complete disclosure, and the nature of the Auditor General's report and the nature of the information that was conveyed I think comes very close to providing a tremendous disincentive to that process.

The Chairman: Thank you. Mr. Wilkie.

Mr. Wilkie: In addition to that comment, almost regardless of whether the disclosure incites or disincites the process, I think there are two points that are important for the committee to recognize. The first is that it's actually illegal for taxpayer information to be disclosed, and I think the two government departments that have been criticized go out of their way to make sure this doesn't happen, either directly, indirectly in some sense, or by implication. I don't think it's a point. It's not a good thing or a bad thing. It is a thing. That's what the law says, and it's in the interest of everybody that it say that.

The second point is that I think this same inquiry into the substantive significance of the law as it's written, the quality of the process by which it's interpreted, and whether or not the law as written is better or worse than new law that could be written to address policy concerns could have taken place with the same degree of seriousness and debate if the Auditor General had said ``We have discovered a file in which there does not appear to be a record of deliberations. The issue in the file is whether or not Canadian residents can hold property that bears the designation `taxable Canadian property', and one of the implications of that determination is that planning may result in a tax that could be collected, not one that has been collected.''

The last point I guess I would make, which is incidental to all of this, is that this discussion sometimes takes the tone of tax having not been collected, in the sense that somehow tax was forfeited. I think ``forfeited'' is in the Auditor General's report. You can make that statement only if you believe that the correct determination of the substantive point is that tax was otherwise owing.

I might put the question somewhat differently. I would say that tax wasn't collected. That's surely the case, and depending on how you resolve the debate in the first question, it wasn't owing either.

The second question, which is one yet to be debated by this committee with us, is in a different system could you have a more absolute or a more comprehensive exit tax? The answer to that question obviously is yes. The harder question is should you? That's another question, and we will debate that. But I think the two have to be kept separate.

The Chairman: Thanks, Mr. Wilkie.

Mr. Brooks.

Prof. Brooks: I have just a brief note on the confidentiality point, and I don't make this point solely to provoke my fellow panel members, but it might have that effect. That's your problem if they all want to respond.

I must confess that I just don't see the confidentiality issue. Parliament has the right to know how tax laws are being administered. The Auditor General has the responsibility to report to Parliament about how the tax laws are being administered. As part of that, the magnitude of the money involved is simply a relevant fact.

Therefore, the fact that the amount of money involved was reported doesn't mean that confidentiality was breached at all. Indeed, the report would be insignificant without it. If there are only six people in this country who have that amount of wealth, so be it. Also, there just isn't any serious breach of confidentiality here. All we learned about these people, whoever they are - and no one knows for sure - is that they moved $2 billion from Canada to the United States. So what we learned is that there are some very wealthy people in Canada. We all knew that. We also learned that they move money out of Canada to avoid our tax. We all knew that. We didn't learn anything about their personal affairs or their business affairs.

.2010

The Chairman: Professor Brooks, let me ask you straight on. It wasn't you, was it?

Prof. Brooks: Well, no.

Let me make this point. I do have a personal interest in this, and I might be the wrong person to be asking. Two months ago the Ontario government required everyone in Ontario who earned over $100,000 and who worked for the government to disclose their T4 forms. That information was on our salaries. How much we made was disclosed.

I only point this out for the record because it seems to me the height of hypocrisy that The Globe and Mail reported all our names and how much we made in the newspaper. At least some of the columnists were concerned about confidentiality in this case. That was private information, I would have thought.

I might add it caused me enormous personal embarrassment because up to then my mother always thought I was being fairly generous in giving her Christmas gifts. When she found out how much I made, she now thinks I'm a tightwad.

I can tell you the persons involved in this case did not have to suffer that kind of embarrassment from their mother. All we learned of was that they moved $2 billion. I just can't see there being a confidentiality issue here.

Furthermore, Mr. Chairman, here's a really relevant point that the committee might look at later on. There's an argument about whether or not the government was delivering a subsidy to these people through the tax system. Perhaps the general rule is that there should be deemed disposition when you leave, and to encourage mobility of labour or for whatever reason, we provide an exemption for some people and therefore defer their taxes. If that's the justification for this particular exemption, then in effect it's an implicit interest-free loan from the government to these taxpayers in the amount of tax they would have otherwise paid.

The Chairman: We'll deal with that later.

Prof. Brooks: My point is that if the government is giving interest-free loans through the tax system, it should all be disclosed. When the government gives direct interest-free loans, direct grants, we know who they're giving them to. When they do it through the tax system, we know nothing.

The Chairman: Could we deal with that question of loans on the fourth issue?

Mr. Lanthier and then Mr. Smith, please.

Mr. Lanthier: I'm not a lawyer and I can't address this. It's very interesting about Mr. Brooks' mother's gifts, etc.

As Scott Wilkie referred to, it's an offence to disclose information that would directly or indirectly identify a taxpayer. I'm just an accountant so I don't have an answer to this, but a question that's been raised is whether the Auditor General contravenes the provisions of section 241 of the Income Tax Act and creates an offence by directly or indirectly disclosing the identity of the taxpayer.

The Chairman: I believe he has an opinion to the effect that he did not, and I don't think this committee has any intent of trying to get blood out of anyone. That's not our purpose.

Mr. Smith.

Mr. Smith: As expected, Mr. Brooks has drawn something into the debate that's totally irrelevant. That was a law that required disclosure. We're dealing with a law that prevents disclosure.

My own personal view is that the Auditor General could have worked harder at maintaining the confidentiality and still made his point about the seriousness of the issue.

Insofar as disclosing rulings and making them public, and the impact of that on confidentiality, I think that in this day and age with the computer and the amount of information that is currently available in the form of technical interpretations, we should move towards disclosing all rulings. Revenue Canada has said it would move in that direction, and I think we should be sure they do move in that direction.

Again, in making the rulings public, I think it's important that confidentiality be maintained as well as possible so there's little risk of identifying the taxpayers by the facts disclosed in the ruling.

The Chairman: Thank you. Could we go on to the next issue or do people want to pursue the confidentiality issue?

Prof. Brooks: The next issue.

Mr. Williams: I have a comment, Mr. Chairman. The Auditor General was looking at the rulings process and he commented on that. But he also had a very serious concern regarding the erosion of the tax base, and that's why the magnitude of the transaction also had to be reported.

The panel took exception to the fact that by a process of elimination perhaps we can presume who it might be. But we can also look at chapter 11 of the auditor's report, where it deals with other erosions of the tax base, Mr. Chairman. He's quite concerned about that too, and he talks about debt swaps in Canadian financial institutions.

.2015

I would think there'd be about as many Canadian banks in this country as there are people with $2 billion in their jeans.

Yet, what is he supposed to say, they're all farmers? He has to say these are financial institutions. He has to identify them. How many people in this country deal with LDCs and offshore swaps and so on? He has to tell us these things are going on, in exactly the same way as he told us that this trust situation was going on. It's maybe unfortunate Canada has such a select few number of billionaires that perhaps we might be able to think we know who it was. We should perhaps have more of them. But the point is the Auditor General was in a difficult position and he also had a duty to do.

The Chairman: Shall we move on to the next issue?

Some hon. members: Yes.

The Chairman: Thank you for that one.

This is our last issue. We've seen one example here of how the public at large thinks there has been a tax rip-off of enormous proportions. Money has flown out of Canada in such a way that accrued gains are not being taxed and will never been taxed.

Is this the type of tax system we want for the future? Is this the reality of what this ruling does? I just want you to look at this ruling as a catalyst for the issue of whether we should be looking at changes to the law in terms of Canadians who are leaving the country or Canadian resident trusts or corporations that are leaving the country. What are the impacts on the international ability of capital? Would Canada be a net beneficiary or a net loser from changes that were done on a reciprocal basis in this area through our international tax treaties? If we can pick the brains of some of the most knowledgeable people in the country on this issue, we'd love to do it.

Who wants to start? Allan Lanthier.

Mr. Lanthier: Mr. Chairman, perhaps this will pose a slight conflict, but I have no problem with the existing tax policy. As I mentioned too many times, Canada, Australia, and to a very limited extent Denmark are the only countries that impose exit taxes.

Having said that, I've given the issue a considerable amount of deliberation. I personally would not be adverse to a policy change that would treat trusts and corporations in the same manner. There are a great number of reasons why individuals choose to leave a particular country. There are personal reasons, health reasons, business opportunities, and family reasons.

Some of my co-panelists may not agree with me, but there's not necessarily any compelling reason why a corporation or a trust has to leave Canada. Many people would think that a trust leaving Canada, by virtue, let's say, of the Canadian resident trustees resigning and of foreign trustees coming on would be sufficient to change the residence of a trust. There is no compelling reason in many cases.

So I would not be adverse to a change in policy on a going-forward basis, whereby trusts and corporations would face an exit tax. It would be the heaviest exit tax in the world of any other country. But that notwithstanding, trusts, as with corporations, would be taxed on all property, without exception - with no exception for taxable Canadian property, with no election to defer, and no election to pay over six years.

Individuals are in an entirely different boat. Individuals have a great number of reasons why they have to leave Canada. If Canada ever came close to imposing an exit tax on individuals who have to leave for any number of reasons, as I say, personal, health, whatever, it would be tantamount to putting a Berlin Wall around the country and be the next step to foreign exchange controls. The capital that would flow out of here would be... It would be a disastrous tax policy.

So I would not be opposed to a change in the rules as they apply to trusts. I'd be strongly opposed to any suggestion that the rules apply to individuals. In the context of the subsection 107(5) issue, a distribution by a trust to a non-resident individual is exactly the same thing as an individual leaving Canada. I don't think that particular rule should be touched from a policy viewpoint either.

.2020

The Chairman: Thanks very much, Mr. Lanthier. Mr. Brooks.

Prof. Brooks: Let's me take the opposite position. I agree with respect to trusts and corporations, and I frankly think you should apply the same rule to individuals. When individuals leave Canada they should have to pay tax on their accrued capital gains.

The exemption for a Canadian taxable property, it seems to me, makes absolutely no sense for three reasons.

Firstly, it lends itself to too much tax avoidance. Often these gains are never taxed in Canada. Indeed, often they're not taxed anywhere in the world when they leave as taxable Canadian property.

Secondly, it means that Canadians who retire abroad end up paying less tax than if they had remained resident in Canada. It seems to me rather bizarre to have a tax rule that encourages people to retire abroad. An important point is that this rule has nothing to do with the mobility of capital. It has to do with the mobility of individuals.

Thirdly, the distinction we make with respect to taxable Canadian property rests on a conceptually incoherent distinction between capital gains and other kinds of income. Any good tax lawyer can tell you that there's no economic substance to a capital gain. It's easy to convert various forms of income into one kind or the other. It also means that if I live in Canada and earn income from labour, for example, I end up having to pay tax on all of my income before I leave. But if I earn part of my income from capital gains, I don't have to pay tax on all of my income before I leave. That makes absolutely no sense to me.

I would have a rule that when you leave, you pay tax on the income you earned while you were a resident in Canada. I would make an exception, and this is what hung up the department back in 1972, I think, and gave rise to these quite peculiar rules we have. They were worried about people who go overseas for short periods of time. We don't want to discourage corporate executives and others from going overseas for two or three years and then coming back, and the deemed disposition would do that. Therefore I would put in an exception that if you're only going over for a short period of time, there will be a deemed disposition at fair market value. You have to value it and you have to put up security for the tax you owe. If you come back within five years or whatever, we'll forgive the tax. If you don't, we'll collect the tax from your security.

The only objection one can make to that rule, the objection you commonly hear other than the objection about the Berlin Wall, is that when people leave the country it's hard to value their assets. Also, they might not have liquidity to pay the tax. Those are the arguments you normally hear.

On the valuation point, it means we only have to value all your assets at one point during your lifetime. We now do it when you die, but it seems to me we could easily do it when you leave.

On the liquidity point, I never understood the point of giving a tax exemption for someone because they have liquidity problems. It's always struck me as kind of odd that when a person loses their job through absolutely no fault of their own, we force them to value all their assets and indeed sell all their assets before they qualify for social assistance. No one seems very concerned about that. Yet when some lucky Canadian with a lot of property retires abroad, we're really solicitous about the preservation of their assets. It makes no sense to me.

The Chairman: Thanks very much, Professor Brooks. Mr. Goodman.

Mr. Goodman: I could not disagree more strongly with Professor Brooks' comments.

Prof. Brooks: You have surely disagreed more strongly with other points, haven't you, Wolfe?

Mr. Goodman: I'd have to think rather hard.

There is a logical distinction, one that Professor Brooks disagrees with and diminishes the importance of. Shares of public companies are generally very liquid. It's therefore not at all unreasonable that when someone ceases to be resident in Canada, we collect tax at that point. Shares of private companies and real estate and various other kinds of property are relatively illiquid. For that reason I see a perfectly good reason not to exempt them from tax at the time they leave Canada - but of course that's not the case - but to defer the tax liability until they subsequently dispose of their assets. If they go off to live in some tax haven, they will be liable for tax indefinitely.

If we need better measures to ensure that we in fact collect the tax, then maybe we ought to consider changes in the legislation to require various forms of security, not merely in the election that is currently provided, but also when, for example, shares of a private company are exchanged for those of a public company and they remain taxable Canadian property. At that point they're relatively liquid, and it wouldn't strike me as unreasonable to say that security has to be given.

.2025

The problems are not insurmountable. They represent a balancing of interests not only within tax policy domestically but also internationally. I for one would be reluctant to see major changes. I agree there are some technical problems involved in subsection 13(5) that come to the fore when you're discussing a trust that has only recently been formed and is therefore not a trust that has been resident in Canada for ten years. But that's something that should be discussed with the United States and necessary modifications made to the tax treaty.

The Chairman: Thank you very much, Mr. Goodman. Mr. Laloge.

Mr. Laloge: The changes that should be considered include the one Allan has raised of using the alternative of a tax system similar to our existing corporate system in lieu of the existing trust rules, perhaps for all trusts other than spousal trusts. There are other minor modifications that might patch up the system and return integrity to it, at least in the public mind, for example some of those that Mr. Goodman has raised.

There is a need to be perceived as favouring Canadian residents on an equal or better basis than those of us who leave. I would like my colleagues to comment on whether Canada is a net benefactor of capital in these situations where individuals leave the country compared to when people come into the country. In my area of the country we continually see individuals moving there from the rest of the world. I'm not sure that's the case on a national basis.

I think it is important that whatever process you follow, you consider two things. One is the appropriateness of a white paper approach to these kinds of changes. One reason we have so many problems in our tax system here, there and wherever is that we go on for twenty years making minor changes to this part of the system and that part. Unfortunately those compromises lead to a situation where what started out being a very clear philosophical starting point, such as Neil Brooks outlined this evening, and what the system is today are two different things.

Second, I believe the Department of Finance has another committee of specialists, some six or seven of them, reviewing certain issues related to corporate and personal taxation matters. I do not believe the focus of that group covers this area; however, it should be checked with them.

The Chairman: It's public taxation only as I understand it.

Mr. Laloge: Yes, but if they are proposing major changes, for example, to eliminate integration in the corporate tax system, it would be rather foolish for us to suggest moving to a corporate-style taxation system for trusts. There is a need to coordinate what the left hand and the right hand are doing.

The Chairman: Thank you, Mr. Laloge. Mr. Smith, please.

Mr. Smith: Mr. Chairman, I would like to suggest that in its review and deliberations, the committee give some thought to how most countries in the rest of the world deal with this issue. I think there are two points.

One is that it is the accepted international norm that capital gains are taxed on realization rather than on an accrual basis. Canada taxes accrued gains at death because we don't have an estate tax and it serves as a substitute for an estate tax. But taxing accrued gains upon someone leaving the country I don't think falls into the same category. If we had an estate tax and someone left the country, they wouldn't be subject to the estate tax, nor would they have to pay an accrued estate tax, if you like.

So I think the committee should spend some time looking at this question. Is an accrual taxation approach appropriate when someone leaves the country, or should we follow the approach of most of the countries in the world and tax on realization only?

.2030

Second, in trying to decide the tax jurisdiction of countries when it affects non-residents, most countries in the world retain jurisdiction over real estate or substitutes for real estate. Virtually every one of Canada's tax treaties follows that principle that only limits taxation on real estate. Most of the other countries follow that same approach. We are unique in trying to extend our tax base beyond real estate to pick up other assets with a nexus or connection to Canada.

I think it's worth serious consideration as to whether we should have a system that only taxes on realization, except on death, and that confines our tax base to real estate only. When someone comes to Canada there's no step-up in cost base, and when someone leaves Canada there's no tax. If realization occurs when they are here, Canada taxes. If realization occurs somewhere else, that other country taxes. I think that's worth a serious look when trying to decide on the future direction of taxation.

Thank you.

Mr. Lanthier: David, could you clarify for me? Because you are making very important points, whether you're talking about corporations, trusts or individuals.

Mr. Smith: I'm focusing on individuals in particular, Allan. I don't know whether corporations... I don't think many other countries have an exit tax, like we do, on corporate emigration. I don't know about trusts, but on individuals they don't have it.

Mr. Sirkis: Mr. Chairman, I would agree with the points that David is making and add one further point.

At present we have a comprehensive system for taxation of persons who leave Canada. What we have brought forward is a system through our tax treaties where through negotiations with treaty partners we decide how far we're going to extend that taxation. With the U.K. I believe it's five years, with Australia it may be much the same, and with the United States it's ten years. I think this has to be reviewed in the context of the treaty negotiations and treaty decisions that are made, because with respect to those treaty decisions, our treaty partners obviously have interests that compete with ours, and those are balanced through the treaty negotiations. I think that aspect of it has to be included in the review.

One smaller feature, which I understand Professor Brooks would take issue with, is that the level of taxation in the country is very high. To tell people who want to leave that before they can get out they have to pay us a bunch of money is a further impediment to retaining persons in Canada who will try to create wealth. I know that may not count for much in some pantheons, but I think it's something the committee ought to keep in mind.

The Chairman: Thank you, Mr. Sirkis.

Mr. Wilkie.

Mr. Wilkie: Following on Mr. Smith's and Mr. Sirkis' points, I think two other points ought to be made. Mr. Smith drew a distinction based upon Canada's taxation of accrued gains at death, and compared that with the situation where the taxpayer doesn't die but simply moves. I think one way of looking at that and illustrating the significance of the distinction is to say that at death the taxpayer's involvement with the property ends, and therefore in effect there's a reckoning.

When the taxpayer leaves the country, his involvement with the property doesn't necessarily end. Indeed - and this is not meant to trivialize the liquidity point, as I think it's different from liquidity - the intrinsic characteristics of the property may well cause the value of the property to go down as well as up, and those characteristics may have been embedded in the property and probably were embedded in the property when the taxpayer left. What Canada does instead is say that property remains permanently within our ability to tax it.

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It is another question whether or not Canada chooses to forgo that taxation in the context of bilateral arrangements that are an international norm - the tax treaties, that is. You've heard from others about how the tax treaties work and what their significance is.

I think it's worth making the point that at that level of discussion, while the taxpayer's relationship with the two countries at issue is still relevant, even more relevant - unless we're talking about a zero tax jurisdiction, and there aren't very many of them where individuals actually choose to live - the debate is raised up a notch. It's a debate between two countries over who shares a tax pot, a revenue pot. Appreciate that when Canada chooses to tax a non-resident who disposes of taxable Canadian property, in most jurisdictions that implies an imposition of that tax as a cost on somebody else, some other country, or their foreign tax credit regime, more or less subject to limits.

At that point a determination is being made between countries about whose revenue base and tax base it is, and that international tax policy question cannot be ignored or obscured by a narrower and more contained view from a purely Canadian domestic point of view, or any other country's domestic point of view, about what in other circumstances, absent those tensions or concerns, another result might be.

The Chairman: Thank you, Mr. Wilkie.

Mr. Spindler, you haven't had a chance on this issue yet. You're the only one I've neglected.

Mr. Spindler: I don't feel terribly left out. I don't feel I've suffered from being left out.

The sense I'm developing from all of this is whether the Canadian tax net should be tightened to clearly tax a variety of gains accruing while somebody is resident in Canada. I think the answer lies - and I'm not evading the question, although it probably sounds like it - in trying to establish whether, although it might collect some tax in the short term, it has a negative impact in the long term on Canada and our ability to attract capital and build capital.

I think it goes beyond the specific issue to the broad issue of what kind of a system. I think various other people here are alluding to this. Do you want an open-ended system that simply taxes gains that are realized while somebody is in Canada, or do you want a system that throws a ring around a taxpayer? I think the answer is not so much the short term and which one raises the most revenue, but probably should be answered by which one is most likely to generate the greatest amount of capital and wealth in Canada for all Canadians. I don't think that's a question that anybody in this room can answer tonight. I think that's the challenge for the committee.

The Chairman: Thanks, Mr. Spindler.

Mr. Grubel, Mrs. Brushett and Mr. Williams.

Mr. Grubel: I'd like to start with a statement. I believe that what we have here is a problem of ideology. I believe the present system is very desirable because it maintains international competition among countries for rich migrants. In fact I wish we had the lowest taxes so that they would all come here to escape their taxes at home. I think the world would be better off by this. Personally and ideologically, I believe the smaller the size of government and the lower the rate of taxation, the better off we all are.

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I know where Mr. Brooks is coming from. We have heard this here often enough in his testimony. He thinks it's exactly the opposite - that the bigger the government, the higher the taxes and the more good government can do. Therefore, it is totally consistent from an ideological point of view that you want to make sure that the people, once they're here, stay here. I think he neglects the kind of point Mr. Spindler made. I fully agree with him, and I don't have any doubt at all in asserting that the welfare maximization will take place if in fact we encourage international competition, both for migrants and for capital.

I have one quick question for Mr. Lanthier. This is just plain informational. If General Electric - let's say company X - is a Canadian company and it has shares outstanding, but it decides to move headquarters from Canada to the United States, in what sense will there be a capital gains tax due, on what assets?

Mr. Lanthier: Just by movement of headquarters?

Mr. Grubel: That's right.

Mr. Lanthier: There won't be any tax. We have seen a number of instances of that with Canadian public companies. Despite some of the comments made here, our corporate emigration rules are very tight and make it prohibitively expensive for most corporations that might want to get out of Canada because of high tax rates, etc., to leave.

Mr. Grubel: Moving corporate headquarters?

Mr. Lanthier: Yes.

Mr. Grubel: I don't know what it means legally to move a corporation.

Mr. Lanthier: It means nothing. We have a Canadian public company with publicly issued shares and it's carrying on business in Canada and internationally through various subsidiaries and affiliates. It simply takes its head office and rather than have it in Vancouver, Montreal, or Toronto it moves it to South Carolina. You take 40 or 50 executives and you move them, and you start operating out of there.

Mr. Grubel: Okay.

Mr. Lanthier: So what we've lost is 40 or 50 talented executives.

Mr. Grubel: We're running out of time. So just to follow up on this, could you please explain to me, then, the sense of your saying that trusts should be treated like corporations?

Mr. Lanthier: We prevent corporations from escaping the Canadian tax net other than -

Mr. Grubel: When they do what?

Mr. Lanthier: - at a prohibitive cost.

Mr. Grubel: When the corporations do what?

Mr. Sirkis: I think your point is that if a corporation changes its residence, is it then liable for tax in Canada? The answer is yes. The way it changes its residence, by and large, is by emigrating from Canada through a formal legal procedure and becoming incorporated in a foreign jurisdiction. So that's generally the way. It may also change the composition of its... That's generally the way they would go.

Mr. Lanthier: Massey Ferguson was a well-publicized public transaction. Verity, which had incurred such tremendous losses -

Mr. Grubel: Yes, I was just going to say...

Mr. Lanthier: So they did exactly what Rob was talking about. They took their company, and they ceased to be governed by the Canada Business Corporations Act. They moved under U.S. law.

Mr. Grubel: To the extent, therefore, that corporations are facing a prohibitive barrier for moving, you are now essentially saying that you're prepared to impose a prohibitive barrier on trusts from ever moving abroad. Is that your intention?

Mr. Lanthier: I say that, Mr. Grubel, because a compelling reason for leaving Canada for corporations is often tax-driven and is often tax-motivated. This is entirely different from individuals, of course. For a corporation that's been established here, that's been operating here for 50 years, that is a Canadian public corporation, that doesn't like our high tax rates any longer, that doesn't like our foreign affiliate system, and that doesn't like some of the recent changes and would like to get out, we stop it from getting out. Whether that's bad or good we can debate, but often one of the most compelling reasons for wanting to leave Canada is to avoid the Canadian tax net. It's a completely different situation for individuals.

Mr. Grubel: Yes, but now you believe, if I can... The logical conclusion for what you said is that you believe trusts are moving abroad, predominantly motivated by the attempt to avoid high taxes in Canada, just the way corporations are. Therefore, you think it would be all right to follow Mr. Brooks' idea that we should erect a barrier.

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Mr. Lanthier: I wouldn't put it in as broad terms as you did, Mr. Grubel, but I would say that ``artificial entities'' or ``legal relationships'', if I can call them that, corporations or trusts, are different from individuals like you and me.

Mr. Grubel: I understand that. I wanted to draw for the record the conclusion that follows from your assertion. It must be based on the idea that they're moving for tax reasons, and if somebody moves for tax reasons we should punish them. Now you are saying that's what we should do for trusts. It follows logically from what you said, from all the information you gave to me.

Mr. Lanthier: I'm not saying it as bluntly as that. I wouldn't say that for any trust we see moving out of Canada - quite frankly, we see very few - the only reason in all cases is to minimize future taxes. I'm saying that there is often no compelling reason other than taxes, and I guess the conclusion does follow logically. I would not be opposed to that sort of policy change.

Mr. Grubel: If this is the case, you create new inequities. Maybe 10% move in order to avoid taxes and 90% will be treated inequitably. I understand that of course we can't name the name of the family that moved their $2 billion assets, but in fact given the taxes they will face by the time the chief beneficiary dies they will end up paying more taxes on the estate then if they had stayed here, if it's after ten years. Even in the biggest recent history that has brought us here together the opposite is true. So what makes you say that they avoid taxes? How do they avoid taxes, especially if we don't have a double-taxation agreement? We are maintaining a claim on those trusts for the rest of our lives.

Mr. Lanthier: There are a number of assumptions built into your question, Mr. Grubel, and I can't address them without knowing the taxpayer's particular situation.

The U.S. tax system is different from the Canadian tax system. As Mr. Goodman said, in the U.S. you have an historical tax basis. Whether the historical tax basis in that particular case was an old historical tax basis or a very recent one...a much greater fair market value in Canada, I don't know. Whether the beneficiary will be there when he or she dies and will be subject to any U.S. estate taxes, whatever - I don't know.

Mr. Grubel: But it's not at all clear. I would like to establish for the record that even in this case, with all the speculation that has been made about which family it is and that this was motivated by tax avoidance, I have heard stories that in fact if this company locates in New York and that individual dies in New York, the tax burden is likely to be higher than if the individual had stayed here.

Mr. Lanthier: It would logically follow that the tax burden would be enormous, and your point is well taken. Another point is that no assets have in fact left Canada. I don't know who it is and I don't know what it is, but if it's a manufacturing operation, the manufacturing operation is still here, the jobs are still here, payrolls are still being paid to the people here.

Mr. Grubel: I'm very surprised that you then recommend they be treated like corporations.

Thank you very much, Mr. Chairman.

The Chairman: Thank you, Mr. Grubel.

Next is Mr. Williams and last will be Mrs. Brushett. Then I want each of our individuals to have an opportunity to sum up. I know there are some more comments from our experts here.

Mr. Williams: While I also have an aversion to high taxes, I did like Mr. Brooks' comment that people who earn money in Canada and leave shouldn't have lower taxes than Canadians who earn money in Canada and stay. It seems to be an inequity that we would allow people a benefit to leave under that concept.

There seems to be an illusion that Canadian taxes are much higher than elsewhere. That may be true in many cases, but I also want to point out that for example in the United States earned income is taxed worldwide even if you don't set foot in the United States for years and years. They have gross inequities down there as well.

I'm also concerned about the concept that Canada is an immigrant country for young people and an emigrant country for people who have acquired their wealth and want to leave. We should recognize that point too.

I have one final question on a matter I wasn't clear on. It's a simple question. If corporations leave Canada, can they have Canadian taxable property too? For example, if they have a manufacturing plant here in Canada, here in Ottawa, and they leave, is that manufacturing plant taxable Canadian property?

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Mr. Lanthier: No. When a corporation leaves Canada, in a manner Rob Sirkis described, actually leaves, gives up residence of Canada, two things happen: it has a fair market value disposition of all its assets, and there's a secondary tax in lieu of the dividend withholding tax that would have applied. So if you have accrued value on any assets, you have a massive hit and it's prohibitively expensive.

Mr. Williams: That's the prohibitive point you're pointing to.

The Chairman: Thanks, Mr. Williams. Lastly, Mrs. Brushett, very briefly, please.

Mrs. Brushett: I have two points. I want to come back to this disclosure of the advanced rulings. Since there are so many of them made, would it be sensible and appropriate to publish them in the Canada Gazette within 24 hours of the advance ruling and not leave a six-year hiatus when nobody knows what is going on?

The Chairman: Scott Wilkie has an answer to that.

Mr. Wilkie: It would be impossible to do that, because in fact there's a program under way to publish all of the rulings. In fact historically there are published rulings, but the circumstances of the descriptions in them that would identify taxpayers have to be removed without distorting or removing the substantive significance of the ruling from the standpoint of the act.

Mrs. Brushett: But isn't it possible to remove the identify?

Mr. Wilkie: It is, but it can't happen that fast.

Mrs. Brushett: You're saying we can't publish these things quickly.

Mr. Wilkie: I don't think so. The point is they can be published.

Mrs. Brushett: You talk about outflow of cash. That's all this country's known, for one reason or another. So I think I'd like a little clarity on that, because we have this great spread when you talk about this great outflow of cash.

I guess it was David Smith who mentioned this, but I'd like to know what would be different, because it's going now, and you say if we treat individuals like corporations or trusts then there will be this outflow. I disagree with you, and I'm wondering -

Mr. Smith: I don't think I was the one who made that particular comment about an outflow of cash.

Mrs. Brushett: Perhaps Mr. Lanthier did.

Mr. Smith: I think it was Mr. Lanthier.

Mrs. Brushett: I think it's very critical. Why do you say there will be an outflow? We have it now. I have never seen so many individuals in my life, in my small community, who have trusts around the world, ordinary middle-class people. It blows my mind. So there's an outflow of cash now.

Mr. Lanthier: There are two ways of moving assets out of the country. One can stay here and for example establish a corporation or a trust that one owns and which has assets offshore. The assets are still in Canada because you or I are still in Canada. We own those assets. The assets are physically outside Canada, but they're all subject to the Canadian tax jurisdiction, our offshore trust rules, and our Canadian foreign affiliate rules, etc. There's a lot of publicity of course about that in new foreign reporting requirements that the Minister of Finance and the Minister of National Revenue have introduced.

The other way is you or me packing our suitcases and leaving the country, and to a certain extent that's happening. In talking to Mr. Brooks at supper, he doesn't seem to see it happening, but I see it happening every day of my working life. Young entrepreneurs with capital and with ability are packing up and leaving this country and making investments outside Canada for a number of reasons. High taxes and high government deficits are some of the primary reasons.

So, yes, people are leaving; we're in a free society and people are free to leave when they wish to under the present government.

The Chairman: Would you mind if I interrupt you there? I promised you'd be out of here on time to catch that plane, which gives us five minutes. Usually when I have a group of people I presume that I have to summarize. We have such an articulate, intelligent and informed group tonight, I want each of you to summarize. Could you do it in 30 seconds?

Neil Brooks.

Prof. Brooks: I would summarize. Let me make two trivial and non-provocative points, and again thank you very much for inviting me. It's always a pleasure to appear here and to make some modest contribution to this committee's important work.

One point is I don't think there's any doubt that they did this to avoid tax. I think that's in the ruling. They wanted to avoid the 21-year rule. Secondly, it is the case that this trust is not likely to pay tax anywhere. For one thing, if they went down to the United States and waited there for ten years, they could bring it back into Canada and get a stepped-up cost base to its fair market value and pay tax nowhere on this gain.

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All sorts of taxable Canadian property leaves this country and pays tax nowhere. That's what these folks are paid lots of money to do, and they do a good job of it, I assure you.

The second trivial point is that in deciding what you're going to do with this, when you compare jurisdictions around the world it's important to look at the whole system. One reason the Europeans don't worry much about a departure tax on capital is that they impose a net wealth tax on it. They tax people every year on the net value of the wealth. They also tax the computed rental value of homes in most European countries. So they don't care much when you leave the country because you've been paying tax all along on the value of your capital.

The Chairman: Thank you, Mr. Brooks.

Scott Wilkie.

Mr. Wilkie: Mrs. Brushett, when you submit a ruling application you could ask the taxpayer to submit what the taxpayer would be prepared to have published as its reflection of the ruling. That is done in some countries. So you could in effect have parallel rulings.

I don't have much to add to what I've already been given the opportunity to say. I would like to thank the committee for inviting me and for hearing all of us.

The Chairman: Thank you.

Mr. Sirkis: I'm in the same position. I'd like to thank you for asking me to be here.

Mr. Smith: I would add that I'm honoured to be part of this process and I thank you for inviting me.

I would like to make a couple of points. The first topic we addressed today is a very important and serious matter, but I would hope that in its deliberations and its report the committee doesn't lose sight of the fourth topic, which I think is very important as well. I hope it will get attention at least equal to the first point.

Before the committee latches onto Mr. Lanthier's proposal in its report, I would point out that we already do have a departure tax on trusts. Second, a trust isn't some magical entity, it is simply the people who are the beneficiaries, and they are equally individuals. If the individuals are out of the country I think it's equally justified for the trusts to be out of the country.

The Chairman: Thank you, Mr. Smith.

Mr. Goodman: Thank you for inviting me. I was going to make a brief comment about trusts that decide to leave the country.

The case we are presently discussing involves people who have been U.S. residents for a considerable period of time, I understand. It's extremely inconvenient, to put it mildly, that a Canadian resident trust continue to be resident in Canada when that trust was established for the benefit of a U.S. resident.

Typically, the U.S. resident wants to invest in the United States and wants his trust to invest in the United States. Where that occurs there is withholding tax when the investment income is paid to the trust in Canada. Withholding tax is payable a second time when the trust distributes its income to the American resident. There may be other reasons why the trust may wish to leave, but the avoidance of double taxation in those circumstances is a rather obvious reason that any sensible tax adviser would recommend. There are hurdles to be involved.

Mr. Lanthier's suggestion that trusts be equated with corporations is an inappropriate one, in my view, and one that should be resisted.

The Chairman: Thank you, Mr. Goodman.

Mr. Lanthier: Mr. Chairman, it's been a privilege to be here.

Neil Brooks talked about a 21-year rule. I'm not sure where he gets the proprietary information about this particular transaction, but the 21-year rule generally becomes effective January 1, 1999.

Prof. Brooks: It is right in the rules. It was going to become effective in 1993.

Mr. Lanthier: Thanks, Neil.

I'd like to re-emphasize strong support for Revenue Canada. In my close to 25 years of dealing with them I've seen nothing but the highest levels of competence, professionalism and integrity, and I would hate to see this process damage the rulings process in any way.

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Point three is equating trusts with corporations, and obviously there is no unanimity from my colleagues on that. I would encourage the committee to continue to study that aspect and the inter-relationship of the trust rules with our treaties and what tax-planning opportunities are available there, and whether changes are required as a result.

Fourth and finally, individuals are leaving Canada. Capital has to be mobile and individuals must have the freedom to move. My suggestion was that imposing an exit tax on realization on individuals would make us such a hostile nation that capital would flee and no capital would come in. It would exacerbate the situation we're already starting to see.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Lanthier.

Mr. Laloge.

Mr. Laloge: Thank you, Mr. Chairman and members.

It is absolutely essential this committee make progress toward improving the perceptions of individual Canadians about the fairness of the Income Tax Act by making strong recommendations in this area. The amount of capital fleeing our country is significant and the long-term effects of it are very damaging to our future. You cannot leave this issue forever. It has to be dealt with as soon as possible.

The Chairman: Thank you, Mr. Laloge.

Mr. Spindler.

Mr. Spindler: To reiterate a couple of Allan's points, in looking at the first question that was asked, I think Revenue Canada conducted themselves properly. I think the Auditor General did an excellent job in terms of identifying an area for potential change in the tax law, but the manner in which it was done left something to be desired. If there are changes and they go beyond the level of reviewing the legislation for internal consistency and anomalies and start to produce fundamental changes, I'd be very concerned about solving a small problem and creating a large disincentive.

It's a system that has to be balanced internationally. It may well be that a tightening can be achieved without any losses anywhere else, but the stakes are fairly high, so it has to be a well-reasoned and well-thought-out change.

The Chairman: Thank you, Mr. Spindler.

Tonight we've heard a plea from every witness before us, as well as from members around the table, that we have to take a major look at the law, particularly as it applies to emigration. We have not had any sense of unanimity, but you've given us some directions we could head in.

I despair of having to come up with these answers quickly without your ongoing participation, and that of other Canadians, in that process. Maybe all we can do is recommend certain directions and start the process for a detailed consultative process for change in the law for the future.

As I stated when we opened up, the Auditor General plays a valuable role in the lives of all of us in holding government accountable - to we the parliamentarians, and through us to the people of Canada, who are the shareholders in this whole process. I do not want to see anything that diminishes the role of the Auditor General or takes away from his capacity to perform to the highest standards on behalf of his shareholders and the people of Canada.

We have heard some criticisms tonight of a particular ruling and the implications that might have. Of course we do not have unanimity on that, but we thank you for your expertise. I hope Canadians realize how fortunate we are as a finance committee to be able to call upon some of the most highly skilled, experienced professionals who are in the primes of their lives - particularly Wolfe Goodman - in terms of the contributions they're making to their clients in Canada and internationally. If I had to pay for their services on an hourly basis, I'd probably be paying well over $5,000 an hour for these eight people. They're known worldwide for their reputations, because international taxation is a global art, a global profession. I know this, having many years ago just touched on it in my career. I know the eminent reputation of these people.

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We are very fortunate to be able to call upon you for your free services and your advice. The alacrity you showed in coming here on one or two or three days' notice is a tremendous credit to a system to which I think you are prepared to devote your time and effort to try to make it better, as we are.

I thank you very much.

Some hon. members: Hear, hear!

The Chairman: The meeting is adjourned.

[Translation]

The Chairman: Thank you very much, Mr. Rocheleau.

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