21 November 2017 CTF Annual Conference - Department of Finance Update
This is a summary of oral remarks made by Ted Cook, the Director of the Tax Legislation Division, Tax Policy Branch at the Department of Finance during the Department of Finance Update held on November 21, 2017 in Toronto during the Annual Conference of the Canadian Tax Foundation. His remarks commenced with a review of legislative developments over the previous 12 months, which we have not summarized.
The Multilateral Instrument (MLI) currently has 70 signatories. Canada signed up for the minimum standards plus binding mandatory arbitration.
Canada entered provisional reservations with respect to all the other measures and we are currently in the process of determining whether to make recommendations to adopt additional provisions on ratification. If we have a reservation, we can remove it, but once we remove a reservation, we cannot put it back in place.
It is unlikely that the MLI will enter into effect for any of Canada’s tax treaties before 2019.
At the same time as signing the MLI, we announced the commencement of tax treaty negotiations with Switzerland and Germany. We signed Tax Information Exchange Agreements this year with Antigua, Barbuda, and Grenada.
Our BEPS work is continuing. We expect follow-up work on the digital economy, and we are involved with transfer pricing and attribution of profits, and monitoring compliance with the four minimum standards.
U.S. tax reform
There is a lot of activity on the U.S. front. We are keeping an eye on this and analyzing what kind of impact there will be on Canada, and what the appropriate response will be. At this point, there is only a watching brief.
Beneficial ownership and the Paradise Papers
There has been a lot of media coverage, most recently on the Paradise Papers and also previously on the Panama Papers, and that has engaged public and political interest in international tax evasion and avoidance.
In Budget 2017, the government announced that it would work with the provinces and territories to examine issues around transparency for legal arrangements and also the collection and verifiability of beneficial ownership information. We have established a working group with the provinces. Canada has particular challenges going down the corporate route – only 10% of Canadian corporations are registered federally, and the rest are distributed among the provinces and territories. Work on that is continuing. This is being led on the federal side by Innovation, Science and Economic Development Canada with the Department of Finance participating.
Budget 2017 also announced that we were going to be looking at enhanced trust reporting requirements to improve the information capacity in this space. We are working at the Department on options with respect to trusts, and hopefully we will have something to report on that in Budget 2018.
Income sprinkling (s. 120.4)
We released the paper in July and the consultation period closed October 2nd. We received over 29,000 submissions and it has generated an unprecedented taxpayer response and media coverage.
The Minister announced in October that we would be proceeding with the income-sprinkling measures. The proposal is to re-release draft legislative proposals later this fall, so we plan to continue work on that to release it as soon as possible.
As to where income sprinkling is, the Minister announced that we would not be proceeding with measures that would limit access to the lifetime capital gains exemption. I have heard questions about the interaction between the LCGE and what might be happening with respect to the tax on split income.
The way I think of this question is whether a reasonableness test would apply to the lifetime capital gains exemption. One thing to mention is that, where the LCGE would be available prior to July 2017, that eligibility for the exemption will be preserved under the revised proposals.
I have also heard questions about the potential application of ss. 120.4(4) and (5). In the Backgrounder that we released in October, the Government indicated that we were aware of potential double taxation issues, and we are trying to work through them and revise the legislative proposal.
I would reiterate that, when talking about a reasonableness test, that we would look at total contributions, including previous contributions of capital or labour and assumptions of risk.
We are trying to minimize the compliance burden, including looking at potential exclusions from the reasonableness test. We are looking at how to simplify the drafting and provide appropriate clarity and guidance on its application.
Our intention is still to have it apply for 2018 and subsequent taxation years. We hope that taking away the application of these measures to the LCGE will help address some of the timing pressures that would otherwise have been applicable to the private sector.
Conversion of income into capital
When the October announcement indicated that we will not be proceeding with the proposals respecting conversion of income into capital, it meant that we will not be proceeding with an amendment to s. 84.1 as proposed in the draft paper; and we will not be proceeding with the proposed new 246.1.
The paper also mentioned that it had recognized that there was an issue with respect to intergenerational transfers. I am sure that this group is aware of the potential application in the context of transferring a business to a child’s corporation as opposed to a third party. This issue arises regardless of what we do with the s. 84.1. We intend is to continue to work on accommodating intergenerational transfers while confronting genuine integrity issues around those.
As to what form that will take, i.e., public consultation or not, our focus right now is on income splitting and passive investment income. We will have to see where we end up with the conversion of income into capital gains.
As the Minister indicated, the Government intends to move forward with measures to address passive investment income, and details of the proposed rules will be released in Budget 2018, including of course greater clarity on coming-into-force and grandfathering issues.
As the Minister had indicated, the idea is to include an annual threshold of $50,000 of passive investment income, which is intended to be roughly equivalent to a million dollars in assets. There will no tax increase on passive investment income below this threshold. Our intention is to ensure existing investments held by corporations, including income on those investments, is protected and that the new measures will apply prospectively.
We are still working through all the design issues – I think this group can appreciate the kind of gyrations we’re going through in trying to develop an appropriate measure dealing with passive investment income – so we are still working on those key design elements and we will be looking at all the planning deferral benefits that arise with respect to passive investment income.
The expectation is that we will have more to say through detailed proposals in Budget 2018.