INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 6, 1997

• 0908

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): Order, please.

Pursuant to an Order of Reference of the House dated Wednesday, October 29, 1997, we are considering Bill C-10, the Income Tax Conventions Implementation Act, 1997. We're on clause 1.

We have before us witnesses from the finance department: Mr. Len Farber, general director, legislation tax policy branch; Brian Ernewein, senior chief, tax legislation division; and Lawrence Purdy, senior tax policy officer, corporate and international tax.

Everyone should have received the briefing material yesterday at committee. If not, the clerk has copies.

With that, I'll turn it over to the finance department to give us a summary of what we have before us.

Mr. Len Farber (General Director, Legislation Tax Policy Branch, Department of Finance): Thank you, Madam Chair.

Bill C-10 implements tax conventions with Denmark, Iceland, Kazakhstan, Lithuania, and Sweden, and amends tax conventions with the Netherlands and the United States. The new conventions deal basically with the OEC model in language, and there are no unusual provisions in any of those tax conventions.

The main issue in this bill, as I'm sure you are all aware, is the protocol with the United States dealing with social security payments. You have a package of material with the various press releases dealing with each one of the conventions, as well as material dealing with the social security protocol with the United States.

• 0910

Rather than go into any particular issue, Madam Chair, I thought it best to open up the discussion and try to get answers to any of the questions that committee members have.

The Chair: Okay.

Are you ready to ask questions, Mr. Schmidt?

Mr. Werner Schmidt (Kelowna, Ref.): Thank you, Madam Chair.

I believe the change or the proposal in the legislation takes the income tax provision back to the protocol arrangement that existed prior to 1996. Is that correct?

Mr. Len Farber: Yes, the social security issue with the United States is applied on a retroactive basis, back to 1996. Refunds with respect to that, once all the information is gathered between Revenue Canada and the U.S. social security people, will have effect from 1996.

Mr. Werner Schmidt: Does this then change the protocol that existed as of 1996, or does it take us back to a regime that existed before that?

Mr. Brian Ernewein (Senior Chief, Tax Legislation Division, Department of Finance): Yes, the effective date of the change under the protocol before this committee today goes back to the beginning of 1996. That means the third protocol that was signed in 1995 to take effect as of the beginning of 1996 will retroactively never have happened.

There is a change between the provisions in place before 1996 and the scheme this protocol would implement, in only one respect. Under both the old system and the proposed system, the resident's country would be the only country in which a person could be taxable on social security. That is, Canadian residents will only be taxable by Canada on U.S. social security payments they receive, and American residents will only be taxable by the United States on any Canada Pension Plan, Quebec Pension Plan or old age security payments they receive.

There is a difference between the protocol under consideration today and the system in effect up until the end of 1995. That's with respect to the amount of income that is taxable in Canada in respect of U.S. social security. Up until the end of 1995, 50% of the amount of U.S. social security received by Canadian residents was included in their income and taxable in Canada. That reflected the maximum rate or a maximum amount of social security that an American resident would be taxable on in the United States. That rule in the United States has changed. Now they tax or include in income up to 85% of the social security income. Because of that change, the old 50% rule has been revised to reflect the new state of law in the United States, and it's now an 85% inclusion rate.

Mr. Werner Schmidt: Okay. The 85% thing was changed because that apparently is a parallel situation between Canada and the United States.

The other question I have is this. Are the contributions that are made by a citizen in the United States to the American social security system taxed, or are those after-tax dollars?

Mr. Brian Ernewein: Under U.S. law, they're contributions after tax. There's not a deduction or credit provided for U.S. social security contributions as there is provided in Canada for Canada Pension Plan contributions, for example.

Mr. Werner Schmidt: That means the parallel structure is not really a parallel structure. So the argument you're using that it's 85% of the benefits in the U.S. and 85% here is really not an accurate comparison. That is not the same situation. Those are very different dollars.

Mr. Brian Ernewein: I'm sorry. What I was describing as the change between the 1995 and the 1997 situation is simply the difference in tax effect of the two agreements. The tax effect of the old agreement was that Canada could tax a maximum of 50% of the U.S. social security payments that Canadian residents received. Under the new rule, 85% of it is taxable.

Mr. Werner Schmidt: You said that once already.

Mr. Brian Ernewein: Yes.

Mr. Werner Schmidt: That's not my question. My request is different.

Jason, do you want to come in on this?

• 0915

Mr. Jason Kenney (Calgary Southeast, Ref.): I'm sorry, I'm just coming in. Mr. Ernewein, you just indicated there's an 85% inclusion rate for U.S. social security payments to U.S. residents. Is that what you said?

Mr. Brian Ernewein: I said the protocol allows us to tax a maximum of 85% of U.S. social security contributions, and that matches the maximum amount—

Mr. Jason Kenney: The maximum. Mr. Ernewein, you didn't say that during your comment. You just said the rate was 85% in the United States, which is misleading, I would suggest, because the average rate is 50%, sir. It's 0% up to the equivalent of about $35,000 Canadian income, and you reach the maximum only at a very high level of income, upwards to $100,000. So to suggest there's parity between the 85% inclusion rate for Canadian residents and the American residents I think is somewhat misleading.

Mr. Brian Ernewein: I believe I did say the rates were up to 50% and now up to 85%. If I did not, I apologize, because that is the system. Before 1995 up to 50% was taxable. We were entitled to tax 50%, even though under U.S. rules it may have been less than 50% that one would be taxable as a U.S. resident. Similarly the 85% rule as the top rate in the U.S. is the governing rate under the new U.S. protocol. I believe the standards are the same.

Mr. Jason Kenney: Right. I understand it's the governing rate under the protocol, but the important thing is that's the top rate in the United States. Would you agree the average inclusion rate for the average U.S. social security recipient is still 50%? Is that not your understanding?

Mr. Brian Ernewein: I don't know what the average rate is. Certainly inasmuch as the most you can be taxed on is 85%, the average rate will be below 85%.

Mr. Jason Kenney: I have information from the Internal Revenue Service that indicates the average rate is 50%. I would be happy to table that. So how do you justify this disparity, this inequity, between the inclusion rates for U.S. social security recipients and Canadian social security recipients?

Mr. Brian Ernewein: Well, in point of fact the answer is that under our residence-based taxation system we should not have an 85% inclusion rate. It should all be taxable at the same rate as Canada Pension Plan income is taxable; that is, fully, at 100%.

Mr. Jason Kenney: But as Mr. Schmidt has pointed out to you, Canadian CPP contributors do not pay taxes on their CPP premiums, whereas U.S. social security contributors are taxed on the front-end contributions. So in effect what you're proposing in this protocol is to double-tax Canadian recipients of U.S. social security payments who have already paid taxes on those premiums when they were working in the United States. Is that not correct?

Mr. Brian Ernewein: No. What we're proposing to do is to change the system around so source taxation no longer governs. There are reasons to support source taxation. Those are the reasons why we put forward a protocol, implemented in 1995, that would have exclusive source taxation. Those reasons are to match the contribution system in the country paying the benefits with the taxation of those benefits.

So yes, that allowed the United States, for example, to have a system whereby it did not provide contribution relief for contributions to the U.S. social security plan, and to adjust its payments possibly to take into account the tax treatment of its social security contributions with the tax treatment of the pay-outs. Similarly in Canada that protocol, that agreement, established in 1995, allowed us to impose our own taxes on old age security payments and Canada Pension Plan payments going to American residents. We could tax those under the changes.

That gave rise to a problem, and the problem is one probably all members are familiar with; that is, the application of a flat-rate U.S. withholding tax rate on all recipients in Canada of U.S. social security, regardless of income level. What happened was that the U.S. imposed a tax of 25.5%. The figure was derived because they took their basic withholding tax rate of 30%, multiplied it by the maximum 85% possible taxation rate that it could apply in the United States, and 85% of 30% is the 25.5% rate all Canadian recipients of U.S. social security were charged.

• 0920

That was a tremendous burden for low-income Canadians, and that's the problem we sought to address. We would have liked to have had the best of both worlds, which is to impose all the taxes we might have without having the U.S. impose this tax on Canadian residents.

The Chair: Mr. Kenney, I'm sorry; your time is up for now.

Mr. Jason Kenney: My time was taken up because he wasn't answering my question.

The Chair: Mr. Kenney, I'm sorry; we've now gone 10 minutes.

Mr. Shepherd, please.

Mr. Alex Shepherd (Durham, Lib.): As I understand it, the 15% that is that portion of social security payments is received by Canadian residents. It's not tax. It's basically trying to recognize the fact that the original premiums possibly were not a tax deduction in the United States.

Isn't that basically the philosophy?

Mr. Brian Ernewein: That's my understanding. I don't know how accurate the level is; that is, the 15%. In many cases social security contributions were very low, and 15%, as I understand it, is even in excess of the amount of contributions.

Certainly in other cases it will not be enough. If you're someone who simply started receiving social security contributions and died a couple of months after you became entitled to it, the two months of payments you got under the social security system were probably not enough even to match the contributions you made over your lifetime. So in that case there should have been 100% deduction.

On average I gather the 15% is somewhere around the mark, or perhaps generous.

Mr. Alex Shepherd: I guess what I'm looking for is some kind of an idea of the numbers of Canadians. We talk about the 81,000 Canadian recipients that are affected by this legislation. If I take into consideration that the current regime is to withhold 25.5% from them, after all the smoke has cleared and we've put this away, what is the percentage of people who will incrementally pay more tax? It must be a very small minority.

Mr. Brian Ernewein: We have, as you say, about 80,000 Canadians receiving U.S. social security. About a quarter of them, 20,000, were U.S. citizens or are U.S. citizens living in Canada and weren't affected by the flat 25% withholding in the United States because they were entitled to file U.S. tax returns and calculate their income on a net basis, pay U.S. tax on a net basis.

Of the remainder it breaks down roughly into thirds, that—

[Translation]

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): Madam Chair, I am trying to follow while the Reform Party member is having a big talk next to me. If he wants to talk, could he do that outside?

[English]

The Chair: Yes, you're right, Mr. Bellemare.

Could we ask you to lower your voices just a bit. It's hard for us to understand the translation.

Please continue.

Mr. Brian Ernewein: Of the 60,000 remaining, the figures break down roughly into thirds for income levels. Those in the first third, the lowest income level, will be beneficiaries under the plan, under the change, receiving most or all of their U.S. social security withholding tax back. They're simply at or below our tax margin and thus benefit from receiving all of that tax back.

The middle third, in rough numbers as I say, will be even under this proposal because the first tax rate applicable in Canada is 17% federally plus about half again as much provincially, roughly a 25% tax rate. That's equivalent to what the U.S. withholding tax is, so for that income band going up to $25,000 or $30,000 Canadian, their withholding was at about the same rate as they would have paid in Canada.

The top third, or slightly less than a third, will see a tax payable in Canada at a rate higher than the 25.5% withholding tax, and that's simply the effect of marginal rates. So for that group potentially there will be some additional tax payable. You are speaking of perhaps a 10% or 15% rate, or a 35% or 40% rate in their case, on the income in question versus the 25% they paid under the withholding tax system by the U.S.

Mr. Alex Shepherd: Let's talk about tax equity and fairness. You have two people. One is receiving old age pension payments in Canada, a Canadian resident, and the other has had a period of time in which they lived in the United States and were receiving this. One is showing their 100¢ on the dollar as income, and the other one is.... We talked about the fact that there was a deduction. But there must be a lot of people who are saying that's iniquitous. My neighbour only has to show 85% of their pension income and I have to show 100%. How do we explain that to those people?

• 0925

Mr. Brian Ernewein: As I noted before, I think the proposal to implement residence taxation, if you were to follow it through, would be to say that the countries of residence rules are the only rules that govern. In that case you would treat U.S. social security payments precisely like Canada Pension Plan payments and you would be able to say to your neighbour that you're taxable on 100% of your Canada Pension Plan income. He should be taxable in Canada on 100% of the U.S. social security contributions.

In point of fact, we did have the 50% rule under the old protocol. The U.S. wanted to maintain some rule equivalent to that, given the changes under their own law, so they sought and obtained from us a limit on our rights to tax to 85% of the income. In exchange for this we obtained from them an agreement that they won't tax any income we pay to U.S. residents who we exempt from tax in Canada. That's in anticipation of any system we might set up that would be an after-tax system of payment, possibly under the seniors' benefit or another system that would have a payment going to Canadian residents, which would not be taxable and would be calculated on the fact that it wouldn't be taxable. If we're going to have that system in place, we wouldn't want the U.S. to tax on top of it. So we've obtained an agreement in anticipation of any possible changes along those lines that they won't tax.

The Chair: Thank you, Mr. Shepherd.

Mr. Crête.

[Translation]

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): First of all, I'd like to congratulate the minister and his officials for correcting speedily the mistake that was made in the first agreement. I think that everybody did a good job on that. I congratulate you on behalf of 1,000 people from my riding who are affected by this and of the 10,000 Quebeckers and 70,000 Canadians who are also affected. So I think that we can congratulate everybody.

I would be ready to go to the clause-by-clause consideration and I would like us to check whether it is possible to have consensus so that we can go to third reading as soon as possible. I'd like to ask the following question. If, for instance, the bill was passed before the end of November—I think this is a reasonable time frame—, could we expect the refunds before Christmas? I know that it depends on the United States passing the legislation, but I would like you to give us some details.

[English]

Mr. Brian Ernewein: Yes, it's a useful question. I know I've been long-winded so far. I'm going to be for one more moment, but it's useful to describe the process we have in place.

Nothing can happen until both countries ratify and implement the agreement. The United States has, fortunately, already passed the provision through its Senate and it's simply awaiting the president's signature, which we don't anticipate being a problem. This action, of course, is necessary for implementation on the Canadian side.

We were concerned that there would be great problems with having Canadians having to apply to the United States on an individual basis seeking tax refunds. It's not that the U.S. bureaucracy is worse than ours, but they'd be getting into a huge bureaucracy for the sake of establishing their entitlement to refunds. To deal with that, Revenue Canada has taken on the task of making application on behalf of Canadians for U.S. tax refunds, and how that's to be done is through the Canadian tax assessments and a review of Canadian tax returns that have already been filed by seniors.

In other words, Revenue Canada has the tax returns already filed by Canadian seniors for 1996. They are going to receive from the United States the information on withholding from social security. They are going to match up that information and recalculate the Canadian senior's total income to see what their Canadian tax bill would be under the terms of the new protocol. If it turns out to be more than the U.S. withholding, more than the 25.5%, they forget about it. For last year and this year there's no retroactive tax increase. If it turns out to be less than the 25.5% U.S. withholding, a cheque will automatically be issued by Revenue Canada to the seniors.

• 0930

Revenue Canada has already received—or within the next couple of days is expecting to receive—the information from the U.S. social security administration that it can match up in order to start running these programs.

Hopefully that means that within a couple or three weeks of implementation of approval of the protocol by both countries, cheques for the 1996 taxation year can be issued. For the 1997 taxation year the withholding that's taking place during the current year can only be assessed once the tax returns are in, hopefully sometime shortly after April of next year.

[Translation]

Mr. Paul Crête: So we could expect two payments: one which should be retroactive to 1996 and another one which would be made as soon as we know the numbers for the 1997 tax. Is that what you are saying?

[English]

Mr. Brian Ernewein: That's precisely right. It will be in two payments, one for 1996, as soon as possible after the protocol is implemented, and then the second sometime after tax returns are filed in the first four months of 1998 and Revenue Canada again receives the information from the United States on the 1997 withholding. Then the 1997 refunds can go in.

[Translation]

Mr. Paul Crête: So if the bill is passed before December 1st, or before the end of November, those payments could theoretically be made before Christmas.

[English]

Mr. Brian Ernewein: We of course can't offer any lifetime guarantee, but we're hopeful that could be done.

[Translation]

Mr. Paul Crête: Madam Chair, I just want to indicate that it is important that the bill be passed as soon as possible in the House. I hope that all the parties will cooperate, because this bill aims at correcting the basic inequity that hurts low-income people.

[English]

The Chair: Thank you, Mr. Crête.

Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): I need to get some definition on something I didn't understand a little bit earlier. When you were talking about the 80,000 people that could be affected, you mentioned that 20,000 are U.S. citizens and that in the meantime there are 60,000 Canadians affected by this.

Mr. Brian Ernewein: There are 80,000 Canadian residents receiving U.S. social security. Sixty thousand of them were subject to the 25.5% flat withholding, and the other 20,000 were not, because although they were Canadian residents, they were U.S. citizens. The U.S. taxes on a citizenship basis, meaning that no matter if they were resident in Canada, the U.S. would still require them to calculate their income and pay tax to the U.S. on an equivalent-to-residents basis. That, for low-income U.S. citizens living in Canada, actually was beneficial in this particular context, because instead of paying a flat 25% withholding, they paid tax at whatever U.S. rates applied to their income band. If they were low-income their U.S. tax bill would be below 25%.

Mr. Walt Lastewka: In follow-up, then, I understood your one-third, one-third and how they were going to benefit and so forth. In the end, between the two methods, my understanding is that it's basically a wash as far as any taxation for the federal government, that it pretty well balances out.

Mr. Brian Ernewein: That's true. In terms of net revenues, we have difficulty estimating with certainty the revenues that arrive from the taxation of U.S. social security because there's no form in the Revenue Canada form that one can program to lift off to find out how much U.S. social security tax is collected. It is our understanding that in terms of net revenues it's possibly $5 million of swing one way or the other, $5 million or $10 million of swing. Just the revenue numbers certainly didn't drive the exercise.

Mr. Walt Lastewka: Thank you.

The Chair: Thank you, Mr. Lastewka.

Mr. Power, no questions?

Mr. Charlie Power (St. John's West, PC): No questions.

The Chair: Mr. Kenney, do you have another question?

• 0935

Mr. Jason Kenney: Yes, Madam Chair.

First of all, we discussed the problems with the third convention, with the flat withholding tax. I gather you meant that was problematic. Perhaps you could explain for us how it was that policy advice was given to the government that the third convention would be beneficial to Canadian social security recipients. How was this very significant error, which has been so prejudicial and harmful to low-income Canadian seniors, made?

Mr. Brian Ernewein: I won't share the advice we rendered, but I can explain what the purpose of the third protocol was attempting to do. It was attempting to match up the taxation of social security payments with the contribution system in respect of social security plans. In particular, in the early 1990s, we instituted a means testing for old age security. If you were a high-income Canadian resident receiving old age security, there was a tax imposed to effectively recover all of the old age security. It meant that no net payments under the old age security system were payable to you above a $75,000 or $80,000 income figure.

The pre-1995 protocol had the effect of saying that as far as social security taxation is concerned, only the residence country could tax. In other words, Canada could not impose that same means testing on old age security payments that went to U.S. residents.

You have to choose your poison, in a sense, so we thought it was important to obtain the right to impose that tax on U.S. residents at that point in time. Also at that time, the U.S. withholding tax rate on the converse situation—that is, for U.S. social security payments coming to Canada—was at 15%. Since that time, the U.S. withholding tax rate has gone up to 25.5%, and I think that has certainly aggravated the problem. It's not clear to me if we would have been here or would have renegotiated if the 15% rate had been maintained.

Mr. Jason Kenney: Could I ask whether or not your department projected or estimated the impact that the third protocol would have on Canadian resident recipients of U.S. social security benefits? Did you project what impact this would have on their incomes?

Mr. Brian Ernewein: There were no revenue numbers run on that, if that's the question. We were aware that we were conceding to the U.S. the right to impose its taxes on Canadian recipients of U.S. social security, at the same time that we were gaining the right to impose the tax on American recipients.

Mr. Jason Kenney: So perhaps your failure to run those numbers may have led to the policy error that we're trying to correct today.

Mr. Brian Ernewein: I describe it more as a matter of choices. We are moving to residence taxation because greater importance has been assigned to the question of the tax level faced by low-income seniors. We've traded that for the right or the ability to impose our tax on others.

Mr. Jason Kenney: Given that we didn't run the numbers with respect to the impact on Canadian residents under the third protocol, have we run the numbers to assess the impact on Canadian resident recipients of U.S. social security benefits with respect to Bill C-10, with respect to this fourth protocol?

Mr. Brian Ernewein: When you say “run the numbers”, do you mean whether or not we do pro forma examples of different-level taxpayers?

Mr. Jason Kenney: Yes.

Mr. Brian Ernewein: Yes, we have.

Mr. Jason Kenney: You didn't do this under the third protocol.

Mr. Brian Ernewein: We recognize the effects of allowing the U.S. to impose withholding tax. It was a 15% withholding tax at the time, which meant that the U.S. had the right to tax all payments coming out to Canadian recipients at 15%. That number we knew. I don't recall having done calculations with respect to particular taxpayers, but we knew the numbers, so we could have.

Mr. Jason Kenney: Right. By the way, I'm not pettifogging. This is an important point, and I think we need to know why this mistake was made.

• 0940

If you have made projections as to the impact this protocol will have on Canadian residents, can you tell us—and I think you answered a question about what the difference would be for Canadian residents between the 25.5% withholding tax and the 85% inclusion rate proposed—what the difference is between the status quo ante, i.e., the 50% inclusion rate in the second protocol and the 85% inclusion rate proposed in the fourth protocol? Can you tell us what the differences will be in terms of taxes paid by Canadian-resident recipients of benefits?

Mr. Brian Ernewein: If you can tell me your assumptions of income levels and particular taxpayers' entitlements to tax credits, we can give you a number, but the brief answer is that 50% of the benefit was taxable under the pre-third-protocol system, and 85% will be taxable under the new system.

Mr. Jason Kenney: You'd suggested at an earlier point in the hearing that some people will end up paying more taxes under the fourth protocol as opposed to the 25.5% withholding tax. Is that correct? Some people will pay more taxes in this proposed protocol as opposed to the previous one?

Mr. Brian Ernewein: Yes, the higher-income will.

Mr. Jason Kenney: Can you estimate what percentage of these taxpayers will see their total taxes on social security go up from the 50% inclusion rate, the status quo ante, to the 85% proposed today?

Mr. Brian Ernewein: Those whose taxable income puts them into tax territory—that is, above $10,000 or $12,000—will have a different inclusion rate under the new protocol than under the pre-third protocol. They'll all be paying less than similarly situated Canadians receiving Canadian benefits, but again, the effect of it is that there'll be 85% inclusion rate under the terms of the new protocol as opposed to the pre-third-protocol situation of 50%.

Mr. Jason Kenney: They'll all pay more than they did.

Mr. Brian Ernewein: Those who are above the basic thresholds, yes.

The Chair: Thank you, Mr. Kenney.

Mr. Lastewka.

Mr. Walt Lastewka: I want to go back to when the U.S. changed from 15% to 25.5%. Do we have any information on what was the reasoning here? We made an agreement and had a certain understanding of parameters. Then they changed from 15% to 25.5%. Do we have any information on why they changed, on why they decided to do that?

Mr. Brian Ernewein: Yes. My understanding is that they thought the 50% exclusion, the other half, in respect of contributions to U.S. social security was unjustifiable. In fact, most of the income coming out on your U.S. social security cheque represented payments that you didn't make yourself but were rather the government's contributions or support.

I should be clear that we negotiated this on the basis of there being a 15% withholding tax in place, but we did not limit the U.S.'s right to tax at 15%. Indeed, we were proposing a 100% tax for high-income old age security recipients in the United States, so we could not have asked them to limit their tax rate to 15%.

Mr. Walt Lastewka: No, but I want to make sure it was understood—and I understood Mr. Kenney's question very clearly—that the U.S. did change from 15% to 25.5%.

Thank you very much, Madam Chair.

The Chair: Thank you, Mr. Lastewka.

Mr. Shepherd, you had a brief question?

Mr. Alex Shepherd: Getting back to the whole issue of income inclusion—and I know we're fixated on the U.S., because that's what we're dealing with, that protocol—if we talked about other countries, such as European countries, are we fixated on whether they in fact have a tax deduction in their country for their premiums, and any kind of a pension plan?

I mean, it must be very difficult for you people to know how these things were handled from a tax law in their own individual countries.

Mr. Lawrence Purdy (Senior Tax Policy Officer, Corporate and International Tax, Department of Finance): The easiest way to accommodate the different treatment of contributions under different social security systems is to tax the benefits paid in the source country.

In other words, if you have a primary concern that deductions of contributions are matched by taxation of benefits, or reciprocally, that a non-deductibility or non-credit for contributions is matched by non-taxability of benefits, the best way to accommodate that is by a system of source taxation of the benefits paid out, so the country that determines the rules for the contributions determines the rules for the taxation of the payments.

• 0945

Mr. Alex Shepherd: When there's doubt...I'm just thinking of the nuances of all of this. Generally speaking, wouldn't it be your orientation to simply tax 100% in Canada?

Mr. Lawrence Purdy: Certainly, if you opt for a system of residence state taxation, it is the norm to tax—

Mr. Alex Shepherd: Isn't the 85% inclusion a concessionary thing we're giving because of the U.S.?

Mr. Lawrence Purdy: Yes, it is, and I think this is an important point to make. When Mr. Ernewein was commenting earlier on the policy basis for the 15% exclusion, he was speaking of the policy basis in United States tax terms where, for their own domestic reasons, they choose not to tax social security benefits paid to United States residents on a full inclusion basis. But that kind of consideration in a foreign tax system doesn't normally effect how we in Canada tax foreign-source income. Generally speaking, we treat the foreign-source income the same way we treat the Canadian-source income. Certainly in an instance like this, where the proposal is to move to a system of residence-based taxation with the country of residence taxing the benefits, it would be the norm to include the full amount of the benefit from the foreign country in taxable income.

Mr. Alex Shepherd: Mr. Kenney keeps talking about this being a mistake. Do you see this as a mistake?

Mr. Lawrence Purdy: I have to say I think it comes down fundamentally to a choice about how you want to treat cross-border benefits of this nature. You can opt to tax them in the source country, which gives Canada the right to tax U.S. recipients of Canadian benefits the same way we tax Canadian recipients of Canadian benefits, or you can choose to tax them in the residence country, which permits Canada to treat the Canadian resident recipient of the U.S. benefit the same as the Canadian resident recipient of the Canadian benefit.

I think there are sound policy arguments that can be made in favour of either of those, and the experience we've been through on this demonstrates that. The arguments in favour of a source-based system dominated in the third protocol, and the arguments in favour of a residence-based taxation system have come to be appreciated more fully and are driving this.

The Chair: Thank you, Mr. Shepherd.

Are there any other questions.

Mr. Schmidt.

Mr. Werner Schmidt: I have one question about the disability pension. Does that come into this protocol at all?

The Chair: You mean the U.S. social security disability?

Mr. Werner Schmidt: Yes.

Mr. Lawrence Purdy: Yes, it does. Benefits paid under the U.S. social security system to persons with disabilities are treated under this protocol in the same manner as retirement benefits.

Mr. Werner Schmidt: Was that the case before as well?

Mr. Lawrence Purdy: Yes.

Mr. Werner Schmidt: Is that what's happening right now?

Mr. Lawrence Purdy: Yes, it is.

Mr. Werner Schmidt: So this doesn't change that at all.

Mr. Lawrence Purdy: It doesn't change it in the sense that disability benefits are still treated the same as retirement benefits.

Mr. Werner Schmidt: Was that the case before this protocol was in place?

Mr. Lawrence Purdy: Yes, as far as I know.

Mr. Werner Schmidt: Was it there in protocol 2 as well?

Mr. Lawrence Purdy: In the pre-1996 system the rule for social security benefits was, as far as I know, the same in terms of its coverage. It covered both retirement benefits and disability benefits.

Mr. Werner Schmidt: But I'm talking about taxation.

Mr. Lawrence Purdy: Yes, I understand that. The pre-1996 rule in the tax treaty provided that the source country could not tax social security benefits at all and the country of residence could include only 50% of the benefit in taxable income.

As far as I understand, that rule applied to all social security benefits including those provided to persons with disabilities.

Mr. Werner Schmidt: Thank you.

The Chair: Thank you, Mr. Schmidt.

I just have one brief question. We've had some discussion here about residence and taxation, and it comes down to choices. Every country has different choices, though, and in Canada we choose to have a full-funded health care system, which they don't have in the United States. That explains some of the exemptions in its tax laws, especially for U.S. social security. So although we allow people to live in Canada and work in the United States, and there are benefits from that, we also entitle them to every Canadian service.

Correct me if I'm wrong, but they pay their taxes first to the United States and any tax they pay to the United States they deduct from what they pay to Canada. They pay a lesser amount of tax in Canada, yet they're entitled to all the same Canadian benefits, including post-secondary education and health care. This protocol change will actually ensure that all people living in Canada and receiving U.S. social security benefits, the majority of whom are seniors, but there are also the disabled, spouses, and many children.... In particular, the health care system should benefit in Canada, because now everyone will be paying something toward that through our taxation system.

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Mr. Lawrence Purdy: I think that's an important point certainly from a policy standpoint. It also points out the uniqueness of the Canada-U.S. relationship, which, as the high level of interest shown in this protocol demonstrates, is a uniquely important relationship for large numbers of Canadians.

Take, for example, the cross-border worker you described or the person who spends his or her working career in the United States and then retires to Canada. That relationship, I think, is an important consideration in making the choice that I described earlier between source taxation and residence taxation.

The Chair: Thank you very much. I would also like to point out that Mr. Crête mentioned that the second payment for 1997 could be made after April 30. I know some people file their income tax sooner than April 30. Some start to file in February, as soon as the forms are available. So I would suggest to the Department of Finance that you talk to the Department of Revenue. Ask them for people to be able to get their refunds for 1997 as they file, not after April 30.

I understand there's some information you need to have from the United States for 1997, but I will personally—I'm sure many members of this committee and of Parliament will also do this—write the respective agency in the United States to ask that they send that information as quickly as possible. That's because we have some very serious situations in Canada with people being threatened with removal from nursing homes, and many disabled people and children need this money to go to school.

I would like to move to clause-by-clause now.

Mr. Jason Kenney: I move, before we go to clause-by-clause, that this committee consider hearing other witnesses. I have received notice from several Canadian citizens and taxpayers who desire to speak to this bill at committee to describe the impact it will have on their livelihoods. I move that this committee receive and hear witnesses to speak to Bill C-10.

The Chair: Mr. Kenney, when this committee was informed that this bill was coming before it on Tuesday, at the earliest time I was able to find I spoke to every opposition party member and the government members. Everyone at that time, as late as yesterday, was still in agreement that we would not call witnesses because of the timeframe of this bill. There is adequate time for debate in the House, both at second and third reading, to have these discussions and representations made on behalf of witnesses.

Many people have contacted and met with many individual members of Parliament. I didn't think it was appropriate, after consultation with everyone, for us to start to pit a disabled Canadian against a wealthy Canadian.

Mr. Jason Kenney: You're speaking on my motion. That's very interesting. What if you encourage other debate on the motion?

The Chair: Sure. Debate is welcome. I'm just telling you what the rationale was.

Mr. Jason Kenney: You're debating; you're not sharing. That's fine, however.

The Chair: Mr. Peric.

Mr. Janko Peric (Cambridge, Lib.): I believe there is a steering committee.

The Chair: Yes.

Mr. Janko Peric: Was there a decision made by the steering committee to go clause-by-clause today?

The Chair: Mr. Peric, this decision was made by individual consultation with representation on the steering committee, because the steering committee met before this bill was referred to this committee. It was referred by unanimous consent of all the House leaders. If Mr. Kenney has difficulty with why it's at this committee, he should take it up with his House leader.

Mr. Alex Shepherd: I totally object to the delay of this bill. This has been going on much too long.

We have very significant low-income seniors. I have them in my riding; I know you have them in yours. There are many others. Maybe it doesn't concern Mr. Kenney, but these people need this money. The longer this thing is delayed, the more severe that situation is to them. I think we just better continue on with this process.

I think it's terrible that the Americans are progressing on this a lot more quickly than we are. Yet we are the ones who stand to gain out of this.

The Chair: Thank you, Mr. Shepherd.

Are there any other comments? Mr. Kenney.

Mr. Jason Kenney: I would like to speak to the motion before the question is called.

I resent the suggestion that somehow I and my party are responsible for the delay of this bill. We didn't create the problem in the first place, the government did. We didn't delay bringing forward this legislation until after the election, the government did. We haven't waited three weeks since the debate in the House to bring this to committee, the government did. So if you have a complaint to make about the progress of this bill, it's not on this side of the table.

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The reason I've made this motion, Madam Chair, is precisely because I'm concerned about the comments I'm hearing from Canadian taxpayers, low- or middle-income seniors at the very least, who are concerned that this is going to very significantly impair their livelihoods. I simply think those people should have an opportunity to express their views.

We gave notice to the finance committee clerk that we would like witnesses to be heard, and then this thing got shuffled unexpectedly and rather hurriedly to this committee. We did what we thought was appropriate, and I don't think it's untoward for opposition members of Parliament to call for witnesses to be heard before a committee. I can't understand why such great exception would be taken to such a proposal; it's called democracy.

The Chair: Mr. Peric.

Mr. Janko Peric: Madam Chair, I'm not aware that Mr. Kenney is a full member of this committee. I'm a little bit disturbed. First of all, this morning Mr. Kenney came late to this committee, and now....

I respect your motion. Let's have a vote on this motion.

The Chair: We have to have some other comments, Mr. Peric.

Mr. Crête.

[Translation]

Mr. Paul Crête: I would like to remind you that we got the protocol in August and that the agreement between our minister and the American minister was made within the time lines. The only thing people in my riding want, is that the bill be passed as soon as possible. If somebody happens to act to prevent the retroactive payments within reasonable time lines, be sure that all those who benefit from the pension in my riding will know who is responsible.

[English]

The Chair: Thank you, Mr. Crête.

Ms. Jennings.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): I didn't come late to the meeting, and as the member of the Bloc just mentioned, the protocols have been available since August. I think if the members of the official opposition felt it was important that there be witnesses other than government civil servants to address this bill, they've had ample time to raise the issue, and it has not been raised. So I agree with Mr. Peric; let's move the question and vote.

Mr. Jason Kenney: I have a point of order, Madam Chair. I'd be happy to go to the question, but I just want to clarify again that I am a member of the finance committee. It was our understanding that this was coming before the finance committee and we notified that we would like to have witnesses called.

The Chair: Mr. Kenney, that's not in the motion.

Mr. Jason Kenney: It is in so far as I've been misrepresented. I just want the record to be clear that, as I said earlier, we did notify the finance committee of our desire to call witnesses.

The Chair: Mr. Kenney, just to clarify the record, it's my understanding, from conversations I've had with our House leader, that the finance committee said they could not hear this bill until after November 30, 1997. As Mr. Crête explained, there is a time line on this. The finance committee said they were sending it back to the House. So if you have a difficulty with what the finance committee did, you should talk to your representative on the finance committee. The House leaders all agreed, including the Reform leader, that it come before this committee. We have made a decision, as members of this committee. We respect your opinion, but we now have a motion before us that I believe we should vote on. We've now heard it.

I'm calling the question on Mr. Kenney's motion. I will read it, as best I have it: that the committee hear further witnesses on Bill C-10 before proceeding to clause-by-clause consideration of the bill.

(Motion negatived)

The Chair: We'll now move to clause-by-clause.

I would propose first that consideration of clause 1 be postponed pursuant to Standing Order 75.(1). I will now propose that we proceed to the clauses that do not have amendments. When we reach a clause that has an amendment, we will stop for that clause. If I have unanimous consent, shall clauses 2 through 33 carry?

(Clauses 2 to 33 inclusive agreed to)

(On clause 34)

The Chair: We now have an amendment before us on clause 34. Do I have someone to move that amendment? Mr. Kenney.

Mr. Jason Kenney: Madam Chair, I move that Bill C-10 in clause 34 be amended by replacing line 5 on page 7 with the following:

Protocols set out in Schedules II, III and IV and in Schedule V, with the exception of the provisions of Article 2, Paragraph 2 of Schedule V.

The Chair: I understand there's discussion on that amendment. Ms. Caplan.

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Ms. Elinor Caplan (Thornhill, Lib.): My question is of the witnesses that are before us.

I would like to know what the impact of this amendment would be on the legislation that is before us. It's my understanding that the effect of this would be to nullify the agreement and that the benefits we've heard about for those low-income residents of Canada who are at the present time anxiously awaiting the passage of this legislation, because it will significantly improve their tax situation, in fact would be dramatically hurt by this.

Could you just clarify for us what the impact of this amendment by the Reform Party is?

Mr. Brian Ernewein: I believe it would have that effect, if I'm reading my cross-references correctly. What this would do is wipe out of the protocol to the Canada-U.S. tax treaty, the principal provision dealing with the taxation of social security income, which would restore.... Assuming we would be able to have ratification of the changed agreement, because the U.S. has approved an agreement different from the one that's proposed to be amended, it would eliminate the change with respect to social security and retain the system we've had since the beginning of 1996. So the U.S. would impose its 25.5% withholding on all Canadian recipients of U.S. social security.

Ms. Elinor Caplan: I just want to be clear. So this amendment not only nullifies the agreement but also would have a serious detrimental effect on low-income Canadian residents who are expected to benefit by the agreement that is in this legislation. Secondly, in effect this amendment would undo all of the negotiations, I guess, with the United States for fairer treatment of residents in Canada.

Mr. Brian Ernewein: The effect of it is to maintain the status quo. That's right. The 25% withholding would continue to be the rule. There would be no refunds because there would be no authority for refunds.

Ms. Elinor Caplan: Madam Chair, on behalf of not only the residents of Thornhill but also low-income, disabled Canadians, I find this amendment is unsupportable.

Mr. Alex Shepherd: To clarify, as I understand it essentially the Reform Party's amendment is basically to protect 25% of the 80,000 people we're talking about and to make the other 75% worse off. Is my understanding of the interpretation right from a fiscal position?

Mr. Len Farber: I think that's right, because the withholding tax is a final tax and therefore at 25% those at a higher marginal rate would get that benefit. So in terms of the statistics you just quoted, I think that's right.

The Chair: Mr. Kenney, did you wish to speak to your motion?

Mr. Jason Kenney: Yes, Madam Chair.

The effect of this motion would be to essentially nullify this section of the protocol. We propose to do so in the name of the many thousands of Canadian seniors who will be detrimentally affected by this bill.

I would like at the outset to make clear that we do not support the 25.5% withholding tax included in the third protocol. We think it's unfortunate that the government agreed to that in the first place. But, as I pointed out in debate at second reading, we must be sure that we do not repeat the same kind of error as we're trying to correct today.

When the third protocol was agreed to, apparently this Parliament didn't fully consider the ramifications for all seniors, and hence the difficult circumstances many people find themselves in today.

• 1005

We believe, and I think the evidence makes it clear, many thousands of Canadian seniors...in fact as Mr. Ernewein agreed under testimony, every senior who pays taxes on social security benefits will end up paying more taxes under the protocol we're examining today than they did under the status quo ante under the 50% inclusion rate. So essentially what we're agreeing to if we support this bill without this amendment is to raise taxes on all the Canadian residents who receive U.S. social security benefits and who pay taxes. I think that is cause for concern.

I have received evidence, for instance, from a man who won't be able to appear before this committee now, Mr. Farrel Mock, from the Windsor area, who is legally blind and who has recently undergone a liver transplant. He has high medication costs. He was hit desperately hard by the 25.5% withholding tax. He wants that problem to be corrected, as do I. But he also indicates that under the 85% inclusion rate proposed in the fourth protocol his financial situation is going to deteriorate even further.

Mr. Mock is not a high-income senior. He's not the idle rich. He's a middle-income senior who relies on his social security payments, which he worked for and paid into and which he paid taxes on at source.

Seniors like him...and I have the case of an elderly lady from London, Ontario. She doesn't want her name used. She is a recipient of a widow's pension in her U.S. social security benefits. She was deeply affected by the 25.5% withholding tax. She wants the retroactive change to be made, but she doesn't want it to be made with an 85% inclusion rate that is going to impair further her very tight budget, her fixed income.

It's all fine and well for the members opposite to play partisan politics and suggest this amendment is about—

Mr. Walt Lastewka: Madam Chair, I object.

Mr. Jason Kenney: —I'm speaking to my motion; it's a point of debate—about protecting the idle rich and so on. That's just nonsense. I wouldn't be here proposing this motion and we wouldn't be opposing this bill if we weren't seriously and sincerely concerned about the circumstances of people like this, who now won't be allowed to air their views before this committee.

That is why we're proposing this amendment. A mistake was made before, we took the advice of the department before, without considering the impact it would have on all seniors. We made an enormous mistake again. I just call on us to take pause. That's why there is this amendment to consider the impact it has on all Canadian seniors, who will pay more taxes under this bill. I propose we send this back to the drafter of the protocol so Canadian seniors get a fair shake and not a shakedown and the low-income people who are counting on their retroactive payments get them as soon as possible.

The Chair: Mr. Lastewka.

Mr. Walt Lastewka: Madam Chair, I would like to vote on the amendment before us. I'm personally very disappointed that we're now entering partisan politics into the committee. This committee has been out of that and worked very effectively on looking at the individual items on the table. It's Mr. Kenney who has brought partisan politics to this committee. He wants it both ways, ready for his news releases. He wants to be able to say errors and everything else, but he doesn't want to talk about other items, such as U.S. benefits and changes that were made by the U.S. on the withholding.

Mr. Kenney, I respect the people in the Reform Party who come to this committee, who talk about the issues, who debate the issues, without adding all the political rhetoric you have now entered into this committee.

The Chair: Mr. Lastewka, we should try not to reflect on personal members of this committee.

Mr. Dubé.

[Translation]

Mr. Antoine Dubé (Lévis, BQ): I would personally ask for the question.

[English]

(Amendment negatived)

(Clause 34 agreed to)

(Clause 35 agreed to on division)

(Schedules 1 to 7 inclusive agreed to on division)

• 1010

The Chair: Shall the preamble pass?

Some hon. members: Agreed.

The Chair: Shall the title pass?

Some hon. members: Agreed.

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

Some hon. members: Agreed.

The Chair: Shall the bill be reprinted?

Some hon. members: Agreed.

The Chair: Thank you. We'll adjourn to the call of the chair.