[Recorded by Electronic Apparatus]
Wednesday, April 9, 1997
.1612 
[Translation]
The Chairman (Mr. Jim Peterson (Willowdale, Lib.)): Let us start the discussions,
[English]
but we cannot vote until we have two more people.
With us from the Department of Finance, though, are Len Farber and Brian Ernewein. Thanks for being here. Could you just give us a very brief overview before we go to questions, please,Mr. Farber?
Mr. Leonard L. Farber (Director General, Tax Legislation Division, Department of Finance): Yes, Mr. Chairman. Thank you very much for having us here.
The purpose of Bill C-37 is to implement income tax conventions and agreements with Russia, signed in 1995; South Africa, also signed in 1995; Tanzania, signed in 1995; India, signed in 1996; and Ukraine, also signed in 1996. This bill was tabled in the House of Commons on May 17, 1996, and was referred to the House Standing Committee on Finance on June 17, 1996.
To my knowledge, Mr. Chairman, all of the countries that are party to these agreements have passed the required legislation to put the respective treaties into force. All of the treaties take effect on January 1 of the year following the year of entry into force, except for the one with South Africa. Its provisions are effective from the first day of the third month following -
[Translation]
The Chairman: I apologize. We have a translation problem. For the smooth running of the hearing, it might be better to start with the vote in both Official Languages, without any translation. If you are agreed, we could proceed. We have abundantly discussed this matter and we know it by heart.
Our clerk has become very conservative.
.1615
[English]
I am only the chair. It's up to the members to decide if they would like to have the votes before we hear the witnesses or after.
Do we have any idea how long it will take to fix this thing?
A voice: No. A technician is on the way.
The Chairman: Have you tried kicking it very hard?
Some hon. members: Oh, oh!
The Chairman: Mr. Grubel, would you like to vote on this before we hear about it?
Mr. Herb Grubel (Capilano - Howe Sound, Ref.): Yes, I would be happy to cooperate with my chairman.
[Translation]
The Chairman: Mr. Pomerleau, perhaps we could hold the vote.
[English]
Barry, maybe you could tell us when we'll be seeing the finance bill for budget implementation.
Mr. Barry Campbell (St. Paul's, Lib.): Mr. Chairman, if you were to check the transcript of our last meeting, which I'm sure the clerk has handy, you could read what I said on that occasion. Nothing has changed since then. Therefore, you will see those bills, hopefully, given the usual cooperation we anticipate from all sides of the House, late this week or early next week.
In fact both bills will be debated in the House tomorrow: the 1997 Budget Implementation Act and the 1996 Income Tax Act measures. We hope for a very limited debate so we can refer them quickly to committee and people can get to work. I'm hopeful that in light of the budget debate we've had stretching over many days, the Budget Implementation Act debate will not even use up the three hours that will be allotted to it tomorrow.
The Chairman: Is there any opposition to any of these budget measures?
Mr. Barry Campbell: Not from this side of the table, Mr. Chairman.
The Chairman: Well, that's unusual.
Mr. Barry Campbell: But you might wish to ask that question of our colleagues on the other side of the table.
Mr. Herb Grubel: Which bill?
Mr. Barry Campbell: The Budget Implementation Act and the 1996 tax measures.
Mr. Roger Pomerleau (Anjou - Rivière-des-Prairies, BQ): That's Bill C-92 and Bill C-93?
Mr. Barry Campbell: I don't know the numbers on them yet. They sound right.
So you're not going to put up any speakers tomorrow; we're going to go very quickly?
Is Loubier here?
Mr. Roger Pomerleau: I will speak, but I speak faster than Yvan.
Mr. Barry Campbell: Yes, you do. This is true.
.1620
Herb, you couldn't possibly have anybody else in your party who wants to stand up and talk about the 1997 budget, could you, after all those days of debate?
Mr. Herb Grubel: I'm completely out of the loop.
Mr. Barry Campbell: Okay.
The Chairman: I have another possible suggestion; that is, we could ask the translators to come here and either translate simultaneously with an individual... We would forgo the opening statement by our officials, but we could go immediately to questions.
I refuse to conduct any meeting that isn't bilingual, but the translation need not necessarily be simultaneous for every person.
[Translation]
I suggested that the interpreters sit by the side of those of us who require simultaneous interpretation, instead of having to translate all the interventions for everybody, which they could perhaps do later. It's mere suggestion.
The Clerk of the committee: If the interpreters are agreed.
.1625
The Chairman: You could perhaps ask them.
A voice: Do our guests speak French?
A voice: A little.
A voice: The interpreters should be present.
The Chairman: Agreed.
[English]
Mr. Farber, maybe you'd be good enough to just continue those eloquent remarks you began, please.
Mr. Farber: Thank you very much, Mr. Chairman.
The purpose of this bill is to implement income tax conventions or agreements with the following five countries: Russia, whose agreement was signed in 1995; South Africa, 1995; Tanzania, 1995; India, 1996; and the Ukraine in 1996. The bill was tabled in the House of Commons on May 17, 1996, and referred to this committee on June 17, 1996.
To the best of my knowledge, Mr. Chairman, all the countries that are party to these agreements have passed the required legislation to put the respective treaties into force. All the treaties will take effect on January 1 of the year following the year of entry into force, except for South Africa, for which all the provisions are effective from the first day of the third month following entry into force, and the Ukraine, for which the withholding provisions in the treaty take effect from the 60th day after the day of entry into force.
Mr. Chairman, the two main objectives underlying this treaty bill are the avoidance of double taxation and the prevention of fiscal evasion with respect to tax on income. The treaties are largely patterned on the model double taxation convention, according to the OECD, and follow very closely that model convention.
The treaty bill before you deals with all the rates of withholding, as well as other provisions that have been bilaterally agreed to. There's no issue that has come to our attention that is controversial in any one of these treaties and that to a significant degree updates our treaty provisions with these countries according to budget announcements that were made in 1992 with respect to reducing the floating tax rates.
Mr. Ernewein and I will be very pleased to answer any questions any committee member has.
[Translation]
The Chairman: Thank you very much. Mr. Pomerleau, do you have any questions?
Mr. Roger Pomerleau: First of all, should not Mr. Jean-Marc Déry be present as an invited witness?
The Clerk: I was told sure that he would be coming.
Mr. Roger Pomerleau: He's the Head, Tax Treaties. I would like to ask him a few questions.
The Chairman: I can assure you that we have two true experts who have been working in this area for a long time.
Mr. Roger Pomerleau: We are talking here about new conventions with a number of countries. Generally speaking, how long does it take to negotiate a new convention when there is no previous convention with the country? Are you called upon, at times, to renegotiate existing conventions?
.1630
[English]
Mr. Brian Ernewein (Chief, Corporate and International Tax, Department of Finance): In answer to the first question of how long it takes to negotiate a tax convention, it can be as short a period of time as one week, if both parties arrive and have fairly common goals or if there's been an exchange of correspondence before that and if the issues are fairly limited. That's an abnormally short period of time, and of course that ignores the processing required. Well, it's more than processing. The ratification procedure is part of this here and in the other country as well.
Reaching agreement with other countries can involve a matter of years. On average there would be a timeframe of probably two or three years between the first agreement or approach of one country to another to enter into tax treaty and negotiations and the implementation of that agreement.
[Translation]
Mr. Roger Pomerleau: We are talking about new tax conventions. During the last five or ten years, has Canada had to renegotiate existing conventions, apart from these?
[English]
Mr. Ernewein: Yes, it has. These are new tax treaties, although with respect to South Africa there was a treaty between the mid-1950s and the mid-1980s. This represents a new treaty replacing the treaty terminated with South Africa about ten years ago. Also with respect to Russia and Ukraine, those treaties replace a treaty we had with the former U.S.S.R.
In direct answer to your question, yes, we do renegotiate treaties. We're not prescient. Changes arise that require us to seek changes to the terms of existing treaties. The same occurs with respect to other countries. Recent examples are current negotiations with the United Kingdom and a recent agreement with France. Indeed, particularly as a result of reducing or withholding tax rates on some dividends from the prior rate of 10% to our current announced rate of 5%, we have renegotiated or are in the course of renegotiating treaties probably with a dozen or more countries for which treaties are already in effect.
[Translation]
Mr. Roger Pomerleau: I note, as Mr. Farber said, that the fiscal conventions that we are studying today are based on the OECD model and follow it rather closely. In some previous fiscal conventions, for example, the one between Canada and the Bahamas, we did not directly follow the OECD model. Do you intend to update these conventions? Will the existing convention with Barbados be eventually updated and also based on the OECD model?
[English]
Mr. Farber: I don't believe we have a treaty with the Bahamas. I think the member is talking about Barbados. I think I understand the nature of the question.
Certainly in the context of any renegotiation we would look at certain provisions that Barbados has in place with a view to updating it according to the OECD standard. You should be aware that underlying the issue the member is raising is the question of tax competition by certain tax haven countries. The OECD has launched a special session wherein member countries that are participating in the session are reviewing issues of tax competition worldwide and attempting to put forward a set of criteria and standards that OECD member countries would abide by. Hopefully we'll find those standards ending up in the model convention.
.1635
There have been a number of meetings to date, and we are participating very actively in that special session. We are helping in the drafting of some of the papers and we are involved in the working group. We are hopeful that some consensus will come about from that special session such that there will be cooperation, at least amongst OECD countries, with regard to how to deal with issues of tax competition in a worldwide context.
With that in mind, and with those standards put in place at the OECD, I believe it will be far easier for countries to abide by a set standard and not have that type of tax competition - which has been prevalent - in attracting businesses to the various tax haven types of countries.
[Translation]
Mr. Roger Pomerleau: Are you planning to hold a study session on the subject in the future? Do you think that there really is an opportunity to standardize tax competition in those countries and, if so, when do you think it could be done?
[English]
Mr. Farber: Mr. Chairman, I certainly can't speak on behalf of the OECD or about where the OECD is in its working group and what recommendations will come forward. What I can say,Mr. Chairman, is that from the very inception, Canada does not participate in tax treaty negotiations with countries that don't have taxation systems somewhat comparable to our own.
The treaty with Barbados that the member is referring to is a treaty that by and large was already in place. Barbados had put forward certain provisions under their IBC legislation, their banking centre legislation, in order to attract financial services to Barbados at fairly preferential rates of tax. It certainly is a concern of ours. We have tolerated that. We have not tolerated any extension beyond that.
You will recall that as a result of the Auditor General's report in 1992 or 1993 where he referred to certain tax haven provisions and certain of the measures in the income tax regulations that permit certain countries, particularly in the Caribbean, to benefit from certain aspects of our taxation system, we gave notice to all those countries already on the list of countries that had gained this preferential treatment that within a two-year period of time they would be removed from the list unless they completed negotiations for a double taxation treaty with Canada.
A number of the Caribbean countries fell off that list because either we refused to negotiate with them for the simple reason that they didn't have an effective taxation system, or at least not one anywhere near comparable to ours...and with respect to certain provisions that Barbados had with regard to captive insurance companies and other financial services other than the ones already covered by their IBC legislation, it would not be eligible for what we call exempt surplus treatment.
From that perspective, we have certainly gone a long way in stabilizing the system vis-à-vis the benefits that other countries can get out of provisions that were in the Income Tax Act or the regulations before that time and certainly from here on in in terms of negotiating with countries. While we still have ongoing discussions with the Organisation of Eastern Caribbean States, we have not at this point entered into any formal negotiations, for all the reasons I have just given you.
[Translation]
Mr. Roger Pomerleau: We know that fiscal competition favours Barbados vis-à-vis Canada. Has any Canadian organization ever tried to assess our cost for not being on a level playing field with the other countries with which we sign OECD type conventions? How much does it cost us?
.1640
[English]
Mr. Ernewein: If I understand the question correctly, it's about the competitive effects of the Barbados tax system versus those of the Canadian tax system.
Mr. Roger Pomerleau: Yes.
Mr. Ernewein: That is in fact one of the questions this tax competition project that Mr. Farber has referred to is looking at. In our view, it's not an issue of Barbados in particular. It's an issue of the effects of other countries with fiscal regimes that, through low taxes, attempt to attract businesses to those countries that would not otherwise locate there for commercial reasons.
That work at the OECD has not attempted to operate on a country-specific basis. It's attempting to establish, first of all - although many of us believe it doesn't need to be established - that tax competition is harmful, that you can be taking on a beggar-thy-neighbour approach that in the long run is not good for the country losing the business or for the country attempting to attract the business. They will achieve some short-term gains, but in the long run they will not benefit from it either.
In sum, we don't have an answer on Barbados in particular. We're striving to find an answer with respect to tax competition generally and the effects on what we can call the taxing countries of what we can call the tax havens.
[Translation]
Mr. Roger Pomerleau: That's all, Mr. Chairman. Thank you.
The Chairman: Thank you very much, Mr. Pomerleau. It was an excellent question.
[English]
Mr. Grubel.
Mr. Herb Grubel: In response to what was just said, I'm wondering if there are two different types of problems that the Bloc always brings up with respect to foreign taxation.
You responded to a question that concerns tax competition. I can understand that it is being solved, but what about outright taxation, where a country decides it will charter financial institutions that have sea-to-sea provisions, which in turn would mean that the home country would never get any information about deposits and incomes earned by their own nationals? Are these covered by these treaties? And could you comment on the problems that Canada faces with respect to those genuine tax havens?
Mr. Farber: Let me just say, Mr. Chairman, that with regard to what the member refers to as genuine tax havens, we don't have treaties with those countries. So to that extent, we have no basis under which to limit any type of taxation measure that the sovereign country wants to implement. To that extent, any Canadian multinational that carries on any kind of business in that jurisdiction wouldn't get any benefit of any treaty provision. We would regard it as totally taxable, and to the extent that there are any taxation provisions in that jurisdiction, it may very well be subject to double taxation.
From that point of view, I don't believe there's any particular problem. I think what the Bloc member was getting at is that you have other problems with regard to treaty countries with whom you've already negotiated a treaty and who maybe after the fact come in with certain provisions that may be viewed as tax haven provisions. That's a bit of a term of art, but they're really incentive measures that the particular country puts in place in order to attract a certain kind of business for whatever reasons it feels it wants to attract that business, either to establish some employment base to generate licensing fees or for some type of revenue to establish its economic base.
Those are the kinds of issues that...when a lot of countries start engaging in that type of competition and start lowering taxes to a level where they're making it economical to move into jurisdictions like that, that is where you have cause for concern.
.1645
Mr. Herb Grubel: Mr. Chairman, I would like to ask what opportunities are available to an industrialized country like Canada to limit what, by our national law, are illegal deposits and income-earning in these tax havens? Is there anything we can do, other than trying to put pressure on our own nationals not to do so? Are there any international moves afoot to try to collectively get at these havens?
Mr. Farber: Well, Mr. Chairman, as you know, in recent years the government has introduced a number of different measures with respect to foreign income reporting. Because of its very nature, prior to these income-reporting rules being put into effect... As you very well know, a week didn't go by that you didn't see an ad in The Globe and Mail or The Financial Post for some seminar on how to put money away in some tax haven island in the Caribbean, shelter it from tax, set up some trust, and have some nominee beneficiary in that foreign jurisdiction.
As you know, the government put forward foreign income reporting rules so that if any individual in this country had any interest in a trust, or in any vehicle whatsoever offshore, there would a requirement to report that.
So with regard to our own nationals, we've certainly taken some fairly significant steps in ensuring that they're knowledgeable, that in Canada we tax worldwide income, and you can't just put money into a trust with other beneficiaries and have some view that this is not reportable in Canada.
With regard to corporations, again, we significantly expanded our reporting requirements with regard to foreign affiliates, ensuring that information with regard to investments, foreign affiliates, and income positions of at least first-tier, controlled foreign affiliates is adequately reported for Canadian tax purposes.
Mr. Chairman, I believe that once these measures are fully implemented and we get a year or two of experience under our belt with regard to the type of information coming forward, we'll be in a much better position to assess what other measures may be required to ensure that everybody pays their fair share of tax.
Mr. Herb Grubel: Thank you.
The Chairman: Thanks very much, Mr. Grubel.
Ms Whelan, please.
Ms Susan Whelan (Essex - Windsor, Lib.): I just have a quick question. I wanted to make sure that if there are treaties for any of these countries there are not going to be any Canadians residing in any of these countries, or any other people residing in Canada who receive pension benefits, who will be subject to the situation we just had with Canada and the U.S.A., the situation we just changed.
Mr. Ernewein: In fact, no Canadian residents receiving pension benefits from any of these countries will have the other country's tax rights increased as a result of these treaties. However, under the terms of the treaties, those other countries will maintain some of the taxing rights they already have.
Put differently, I believe all five countries currently have the right to impose tax on social security, as do we on payments we make. The treaties would not change that.
Ms Susan Whelan: Do they do it now in those countries?
Mr. Ernewein: Not to my knowledge, but I don't know whether they do or not.
Ms Susan Whelan: Okay.
The Chairman: Thank you.
Mrs. Brushett, please.
Mrs. Dianne Brushett (Cumberland - Colchester, Lib.): Thank you, Mr. Chairman. I have a couple of questions.
I know we had a treaty with the Union of Soviet Socialist Republics before, and with the break-up we now have it with the Russian Federation, but did we have treaties with these other countries previously, or are these new?
.1650
Mr. Ernewein: We had a treaty with the U.S.S.R. The Russian Federation and the Ukraine had agreed to abide by the terms of that treaty for the last couple of years.
The treaties now, specifically with Russia and the Ukraine, supersede the earlier treaty with the U.S.S.R. We did have a treaty with South Africa, which was terminated in 1985, so we have a new treaty with South Africa, if you will. The treaty with Tanzania is brand new. The treaty with India replaces an existing treaty.
Mrs. Dianne Brushett: So some are being updated for various reasons.
Now, can I ask you why we really need these. I understand the protection, the double taxation, or lack of it. But if a businessman goes to India, sets up business as they've done for many years, have they worked outside of any treaties such as this one? Have they been taking their own risk, their own chances, resulting either in their not paying too much taxes or our not getting our share?
I don't quite understand how... Does this mean a lot to those companies who are looking for financing from the World Bank or International Monetary Fund? I mean, what's the real need here in practical terms?
Mr. Ernewein: The need or the benefits to be derived from tax treaties depend upon what those treaties do and what the particular taxpayer himself or herself is interested in doing.
The general goal of tax treaties is to prevent fiscal evasion. That's done through exchange of information and working between the competent authorities, the revenue authorities, of the two countries.
The goal is also to prevent double taxation. That's done by limiting each country's rights to tax-particular income and coordinating those tax rights so that if both countries have the right to tax, one will be obligated to give credit for the tax imposed by the other. There are examples like that.
So what benefits would someone interested in carrying on business in India obtain from a tax treaty? It establishes certainty with respect to the scope of the taxes India can impose on that person, to make sure they have to have a physical presence and a permanent establishment in that country before India will have any right to tax.
It means that if dividends, interest, or royalties are paid from India to a Canadian investor, the rates of tax imposed on that will be lowered. They won't be whatever rates India chooses to provide; they'll be limited by the rates the treaty allows to be charged.
If there's any dispute about the application of the treaty or the rules under the Indian tax code, the treaty provides a mechanism for the revenue authorities to work together to resolve the problem, to resolve the dispute.
Mrs. Dianne Brushett: So under Bill C-37, what does define residency? We know that comes up frequently in any of these treaties. Is it the ownership of a physical structure, or is it just the fact that you're doing business in a country?
Mr. Ernewein: Residency is a term of art under tax treaties. It's defined to refer to someone who is treated as a resident and is taxable. This generally means that they're taxable on all their income worldwide, wherever it's earned, by the country in question.
So, for instance, if I assume that everyone around this table is taxable as a Canadian resident, they'd be subject to tax on their income wherever earned. That is the definition of residency that the treaty applies.
The only condition, or further requirement, the treaties have is that to be considered a resident under a tax treaty, that person is liable to tax in the country in which they're considered to reside.
If I understood your question correctly, it may relate more to when the other country does get a right to tax a Canadian resident.
Mrs. Dianne Brushett: Well, again, it's a term that comes up frequently under taxation: which country defines residency? Is it the process of doing business in a country? Is it the ownership of physical assets in that country?
.1655
I read through the limitations of this bill when it talks about movable assets. Airplanes and ships are considered immovable assets. I'm wondering, what defines residency when you're doing business in Lebanon or Tanzania?
Mr. Ernewein: Neither physical presence nor level of investment necessarily relates to residency. Residency is where, as an individual, you hang your hat, where you maintain a permanent home.
That's not the only basis on which a country has a right to tax. We have the right to tax our own residents on all their income. We also have the right to tax non-residents on their income generated from Canada. When a tax treaty applies, we are limited further with respect to non-residents, residents of the other country. We can tax only their income from permanent establishments - a physical location here - or from income paid out to that person in the form of interest, dividends, or royalties.
I'm sorry. Am I getting near to the answer?
Mrs. Dianne Brushett: I'll leave it for now, thank you.
The Chairman: Mr. St. Denis.
[Translation]
The vote will take place in the next 15 minutes.
The Clerk: No, it was only because we did not have a quorum.
The Chairman: Good.
[English]
If there are no more...
[Translation]
Clauses 2 to 31 inclusive are carried
Schedules 1 to 5 inclusive are carried
Clause 1 is carried
The title is carried
The Chairman: May I report Bill C-37 to the House?
Voices: Agreed.
The Chairman: Thank you very much for your cooperation.
[English]
Brent, did you have a motion?
Mr. Brent St. Denis (Algoma, Lib.): Yes. This is just a small item of business. When our subcommittee on the IFIs was in Washington, it was the consensus that we get a small gift for one of the contact people down there. So I'm moving that the committee reimburse the expenses for an official gift when the subcommittee on the IFIs was in Washington. It was a nominal amount for a gift for Leslie Boucher.
The Chairman: Is it under $25,000?
Mr. Brent St. Denis: I believe so.
The Chairman: Is it agreed?
[Translation]
Motion carried
[English]
Mr. Brent St. Denis: By the way, we'll have a report for the committee before the end of April.
The Chairman: Wonderful. I would like to thank our officials and
[Translation]
particularly the two Opposition members for their cooperation during the study of the Bill. I hope that with this kind of cooperation, the Bill will be passed by the House before it adjourns. I wish to thank you because it will considerably help our investors and the Canadian companies that do business in these five countries. Without the support of our country, it would be impossible for them to do so.
[English]
and particularly to our wonderful person from the whip's office,
[Translation]
Thank you all for your help.
[English]
The meeting is adjourned.