Bill S-5 (Historical)
Tax Conventions Implementation Act, 2006
An Act to implement conventions and protocols concluded between Canada and Finland, Mexico and Korea for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income
This bill was last introduced in the 39th Parliament, 1st Session, which ended in October 2007.
This bill has received Royal Assent and is now law.
Settlement of International Investment Disputes Act
January 29th, 2008 / 10:20 a.m.
Vivian Barbot Papineau, QC
Mr. Speaker, on May 15, 2007, I had the opportunity here in the House to talk about why the Bloc Québécois supports Bill C-53, which is identical to Bill C-9, An Act to implement the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). Today, therefore, I will talk about how international treaties are now typically drafted with no regard whatsoever for democracy.
I would like to begin by saying that the Bloc Québécois wants all treaties to go through the House of Commons. The current way of doing things completely disregards democracy. Bill S-5, which provides for the coming into force of tax conventions, shows how important international treaties are to our daily lives. These days, treaties are brought before Parliament only when they require enabling legislation.
In Canada, Parliament and parliamentarians play a minimal role in negotiating and ratifying international treaties. The federal executive controls all phases of the process. The executive is also responsible for what takes place in negotiations, which are, for the most part, secret. This secrecy is an important part of the federal government's negotiation strategy. Next to nothing, and sometimes nothing at all is disclosed before the parties sign an agreement in principle on the content and even the wording of the treaty. Even though the provinces are usually kept abreast of negotiations for trade agreements, they participate very little in the process and, with few exceptions, are totally excluded from the decision-making process.
Where international treaties are concerned, democracy is totally absent. There is no complete compilation of such treaties. Governments release them when and if they see fit, and people cannot be sure they are all being disclosed. The treaty section at the Department of Foreign Affairs does not even have a list of signed treaties to consult. The government is not required to table treaties in the House of Commons. It does not even have to inform the House or the public that it has signed or ratified treaties. The House does not get to approve treaties. The government can sign and ratify any treaty it wants without consulting the representatives of the people. At the very most, treaties requiring legislative changes are brought before Parliament before ratification.
In Quebec, since 2002, a vote in the National Assembly is required. Being in no way involved in the negotiation of treaties, the House of Commons cannot consult the public. It is therefore not surprising to see people increasingly expressing their opposition in the streets. In fact, there is no other place for them to be heard. The government is not required to consult the provinces either, even though it cannot implement treaties that concern areas of provincial jurisdiction and the provinces are not bound by the federal government's signature. It is totally absurd that no formal consultation mechanism is in place.
The government is preventing the provinces from being able to act internationally by controlling their international relations and by not allowing them to reach treaty-like agreements. This is unacceptable.
It used to be that international treaties governed relations between states and had little or no impact on how society functioned or on the lives and rights of citizens. At the time, it was acceptable for the government to unilaterally sign or ratify treaties.
Now, however, international treaties, especially trade agreements, affect the power of the state, the workings of society and the role of citizens. Furthermore, they often have an even greater impact than many bills. The Canadian treaty ratification process is not in line with this new reality. The people's representatives must be involved in decisions that affect the people they represent.
During the election campaign, the Conservatives promised to bring treaties before the House prior to ratifying them, but they still have not kept that promise. Recently, the government signed an investment protection agreement with Peru. This agreement is based on chapter 11 of NAFTA, which has been criticized by many. Yet the government concluded it without putting it to the House. When the House presses the government to honour its international commitments, as it has done in the case of the Kyoto protocol, the government does what it pleases, with no regard for the will of the people or the promise it made when it signed the treaty.
As was the case when Bill S-5 was passed, the fact that Bill C-9 will be passed quickly is an opportunity to show the government that democracy is not something to be feared when concluding fair treaties. The government must honour its promise to submit to the elected representatives any treaties that it intends to ratify, as it is forced to do here today with the three tax treaties. Once it has ratified them, it must honour them, as we hope it will honour the tax treaties we are discussing here today, and the Kyoto protocol, which the House is pressing it to honour.
This failure to involve the representatives of the people is an anachronism. It is impossible to tell from the division of legislative powers provided in the Constitution Act, 1867 which level of government, federal or provincial, has authority to sign a treaty with a foreign government. No provision is made in the Canadian Constitution for a jurisdiction anything like external relations or international relations. This is understandable, however, because when the Constitution Act, 1867 was passed by the British Parliament in London, Canada was still a colony of the British Empire. In 1867, the British Parliament reserved for the British Crown the power to represent the Dominion of Canada internationally and to enter into treaties with foreign countries on its behalf.
Under section 132 of the Constitution Act, 1867, however, the federal government was given responsibility for implementing, in Canada, treaties entered into by the British Crown, where these were applicable to this country.
In 1931, pursuant to the Statute of Westminster, Canada, as well as several other dominions of the British Empire, acquired full independence and, along with it, the authority to act with all the attributes of a sovereign state on the international scene. It was then that the federal government acquired jurisdiction over external affairs. Considered a royal prerogative when the Constitution was written, this authority was transferred to the government which, as the sovereign's representative, exercises it alone and without involving Parliament.
Once the governor in council approves an agreement reached between Canada and a foreign country, no matter who negotiated the treaty, that agreement becomes an international treaty. The representatives of the people do not have a say in it because the federal government has simply inherited a royal prerogative dating back to the British Empire.
Parliament only becomes involved when the ratification of a treaty requires an enabling statute. Canadian legislation may have to be amended because of the treaty. The legislative implementation of these treaties is the only occasion when Parliament has a say in the entry into force of a treaty in Canada.
It should be pointed out that many treaties requiring the Canadian state to adopt specific standards are not presented to Parliament for the adoption of enabling legislation. In such cases, the government believes that the Canadian legislation already conforms to the international obligations adopted or that the subject of the treaty does not require the adoption of new legislative provisions.
Consequently, no amendments are made to existing laws nor is a new law adopted by Parliament. For example, Parliament did not adopt legislation to implement or approve the ratification of the International Convention on the Rights of the Child. In such cases, the treaty never goes before Parliament.
In short, Canada is less democratic today that in was in the 20's. In June 1926, Prime Minister King introduced a resolution that was unanimously adopted by the House of Commons. It read as follows:
Before Her Majesty's Canadian ministers recommend ratification of a treaty or convention involving Canada, Parliament's approval must be obtained.
In 1941, Mackenzie King reiterated his commitment to this formula:
With the exception of treaties of lesser importance or in cases of extreme urgency, the Senate and the House of Commons are invited to approve treaties, conventions and formal agreements before ratification by or on behalf of Canada.
Over the years, approval by resolution has been sought less and less. During the cold war, the government dropped the convention of seeking Parliament's approval before signing treaties or engaging in military intervention on foreign soil.
The government even stopped tabling treaties in Parliament. Except for the Kyoto protocol, not one treaty has been approved by resolution since 1966—over 40 years ago—and that was the Auto Pact. As for Kyoto, the government has refused to honour it. So much for democracy.
Furthermore, Canada is less democratic than the rest of the industrialized world. Most other major industrialized democracies support greater involvement of their parliaments in ratifying treaties. For example, the constitutions of France, Germany, Denmark, Italy and the United States require legislative approval of some types of international agreements prior to ratification.
Some countries that share constitutional traditions with Canada have tried to enshrine their parliament's role in examining treaties.
In the United Kingdom, a convention established in the 1920s, the Ponsonby Rule, requires the tabling of international agreements in both Houses of Parliament at least 21 days before they are to be ratified. This gives parliamentarians the opportunity to debate them before the government ratifies them, even though these debates are not binding. This kind of thing does not exist in Canada.
More recently, in 1996, Australia changed its procedure for concluding treaties. Under this procedure, treaties must be tabled in parliament at least 15 sitting days before any binding decision is made by the executive branch; a national interest analysis of the expected impact of the treaty obligations must be done, for each treaty, and tabled in parliament; a standing joint committee on treaties must be established to examine potential treaties and report on them. There is nothing of the sort in Canada.
As usual, Canada trails Quebec.
In Canada, the provinces pass laws in their constitutional fields of jurisdiction. As the British Privy Council ruled in 1937 in the labour conventions case, the provinces' legislative authority also extends to the implementation of international treaties.
As soon as a treaty or part of a treaty involves a provincial jurisdiction, the provisions in question can be implemented only by the provinces. Since 1964, Quebec has concluded some 550 international agreements involving many fields of jurisdiction for which it has full or partial responsibility, such as culture, economic development, drivers' licences, international adoption, the environment, science and technology, and communication.
For a major agreement to be binding, the Government of Quebec must first submit it to the Quebec National Assembly for approval. Only then will Quebec be bound by an international agreement entered into by Canada and agree to pass legislation to implement the agreement. Furthermore, under the legislation, Quebec's Department of International Relations must list and publish all of Quebec's international agreements. There is nothing of the sort in Canada.
The Bloc Québécois has introduced three bills on treaties to modernize the entire process for concluding international treaties.
The Bloc Québécois bill on treaties was designed to build transparency and democracy into the process of negotiating and concluding international treaties. Since such treaties have an increasingly large impact on our lives, it was more important than ever to make such a change. Moreover, the bill required that the federal government respect the provinces' jurisdictions.
The bill provided for five changes: all treaties were to be put before the House of Commons, the House was to approve important treaties, a parliamentary committee was to consult civil society before Parliament voted on important treaties, treaties were to be published in the Canada Gazette and on the Department of Foreign Affairs website and the government was to consult with the provinces before negotiating a treaty in an area of provincial jurisdiction.
The treaty bill came to a vote only once, on September 28, 2005. All the federalist parties voted against it.
No strangers to contradiction, the Conservatives made two promises about international treaties during the last election campaign. They promised to put international treaties before the House prior to ratification and to give the provinces a role in concluding treaties pertaining to their jurisdictions. Both these promises were broken.
Since they were elected, the Conservatives have amended NAFTA. They have signed two investment protection agreements based on NAFTA chapter 11, one of which has been ratified. They have concluded a military cooperation agreement to authorize British soldiers to train in Canada. They have signed cooperation agreements on higher education, even though education does not come under Ottawa's jurisdiction. They have concluded an agreement to facilitate technology transfers from Canada to China. And they have amended the free trade agreement with Chile.
Aside from the amended NATO treaty, which was brought before the House at the last minute for a mini-debate and vote, none of these international treaties has come before the House.
And where is the nation of Quebec in all this? The federalist parties say they rejected the Bloc Québécois bill because of two clauses, 4 and 6.
First, clause 4 provided for a mechanism for consulting with the provinces:
Canada shall not, without consulting the government of each province in accordance with the agreements entered into under section 5, negotiate or conclude a treaty
(a) in an area under the legislative authority of the legislatures of the provinces; or
(b) in a field affecting an area under the legislative authority of the legislatures of the provinces.
As for clause 6, it recognized the validity of the Gérin-Lajoie doctrine:
Nothing in this Act in any manner limits or affects the royal prerogative of Her Majesty in right of a province with respect to the negotiation and conclusion of treaties in an area under the legislative authority of the legislatures of the provinces.
The clause on consulting Quebec and the provinces is nothing revolutionary. When the federal government discusses, in an international forum, the text of a treaty having an impact on the provinces, then it consults the provinces beforehand.
Under an agreement concluded in 1975—and still in effect—between the Trudeau government and the provinces, Ottawa consults the provinces at every stage of the negotiation of treaties involving human rights.
Every federalist party in Ottawa is more centralist than Pierre Elliott Trudeau on the issue of international relations.
It is not just a Bloc Québécois bill that the federalist parties have rejected, it is a Quebec law. Section 22.1 of the Act respecting the Ministère des Relations internationales requires the consent of the Government of Quebec with respect to the signing, ratification or adherence by the Government of Canada, before the latter acts internationally on any agreement concerning matters under Quebec's constitutional jurisdiction.
As far as the section recognizing the provinces' right to negotiate and conclude international treaties in their jurisdictions is concerned, it was simply a recognition of the Gérin-Lajoie doctrine which every Government of Quebec has been following since 1965.
The Gérin-Lajoie doctrine is closely linked to Quebec's independence: the provinces are completely sovereign within their jurisdictions and they must exercise their authority over the entirety of their jurisdictions, which includes signing and ratifying international treaties.
In closing, these are some of the arguments in favour of more involvement by parliamentarians in the negotiation and ratification of international treaties for the good of democracy.
Income Tax Amendments Act, 2006
March 29th, 2007 / 3:55 p.m.
Massimo Pacetti Saint-Léonard—Saint-Michel, QC
Mr. Speaker, I am pleased to rise today to speak to this fascinating bill, Bill C-33, An Act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that Act.
The bill represents a necessary update to the Income Tax Act, particularly as it relates to foreign amendments and other domestic measures. The majority of the bill's provisions are taken from the Liberal government's budget of 1999. The government put the proposed changes up for public comment in July 2005. The changes we are debating today also contain revisions made to that July 2005 release.
Although the amendments to the income tax will be mainly administrative, it is important to highlight them to have a better understanding ahead of an eventual vote.
The bill can be broken down into three parts.
Part one deals with amendments to provisions of the Income Tax Act governing the taxation of non-resident trusts and their beneficiaries and of Canadian taxpayers who have interests in foreign investment entities.
Part two deals with technical amendments that were included in part one of a discussion draft entitled “Legislative Draft Proposals and Draft Regulations Relating to Income Tax”, released by the minister of finance in February 2004.
Part three deals with provisions of the act not opened up in parts one and two.
The proposed measures in part one deal with non-resident trusts and foreign investment entities designed to ensure Canada is properly taxing those Canadians who are earning income through foreign intermediaries in the same manner that income would have been taxed had it been earned directly.
It is essential that Canada close tax avoiding loopholes, not only to protect our own tax base but also to demonstrate our commitment to the international community. We must show our international partners that Canada takes its international responsibilities seriously and that Canada is not a destination for taxation loopholes.
If I look at the bill, it is over 500 pages long. It is not likely that anybody in the chamber has read it. Even if people have, I am not too convinced they can understand this type of bill. However, as vice-chairman of the finance committee, I look forward to sending the bill to the finance committee after second reading so we can further study to determine if any amendments will be needed to make it an even better bill than what it is today.
We need bills like this. They may be complex, but in debating the bill in the past, members have decided to concentrate their points on other areas. As an accountant, I know the foundation of these bills are important. They are just as important as any other bill we debate in the House. That is why, if read some of the debate that went on in previous sessions by members of the opposition, especially government members, they had trouble determining what was a tax haven, what was a tax treaty and what were international tax agreements.
Tax havens are jurisdictions where people park their money, or investments, and they pay no income tax on the income generated on these moneys. Tax havens are countries like Bermuda, Cayman Islands, Turks and Caicos, Gibralter, just to name a few, where people or companies put their money, leave it there and it accumulates tax free. The purpose of the bill is not to address tax havens.
The second point is government members feel these are tax treaties. This is not a tax treaty. A tax treaty is like one of the bills we discussed a few months ago, Bill S-5. Tax treaties are conventions between two countries. Normally the purpose of the tax treaty is to avoid double taxation so Canadians or residents of the other countries do not have to pay double tax. Bill S-5 was our agreement with countries like Mexico, South Korea and Finland.
Some of the other problems we get into when we speak about tax treaties, tax havens and international conventions is our tax base does not get protected. Canada's tax base needs to be protected. If people start taking their hard-earned money and parking it elsewhere, Canada will be unable to maintain the revenue stream that we need so we can rely on the social programs.
The other item that makes Bill C-33 important is there are advantages to using a non-resident trust. If we do not put limits on it, the foreign investment entities will be eliminated.
There are a lot of points on which I would like to speak, but one of the items is the international tax agreements. We can sign these international tax agreements because this affects foreign entities. From what I understand, in the 1990s, although I was not in the House then but perhaps the Speaker was, a tax treaty with Italy was passed by the House. Italy has yet to ratify that treaty.
Italy now has two members of Parliament from other countries who sit in the House of Commons. It has an elected member of Parliament representing the riding of North America. One member of Parliament was born in the United States. The other one was born in Canada. It even has a senator. These elected members of Parliament and senator live outside of Italy but they have full right of vote. One MP seems to be lobbying. He has asked what has happened with the treaty. It was signed with Canada but it has not been ratified.
This is a typical example of a treaty we signed with a developed country and there has been no advancement. Some residents of both countries have had to pay double tax. Then they have to file their tax returns to get some of the money back, all because one country has ratified the treaty and the other country has not.
We can talk about the tax treaties and what these types of bills do on the international scene. When we look at what the government has done in the last little while on its international tax position, we think about regulation. I read in the today's paper that we have a regulation as to foreign ownership in the telecom sector, but we still see foreign entities trying to take over one of our biggest corporations in Canada, BCE, formerly Bell Canada.
Some of the articles say that they are looking for Canadian partners. If we do not protect ourselves with agreements like this, foreign corporations can come here, set up non-resident trusts, with Canadian owners but not really beneficial owners, and take over our corporations. We have seen that in the last few years. We just saw it last year when Inco was taken over by another foreign company.
If things continue as they are, all our historic corporations, which have added to the country's past, will slowly slip away. CN has its head office in Montreal, but it is just a skeleton. Most of the decisions are made in Chicago. We have lost part of that.
These agreements are important. The government has to realize that when it makes a decision, it has to be an overall decision to protect Canadian interests. Canada's financial markets represent 1% or 2% of worldwide markets. We need to protect Canada's corporations or they will be swallowed up in this international global economy that we live in today.
In the budget just tabled one of the items concerns me when it comes to the international tax system and fairness. Canada and the U.S. apparently have agreed in principle to update the Canada-U.S. tax treaty. They want to eliminate the non-resident withholding tax on interest payments and Canada also plans to unilaterally remove the withholding tax from arm's length interest payments to other countries.
What does that mean? Does that mean we will not collect any money on interest payments that are made to foreign companies? How about having an agreement with the U.S. in this case to ensure that the money will be taxed on the other side? When companies from the U.S. pay Canadians, we can collect our taxes from those Canadians.
The government then says that we need to promote more business investment. We turn around and look at the budget. Budget 2007 proposes to eliminate the deductability of interest incurred to invest in businesses and business operations abroad.
How does that make any sense? The government wants Canadian businesses to buy foreign entities. Does it want foreign entities to buy Canadian businesses? This will eliminate the deductability of interest incurred to invest in business operations abroad.
How will that help Canadians to expand, to go abroad and increase productivity? It will not. I am not sure what the government is trying to avoid here. There is no basis for saying it is going to affect revenues in Canada. Most Canadian companies that borrow to purchase foreign affiliates borrow from Canadian financial institutions. The Canadian financial institutions from what I understand pay taxes here.
Perhaps the government should have put a disclaimer that said if a Canadian business was to purchase an operation abroad, as long as it borrowed the money from a Canadian financial institution, that interest could be deducted.
When other members spoke on the bill, they spoke about income trusts. Income trusts have a non-resident aspect to it. We see now that the rules were changed. Some REITs are still allowed, but the government has put a limit as to how much foreign ownership or foreign property they are allowed to invest in.
In the news it said that Canadian REITs were not allowed to invest in foreign entities or foreign real estate up to a certain level. How will that help Canadian companies if they cannot go abroad? As we say in French, “Les bâtons dans les roues”.
Getting back to income trusts, the government has imposed a 31.5% tax on income trusts, which is fine if it chooses to do that. Now it has totally eliminated that sector because it says it did not pay tax or claimed too much tax. The government keeps flip-flopping in terms of its position.
Now we have income trusts that are now going to have to pay 31.5%. People were interested in investing in income trusts, especially the energy sector, because these allowed corporations to go out and get capital at a cheaper price because they were selling units instead of shares. Then the government decided to implement this 31.5% tax. It said that trusts were no longer allowed to operate as of 2011. Existing corporations cannot be converted to trusts.
What has happened is there are no restrictions for foreign entities to buy these companies and turn them into private entities or private trusts to be controlled by foreign entities? There are no restrictions on the actual way in which incomes trusts can now function.
The Liberal way would have been to tax earnings only, to keep the income trusts and tax the non-residents who benefit from the tax free distribution from these income trusts.
Before I get to my next point on private members' bills, I want to go over the tax treaties. The government has also decided to unilaterally provide U.S. companies to borrow in Canada on these limited partnership payments.
What has happened again, if we look at what is in the news, is these limited partnership entities that are allowed to operate in Canada and are allowed to deduct interest payments in the United States are now going to be able to buy up Canadian companies and get a deduction in the United States as well as here in Canada. The only problem is that Canada is not getting cooperation from the U.S. They will probably be able to deduct the interest here in Canada, buy up Canadian companies and use Canadian capital. There is no consistency in how these fee agreements are treated.
There is a whole page on the interest deductibility on the foreign affiliates. There are going to be a lot of problems when we go through this in the finance committee. We are already hearing that Canadian corporations with foreign affiliates are not happy that they are not able to deduct these payments. These items will have to be dealt with when the budget implementation bill is sent to the finance committee.
There was just one more aspect that I want to talk about. If the government is serious about getting a handle on money offshore or making sure that people are not hiding income from Revenue Canada, there are certain procedures that could be used. Some of the departments here in Canada could monitor these moneys or shifts in large sums of money that seem to go offshore and are not accounted for.
FINTRAC, the Financial Transactions and Reports Analysis Centre of Canada was established a couple of years ago. We just did the five year review so it has been around for five or six years. There are financial institutions that have to report to FINTRAC whenever they receive payments of more than $10,000, so FINTRAC could easily monitor any payments that are going offshore.
The problem is that FINTRAC's basic responsibility is to look at whether sums of money are used for terrorist financing or money laundering. It is for crime proceeds. Tax avoidance does not seem to be within its mandate. This is one of the amendments that I had asked for when we were doing the five year review of its mandate, to see if FINTRAC could look at the way tax avoidance is handled in this country.
Another idea that I had was similar to an initiative which has been done in Europe and a couple of countries. It was to provide Canadians with a once in a lifetime opportunity to declare all their worldwide income, and if they repatriated back here, to charge them something like 10% or 20%, and split that amount with the provinces. It would be a good way to generate some revenue even for the provinces. If somebody had forgotten to declare some money or they happened to have some money in another country, they could bring it back. We could assess a tax of 10% or 20% tax. They would not have to pay any interest or penalties on those sums of money.
This initiative seems to have worked in a few other countries. I do not have the stats but apparently there was a good take on it and it increased government revenues by a good 10% or 15%.
There are other ways in which we can look at how tax havens and tax treaties are handled. A 500 page bill is definitely an interesting way to look at all these complex items. The bill tries to amend the Income Tax Act. The Income Tax Act is one of the more complex pieces of legislation, although apparently, the Employment Insurance Act is much more complex.
These are all issues the government should be looking at. I am looking forward to seeing Bill C-33 come to committee so we can analyze it and get a better understanding of what this 500 page document is all about.
Income Tax Amendments Act, 2006
February 21st, 2007 / 4:50 p.m.
Thierry St-Cyr Jeanne-Le Ber, QC
Mr. Speaker, I will continue to address tax evasion and the tax havens used in Barbados.
As my colleagues who spoke before me have said, Bill C-33 is somewhat technical and contains a number of provisions to prevent circumvention of the tax rules and to prevent tax evasion. It responds to a number of requests made by the Auditor General. The Bloc Québécois will therefore support the bill. However, as I said in the question I asked earlier, I think that it does not go far enough in dealing with tax havens. Contrary to what my colleague from the Liberal Party said, we are not talking about people committing tax fraud, we are talking about people who avoid tax and find legal schemes so that they do not pay tax. The reason they can do that is that the existing legislation lets them.
In my presentation, I will try to explain how these people operate and what has to be done to stop this. On the question of tax havens, I would like to tell the House about a comment made by the Auditor General on February 27, 2001. He said that one of the biggest threats to the tax base lies in the international activities of Canadian taxpayers, particularly the use of tax havens.
Tax havens are countries that have a zero or very low tax rate and loose tax rules. That combination is an incentive for taxpayers to settle there or transfer a portion of their activities there in order to be exempt from the Canadian tax system and not have to pay taxes here. Most of the time, these are countries that are notable for their absolute bank secrecy, which makes it impossible to trace all the movements of capital that take place there.
Because of that bank secrecy, it is difficult to measure this phenomenon. In 1998, the OECD estimated that from 1989 to 1994 foreign direct investment rose three times faster in tax havens then elsewhere. That is not a small matter. The OECD drew up a list of tax havens based on four criteria: no or only nominal taxes; lack of effective exchange of tax information; lack of transparency in the operation of tax laws; and no substantial activities in the country where operations are purported to occur. Thirty-five countries met those criteria. The OECD pointed a finger at 47 other countries which, while they were not tax havens, had provisions worthy of a tax haven in certain areas. It should be noted that Canada was on the list of 47 countries because of its tax policies relating to the international shipping of goods.
In 2001, that list was amended by a group of 13 OECD member countries, including Canada, to remove the no substantial activities criterion, which brought the number of tax havens—on paper, obviously—down to 7 from 35. Those countries have not ceased to be tax havens; they are still tax havens.
In 2002, Barbados was removed from the list of countries regarded as tax havens by the OECD. However, Barbados has not changed its fiscal practices; quite the opposite is true. The tax system in Barbados is interesting. I hope that the fact that I am talking about it will not encourage any Quebec or Canadian companies to move there, despite the wonderful conditions it provides, such as a fixed fees of $250 per year and a tax rate of only 2.5% on the first US$5 million in profits. It then declines gradually, to 1% after $15 million. For a company that does not want to pay income tax, this is extremely advantageous.
In Canada, the tax system is tailor made, expressly for Barbados. Let us look at how it operates. The general rule is that all income earned in Canada or abroad is taxable in Canada. However, if income is earned in a country with which Canada has signed a tax treaty to avoid double taxation, that income may not be taxable.
If the foreign subsidiary is deemed to be non-resident in Canada and the tax treaty prohibits double taxation, the general rule that all income received by a Canadian is taxable is bent. It is then the tax treaty that applies.
In theory, in the case of Barbados, the treaty does not apply to subsidiaries that have a tax rate of virtually zero. Like the tax treaty with Cyprus, the Canada-Barbados tax treaty specifically excludes what is known as international business companies or any other similar kinds of companies that enjoy the favourable tax treatment I referred to earlier in Barbados. If we exclude these companies and consider only the normal tax rate in Barbados, which is approximately 40%, virtually all the Canadian companies with a subsidiary in Barbados have established it specifically to enjoy favourable tax treatment. For the most part, these have been established under the Barbados International Business Companies Act and are therefore excluded from this convention.
The companies covered by this provision of the tax treaty are therefore considered under the Income Tax Act to be resident in Canada and therefore subject to Canadian taxation. Based solely on the Income Tax Act and the tax treaty between Canada and Barbados, dividends received by the Canadian parent corporation of a subsidiary in Barbados should be taxed in Canada when they are transferred home. So far, so good.
There are, however, provisions in the Income Tax Regulations which are specifically designed to enable companies to circumvent this difficulty and transfer profits from Barbados tax-free in Canada. I will spare you the whole list of provisions; suffice it to say that paragraph 5907(11.2)(c) of the Income Tax Regulations, if anyone feels like looking it up, renders moot article 30 of the tax treaty, the one that excludes international business companies. It sets out a series of criteria for a company to be considered non-resident in Canada and therefore not subject to tax. Thus, Barbadian subsidiaries of Canadian companies fall into that category.
By invalidating article 30 of the tax treaty, the regulation allows the dividends of Barbadian subsidiaries of Canadian companies to be tax exempt in Canada. Incidentally, through the Access to Information Act, the Bloc Québécois obtained a copy of correspondence between the Minister of Finance and an accounting firm, confirming that this section of the regulations was drafted specifically to allow Canadian businesses to use Barbados as a tax haven.
In July 1994, Wallace Conway, of the taxation policy branch of the finance department, confirmed the following to Craig Cowan, who was employed by the accounting firm Arthur Andersen:
Be advised that proposed paragraph 5907(11.2) is intended to ensure that a Barbados international business corporation which is a foreign affiliate will remain eligible to earn an exempt surplus.
So, the bill did not come into force until 1997, but it was specified that it would be retroactive to 1994. With this amendment to the regulations, Canadian businesses with a subsidiary in Barbados win on both fronts. First of all, since their business is not covered by the tax treaty, Barbados is under no obligation to share information with Canadian tax authorities and, second, since the income tax regulations disregard that exclusion, profits sent back to Canada are tax exempt. The behaviour of the Canadian government, particularly under the Liberals, was all the more deplorable considering that Canada even worked to undermine all the efforts being done by the OECD, this to ensure that Barbados would not be deemed to be a tax haven.
This work to get Barbados off the list was done in two stages. In 2000, the notion of tax havens was replaced with the notion of non-cooperative tax havens, following a recommendation made by a 13 member committee, which included Canada.
Secondly, that same committee changed the criteria to determine whether these countries were cooperative or not. Now, a tax haven simply has to commit to being transparent and to sharing tax information with other countries to be taken off the list. That is really very little.
The tax treaty is essentially based on the exchange of tax information. Thus, once a tax treaty is signed with a tax haven, it is virtually automatically removed from the list. That change made the working group on harmful tax practices completely pointless, and Canada, as a result of what the Liberal government of the time did, was a major participant in weakening it.
For years, the failure to act could be laid at the doorstep of the Liberal Party. We must now recognize, however, that the Conservative government has proposed nothing to fix this. I hope it will soon do so. Probably the budget will be an appropriate opportunity to do it.
The Auditor General has repeatedly deplored Canada's failure to act. She first did this in 1992. In 1996, she took up the issue for the second time; in 1998, for the third time; in 2001, for the fourth time; and ultimately, in 2002, for the fifth time. Still there has been no action by the government, no action by the Liberals at the time and still no action by the Conservatives today. In fact, Canadian investments in tax havens continued to multiply over the same period when the Auditor Generals were issuing us their warnings.
From 1990 to 2003, Canadian companies invested major and growing amounts in countries recognized as offshore financial centres, particularly in the Caribbean. Between 1990 and 2003, Canadian assets in those countries grew by a factor of eight, rising from $11 billion to $88 billion. In 2003, the five main OFCs I referred to earlier were among the 11 countries where there were the most Canadian assets, and so on.
We must realize, from the various reports on television that have dealt with the subject, that this is a situation in which there is more and more money being invested in tax havens, despite the warnings from the Auditor General and, of course, from the Bloc Québécois. The government has never done a thing and we still see nothing being done about this. This is particularly unfortunate from the Conservatives, who claim to want to stand up for taxpayers. What are they waiting for, to ensure that big businesses pay their fair share of taxes, by preventing them from using tax havens?
The Bloc Québécois proposes that all tax treaties go through the House of Commons, which they do not do at present. Bill S-5, which provides for tax treaties to come into force, shows the importance of international treaties in everyday life.
These treaties do not need implementing legislation to be passed. In this case, no treaty will be submitted to Parliament, quite simply.
The federal executive controls all phases of the process of adopting an international treaty. The executive is also responsible for what takes place in negotiations—which are for the most part secret. Nothing is made public during negotiations.
The provinces are seldom consulted, and in many cases they are completely excluded from those negotiations, even though, because of something that falls under their jurisdiction, they often have an interest in the negotiations.
Today, there is no democracy at all when an international treaty is involved. It is worth noting that there is no complete collection of treaties published. The government makes them public on a sporadic basis, and we do not even know whether it discloses all of them. Even the treaty section of the Department of Foreign Affairs does not have a list that we can consult. This is quite incredible, when you think about it.
The government is not even required to table them in the House. It is not even required to inform the House or the people when it signs or ratifies treaties. I find it incredible that in 2007, in our democracy, a government can sign an international treaty without even informing the population. Obviously, the House does not approve them, yet since 2002, in Quebec, the agreement of the National Assembly has been required for Quebec to sign any treaty. This improvement was brought in by the Parti Québécois at the time. It would be interesting to propose such an improvement in this House.
Not only does the House not approve international treaties, but the members are not involved in any way in the process. All we can do is consult with the people and try to obtain their approval.
As I said earlier, the government is not required to consult the provinces even when treaties concern areas of provincial jurisdiction. It is totally absurd that no consultation mechanism is in place. This situation is completely unacceptable.
It used to be that international treaties governed relations between States and had little or no impact on how society functioned or on the lives and rights of citizens. At the time, it was acceptable for the government to unilaterally sign or ratify treaties.
Now, however, international treaties, especially trade agreements, affect the power of the State, the workings of society and the role of citizens. Furthermore, they often have an even greater impact than many bills.
The Canadian treaty ratification process is not in line with this new reality. The people's representatives must be involved in decisions that affect the people they represent.
During the election campaign, the Conservatives promised to bring treaties before the House prior to ratifying them, but they still have not kept that promise. Recently, the government signed an investment protection agreement with Peru. I would note that the agreement still has not been put to the House and that it was already signed before the members could approve it. This agreement is based on chapter eleven of NAFTA, which has been criticized by many.
When the House presses the government to honour its international commitments, as it has done in the case of the Kyoto protocol, the government does what it pleases, with no regard for the will of the people or the promise it made when it signed the treaty.
It is rather paradoxical that the Kyoto protocol is probably the most important of all the treaties this House has approved, yet the government is refusing to acknowledge and implement it. This is a far cry from the Conservatives' promise to submit treaties to the House. I do not know whether the Conservatives meant that they would submit treaties to the House, but would not abide by the House's decision or respect its will. They may have forgotten to mention that when they made their election promises.
The government should have treaties approved and then enforce them.
Not involving representatives of the people is an anachronism in treaty ratification. I would like to point out that Canada is less democratic today than it was in the 1920s.
In fact, in 1926, Prime Minister Mackenzie King introduced a resolution that was unanimously adopted by the House of Commons. It read as follows:
Before Her Majesty's Canadian ministers recommend ratification of a treaty or convention involving Canada, Canada's approval must be obtained.
In 1941, Mackenzie King reiterated his commitment to this approach:
With the exception of treaties of lesser importance or in cases of extreme urgency, the Senate and the House of Commons are invited to approve treaties, conventions and formal agreements before ratification by or on behalf of Canada.
Over the years, the House of Commons had been consulted less and less, and even when it gave its approval in the case of the Kyoto protocol, the government refused to implement it. Nothing in the rest of the industrialized world can compare with that.
I said earlier that Canada was lagging behind Quebec. In Quebec, treaties signed by the Government of Quebec are approved.
On three occasions, the Bloc Québécois has introduced a bill on treaties to modernize the whole process of concluding international treaties. I am referring to Bills C-214, C-314 and C-260. Each time, the federalist parties have rejected the bill. This is very unfortunate.
In conclusion, this bill should be improved—
January 17th, 2007 / 10:55 a.m.
The Chair Brian Pallister
I want to be clear on the wording before we have a discussion on the amendment, so we will just get clarification on the wording so we know what we're debating here.
While we have this little interlude, I would remind members of the work ahead of us in this committee. We have several private members' bills, and we have several motions. We also have BillS-5, an act to implement conventions and protocols concluded between Canada and Finland, Mexico and Korea for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. We also have BillC-37, an act to amend the law governing financial institutions and to review the Bank Act, which is a rather onerous responsibility before the committee.
With that in mind, I want to assure committee members that if we do proceed along these lines as proposed by this amendment, it will be my intention not to till the same field twice. If we are going to call an extensive number of witnesses to debate the income trust issue and we're going to devote the committee's time to this task now, I don't anticipate calling exactly the same people back a second time for any reason.
If committee members would like to make a case for another approach, I invite them to do that at another time, but I assure you that we have too much on our plate to be going through this exercise twice.
Now, I want to hear the wording of the amendment as proposed by Mr. Dykstra. I will let the clerk read that to the committee.
Tax Conventions Implementation Act, 2006
December 7th, 2006 / 11:10 a.m.
Judy Wasylycia-Leis Winnipeg North, MB
Mr. Speaker, this is a very interesting debate on a serious issue, that pertaining to tax havens.
Bill S-5 itself, I would concede, is rather routine in the sense that the purpose of it is to deal with a loophole, to bring some harmony to this whole issue of tax havens. In particular, the bill addresses clearing up some problems in terms of the tax treaties between Canada and Finland, Mexico and Korea. The bill is one we will support; let me say that right at the outset.
When the bill went through the Senate, we all got a pretty clear understanding of what it was about. The parliamentary secretary today confirmed the routine nature of the bill. It is clearly, as many have said, about dealing with the issues of double taxation and about preventing misuse of offshore venues in terms of tax havens. This is all well and good. We are glad that this small step has been taken.
However, as my colleague from the Bloc has pointed out, the bill begs the much larger question of the Conservatives and forces us to ask why in the world the government did not do what it said it wanted to do in opposition. The Conservatives said repeatedly in opposition that they were bound and determined to close all tax loopholes. They said that they were bound and determined to close tax havens, that they were bound and determined in particular to deal with Barbados.
I have just been going through the Hansard from a year ago. A little more than a year ago, in October 2005, there was a fairly significant debate in the House, some of it initiated by the Conservatives when they were in opposition, about tax havens and about Barbados. I will refer to a few of the speeches that were made on October 6, 2005. The member for Durham, who is now the Minister of Canadian Heritage and Status of Women, the person who is cutting all of our women's programs across the country and taking away from women the right to help shape their own futures, that same person back then said:
Closing tax loopholes that allow Barbados to operate as a tax haven for Canadian companies should be part of an overall strategy to restrict the use of tax havens.
That is interesting. She went on to say:
Merely closing tax loopholes that allow the Barbados to operate as a tax haven without addressing other tax havens will cause many companies to shift their operations to other tax havens. More important, the government should make Canada more attractive to business by implementing competitive corporate tax levels.
We know that the Conservatives have moved significantly on reducing corporate taxes. That was clear in the budget of May 6, 2006. The Conservatives clearly moved on making it more attractive for businesses to operate in this country, but did they close any tax loopholes? Was there a mention of Barbados anywhere in that budget? Was there any indication that they were committed to fulfilling a long-standing commitment to Canadians to join with us in the House, knowing full well they had the support of the Bloc and the NDP to deal with a most egregious situation? No, they did not.
Instead, today we have a tiny piece of the problem being addressed, which is fair enough. We appreciate that the Conservatives took one small step to deal with some outstanding issues on this front, but why in heaven's name did the government not decide to do it all at once? Why does this bill not deal with the whole range of concerns that the Conservatives themselves enunciated when they were in opposition?
Moving on to other speeches, there is an interesting one by the chair of our finance committee, the member for Portage—Lisgar. He interestingly started off his speech on January 31, 2005, almost two years ago, in a way that only the member for Portage—Lisgar could do, saying:
I learned the other day that goldfish apparently cannot create new memories, which is interesting. I guess that every time they swim around their bowl that little plastic castle is a brand new thing to them, an exciting new event.
Of course, he was mocking the Liberals, making fun of the Liberal government, suggesting that the Liberals never seem to learn how to deal with a situation and they continue to make promises that they never keep. They keep forgetting, apparently, that they ever made those promises. He went on to say:
This may be humorous when it comes to goldfish, but it is not an appealing quality in a government. It is not an appealing quality for a government to be unable to learn from its mistakes or to learn from the past. Unfortunately that is what we have in this country. Canadians deserve better.
In the context of that speech, he enunciated some actions that he thought were necessary and which he thought the Liberals should have taken, thereby suggesting that the Conservatives themselves would have taken them. That has to do with tax havens.
In his speech, our chairperson for the finance committee said:
This is a government that continues to allow the diversion of profits from this country to tax havens abroad by the creation of debt-reducing tactics allowed here, such as leveraging on Canadian assets and borrowing money to invest offshore, which results in the shifting of profit and the reduction of tax obligations for Canadian corporations so located, such as Canada Steamship Lines International.
That is interesting. We all agree on the saga around Canada Steamship Lines. In fact no one was more active on this file than the federal New Democratic Party caucus in this House. We repeatedly asked questions of the then prime minister, now sitting as the member LaSalle—Émard, about his own private company and why in fact he chose not to deal with the situation in Barbados and instead left it as a clear opening for investment by Canada Steamship Lines.
I can remember, going back to 1994, when the then finance minister said:
Certain Canadian corporations are not paying an appropriate level of tax. Accordingly, we are taking measures to prevent companies from using foreign affiliates to avoid paying Canadian taxes which are otherwise due.
It sounds familiar, does it not? Those are the same words that the government is using today. It is concerned about closing tax havens and it is taking the initiatives as we see under Bill S-5, all the while avoiding the big, tough questions, avoiding previous statements, acting like goldfish in a bowl, refusing to learn from their mistakes, refusing to be consistent in their approach to Canadians.
Just as we saw back then, the former prime minister said one thing and did another. He made all these fine statements about tax havens but did not shut down Barbados. When his company was asked why it moved its shell company to Barbados in 1995, the company representative answered that it was moved because of the change in Canadian tax rules.
Question: Was the member for LaSalle—Émard aware of this when the company moved to Barbados in 1995? Answer: His assets are in a blind management trust. Question: Was he part of this decision to move to Barbados? Answer: This is a question that should be asked of Mr. Wilson, the federal ethics counsellor. Question: Was this discussed at any of their meetings? Answer: These are all questions that should be put to Mr. Wilson.
The questions were put to Mr. Wilson and the questions went like this: Question: What was discussed at these meetings? Answer from Mr. Wilson: “Well, I'm not really in a position to go and tell you. These are matters that are covered by the Privacy Act”. Question: We are just asking what went on in those meetings. And what was discussed in those meetings. Answer from Mr. Wilson: “Well, you've got my answer on that”. Question: We are not going to know. Mr. Wilson: “No”.
Clearly the situation back then of the continued presence of the Barbados tax haven is still of paramount concern today. Obviously at that point we were certainly concerned about the whole issue of conflict of interest and the possibility of a prime minister doing something untoward. That is all well and good.
The Liberals paid the price at the polls for their failure to be completely open and transparent and for their failure to be honest with Canadians about closing tax havens. They paid the price for their failure to address the real needs and concerns of Canadians around a fair deal for ordinary working families as opposed to always catering to the interests of big corporations and wealthy individuals.
Today we had a chance to start over. This was a new beginning. We were rather encouraged by the fact that the Conservatives had agreed with us several years back and every year since then about the need to close this tax loophole. We had discussions at the finance committee. The Bloc brought forward a motion. There was complete agreement on the part of the Conservatives at that table to review this issue and to find ways to close the tax loophole.
There was very definite interest and a firm belief that the government would act. Today is a disappointment because the Conservatives still have not answered the question of when they will come to us with a complete package dealing with tax loopholes and tax havens. Every day we see the dire consequences of that inaction.
A month or so ago the news came out that Revenue Canada was seeking $2 billion from a huge brand name drug company by the name of Merck Frosst in Montreal for unpaid taxes and for using the Barbados tax haven as a way to avoid paying those taxes. As was reported back then, it was clear that Merck Frosst, which is one of the largest pharmaceutical companies in Canada employing some 1,600 workers, had actually used the Barbados tax haven to avoid paying taxes and the government was now spending our hard-earned taxpayers' money to pursue the company to make it pay the taxes owing to Canadians.
This process has just begun and it will be a lengthy and costly one. Why did it have to come to this? Why was action not taken earlier, or at least now with the benefit of this knowledge, why is the government not prepared to say it will close the Barbados tax haven and bring forward a complete package of legislative proposals dealing with problems in this regard generally?
It was not too long ago that we dealt with the project loophole case. A prominent family in this country had managed to ship $2 billion out of Canada and to put it in an offshore haven, thereby avoiding paying any taxes on that money. That became a Canada-wide case. It was headed up by a volunteer organization in Winnipeg, Cho!ces--A Coalition for Social Justice. It was George Harris who took it upon himself to champion this case right through the court system. In the end he did not win the case, but there was a clear statement from the court that this was a situation that the finance department had to deal with and that there were problems within the administration of the Department of Finance around oversight in this regard.
It became a high profile case which brought our attention to this whole problem. It is not news. We are dealing with an old situation that continues to be very disturbing for Canadians because it means lost revenue for this country at a time when we have seen so many of our important programs gutted and destroyed by the present government and the former government, all under the guise of inadequate resources. Yet here we are with incredible resources available, if only we had the courage, the guts and the willpower to actually crack down on some of these tax havens.
The problem gets even more serious when we look at the statistics. It was not that long ago when we received information about how much money was being invested in offshore tax havens. Information was also released less than a year ago indicating that the amount of money had increased many times over. I will quote from a study, and I think my colleague from the Bloc also mentioned it. It states:
Between 1990 and 2003, the amount of money Canadian corporations put into tax havens, mainly in the Caribbean, soared to $88--billion from $11--billion, according to a study by Statistics Canada. Direct investments in these countries increased 18 per cent annually on average. That compared with an annual increase of 8 per cent for investments in the United States and 14 per cent annually for investments in other countries. Tax haven countries “accounted for more than one-fifth of all Canadian direct investment abroad in 2003, double the proportion 13 years earlier”.
The most popular tax havens were Barbados, Ireland, Bermuda, the Cayman Islands and the Bahamas.
This was the first time we had a serious measure of the amount of direct investment that was occurring. It was an eye opener for all of us. I know at the time it caused the Conservative members to describe their horror at this development and call even more forcefully on the Liberal government at the time for action.
What did the government do at the first chance it had to put its words into action? Nothing. Yes, there was some rhetoric. The House will recall that a couple of weeks ago, when the government decided to deal with the loophole made available to corporations through income trusts, the Minister of Finance suggested the Conservatives were interested when asked to close other tax havens and loopholes. We expected something to be forthcoming by now.
Here we have legislation that deals with tax havens, with offshore investments, with levelling the playing field, with double taxation and with trying to keep money in our country, but it does nothing about the most egregious, biggest, notorious tax haven that ever existed. It was used by the Liberals apparently. I will not make unsubstantiated comments, but we all know that questions remain about Canada Steamship Lines and the role of the member for LaSalle—Émard in the continuation of that tax haven.
Why in the world did the Conservatives not decide it was time to shut that loophole? Why do we have to fight Merck Frosst? Why do we have to spend money to try to collect money that is rightfully ours? How many other cases are there out there that Revenue Canada is pursuing?
I tried to get that information and I cannot. We are told this is a matter of confidentiality and privacy. It is time the government told us exactly, at least in broad terms, the kind of situation with which we are dealing. I would expect a plan of action from the government to help correct this problem.
We are talking about billions of dollars that belong in Canada, money that ought to be put to use in Canada and invested in Canada so Canadians can be a part of our economy in the fullest way possible, using their talents to the fullest. We are talking about an incredible loss of talent and resources, which has a very direct impact on our productivity and prosperity.
It is absolutely unfair and improper of the government to continue to heap problems on top of ordinary working families, while allowing big corporations and wealthy Canadians to make use of these tax loopholes. It is time the government kept its word.
Tax Conventions Implementation Act, 2006
December 7th, 2006 / 10:45 a.m.
Pierre Paquette Joliette, QC
Mr. Speaker, I am pleased to speak to Bill S-5 because this will allow me to talk about something we have not talked about much in this House for the past weeks and months, and that is tax havens.
The bill before us is on tax treaties with Korea, Finland and Mexico. These tax treaties do not pose any problem. The Bloc Québécois agrees with all the parties in this House, I imagine, that we should not double tax taxpayers who earn income in any one of these countries or in two countries at the same time. Tax treaties to ensure information sharing to prevent tax evasion and double taxation are perfectly acceptable.
However, as far as tax havens are concerned—and that is what I want to focus on today—tax treaties do not prevent double taxation, they prevent taxation, period. I am referring to the tax treaty with Barbados, in particular. I will provide some detail on this situation, which we have denounced a number of times in the past.
It is now known, internationally, that Barbados is a tax haven for Canadian capital. The Conservative government has a responsibility to ensure that taxpayers pay their fair share of the taxes that fund our collective tools and our social programs.
There is cause for concern. For example, look at how eager the Minister of Finance was to plug the loophole of income trusts. The issue of tax havens also constitutes a major loophole in terms of our ability to collect all the taxes to which the Canadian government, the provinces and Quebec are entitled. It is a little surprising to see how slow they are to plug this hole.
As I said, we are in favour of Bill S-5 and we will continue to call on the government to find ways to tighten up the use of countries like Barbados and several other jurisdictions that, through their regulations, allow taxpayers in countries like Canada to shirk their collective responsibilities.
Subsidiaries of Canadian companies can be found in Barbados, for instance. Since information sharing is practically non-existent with that country, as with other tax havens, we have good reason to be concerned.
As I said, the previous government did nothing. As we all know, we were even able to prove that the companies once belonging to the former Prime Minister and now belonging to his sons—of course, I am referring to the hon. member for LaSalle—Émard—had used the legislation and regulations in Barbados to avoid paying a portion of their Canadian income tax, through a company called Canada Steamship Lines.
Thus, this is a serious problem. As I mentioned, it is unfortunate that we have not had the opportunity to discuss this more over the past few months, because it is a growing problem.
In 2002, the Auditor General expressed concern that the use of tax havens was leading to the erosion of the tax base, which could call into question the capacity of the federal, provincial and Quebec governments to assume their full responsibilities. In any case, this tax burden, which is evaded by those businesses and taxpayers who use tax havens, must then be carried by all other tax payers who do not wish to or are unable to shirk their responsibilities.
I would remind the House that a tax haven is a country where the rate of taxation is nil or very low and whose tax system is extremely lax. This obviously encourages many wealthy taxpayers to discreetly transfer a portion of their fortune and many businesses to set up subsidiaries and then be able to avoid paying taxes on part of their revenue. It is not just Canadian taxpayers who do this, but Americans and Europeans, too.
Since many of these countries are known for the absolute secrecy surrounding their financial sectors, it is very difficult to know with any certainty the total amounts invested in such places.
Might I remind you that, according to the OECD, a significant proportion of the money used in this kind of tax avoidance is associated with money laundering operations. Recently, we have had discussions about the tools Canada can use to ensure that we avoid this kind of money laundering. States are becoming increasingly concerned about the financing of illegal activities, including international terrorism, mafia activity and international organized crime.
That is why it is surprising that although the issue of tax avoidance via tax havens is becoming a growing concern for us, most governments, including the current government and the former Liberal government, are virtually unconcerned about it.
As I said, in 1998, the Organisation for Economic Co-operation and Development found that from 1989 to 1994, direct foreign investment had grown three times faster in tax havens than elsewhere. That is a sure sign that those investments are not intended to promote economic activity—the production of goods or services—but simply to avoid paying the taxes we all have a legitimate responsibility to pay.
The OECD compiled a list of tax havens in 1998 using four criteria: non-existent or insignificant taxation; no real exchange of tax information; no taxation or legislation transparency; and no significant activity. Companies that set themselves up in these countries must have real activities to be considered productive investments.
Now that Barbados has become the third most popular destination for Canadian investment—I will come back to this—we might well wonder where all that investment goes in a small country with a small population. Clearly, it is not going into actual operations. It is just a way to avoid Canadian taxation and, as I said earlier, that is detrimental to the common good.
In 1998, the OECD established a list of 35 countries that met these four criteria. It also identified 47 other countries that met, in certain areas, one, two or three of these criteria. It nevertheless established a list of 35 countries that met these criteria. Barbados was one of those countries. I will take a closer look at Barbados' tax system because it is the most popular tax haven for Canadian taxpayers who wish to avoid paying taxes. I would like to make it clear that no illegal activities are involved. That is what I said. If I recall correctly, only 20% of this tax avoidance represents money laundering. The avoidance is legal.
However, what makes it legal is the fact that we have established rules for it. This by no means makes it moral or legitimate. Others are made to pay the price of this irresponsibility and unwillingness to assume a fair share of the collective responsibility to pay taxes.
Under the Barbados' tax system, domiciled taxpayers and companies pay a flat tax of US $250 per year. Then, the first $5 million in profit, in US currency naturally, is taxed at a rate of 2.5%. What is interesting is that unlike most tax systems in industrialized countries, the rate diminishes as profits increase. Starting at 2.5% on the first $5 million, the rate drops gradually to 1% on $15 million or more in profits earned by the company or income declared by the taxpayer.
Barbados obviously meets this criterion of a tax haven because of its ridiculously low tax rate. In my opinion, the fact that an individual who pays income tax in Barbados would not have to pay tax in Canada and Quebec is clear evidence that the tax agreement with Barbados is not intended to avoid double taxation, but to help people avoid paying taxes in Canada.
Barbados' tax laws include a special section on international business corporations. This refers to companies that are registered in Barbados but conduct most of their business activities abroad.
For example, the head office of CSL International was in Barbados. I remember a report on Radio-Canada—I think it was on the program Enjeux, but I am not sure—where journalists went to see where CSL International's head office was. They found that it was a law firm where there were approximately 130 different names of foreign companies that are international business corporations. These truly are shell companies.
A company has very few conditions to meet to be recognized as an international business corporation. It must be registered in Barbados, have its headquarters there—as I just mentioned—and hold its board of directors meetings there. A conference call will suffice, however. The company must keep its board meeting minutes in Barbados and make a Barbadian one of its directors. As members can see, these are truly minimal requirements. However, by unanimous decision of the shareholders, this director may have no powers. Registration fees are US$390, plus $250 annually, as I mentioned earlier. These companies are subject to a regressive tax. They are exempted from tax on capital, from exchange controls and from tax on transactions. They can import duty free all the equipment they need to do business.
However, international business corporations must actually conduct business in order to meet the criteria that Canada sets to ensure that a tax agreement avoids double taxation. There has to be productive activity, so that a company does not simply serve as a way to avoid paying taxes. A company must therefore have a business line, receive company dividends and actually conduct business. That is enough to comply with the law, but simply owning an asset such as a building that generates revenue is not.
For example, in the case of a ocean-going fleet of boats, each boat can be considered to be an active business. CSL International was the holding company and received the dividends. These were considered to have been received by a company with real activities, even though that company does not actually operate a boat but rather is the proprietor of companies that themselves operate boats. One can see that by means of this provision it would be easy to avoid tax responsibilities here in Canada. Some 98% of international business corporations are foreign corporations created to oversee the foreign activities of the parent corporation.
So much for the tax system in Barbados. Now, what is the Canadian equivalent? That is interesting because we can see that the tax system in Canada is designed expressly for Barbados. As I have said, it is widely known internationally that Barbados is a tax haven for Canadian financial interests, and there are a great many Canadian banks in Barbados. As a general rule, all income earned in this country or abroad is taxable in Canada, except of course where there is a tax treaty, as we are discussing in connection with Bill S-5. The Income Tax Act provides as a general rule that a Canadian taxpayer will be taxed on all of his or her income, including income generated in the form of dividends from a foreign subsidiary, according to section 90 (1) of the Income Tax Act.
The calculation of income for a taxation year of a taxpayer resident in Canada must include any amounts received by the taxpayer during the year on account or in full or partial payment of dividends in respect of a share that he or she owns in the capital stock of a corporation that is not resident in Canada.
However, if the income was earned in a country with which Canada has signed a tax treaty—in this case, Barbados—one avoids double taxation. That income can be non-taxable.
From the moment that a business, an international business corporation, says that it has paid US$250 in addition to 1% of its profits—a little more because, as I mentioned, it starts at 2.5%—it can take advantage of the tax treaty and not pay income tax in Canada.
If the foreign subsidiary is considered to be not resident in Canada and the tax treaty prohibits double taxation, we are stretching the general rule that all income received by a Canadian is taxable. It is the tax treaty that applies, as I have already said.
In the case of Barbados, of course, the treaty does not apply to subsidiaries that have a tax rate of virtually zero. The Canada-Barbados tax treaty specifically excludes international business corporations or any other similar kinds of companies that enjoy favourable tax treatment in Barbados.
One might think, therefore, that corporations pay a normal tax rate, but since the normal tax rate in Barbados is around 40%, virtually all the Canadian corporations that have a subsidiary in Barbados established it specifically to enjoy favourable tax treatment. It is the rule, therefore, but obviously not the reality. What possible interest might a Canadian corporation have in opening a subsidiary in Barbados if it had a higher tax rate than in Canada while not engaging in any activity?
They are therefore established mostly under the aforementioned legislation that makes it possible to set up international business corporations that are not covered by the treaty. The corporations covered by this provision of the tax treaty are therefore considered under the Income Tax Act to be residing in Canada and subject to Canadian taxes. That is the way it is supposed to be according to the Canadian legislation.
However, based solely on the Income Tax Act and the tax treaty between Canada and Barbados, dividends received by the Canadian parent corporation of a subsidiary in Barbados should be taxed in Canada when they are transferred home.
What actually happens, though, is this: the regulations under the Income Tax Act are specifically designed to enable corporations to circumvent this difficulty and transfer profits from Barbados tax-free in Canada.
We find, therefore, in paragraph 5907(11.2)(c) regulations under the Income Tax Act that render moot article 30 of the tax treaty, the one that excludes international business corporations. This section of the regulations sets forth a series of criteria for a corporation to be considered non-resident in Canada and therefore not subject to tax, in particular:
5907(11.2)(c) where the agreement or convention entered into force before 1995, the affiliate would, at that time, be a resident of that country for the purpose of the agreement or convention but for a provision in the agreement or convention that has not been amended after 1994 and that provides that the agreement or convention does not apply to the affiliate.
Barbadian subsidiaries of Canadian companies fall into this category because the treaty entered into force before 1995—in 1980, to be precise—and has not been modified since. Annexes have been added, but the body of the treaty has not changed, and only one section of the treaty, section 30, excludes the majority of Canadian owned subsidiaries.
Thus, by invalidating article 30 of the tax treaty, subparagraph 5907(11.2)c) of the regulations allows the dividends of Barbadian subsidiaries of Canadian companies to be covered under subsection 250(5) of the Income Tax Act and to be tax exempt in Canada.
We can therefore see how Canadian taxation, through these corporations created under Barbadian laws, allows Canadian businesses to avoid paying taxes in Canada.
Through access to information, the Bloc Québécois obtained a copy of correspondence between the Minister of Finance and an accounting firm, confirming that this section of the regulations was drafted specifically to allow Canadian businesses to use Barbados as a tax haven. Wallace Conway, of the taxation policy branch of the finance department, confirmed to Craig Cowan that subparagraph 5907(11.2)c) assures international businesses that they will not have to pay their taxes in Canada. Perhaps Mr. Conway is no longer in that position because he wrote this in July 1994.
Their draft regulation did not come into force until 1997, but it was specified that it would be retroactive to 1994. With this amendment to the regulations, Canadian businesses with a subsidiary in Barbados win on two fronts. First of all, since their business is not covered by the tax treaty, Barbados is under no obligation to share information with Canadian tax authorities and, second, since the Income Tax Regulations disregard that exclusion, profits sent back to Canada are tax exempt. It is crucial that the government and the Minister of Finance act quickly in order to correct this loophole, just as the minister did in the case of income trusts.
Tax Conventions Implementation Act, 2006
December 7th, 2006 / 10:35 a.m.
Massimo Pacetti Saint-Léonard—Saint-Michel, QC
Mr. Speaker, I wish to speak on Bill S-5. Some of the points that I am going to speak about were already addressed by my colleague from the Conservative Party, but I want to speak today on the Liberal point of view.
Bill S-5 is an act to implement conventions and protocols concluded between Canada, Finland, Mexico and Korea, all separate tax treaties from what I understand, for the avoidance of double taxation and the prevention of fiscal evasion with respect to income taxes. It is also known as the 2006 tax convention implementation bill.
While international tax law does not always make for the most exciting of debates, its importance is indisputable, especially as we move toward greater globalization and greater free movement of labour and capital across international borders.
This bill seeks to obtain tax treaties between Canada and, as I said, three other countries, those being Mexico, Korea and Finland. We have had tax treaties in place with these countries for many years. As with most laws, there comes a time when they need to be amended in order to reflect changing times.
Consequently, the bill presents some routine amendments that I believe will help ensure Canada remains a leading participant in the global economy.
Our party will support the updates contained in the bill.
There are two primary areas with which the bill occupies itself. The first is to help combat tax avoidance between signatory countries. The second is to avoid the double taxation of nationals working abroad in these other countries.
I will begin with the issue of international tax avoidance. As an accountant, I can tell the House that combating tax evasion is not an easy task, but it is an urgent one. It is also a task that Canada cannot fight on its own. As the former chair of the finance committee during the last parliamentary session, I can say that this is why our committee looked at how Canada can increase its battle in curbing the increase of tax evasion.
With the call of the election by the opposition parties, our work was never completed, but during this session the finance committee, forced to conduct a parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, has hopefully given FINTRAC more tools to help combat tax evasion, through Bill C-25.
Stemming international tax evasion is something that requires the efforts of all countries among which capital and people flow back and forth, and they are perhaps flowing more freely now than at any other point in history. It is therefore not only advantageous for us to close tax avoidance loopholes in order to protect our own tax base, but it also speaks about our commitment to the international community. We have to show our partners, allies and competitors that Canada takes its international responsibilities seriously. We have to be willing to exchange information and work with foreign revenue authorities to help stem the tide.
I will now move on to the second part of the bill, the avoidance of double taxation. We are living in a highly globalized economy. Without international tax treaties such as this one, a Canadian working abroad would likely be taxed twice on the same income, once by the Canadian government and then again by the country in which that income is earned.
There are several ways to ensure that double taxation does not occur when the citizen of one country works in a foreign country.
A tax treaty can ensure that worker's income is taxed solely in the country where the work is done. Conversely, a treaty can also ensure that only the country of which the worker is a citizen taxes that person. Or again, finally, a tax treaty can see both countries tax a worker but at lesser rates, to ensure that the taxpayer who pays in one country will receive a tax credit in the other country in which he or she files his or her income tax return based on global income, to avoid double taxation.
The treaties in Bill S-5 cap the tax rate at 15% on portfolio dividends paid to investors who do not reside in Canada. In the case of dividends paid by subsidiaries to their parent companies, the maximum withholding tax rate is reduced to 5%. The withholding rate reductions also apply to royalty, interest and pension payments.
Each treaty in Bill S-5 caps the withholding tax rate on interest and royalty payments at 10%, which is in line with current trends in this area and current Canadian tax policies.
At this point what does concern me are the recent rumblings by the present government that seem to indicate it would like to rip apart many of the 90 tax treaties that were signed by the previous Liberal government in order to prevent the double taxation of Canadian dual citizens who work outside of Canada.
It was a little over a month ago when the Minister of Foreign Affairs told the Senate committee that the government was considering imposing a tax on Canadians living abroad under a second nationality. This would not only violate our bilateral treaty obligations with dozens of other countries, but it would also go against the fundamental value of what it means to be a Canadian at home and in the world.
Furthermore, it would also represent a complete U-turn from what Bill S-5 attempts to do. Bilateral tax treaties signed between Canada and other countries, such as the one we are discussing today, allow for dual nationals to live and work in one country without having to pay income tax in their country of citizenship. In a world of increasing international movement, these tax treaties have become more and more vital. As such, Canada has been hard at work to extend its tax treaty network for decades.
International arrangements such as these allow for relatively free movement of people and capital across borders, contributing greatly to the rich multicultural nature of our country. Imposing an income tax on dual citizen Canadians living abroad would not only violate these treaties, it would seriously reduce our domestic tax base by opening up the likelihood that foreign dual nationals here would face double taxation from their country of citizenship.
While I am happy to support the bill, which will ensure there is no double taxation between Canada and either Finland, Mexico or Korea, I am very concerned about the government's commitment to respecting the bill over the long term. I am also concerned about what that says about the government's commitment to making Canada internationally competitive in terms of taxing its citizens working abroad and potentially foreigners coming to Canada to work.
There is another aspect of what international tax treaties such as Bill S-5 achieve. It is just as important as avoiding double taxation or stemming tax avoidance. That aspect has certainty. With so much investment, goods, services and labour flowing across international boundaries, it is important for the people involved to hold a fair degree of certainty that the tax situation that exists today will more than likely exist tomorrow.
In short, it is a commitment that the rate of taxation will not change on the whim of a government. It is kind of guarantee to the international community and to Canadians that the government will not, for instance, suddenly decide to tax its dual citizen nationals living abroad like the present government decided to do by taxing income tax after promising not to do so in the last election. I have no idea why the government wanted to erode that confidence by musing about taxing its dual citizens living abroad.
Finally, I am also concerned that the government is not moving important legislation through Parliament as fast as it should. I am told that the bill needs to receive royal assent by January 1, 2007. Fortunately, it is a Senate bill and it has already passed in that place in a very speedy manner, which is why it is before us in the House.
The bill arrived in the House just two short weeks ago. It has taken the agreement of all opposition parties to fast track the bill through second and third readings. In short, it took the three opposition parties to ensure the bill, a bill that may not be tremendously exciting but is nonetheless important to Canada's competitiveness, was passed on time.
That being said, we on this side of the House are happy to support the bill at all stages.
Tax Conventions Implementation Act, 2006
December 7th, 2006 / 10:25 a.m.
Diane Ablonczy Parliamentary Secretary to the Minister of Finance
Mr. Speaker, I appreciate the opportunity to present Bill S-5, the tax conventions implementation act, 2006 for second reading today.
This bill is part of Canada's ongoing network of tax treaties with other countries, which happens to be one of the most extensive of any country in the world. At present Canada has tax treaties in place with over 80 countries.
Bill S-5 would enact updated tax treaties that Canada has signed with three countries: Finland, Korea and Mexico. These treaties will provide taxpayers and businesses both in Canada and in those countries with more predictable and equitable tax results in their cross-border dealings.
The conventions in Bill S-5 would replace existing treaties that have been in force for some time and need to be updated. The Canada-Korea treaty, for example, was originally signed in 1978. In the case of Finland and Mexico, the original treaties were signed in 1990 and 1991 respectively.
Through this bill our bilateral arrangements with these three countries would be updated to make them consistent with current Canadian tax treaty policies. For these treaties to have effect depends on the countries involved completing the legislative requirements. All indications are that all three countries, Finland, Korea and Mexico, are anxious to ratify these conventions as soon as possible.
Before discussing these treaties I want to take a few minutes to provide the House with a brief overview of the importance of tax treaties and why it is necessary for this bill to be passed.
Canada's new government is committed to enhancing fairness in the tax system. Tax treaties or income tax conventions, as they are sometimes called, are an integral part of our tax system.
Basically, they are agreements signed between countries that are primarily concerned with setting out the degree to which one country can tax the income of a resident of another country. In this regard, since income tax was first put in place back in 1917, Canada has taxed both the worldwide income of Canadian residents and the Canadian source income of non-residents.
The benefits to Canada of having tax treaties in place with other countries are significant. The fact that Canada has over 80 tax treaties already in place attests to this. Our tax treaties, for example, assure us of how Canadians will be taxed abroad. At the same time, they assure our treaty partners of how their residents will be treated here in Canada.
Tax treaties also impact on the Canadian economy, particularly because they are directly related to international trade and investment. Their direct impact on Canada's domestic economic performance is quite substantial. For example, Canadian exports account for more than 40% of our annual GDP.
In addition, Canada's economic wealth each year depends on direct foreign investment, as well as inflows of information, capital and technology. As a result, eliminating tax impediments in these areas has become even more important and contributes toward the creation of a competitive tax advantage for Canada.
In fact, there are definite economic disadvantages for countries that do not enter into tax agreements with other countries. Not having a tax treaty in place can have a negative impact on the expansion of trade and on the movement of capital and labour between countries.
It is only natural that investors, traders and others with international dealings want to know how they will be taxed before they commit to doing business in a country. For example, when considering doing business in Canada, investors and traders are anxious to know the tax implications associated with their activities both in Canada and abroad. They also want assurances that they will be treated fairly.
Tax treaties establish a mutual understanding of how the tax regime of one country will interface with that of another, thus removing any uncertainty about the tax implications associated with doing business, working or visiting abroad. Such an understanding can be achieved by allocating the right to tax between the two countries together with incorporating measures that resolve disputes and eliminate double taxation. All these measures promote certainty and stability, and help produce a better business climate.
Tax treaties, including the ones enacted in this bill, are specifically designed to facilitate trade, investment and other activities between Canada and its treaty partners. They are developed with two main objectives in mind: the avoidance of double taxation and the prevention of tax evasion.
The first and perhaps most important objective of tax treaties is the avoidance of double taxation. This occurs when a taxpayer lives in one country and earns income in another. Without a tax treaty in place to set out the tax rules, this income can be taxed in both countries. In other words, income can be taxed twice.
The absence of a tax treaty leaves open the threat of double taxation, which is, of course, of great concern to taxpayers.
To alleviate the potential for double taxation, a tax treaty between two countries allocates the exclusive right to tax with respect to a number of items. The other country is thereby prevented from taxing those items and double taxation is avoided.
As a rule, the exclusive right to tax is conferred on the state of residence.
For example, if a Canadian resident employed by a Canadian company is sent on a short term assignment, let us say for three months, to any one of the three treaty countries in this bill, Canada has the exclusive right to tax that person's employment income.
However, in the case of most items of income and capital, the right to tax is shared, although for certain types of income such as dividends and interest, the amount of tax that may be imposed in the state of source is limited.
Put another way, the tax treaties in this bill reduce the frequency with which taxpayers of one country are burdened by the requirement to file returns and pay tax in another country when they are not meaningful participants in the economic life of that other country.
The second objective, the prevention of tax evasion or tax avoidance, comes about as a result of cooperation between tax authorities in Canada and our tax treaty partners.
Tax treaties play an important role in protecting Canada's tax base by allowing information to be exchanged between our revenue authorities and their counterparts in other countries with which we have tax treaties. This helps ensure that taxes owed are paid.
Another aspect of tax treaties that I want to discuss is the importance of withholding taxes. Bill S-5 provides for several withholding tax rate reductions.
Withholding taxes are a common feature of international taxation. In Canada's case, they are levied on certain payments that Canadian residents make to non-residents. These payments include interest, dividends and royalties, for example.
Withholding taxes are levied on the gross amounts paid to non-residents and represent their final obligation with respect to Canadian income tax. Without tax treaties, Canada usually taxes this income at a rate of 25%, which is the rate set out under our domestic law or, more precisely, under the Income Tax Act.
Our tax treaties specify the maximum amount of withholding tax that can be levied by Canada and its treaty partners on certain income, and these rates are always lower than the 25% rate provided for in the Income Tax Act.
The tax treaties in this bill all provide for certain reductions in withholding tax rates.
For example, each treaty provides for a maximum rate of withholding tax of 15% on portfolio dividends paid to non-residents. The maximum withholding tax rate for dividends paid by subsidiaries to their parent companies is reduced to as low as 5%.
Withholding rate reductions also apply to royalty, interest and pension payments. Each treaty in this bill caps the maximum withholding tax rate on interest and royalty payments at 10%. In addition, with respect to periodic pension payments, the maximum rate of withholding tax is set at 15% or 20%.
Time does not permit me to go into detail about all the measures in these treaties, which I am sure the House will be disappointed to hear. However, I do want to emphasize that the proposals in Bill S-5 ensure that the tax consequences of certain transactions are in line with current Canadian tax policy.
In closing, I want to point out that Bill S-5 is standard and routine legislation. These treaties, like their predecessors, are all patterned on the OECD model tax convention, which is accepted by most countries around the world. The provisions in the treaties in the bill before us comply fully with the international norms that apply to such treaties.
In other words, Bill S-5 addresses fair taxation and good international and trade relations.
Bill S-5 meets these issues head on. The bill eliminates double taxation. It provides taxpayers living in treaty countries with a more simplified tax treaty system in which to operate. It provides investors and traders with a more stable environment in which to do business.
In short, Bill S-5 represents an integral part of our government's priority to ensure fairness in our tax system. I encourage the House to support this bill and to pass it today.
Tax Conventions Implementation Act, 2006
December 7th, 2006 / 10:25 a.m.
Jim Flaherty Minister of Finance
moved that Bill S-5, An Act to implement conventions and protocols concluded between Canada and Finland, Mexico and Korea for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, be read the second time and referred to a committee.
Business of the House
November 29th, 2006 / 3:05 p.m.
Rob Nicholson Leader of the Government in the House of Commons and Minister for Democratic Reform
Mr. Speaker, I will do better than just tell the hon. member what will happen next week, I will tell him how we will conclude this week.
This afternoon we will be on the report stage of Bill C-24, the softwood lumber agreement. As you may know, Mr. Speaker, tomorrow and Friday the House will be adjourned for the Liberal leadership convention, and we will all be watching that with interest.
On Monday it is my intention to call ways and means Motion No. 12, a motion to refer Bill C-30, the clean air act, to a legislative committee before second reading. We will continue that week with Bill S-5, on tax conventions, and Bill C-34, on the first nations education agreement.
On Tuesday we will then consider the third reading stage of Bill C-24.
Later on that week it is my hope that we will begin the debate on the marriage motion. I will continue to consult my colleagues with respect to a date for the final vote on that. After that it is my intention to proceed with Bill C-28, the budget tax measures.
I hope that is of help to the hon. member.