Bill S-4 (Historical)

Tax Convention and Arrangement Implementation Act, 2016

An Act to implement a Convention and an Arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and to amend an Act in respect of a similar Agreement

This enactment implements a convention between the Government of Canada and the Government of the State of Israel for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and an arrangement between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. It also amends the Canada–Hong Kong Tax Agreement Act, 2013 to add to it, for greater certainty, an interpretation provision.
The convention and arrangement are generally patterned on the Model Tax Convention on Income and on Capital developed by the Organisation for Economic Co-operation and Development (OECD).
The convention and arrangement have two main objectives: the avoidance of double taxation and the prevention of fiscal evasion. Once implemented, they will provide relief from taxation rules in, or related to, the Income Tax Act. Their implementation requires the enactment of this Act.

Tax Convention and Arrangement Implementation Act, 2016

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Madam Speaker, I gladly go back to the issue of risk and potential danger.

There are two treaties before us. The one with Taiwan is brand new since we started from scratch. The one with Israel is only an update to apply the OECD model. That being said, there is a potential danger. I remind my colleague that we have 92 similar tax treaties.

Of course, I keep mentioning the ones that we often hear about, the ones that seem problematic. Therein lies the potential danger, and that is why I recommend that the Parliamentary Secretary to the Minister of Finance establish a mechanism to monitor the tax situation of the countries we sign conventions with. That would ensure that, over time, treaties like the ones with Taiwan and Israel remain reasonable and do not facilitate tax evasion like others do.

I want to emphasize that there is a potential danger and encourage the government to closely monitor the situation in every jurisdiction to make sure that our tax treaties do not defeat the purpose of this bill.

[Kevin Lamoureux, Liberal, Parliamentary Secretary to the Leader of the Government in the House of Commons]

Madam Speaker, the member across the way talked a great deal about tax evasion and avoidance, and even at one stage referenced the government providing literally hundreds of millions of dollars to deal with the issue. It is important to recognize that this government takes tax avoidance and evasion very seriously, and the budget clearly demonstrates that.

When we look at the trade file, we can talk about the investment agreements with Mongolia and Hong Kong that have been signed in the last year and we are debating the Ukraine and CETA agreements today. Those are some of the most obvious ones. Then there is Bill S-4 itself, which deals with the taxation policy, along with trade.

My question to the member is this. I thought I heard the member say he supports the bill. Does he not recognize that the bill is important and that there would be value in passing the bill in a relatively timely fashion so we can put in place the measures encompassed in this legislation?

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Madam Speaker, the member's question gives me an opportunity to talk about the importance of these two tax treaties, which we support because they are beneficial to Canadians, unlike other similar treaties.

These are indeed important opportunities, and more opportunities will open for Canadians and the jurisdictions that sign these treaties with us. They can do business here, and we can do the same in their respective jurisdictions.

As I said earlier, Taiwan is a launching pad for Canadian businesses in the Asia-Pacific region. We could say the same about Israel and other countries, like Japan, which is very advanced. Also, Taiwan's regulations are similar to Canada's, especially when it comes to the protection of intellectual property, which is almost inexistent in China. Taiwan has put a lot of effort into getting Canadian businesses to use it as a point of entry into other areas of the Asia-Pacific region. It is an exemplary democratic presence that we want to encourage with economic exchange and potentially with trade enhancing treaties such as this one.

[Robert Aubin, NDP, Trois-Rivières, QC]

Madam Speaker, I thank my colleague from Sherbrooke for showing an interest in an issue that may seem rather dry at first glance. Before I ask my question, I would like to say that I initiated a discussion with the people of Trois-Rivières on tax havens with the help of the parliamentary tools that are available, and it is one of the issues on which I received the biggest response. Although people may not fully understand how tax havens work, they know that companies that use these tax havens are not paying their fair share of taxes and that Canadians are the ones who will have to compensate for that, if they want to ensure that there is continued funding for existing public services.

My question about the bill before us is this: when there is a reciprocal agreement that the same company will not be taxed twice, should the agreement not contain some safeguards that say, for example, that the tax rate must be the same or that any discrepancy must be previously set out in the bill?

That way every citizen would feel as though the company that is bringing its profits back home paid its fair share of taxes somewhere.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Madam Speaker, my colleague raised an excellent point about such agreements. I have to say that my constituents in Sherbrooke are very concerned about tax evasion. They think it is outrageous that some companies and individuals, rich ones, typically, can hire cunning tax experts to help them bend the rules. KMPG was a pretty high-profile example. Individuals paid the company $100,000 to figure out a tax arrangement under which they would not have to pay tax on income earned from their funds in the Isle of Man. Such shameful situations anger my constituents.

Solutions may be put forward to equalize tax rates, thereby ensuring that companies pay their fair share. Those mechanisms are under review, and this is probably a good approach because companies that use tax shelters also use our infrastructure, our roads, and our airports here in Canada. Our taxes pay for all of that, but they use their wealth to avoid contributing.

They benefit from our infrastructure and our society, but they pay virtually no tax. We need to speak out against that every chance we get. Our constituents in Trois-Rivières and Sherbrooke are speaking out. That is why the government should pay very close attention to this issue.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Madam Speaker, I am pleased to rise today to speak on Bill S-4.

At first glance, members might ask why a bill dealing with international tax treaties and measures would be of much importance. On the face of it, Bill S-4 does not appear to have much to do with economic growth, but if we look at it a little, the thrust of the bill is entirely consistent with our government's commitment to growing the middle class and to help those looking to join it.

Canada is a trading nation and improving economic growth in our country is highly dependent on international trade and investment. Removing barriers to incoming business and capital is essential to these efforts. Let me reiterate, our government has been relentless in its efforts to produce economic activity and has made historic investments in infrastructure.

In addition to the investments made in budget 2016, the Minister of Finance recently announced the creation of an infrastructure bank, which will help to leverage federal government commitments even further.

Our government recognizes that to further grow the economy, we need to attract investment and talent to our country. International tax competitiveness is a key element of Canada's economic performance that we must not overlook. A tax agreement with other jurisdictions, including Taiwan and Israel, is an important part of attracting new investments and talented individuals, boosting economic growth, and creating jobs.

While large-scale tax measures generally get more attention in terms of their efforts on Canada's international competitiveness, there are many other components that can be easily integrated into the tax system and strengthen Canada's tax advantage.

Tax treaties with other countries and jurisdictions play an important part in the goal of making Canada's tax system as efficient as possible, and thus more competitive. Canada currently enjoys the benefits of a network of bilateral double taxation conventions currently enforced with 92 foreign jurisdictions, one of the largest such networks in the world.

I will be splitting my time with the hon. member for Laurentides—Labelle.

There is an ongoing to need to expand and modernize this network, and we are continually working to secure additional agreements and update existing ones. These treaties of mutual benefit to both signatories and to their respective taxpayers provide clarity on the rules relating to cross-border trade and investment, and remove barriers to augmenting them.

Furthermore, these agreements help to combat tax avoidance and evasion through the exchange of information that permits our government to uncover income that may be concealed elsewhere. It is very important, and our government has spent a lot of time and energy on this, ensuring that Canadians have a tax system that they can have confidence in and that all Canadians and Canadian corporations are paying their fair share.

To these ends, Bill S-4 implements a double taxation convention and a double taxation arrangement recently concluded and publicly announced with the State of Israel and with respect to the jurisdiction of Taiwan. Bill S-4 also adds an interpretation provision to the legislation that implemented the Canada-Hong Kong double taxation agreement, for greater certainty.

Relief from double taxation is desirable because of the harmful effects double taxation can have on the expansion of trade and the movement of capital and labour between countries. Double taxation conventions require countries to clarify the respective jurisdiction to tax income and provide certain forms of relief from double taxation. There is currently no double taxation arrangement between Canada and Taiwan, Canada's fifth-largest Asia-Pacific trading partner and 12th overall in 2013. This means that Taiwan is one of the few remaining of Canada's larger, and I would say one of the most important, trading partners to enter into our tax treaty network.

The bill also implements a revised double taxation convention with the State of Israel. This replaces an existing tax treaty that was signed here in Ottawa in 1975. The revised double taxation convention has been updated to make it consistent with Canada's current tax treaty policy.

This revised double taxation convention with the State of Israel builds upon strong, multi-dimensional, bilateral relations, as evidenced by our close political, economic, social, and cultural ties.

Underlying the strength of the Canada-Israel bilateral relationship is a breadth of personal connections between the two countries. There are approximately 20,000 Canadian citizens living in Israel and many Canadians, of course, have family in Israel. The Canadian Jewish community, which stands at around 350,000, acts as an important bridge between Canada and Israel. These informal ties have led to significant co-operation in business, philanthropy, and tourism.

Canada and Israel have a number of bilateral agreements in place, including the air transportation agreement from 2015; a renewed and funded science and technology agreement; the Canadian Space Agency and Israeli Space Agency memorandum of understanding for space co-operation, dated 2005; and the 1975 convention.

On the trade side, Canada-Israel merchandise trade totalled approximately $1.4 billion in 2015, comprising $342 million in Canadian exports to, and $1.2 billion imports, from Israel. Israel was Canada's forty-fourth-largest export destination worldwide in 2013. In that year, it was Canada's forty-third-largest source of imports globally.

Even though Israel's trade numbers with Canadian may not be in the top 10 or top 20, I would still certainly say, after having the honour of visiting the State of Israel this past summer, that expanding trade and investment ties between Canada and the State of Israel is very important.

What Israel has done with venture capital funding, specifically in Tel Aviv, is very impressive. Its venture capitalists are world-renowned. There are a lot of exciting things happening in the State of Israel that Canada needs to look at and emulate.

With respect to Bill S-4, the intention of this convention signed with the State of Israel on September 21 is to contribute to the elimination of tax barriers to trade and investment between Canada and Israel and to help solidify the economic links between the two countries. It is consistent with the government's commitment to seek new investment and trade opportunities for Canadians and to promote foreign investment in Canada.

As with the double taxation arrangement with Taiwan, the convention with the State of Israel generally follows the pattern of other double taxation conventions already concluded by Canada. Accordingly, it generally follows the format and language of the OECD model tax convention on income and on capital.

Most countries, including Canada and Israel, tax their residents on their global income. Additionally, when a resident of a country derives income from sources in another country, such as from a business located there, it is typical for the source country to subject that income to tax.

The convention recognizes this international taxation dynamic and sets out in which circumstances and to what extent Canada and Israel may tax the earnings of one another's residents and non-residents.

The convention also implements the current internationally agreed standard for the exchange of tax information upon request, as developed by the OECD and, therefore, allows Canadian tax authorities to obtain information relevant to the administration and enforcement of Canadian tax laws, and assists them in the prevention of international tax evasion and avoidance.

Bill S-4 would also reduce double taxation and encourage investment by reducing the withholding tax. It would provide for a maximum withholding tax rate of 15%, in the case of the State of Israel and the jurisdiction of Taiwan, on portfolio dividends paid to non-residents. This would help encourage and foster innovation and trade between Israel and Canada, and Taiwan and Canada.

For dividends paid by subsidiaries to their parent companies, the maximum withholding tax rate is reduced to 5% in the case of the State of Israel, and 10% in the case of the jurisdiction of Taiwan.

Again, these measures would encourage and facilitate trade and investment and increase ties between Canada and Israel, and Canada and Taiwan.

The bill would also cap the maximum withholding tax rate on interest and royalties at 10% and on periodic pension payments at 15%.

The provisions of the convention and arrangement contained in the bill are an excellent example of our government's efforts to create a more equitable and competitive tax system.

Bill S-4 would allow us to continue to grow our economy and create good middle-class jobs. It would allow for more predictable and fairer tax treatment of cross-border transactions and help the government to combat tax avoidance. We look forward to securing additional agreements such as these, and I encourage all members to support this legislation to help Canada become a more competitive jurisdiction for international business and investment.

[Charlie Angus, NDP, Timmins—James Bay, ON]

Madam Speaker, I listened with great interest to my hon. colleague. The issue of fixing our tax regimes with other jurisdictions that people move back and forth between is something that we need to do. Here we are doing it with Taiwan and Israel.

I am a little confused about this bill being described as an act to prevent fiscal evasion. I do not see efforts within the bill to deal with fiscal evasion. It is a serious problem internationally, and a larger vision for Canada would be to make sure that we are getting a fair deal for Canadian citizens by dealing with the offshore financial arrangements that put us at a disadvantage, for example, the Canada–Barbados treaty agreement. It certainly was a substandard agreement for Canada that has allowed a lot of money to flow offshore that should have been taxed here.

In terms of whether or not to support this legislation, it is necessary, as it would clean things up and make them more equitable for dealmaking between Taiwan and Canada, and Israel and Canada. But I would like to hear my hon. colleague speak to the larger question of the vision of the current government for dealing with international tax evasion and tax havens.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Madam Speaker, parts 1 and 2 of Bill S-4 include provisions dealing with the issues my hon. colleague mentioned: part 1 deals with Israel, and part 2, Taiwan.

I sit on the Standing Committee on Finance and I am proud to state that I was a member of the committee when it presented a motion on tax avoidance and tax evasion so the committee could to examine those issues. It is something that is paramount to our government. We have invested $444 million over five years to ensure that the CRA has the resources and tools to ensure that all Canadians and all Canadian companies, organizations, and foreign subsidiaries operating in Canada are paying their fair share; that Canadians have confidence in the tax system; and that the revenues coming into our coffers are then used to fund programs that Canadians value and are dear to their hearts.

[Monique Pauzé, Bloc, Repentigny, QC]

Madam Speaker, I heard my colleague talk about the State of Israel.

For the purposes of the treaty, what is Israel? Here is a example: is a settler in the occupied territories in Israel? If so, is that settler covered by the arrangement for the avoidance of double taxation?

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Madam Speaker, this type of treaty encourages greater links between Canada and the State of Israel, and greater investment and trade flows between Canada and Taiwan. That is what is important and what we need to focus on within this bill. It would allow Canada and Israel to continue to create stronger links between the two entities, and that is very important.

I had the pleasure of visiting the State of Israel this summer. It was a learning experience, indeed. I was in Ramallah as well, and it Tel Aviv and Jerusalem. It was an eye-opening experience and a learning experience, and I am the better for it.

Bill S-4 would allow our government to move the needle forward in creating a strong economy for Canadians and strong middle-class jobs. Overall, it is a win-win for us.

[Gord Johns, NDP, Courtenay—Alberni, BC]

Madam Speaker, my colleague from Timmins—James Bay talked about the Canada–Barbados tax treaty, which is similar. What safeguards will be put in place so that we will not see recurring what we have seen happening with the Canada–Barbados trade agreement? We are seeing a $5 billion leakage from the Canadian economy, which could be paying for things that we need, including pharmacare and services that Canadians demand. Maybe the member can tell us what safeguards will be put in place to protect Canadians.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Madam Speaker, to my hon. colleague, please look at part 1 and part 2 of the legislation and you will find the answer there.

[The Assistant Deputy Speaker, NDP, Carol Hughes]

I want to remind the member that he is to address the questions to the Chair, so I would suggest that the member not use the word “you”.

Resuming debate, the hon. member for Laurentides—Labelle.

[David Graham, Liberal, Laurentides—Labelle, QC]

Madam Speaker, I thank my colleague from Vaughan—Woodbridge for sharing his time with me.

I am pleased to rise in the House to address the important matter of Bill S-4. As members will know, this bill implements a convention and an arrangement on double taxation that were recently signed and announced. The convention was concluded with the State of Israel, and the arrangement with Taiwan.

Canada now has 92 tax treaties in force, and it continues to work on developing other such treaties with other jurisdictions. Bill S-4 builds on Canada's ongoing efforts to update and modernize its network of tax treaties, which helps prevent double taxation and tax evasion.

Indeed, Canada currently has one of the world’s largest networks of tax treaties. This is an important feature of Canada’s international tax system, a feature that is key to promoting our ability to compete. At the same time, the system needs to ensure that everyone pays their fair share of taxes. We do not want certain foreign and domestic firms to be able to take advantage of Canadian tax rules to evade taxes, or for certain wealthy individuals to turn to foreign countries to hide their income and avoid paying taxes.

Every time that happens, workers and small businesses in Canada end up having to pay more taxes than they should have to. It is not right. The Canada Revenue Agency needs information from foreign countries in order to identify and discourage the hiding of income.

To that end, the convention and the arrangement on double taxation in Bill S-4 implement the current international standard on tax information exchange on request established by the Organisation for Economic Co-operation and Development, thus enabling Canadian tax authorities to obtain the necessary information for the administration and enforcement of Canadian tax laws, while helping them prevent international tax evasion.

Here at home, the Government of Canada continues to work to keep our tax system up to date and competitive, so that Canada can remain a leading player in the global economy. It is essential to take measures in support of a more competitive tax system in order to foster conditions that allow Canada's entrepreneurs and industries to excel, thus clearing their path to success.

Clearly, having modern tax conventions, such as those contained in Bill S-4, is a key component of that goal. Canada remains committed to maintaining a tax system that will continue to help Canadian businesses in their drive to be world leaders, while ensuring that everyone pays their fair share of taxes.

The tax conventions complement our government's broader commitment to implementing a more competitive tax system that will raise the standard of living of all Canadians. The convention and arrangement for the avoidance of double taxation set out in Bill S-4 directly support and encourage cross-border trade in goods and services, which in turn helps Canada's domestic economic performance.

Moreover, every year, Canada's economic wealth depends on foreign direct investment, as well as the entry of information, capital, and technology. In short, the convention and arrangement for the avoidance of double taxation set out in Bill S-4 provide individuals and businesses in Canada and the other countries involved with predictable and equitable tax results in their cross-border dealings.

I would now like to talk about two things that this bill proposes to do, namely reduce withholding taxes and prevent double taxation. Withholding taxes are a common feature of the international taxation system. They are levied by a country on certain items of income earned in that country and paid to the residents of the other country. The types of income normally subjected to withholding taxes would include, for example, interest, dividends, and royalties.

Without tax treaties, Canada usually taxes this income at the rate of 25%, which is a set rate under our own legislation for income tax, more specifically, the Income Tax Act. Withholding tax rates in other countries are often as high or even higher.

Since one of the main functions of a tax convention is to divide the powers of taxation among the signatory partners, the conventions contain provisions that reduce and, in some cases, eliminate withholding taxes that could be applied by the jurisdiction where certain payments originate.

For example, the convention and the arrangement for the avoidance of double taxation in Bill S-4 provides for a maximum withholding tax rate of 15% on portfolio dividends paid to non-residents in the case of the State of Israel and Taiwan. The maximum withholding tax rate for dividends paid by subsidiaries to their parent companies is reduced to a rate of 5% for the State of Israel and 10% for Taiwan.

Withholding rate reductions also apply to royalty, interest, and pension payments. The convention and the arrangement for the avoidance of double taxation covered by this bill caps the maximum withholding tax rate on interest and royalty payments to 10%, and the maximum withholding tax rate for periodic pension payments to 15%.

The other issue I want to talk about is double taxation. Double taxation at the international level happens when taxes are collected on the same taxable income for the same period in at least two jurisdictions. The convention and arrangement regarding double taxation in Bill S-4 will help prevent double taxation so that any given income is taxed only once.

Generally speaking, the Canadian tax system applies to the income earned by Canadian residents anywhere in the world. However, foreign authorities can also invoke their right to tax any income earned in their jurisdiction by Canadian residents. Canada usually gives a credit for foreign tax paid on that income. This duplication of taxes paid in the jurisdiction where the income was earned and in the taxpayer's country of residence can have unfair negative consequences for taxpayers. No one should have to pay taxes twice on the same income.

Without any convention or arrangement for the avoidance of double taxation such as the ones provided for in Bill S-4, that is exactly what happens. Both countries could claim taxes on the income without providing the taxpayer with any measures of relief for the tax paid in the other country.

In closing, the convention and arrangement for the avoidance of double taxation proposed in the bill will provide certainty and stability and create a favourable climate for trade, to the benefit of taxpayers and businesses in Canada and in the partner countries.

What is more, the convention and arrangement for the avoidance of double taxation proposed in the bill will strengthen Canada's position in an increasingly competitive global trade and investment environment.

Those are the reasons why I ask my colleagues to vote in favour of the bill.

[Robert Aubin, NDP, Trois-Rivières, QC]

Madam Speaker, I thank my colleague for his speech.

I have to say I mostly agree with him when he says that no one should have to pay taxes twice on the same income. I think once is plenty, given current tax rates. However, citizens wonder if everyone contributes their fair share into the common treasury that pays for the services we need.

When we sign a treaty on the avoidance of double taxation, do we make sure that both countries' taxation levels are similar, even if “similar” is rather imprecise?

Does my colleague not believe that we should establish benchmarks and say that if a partner deviates from the benchmark by a certain number of percentage points, the agreement is nullified because it ends up undermining one of the partners?