Finance Committee on May 15th, 2007

[John McKay, Liberal, Scarborough—Guildwood, ON]

It's better to do nothing if you're not sure just what it is you're doing.

I take it that this issue, as the latest reiteration of the minister's position, would not only apply to tax havens or low-tax jurisdictions but would apply right across the board. So simultaneously, there have been discussions going on with the United States about withholding tax. I can readily see how the United States has wanted to tax this particular second part of the double-dip. Could you tell me what impact this latest reiteration of the minister's position would have on these negotiations?

As I said, I can readily see how the U.S. treasury benefits from this, providing, of course, that the U.S. rate is higher or slightly higher than ours, but I don't see where the benefit is for Canada in this exercise.

[Brian Ernewein]

I apologize, Mr. Chairman, but I'm not sure I followed Mr. McKay's question.

[The Chair, Conservative, Brian Pallister]

You're not alone. Don't apologize.

[Brian Ernewein]

To try to be helpful, is it a discussion of the benefits of the Canada-U.S. tax treaty and the elimination of withholding tax on interest? Or is it the interest deductibility proposals, or is it some interaction of the two?

[John McKay, Liberal, Scarborough—Guildwood, ON]

It's the combination of the two, because the combination of the two would lead one to conclude that the U.S. treasury benefit is more than the Canadian treasury benefit.

[Brian Ernewein]

Well, I'm not certain if I follow that. The elimination of withholding tax under the Canada-U.S. treaty will be of benefit to both countries, and enhancing the ability to—

[John McKay, Liberal, Scarborough—Guildwood, ON]

But this aspect of the double-dipping was a particular irritation for the United States, was it not?

[Brian Ernewein]

I believe, from the U.S. perspective, that they were, in fact, supportive of eliminating withholding tax on interest because of the benefits it would provide their investors, as it would, conversely, ours. An incidental effect of that is that it would actually have allowed Canadian firms to invest in the U.S. from Canada and also from some third countries. But I don't know that the U.S. perceived that to be an issue for them, one way or the other.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

Just quickly, can you get back to this exempt surplus and the tax-free dividends the last panel brought up? Isn't there a comfort level that the corporation is flowing their tax-free income into Canada, and then Canadian corporations are issuing dividends to Canadians and there's a tax credit being given on those dividends, or income, that has been received, tax-free, from the corporation?

[Brian Ernewein]

If I understand the question correctly, it's a reference to the fact that individuals are entitled to a dividend tax credit on dividends they receive from Canadian companies, whether or not the dividends have been subject to Canadian tax.

That issue can arise in a purely domestic context if the firm itself is in a non-taxable position but is still able to pay some dividends. It can also, as you say, arise if the underlying income is foreign.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Yes, but I'm referring specifically to companies that derive income from Barbados, let's say. I'm not going to say tax havens in general, but from Barbados. You don't have a discomfort with that?

[Brian Ernewein]

All I can tell you is that the dividend tax credit is not set up to be based on the actual amount of underlying Canadian tax paid. It's set at a level that we hope will recognize the maximum amount of corporate tax paid.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I understand the mechanism, but you're not uncomfortable with that scenario at all? Finance officials must be uncomfortable with that and there must be a calculation, because that's going to be my next question: there must be a calculation as to how much money we're talking about. That's all. That's the ultimate question. The question is, has there been a calculation on how much tax leakage there is by companies flowing their income through Barbados?

[Brian Ernewein]

I'm not aware of there having been such a calculation either with respect to foreign income or with respect to underlying domestic income that may not have been subject to full tax.

You asked me about my discomfort level. It probably doesn't matter how comfortable or uncomfortable I am. I can tell you what I know, and that is that the rule is designed--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I can't believe that.

[The Chair, Conservative, Brian Pallister]

To wrap up, let us hear from Mr. Crête.

Mr. Crête, you have five minutes.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chairman.

The OEDC has set up a task force on the tax havens of its seven-member countries and Canada is a part of it. I was told that next June, there would be a conference call about this matter.

Is the Department of Finance represented on this committee? Is it a member of the Canadian delegation?

[Lawrence Purdy]

No. I believe the group you're referring to is a group of tax administrators, so it includes the Canada Revenue Agency on the part of Canada and their equivalents in the other countries.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

So then, the finance department is not participating in any of the activities of this committee or of any other committee.

[Lawrence Purdy]

In some countries the boundary line lies in a different place from where it lies in Canada along the spectrum between policy and administration, so it may be the case that some other countries would be represented in an exercise like that by their finance ministries, but in the case of Canada, the multilateral work on tax havens specifically is carried out through the Canada Revenue Agency.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Do you have to collaborate in order to provide figures for the members of the Canadian delegation? If they are studying tax havens, they must study them by using figures and evaluations of the financial impact of tax havens. Have you been called upon to collaborate in this?

[Lawrence Purdy]

I'm not aware of any specific requests having come from the Canada Revenue Agency in connection with the call you're describing or the working group. Certainly there's an ongoing relationship at the working level between the revenue agency and the finance department in terms of the sharing of information to make possible this kind of work, but I'm not aware of any specific initiative oriented around that project.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Strangely enough, last week, people from the Canada Revenue Agency told us that they did not have the figures and that they had to come from your department. Now you are telling us that you do not provide them with any information.

Basically, I would like to know whether you can tell us where things stand, and give us figures regarding the impact of tax havens and tax treaty countries with low tax rates. Could you tell us what the situation is?

[Brian Ernewein]

I believe we can. I'm not sure I appreciate the relevance of that information to the work the Canada Revenue Agency is doing with other countries. They're certainly doing important work to try to identify if there are transactions between countries that are leading to tax avoidance or tax arbitrage. That's fine. But I take it this committee is interested in knowing what it can about the amount of dividends coming back, for example. I've already spoken to that and suggested that won't lead you to the conclusion that you can read a tax revenue estimate into that, but as far as the number or the amount of dividends coming back, I believe we're going to be able to track that down. We haven't completed that exercise yet. We'll do it if we can and get it to the committee if we can.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Do you think that we can improve the tax haven situation without an international agreement? Can we still go on making improvements? Would it not be better for the OEDC, the WTO or some other organization to be in charge of the discussions, just as they are in charge of other trade issues?