Your question stems in large part from Canada's historical position on tax treaties and how Canada taxes the income of foreign affiliates of Canadian corporations that carry on active businesses in foreign countries.
I started with the department in 1982, so for at least some 28 years the policy of the department has been that Canada does not tax the dividends paid out of the active business income of foreign affiliates of Canadian corporations that carry on active businesses in jurisdictions with which Canada has a tax treaty. It recognizes that the income in the foreign jurisdiction is earned by a corporation resident in the foreign jurisdiction, and it's up to the foreign jurisdiction to tax that corporation. If there were no tax treaty, the income would be taxable by Canada, but a foreign tax credit would be allowed.
Some were of the view years ago that the policy behind the tax exemption for exempt surplus paid from offshore jurisdictions to the Canadian parent companies was to implement a simplified foreign tax credit. As Canada and other countries reduced their income tax rates, there were many circumstances where other countries, either at the time we negotiated the treaties or subsequently, had lower tax rates than Canada. So it became apparent that we could not look to that as being an underlying policy for our exempt surplus or the ability of foreign affiliates of Canadian corporations to pay tax-free dividends to their Canadian parents.
That policy became very clear in the lead-up to the 2007 budget. As the minister indicated, the key to this isn't so much about telling other countries how much they should tax corporations that carry on business in their jurisdictions and are resident in their jurisdictions, but rather about ensuring that if you are going to provide exempt surplus for dividends paid by those corporations, we should extract a quid pro quo from the countries in which they operate.
That is the essence behind the tax information exchange agreement policy I described earlier that was introduced in 2007. The government indicated that if a country enters into a tax information exchange agreement with Canada, we will provide exempt surplus to the foreign affiliates of Canadian corporations that carry on active businesses in those countries. If after having been invited to enter into a TIEA a country refuses to do so, not only will the exempt surplus not be provided, but we will tax those corporations on an accrual basis.