House of Commons Hansard #133 of the 38th Parliament, 1st Session. (The original version is on Parliament's site.) The word of the day was barbados.

Topics

Spirit Drinks Trade Act
Government Orders

5:10 p.m.

Bloc

André Bellavance Richmond—Arthabaska, QC

Madam Speaker, the timing is perfect to talk about wine and spirits, since it is about time for a drink. I want to assure the House here that I did not have a drink before beginning my speech. My mind is always very clear when I am working. As we know, there used to be a bar in this place. I think hon. members know that. Perhaps that explains why some questionable bills were passed in this House. Be that as it may, this government is still passing questionable legislation, even though there is no longer a bar here.

Enough joking. I am pleased to address Bill S-38, an Act respecting the implementation of international trade commitments by Canada regarding spirit drinks of foreign countries. The Bloc Québécois supports the principle of this bill. There are several good reasons to pass this bill on the implementation of international agreements already signed by the European Community, the United States and Mexico, under NAFTA, and the Caribbean countries.

This bill is consistent with Quebec's policy on labelling and the recognition of local products. In Quebec, as we know, there is more and more emphasis on transparency and consumer choice. There is a great debate at the present time on new legislation regarding the designation of local products. In our view, in fact, the word “terroir” or local site should be protected. It should be a registered designation of origin that is used advisedly. That is what the debate is about because the Government of Quebec's bill was not satisfactory in the eyes of people in the farming sector.

However, it is a step forward. We hope that the debate will prove fruitful and people will succeed in getting adequate protection. My riding is involved, among other things, in a lot of fine cheese production. The French protect the trade names of their cheeses and we would like to do the same. When a product becomes more and more popular, there is a danger that it will be copied. A little earlier, the Conservative Party member mentioned certain scotches that had been copied. It is the same for all agri-food products.

That is why we need to push harder and harder both to protect our products and to inform consumers. These two reasons go hand in hand.

This bill will also enable consumers to choose wines and spirits in an informed way because they will know their real origin and nature. For example, Bill S-38 states that Scotch whiskey can be sold as such only if it was distilled in Scotland. That is only common sense, but it had to be written somewhere in a law. Armagnac and cognac come from France and can only be sold under these names if they have been produced in the regions of Armagnac and Cognac. It is the same for tequila, which is a product of Mexico, and bourbon, which is a product of the United States. These trade names must be protected in order to dissuade fraudsters and copiers, as I said earlier.

Television and the media often mention copiers or people who have produced knock-offs, especially in the area of fashion. Nowadays, products of any kind are copied, whether watches or food products. It is important, therefore, to ensure that products can be protected.

This agreement will help our exports on European markets—that is the good news because we also have an interest in being able to export our fine products there—while our internal measures are maintained, such as the ability of wineries to operate sales outlets that carry only our own products. This will not prevent us from doing what we need to do on our own territory.

The same thing applies to Quebec's requirement that all wines sold in grocery stores must be bottled in Quebec. We would never have let such a thing get by. If we notice a problem as we study a bill, I assure my colleagues that we will deal with it. I have said that we were in favour of the bill in principle, but we are just at the initial stage now. We will make sure that everything is in line with Quebec's requirements.

It is, I repeat, important for the consumer to be protected. There has been some talk of recognizing the specificities and peculiar characteristics of the various terroirs. Bill S-38 also suggests a clearer labelling policy.

Consumers are entitled to know exactly what they are buying and consuming. Quebec feels strongly about this. I am speaking of Quebec as a whole, the consumers, the producers and all the stakeholders who are concerned with this situation.

One need only think about the situation with dairy products. I will repeat what I have said many times: my region, the RCM of Arthabaska, has the highest number of dairy producers in Quebec. I am therefore very much aware of what is going on in that field.

Spirit Drinks Trade Act
Government Orders

5:10 p.m.

Some hon. members

Oh, oh!

Spirit Drinks Trade Act
Government Orders

October 6th, 2005 / 5:15 p.m.

Bloc

André Bellavance Richmond—Arthabaska, QC

I must thank my colleagues, and even some across the way, for their signs of approval when I raise that point.

So there are some terms that have to be protected: butter, milk, cream and cheese. Strangely enough there is no protection for them at the present time. Changes are, however, in the cards with Bill C-27. Obviously we are in favour of very clear labelling in order to protect our good local products.

Take fruit juices as another example. Strange as it is, “100% fruit juice” on a label must mean that the container has 100% juice inside it. Even if it only says “fruit juice”, that is the only thing that can be there.

That is not the case with dairy products, however. There is no such obligation at this time. So supermarkets can sell something labelled “buttered popcorn” when no butter is listed among the ingredients. It is just a marketing ploy to attract a buyer who thinks he is getting something extra: butter. Sometimes he does, and sometimes he does not. So we need to look at the list of ingredients every time.

We can buy a cream pie that contains no cream. That too exists. It can be found at the supermarket. We know that ice cream can be made using butter fats instead of real cream. The labelling is misleading. Fortunately, this will change thanks to provisions included in Bill C-27, which has yet to be passed.

Obviously, the idea is not to prevent certain products from being manufactured or marketed, but rather to regulate their labelling, so that consumers know exactly what they are buying. Popcorn without butter is still popcorn; but if there is no butter, the label should not say something different. It will no longer be permitted to use the word on a label or in a trademark. Manufacturers will not be allowed to write on the label that the popcorn is buttered if no butter was used. That is what we want and wish for. Bill S-38 on wines and spirits provides for similar protection.

With respect to dairy products, according to a Quebec dairy producers survey, dating back to 2001, when they read the word butter on products at the grocery store, a majority of consumers tend to think that the products contain butter. That is a reasonable assumption, because we are used to reading information and relying on it. But in such cases, as I said earlier, it is simply a marketing ploy to have consumers believe that they are selecting a good dairy product when it is not the case. We must always be wary of what is written on the packaging.

We had another long debate on the labelling of GMOs, genetically modified organisms. Naturally, the Bloc Québécois is spearheading efforts in that area.

Another, more recent survey, conducted by Léger Marketing and released in May 2004, shows that 91% of Quebeckers and 83% of Canadians are in favour of mandatory labelling for GMOs.

Spirit Drinks Trade Act
Government Orders

5:15 p.m.

An hon. member

The Liberals are against it.

Spirit Drinks Trade Act
Government Orders

5:15 p.m.

Bloc

André Bellavance Richmond—Arthabaska, QC

The Liberals are against it. All we are asking for is that labelling and advertising be consistent with the reality. People will not know that products contain GMOs until it says so on the labels.

We saw all the problems this caused with regard to Starling corn. We have concerns about this. Consumers are also concerned about it. They have the right to know what they are buying. When they select a product, they are entitled to read on the packaging what it contains. That is all we are asking.

I want to talk about trans fat now. Our NDP colleagues have done a good job here, and we support them. By 2007, all businesses will have to indicate on food labels the quantity of trans fatty acids in their products. Since trans fat is bad for us, consumers will be able to better decide what to eat and can, of course, make healthy choices. In this respect too, this debate is not a witch hunt. Just because cookies contain trans fat does not mean their sale will be banned. We can eat them. It is a question of moderation.

I started my remarks by joking about pre-dinner drinks, but when consumed in moderation, we are not hurting ourselves or anyone else. Obviously, when we eat or drink too much of anything, we have a problem. The same holds true for this kind of product. If we know that cakes or cookies contain trans fat, perhaps we should eat just one instead of two or eat them less often.

Also, if there are any companies concerned about health, they should offer similar products but without such ingredients. Then perhaps we could select them. Consumers would have a choice, but an informed choice. That is what it is important to remember here.

However, there are deficiencies in Bill S-38. We were not going to give our support without identifying some small problems. The bill before us today has good things but it could go further.

For example, with regard to the policy on labelling and respect for local products, not only must we support protection for appellations of origin and wine varieties, but we must also monitor quality standards for products. In the United States, bourbon, which is a type of whiskey, must be at least 51% corn and has to be produced in the United States. Rye whiskey, which is produced both here and in the U.S., must be at least 51% rye in the United States, while Canada has no such requirement.

According to some documents I have read here and there, Canadian whiskey has to be made in Canada. There is a list of requirements for making a good product. Far be it from me to think or say that Canadian whiskey is not good. However, here it is not required, as it is in the United States, to be 51% rye. This bill could have been used to tighten the rules on manufacturing in order to have the best possible product and for people to be better informed on what that product should be.

We could discuss this at length. However, I just want to draw a parallel between this bill and international agreements. International treaties have been ratified. In ratifying agreements with the United States and Mexico under NAFTA, the European Union under the WTO, and the Caribbean, Canada has nonetheless, yet again, been short on transparency. Let me explain.

The government asks for our approval once agreements have been ratified. This is a blatant lack of transparency toward Parliament and the people who elected us. Voters elected us to Parliament to represent them in examining, considering and passing, or not, bills of all kinds. As for international agreements, there is a democratic deficit that is far from being corrected, even though that was one of the Prime Minister's platforms during the last election campaign. It was simply an empty promise, as we so often get from the government side, since the democratic deficit still exists.

Since we have been asking for this for such a long time, the democratic deficit could have been reduced by allowing democratically elected parliamentarians a voice during negotiations with other countries and the signing of agreements in principle. There are initial steps in international agreements. There are agreements in principle before the parliaments of the countries concerned officially confirm the accord.

In other words, we are asking to participate from the very beginning of the process since, ultimately, it is still Parliament that will accept or reject a bill on an international treaty. The example that comes to mind is a recent one. Previously, I was the assistant to the member for Joliette, who was and still is our critic on international trade. Of course, there were a number of issues relating to international agreements, including one in particular on which we worked very hard, along with the hon. member for Hochelaga, since he had sugar refineries in his riding. Let me explain why I am talking about this.

Shortly before the last election, the Liberal government signed a free trade agreement with Costa Rica almost in secret, since we were not even aware of this initiative. We did not know that a free trade agreement with Costa Rica was being negotiated. That agreement sought, among other things, to remove tariff barriers on sugar. The Bloc Québécois and sugar companies in Quebec fought against that part of the agreement. We were experiencing some problems because the world market for sugar was heavily subsidized. Moreover, we did not have access to the U.S. market, because the Americans were very protectionist regarding this product.

Earlier, I was pleased when the NDP member raised the softwood lumber issue. When the Americans decide that they want to protect one of their markets, they do not beat around the bush. They are even prepared to kill or jeopardize a particular industry in other countries, including Canada, its main economic partner, to achieve their goal. So, the Americans did the same thing with sugar. It is out of the question for Canadian sugar to transit through the United States.

It was obviously a major concern for the Quebec sugar industry. Costa Rica is not currently a threat to our sugar industry, but it could be one day. In fact, it has the capacity to produce more and more sugar. But that is not necessarily the problem.

In reality, the federal government is currently negotiating—always in secret, but we are increasingly aware of this because we are on the lookout—with four other Central American countries that are major sugar producers: Honduras, Nicaragua, Guatemala and El Salvador. Here is an example where Parliament will be presented with a done deal once an agreement is reached. This agreement will threaten an industry, whereas if we are consulted right from the start, perhaps this agreement will not take the same shape.

This could and should have been done with Bill S-38. As democratically elected parliamentarians, we should have been involved in the negotiations right from the start.

In closing, I want to say that we support market liberalization. However, with specific regard here to foreign subsidies, American protectionism is creating an imbalance that should have been resolved before the agreement was signed.

In the case of Bill S-38, the agreements signed under NAFTA and the WTO will promote the exchange of spirits and wines between the signatories, while protecting the local products of each. That is why, despite its deficiencies, we support the principle of the bill, as I stated earlier.

Spirit Drinks Trade Act
Government Orders

5:30 p.m.

The Acting Speaker (Hon. Jean Augustine)

It being 5:30 p.m., the House will now proceed to the consideration of private members' business as listed on today's order paper.

Amendment to Income Tax Act Regulations
Private Members' Business

5:30 p.m.

Bloc

Guy Côté Portneuf, QC

moved:

That, in the opinion of the House, the government should amend the Income Tax Act regulations so that they do not override certain provisions of the tax agreement between Canada and Barbados allowing Canadian businesses to use their subsidiary in Barbados to avoid paying taxes in Canada.

Madam Speaker, it is an honour to have the opportunity to speak to this issue that is so important to the integrity our country's tax base. It must be shown how the current Prime Minister, sometimes through his inaction but mostly through very specific measures he took when he was finance minister, managed to arrange things so a good number of businesses, particularly in the shipping industry, avoid paying taxes.

First I will read the motion, which is as follows:

That, in the opinion of the House, the government should amend the Income Tax Act regulations so that they do not override certain provisions of the tax agreement between Canada and Barbados allowing Canadian businesses to use their subsidiary in Barbados to avoid paying taxes in Canada.

The purpose of this motion is to amend the income tax regulations so that they do not override certain provisions of the tax agreement between Canada and Barbados. These regulations currently allow Canadian businesses to repatriate income without paying taxes in Canada, which is a serious threat to our country's tax base. Moreover, this violates the spirit of these tax agreements, the purpose of which is to avoid double taxation. It so happens that in tax havens like Barbados, where the tax rate applied to foreign businesses is ridiculously low, not only do these businesses avoid double taxation, but they avoid taxation altogether.

As members of the House, we cannot turn a blind eye and ignore this reality when our constituents pay taxes and some businesses avoid doing so by using tax havens.

The necessity to look into this issue right now has to be put into perspective. Various measures taken by the current Prime Minister, especially when he was finance minister, are now allowing a number of businesses in the shipping industry, among others, not to pay their fair share, whereas the vast majority of taxpayers do pay their fair share of taxes.

The Office of the Auditor General has provided various opinions on this matter over the past 10 years or more. Since then, instead of getting better, things have gotten worse in many regards.

As early as 1992, the Auditor General brought to the attention of the public the problem posed by tax havens. In chapter 2 of his report, he wrote, and I quote:

Tax arrangements for foreign affiliates are costing Canada hundreds of millions of dollars in lost tax revenues

Avoidance mechanisms also have a negative effect on the equity and integrity of the tax system and on public attitudes toward voluntary compliance. Access to such mechanisms is usually limited to those who can afford expensive advice. Those who cannot, therefore, may be denied equitable or even-handed treatment.

In 1993, when the Standing Committee on Public Accounts presented its 12th report to the House, it reiterated a number of the recommendations originally made by the Office of the Auditor General. The committee said, among other things, that:

—care must also be taken to keep the tax system fair and equitable, and that there is no reason, in our tax regime, why income earned in a tax haven should be given preferential treatment over income earned in Canada and subject to Canadian tax.

What happened in the 13 intervening years? The current Prime Minister has not simply been remiss in implementing the recommendations the Auditor General has repeatedly made to him over more than a decade, but we have seen carried out a long-planned measure to foster the use of Barbados as a tax haven.

Backtracking a bit, we have found a great example to illustrate what we mean: a shipping company by the name of CSL. In 1992, CSL created CSL International, which was at that time nothing but a shell company incorporated in Liberia and responsible on paper for all of CSL's international activities. CSL International is involved in very little actual shipping. It is a holding company that owns other companies, and it is those companies that are involved in shipping. It is important to make it clear that, at that time, it was possible to bring back to Canada, tax-free, the profits generated by a Liberian subsidiary of a Canadian company.

As I have said, in 1992 the Auditor General brought the problem of tax havens to public attention for the first time.

What was the Finance Minister's reaction in 1994? To bring down his first budget and to state in it that he intended to put an end to the use of those havens. Such a noble intention.

However, the budget implementation bill and the regulations that came into effect in 1995 left one loophole available, and it is easy to guess where it was: Barbados.

That bill, in clause 5907 of section 11.2, renders inoperable the section of the tax convention which excluded “international business companies”, by setting out a series of criteria by which a company could be considered non-resident in Canada and thus not subject to taxation by Canada.

So that was in 1994, and the legislation was enacted in 1995. Just by pure chance, 1995 was the year CSL moved to Barbados. What an odd coincidence. The Auditor General's office did not let this go unnoticed. In 1996 he again sounded the alarm on tax havens, for a second time.

This is what he said:

The results of Revenue Canada's program to combat it indicate that avoidance continues to pose a serious threat to the tax base.

So the Minister of Finance of the day responded to the report by stating the government's intent to implement these recommendations promptly and in their entirety.

But far from trying to counter the exodus of capital to Barbados by terminating its convention with this tax haven, Canada encouraged it by signing an agreement to promote and protect foreign investment with Barbados in 1996.

What I am trying to present today is a series of events that will help us understand what we are talking about.

In 1998, the Minister of Finance introduced Bill C-28, the Budget Implementation Bill. One of the clauses in the bill concerned shipping. Henceforth, holding companies incorporated abroad and owning companies involved in international shipping would be considered as involved themselves in international shipping. In this way, they would be exempt from Canadian taxes, even when their profits were repatriated. This clause applied retroactively to 1995, the year when, as if by chance of course, CSL International set up shop in Barbados.

This bill affected only a small number of taxpayers. At the time, the Canadian Shipowners Association had only 11 members, of whom at most eight were involved in international shipping, including CSL. By the way, when he appeared before the Finance Committee on February 10, 1998, the director general of the Tax Legislation Division of the Department of Finance suggested that Bill C-28 could once again apply to a company like CSL International.

Still in 1998, the Auditor General was concerned for a third time. He said:

—the increasing use of tax havens and the growing number of bilateral income tax conventions mean that ... failure to take urgent action on these matters will severely limit Revenue Canada's ability to manage the risks to Canada's tax base that international transactions represent.

It is apparent, therefore, that between 1992 and 1998, the Office of the Auditor General was already paying the necessary attention to this matter, something that the Minister of Finance at the time was not doing.

Let us advance a little in time to 2001. The Auditor General raised the issue for the fourth time in his report in February 2001, saying that:

One of the biggest threats to the tax base lies in the international activities of Canadian taxpayers, particularly the use of tax havens.

How did the Minister of Finance respond? In 2002, the government introduced Bill S-2, the Tax Conventions Implementation Act. Far from terminating the 1980 tax convention between Canada and Barbados, Bill S-2 simply renewed it by amending its schedules in 2002.

The Office of the Auditor General took up the issue for the fifth time.

Although Canada amended its rules in 1995, little has changed. Tax havens continue to attract Canadian money. For example, Statistics Canada reports that Canadian direct investment in Barbados has increased from $628 million in 1998 to $23.3 billion in 2001—over a 3,600 percent increase—

In 2001, investment reached the modest amount of $23.3 billion.

Barbados must be an extraordinary place to invest in. I am sure that economic activity there is rolling along at breakneck speed.

According to data from the Canada Customs and Revenue Agency, in 2000, Canadian corporations received $1.5 billion in dividends from corporations in Barbados.

As you can see, Barbados is of great concern to the government. The question is whether the then finance minister and current Prime Minister is concerned for the right reasons.

Barbados is not a tax haven as such. Both citizens and companies pay 40% in income tax.

Tax laws in Barbados include a special section for International Business Corporations, or IBC. An IBC is a company registered in Barbados that conducts most of its business activities abroad. There are very few conditions to meet: the company must be registered in Barbados, have its headquarters there, hold its board of directors meetings there—a conference call will suffice—keep its board meeting minutes there and make a Barbadian one of its directors. This director may, however, by unanimous decision of the shareholders, have no powers. Registration fees are U.S $390, plus $250 annually.

These companies are then subject to a regressive tax, from 2.5% down to 1%, depending on revenues. They are exempted from tax on capital, from exchange controls, and from tax on transactions.

Fifteen minutes to discuss this issue is excessively short. Therefore, I will conclude quickly by saying that the government must not only review the terms of the Canada-Barbados tax convention but also prevent companies from using dummy companies abroad to avoid paying taxes here.

CSL, for example, must pay its taxes to Quebec and Canada. It must pay its fair share; it must not jeopardize Canada's fiscal balance; and it must not use the power of the government to favour certain specific businesses.

Amendment to Income Tax Act Regulations
Private Members' Business

5:40 p.m.

Scarborough—Guildwood
Ontario

Liberal

John McKay Parliamentary Secretary to the Minister of Finance

Madam Speaker, this must be a historic first. It is the first time since I have been in this House that the Bloc Québécois members are worried about the tax base of Canada. They seem to have an immense number of ways in which to spend whatever tax revenues the Government of Canada generates, but in this speech they are apparently worried about it. Of course it has absolutely nothing to do with politics, absolutely nothing, and I know that their concern for the tax base of Canada is very sincere.

The charming naïveté of the resolution would purport to in effect unilaterally revoke a treatment arrangement we have which is modelled on a treaty arrangement we have with 79 other countries. We do have tax treaties. The theory of a tax treaty is simple: when income is earned offshore, we do not tax it. Similarly, when another nation's company earns income in our country, we do not tax it.

If in fact the hon. individual were to pursue his resolution and it became, as it were, the force of law, we would essentially hollow out corporate Canada. Pretty well all the companies in Montreal, Ottawa, Toronto, Calgary or Quebec City that are of an international nature would simply alter their international arrangements. Then the exempt surplus that is generated by those companies for active businesses offshore would not at all ever arrive back in Canada in any form whatsoever.

On the face of it, the hon. member has something here about which the average Canadian taxpayer would say, “Oh my, that is not quite right”. When we push below that, though, we realize that he in fact is proposing something which would have significant implications for all of our tax treaty arrangements.

I put it to the hon. member that his concern for the tax base of Canada is really not all that well founded and that he simply is trying to use the notion of exempt surplus in order to be able to play a little politics.

Amendment to Income Tax Act Regulations
Private Members' Business

5:45 p.m.

Bloc

Guy Côté Portneuf, QC

Madam Speaker, I am a little sorry to have to say this to the hon. member, whom I really admire, but he did not get it at all.

The idea is not to repeal our tax agreement with Barbados, or any other tax treaty. This agreement provides that when money is brought back to Canada, the people involved must pay their fair share of taxes. The idea is to ensure that the Income Tax Act regulations do not unfairly override certain provisions of that tax agreement.

We do not want to repeal these agreements. Far from it. Through this motion, we want the government to look at the critical need to ensure that what it does with its right hand is in compliance with what it does with its left hand.

Amendment to Income Tax Act Regulations
Private Members' Business

5:45 p.m.

Bloc

Paul Crête Rivière-Du-Loup—Montmagny, QC

Madam Speaker, I am pleased to speak in this debate. I would like to congratulate my colleague on his presentation, the clarity of what he said, and the need in such issues not just for justice to be done but to be seen to be done. I am thinking of all the things that the government does, especially in the case of people working for the government who were affiliated with companies involved in activities that strike us as a little dubious. I am not speaking necessarily of legality but rather of choices. One might say that a private company can make certain choices, but when one is in public life, one must be sure to be absolutely transparent.

I would like to ask my colleague whether he hopes that the debate here in this House on this matter will actually help to clarify some issues surrounding the situation. Can he tell us what kind of clarifications he wants?

Amendment to Income Tax Act Regulations
Private Members' Business

5:45 p.m.

Bloc

Guy Côté Portneuf, QC

Madam Speaker, we do have to make sure that the provisions of the Income Tax Act and regulations are not incompatible with the tax treaty signed with Barbados.

Based on an assessment by a reporter for Walrus magazine, which he himself described as extremely conservative, CSL International apparently saved almost $103 million because of this provision. That is the kind of thing to look out for. It is imperative that the tax treaty signed with Barbados be honoured. Some accounting trick involving the Customs and Revenue Agency must not be allowed to come and invalidate these provisions. It is important that everyone in society, whether individuals or corporations, pay their fair share of taxes.

Amendment to Income Tax Act Regulations
Private Members' Business

5:50 p.m.

Scarborough—Guildwood
Ontario

Liberal

John McKay Parliamentary Secretary to the Minister of Finance

Madam Speaker, the motion as it sits is not really quite clear. Far from my hon. friend's comment about not understanding this, I think I understand this quite well. It seems to be referring to a provision in the income tax regulations which deals with how Canada's tax treaties interact with our domestic tax law with regard to the treatment of foreign subsidiaries of Canadian companies.

The motion calls for changes to the way foreign source income is treated when it is earned by a foreign subsidiary and repatriated to a Canadian parent company. This is a fairly complex area of law and one that is easily misunderstood. With the greatest respect to my friend opposite, I think he added to the mystification rather than to the clarification of this complex area of law. Let me first of all set out how Canada taxes foreign source income of Canadian businesses.

Since 1972 Canada has had a policy of not taxing the foreign source active, and I emphasize active as opposed to passive, business income of Canadian companies if that income is earned through a subsidiary located in a country with which Canada has a tax treaty. In other words, we have 80 of these tax treaties and the fundamental root of a tax treaty is that we do not tax their companies operating here, and they do not tax our companies operating there. This long-standing policy is often called an exempt surplus system and is generally consistent with the practice of many other countries.

Canada is not in this alone; all of the OECD countries, the United States, everyone has these treaties. These treaties are to avoid a double taxation regime. This means that Canadian companies can invest in subsidiaries in all of these foreign markets and bring back profits to Canada in the form of dividends. The Canadian parent company does not pay Canadian tax on the dividends received. The money is earned abroad. It is taxed in that jurisdiction abroad and then it is treated as exempt surplus and returned to the Canadian parent in the form of a dividend.

The income they represent is subject, of course, to tax in two ways. One is it is taxed in the country, and in the case that the hon. member is worried about, it is Barbados. The second is that Canada taxes the income when it is distributed by the Canadian parent to its shareholders.

One of the countries Canada has a tax treaty with is Barbados. In fact Barbados is one of Canada's oldest tax treaty partners. While Canada's existing tax treaty with Barbados was signed in 1980, Canada had an agreement previously with the United Kingdom to extend the 1946 Canada-United Kingdom income tax agreement to cover the British colonies, as they were then known, which included Barbados. Canada and Barbados enjoy a close working relationship bilaterally through the Commonwealth. We represent Barbados at the IMF. We work with Barbados in the Organization of American States. We also represent Barbados at the World Bank.

On the investment side, there are Canadian companies operating in virtually all aspects of the Barbadian economy, in textiles, financial services, building products and software. Canadian companies have located there in part because that is a very profitable area for them to be in, but in part because this is part of their international operations. Madam Speaker, you and I can think of many companies that have subsidiaries in tax treaty countries, including Barbados.

The motion aims to deny exempt surplus treatment to certain Barbadian subsidiaries. Those Canadian businesses have been able to rely on the Canada-Barbados tax treaties since 1980 to obtain exempt surplus treatment. Again, I will emphasize that it is active income earned in Barbados or whatever the other tax treaty country might be. It is taxed in that treaty country and then repatriated as exempt surplus to Canada.

If this long-standing exemption were denied, a number of scenarios could result. If we went through with the motion, this is what could happen.

It could force many of these companies to restructure their operations, for example, by relocating to other jurisdictions that compete with Barbados. All that is being done by this motion is moving from one tax treaty jurisdiction to other tax treaty jurisdiction. There would be a harm imposed on Barbados and there would not necessarily be any benefit to be gained in the other tax treaty jurisdiction. Of course, we would not be collecting any additional tax since we do not tax the exempt surplus in the first place.

I do not know what we would accomplish at the end of the day. It could mean that profits from foreign operations are no longer brought home if in fact that is the intention of the hon. member. Those dividends would not actually arrive in Canadian corporations to be distributed to Canadian shareholders because the exempt surplus would remain offshore.

If the affected Canadian businesses remained in Barbados and continued to repatriate funds to Canada, it could lead to an overall higher tax burden because of course that money that comes in the form of exempt surplus is distributed as dividends, is taxed and would have to be replaced in some other manner. There would be a counterproductive result to this resolution.

In any of these scenarios the change requested would be a significant shift in policy which many would see as contrary to the government's goal of providing a competitive tax system that fosters international trade and investment and ultimately economic growth. I am sure members would agree that Canada wishes, as a public policy, to encourage our international corporations to succeed and they have to succeed in a competitive environment.

One of the elements of a competitive environment is having a competitive tax system. Frankly, if the resolution were to proceed, a lot of those Canadian international operations would just simply go into other jurisdictions. It would be essentially arbitrary and apply only to Barbados without taking into account the ability of companies to restructure and relocate their operations to other treaty countries.

What I have said thus far applies indeed to a regulatory change sought by the motion were it effective in denying exempt surplus treatment. However, that is not entirely clear. This is due to a clause in the Canada-Barbados tax treaty which may have the effect of guaranteeing exempt surplus treatment to all Canadian subsidiaries located in Barbados.

If that interpretation of the treaty clause is correct, then Canada could not ultimately take away the exemption without renegotiating or revoking the treaty. In this case the change in the regulation would only create uncertainty for Canadian businesses as to whether they could or could not earn exempt surplus.

Amendment to Income Tax Act Regulations
Private Members' Business

5:55 p.m.

An hon. member

Oh, oh!

Amendment to Income Tax Act Regulations
Private Members' Business

5:55 p.m.

Liberal

John McKay Scarborough—Guildwood, ON

Madam Speaker, I hear some chirping opposite.

This goes to the heart of the matter because the motion would in fact turn out to be counterproductive. It would ultimately mean that we would not even see the exempt surplus as it is being repatriated.

If the regulatory change were effective in denying exempt surplus treatment, it would make Canadian businesses less competitive in the global marketplace, or it would simply cause taxpayers to restructure their affairs with no additional benefit to Canada. If the change were not effective due to the treaty clause, it would only serve to create uncertainty for Canadian businesses.

I urge all hon. members in the House to reject the motion. It is counterproductive to Canada's best interests.

Amendment to Income Tax Act Regulations
Private Members' Business

5:55 p.m.

Conservative

Bev Oda Clarington—Scugog—Uxbridge, ON

Madam Speaker, in the 1994 budget, the then minister of finance promised too crack down on tax havens. The implementation of the budget cracked down on Liberia as a tax haven but other tax havens, such as Barbados, still qualified due to a loophole in the Income Tax Act.

The OECD defines a tax haven as any jurisdiction that “has no or nominal taxation on financial or other service income and offers or is perceived to offer itself as a place where non-residents can escape tax in their country of residence”. That is from “Tax Havens”, the Library of Parliament, 2004, page 5.

Barbados is one of the 36 countries identified by the Organisation for Economic Co-operation and Development in 2000 as a tax haven. Canadian FDI to Barbados increased from $1.5 billion to $24.7 billion between 1990 and 2003, making Barbados the third largest recipient of Canadian FDI in 2003 after the United States and the United Kingdom. The value of Canadian direct investment in Barbados now surpasses Barbados' GDP by a factor of six.

According to a Library of Parliament briefing, “as a general rule, Canada negotiates tax treaties only with countries that have comparable taxation rates, structures and information disclosure requirements. There are, however, some exceptions to this rule. Canada has tax treaties with three of the 36 countries listed as tax havens by the OECD in a 2000 report on harmful tax practices. These three “tax haven” countries are Barbados, Cyprus and Malta”.

In Barbados the general corporate tax rate and the rules for information disclosure are comparable to those of Canada. Canadian foreign affiliates can, however, choose to incorporate themselves as Barbados international business companies and, instead, to pay tax rates of between 1% and 2.5%. In Canada the combined federal-provincial-territorial corporate tax rate is typically between 35% and 40%.

There is a provision in the Canada-Barbados tax treaty that is supposed to prevent Canadian foreign affiliates from being able to take advantage of tax treaty protection and therefore from obtaining “exempt surplus” status, as the provision implies that any active income earned by a BIBC would be fully taxed when returned to Canada in the form of a dividend. However a provision in the Income Tax Act has served to override the preventative provision in the Canada-Barbados tax treaty. The Income Tax Act gives “exempt surplus” status to any company operating in any country with which Canada has a tax treaty regardless of the content of that tax treaty.

The Auditor General has estimated that the existence of tax havens, including but not limited to Barbados, has resulted in hundreds of millions of dollars in reduced Canadian tax revenues.

According to Statistics Canada, Canadian assets in OFCs, offshore financial centres, increased eightfold, from $11 billion to $88 billion between 1990 and 2003. These centres include countries that are often referred to as tax havens. OFCs accounted for more than one-fifth of all Canadian direct investment abroad in 2003, double the proportion of 13 years earlier.

When companies transfer tax dollars out of Canada into tax havens, hardworking Canadian taxpayers are left to pay the difference. When companies transfer tax dollars out of Canada into tax havens they are evading their social responsibility. Those tax dollars could be used for health care, education or the armed forces. Tax havens deprive the Canadian government of tax revenue that could be used to fund social programs, to pay down debt or to provide tax relief.

One of the results of the government's uncompetitive corporate taxation levels is the desire of businesses to transfer tax dollars out of Canada into tax havens. As a result, the government must use a two-pronged approach when addressing tax havens. It should make Canada more attractive to investment by instituting competitive corporate taxation levels and reinvesting in strategic areas such as skills development and post-secondary education or research.

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. 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 those other tax havens. More important, the government should make Canada more attractive to business by implementing competitive corporate tax levels. It should focus on productivity and make Canada a more attractive place to invest.

Our party is looking forward to the study which will be commissioned by the finance committee during the second week of December. The Conservative Party of Canada feels that it is important to stress that investment is mobile and will continue to move. The problem is serious. Canada is now a net exporter of capital. Neither Canadians nor foreigners are investing in our country. Our party welcomes that Canadians are investing outside the country but we must why they are not investing heavily in Canada.

Our party believes that overall tax reform with an emphasis on tax relief for large employers and reform of investment vehicles is necessary to ameliorate the situation in order that Canadians and other countries consider Canada as a good place to invest.