House of Commons Hansard #93 of the 39th Parliament, 1st Session. (The original version is on Parliament's site.) The word of the day was tax.

Topics

Questions on the Order Paper
Routine Proceedings

10:20 a.m.

Regina—Lumsden—Lake Centre
Saskatchewan

Conservative

Tom Lukiwski Parliamentary Secretary to the Leader of the Government in the House of Commons and Minister for Democratic Reform

Mr. Speaker, I ask that all questions be allowed to stand.

Questions on the Order Paper
Routine Proceedings

10:20 a.m.

NDP

The Deputy Speaker Bill Blaikie

Is that agreed?

Questions on the Order Paper
Routine Proceedings

10:20 a.m.

Some hon. members

Agreed.

Bill C-265--Employment Insurance Act--Speaker's Ruling
Private Members' Business
Routine Proceedings

December 7th, 2006 / 10:20 a.m.

NDP

The Deputy Speaker Bill Blaikie

Order. At this time I would like to share with the House a ruling. The Chair would like to take a brief moment to provide some information to the House regarding the management of private members' business.

On May 31, 2006, after having reviewed all of the bills on the order of precedence which, at first glance, appeared to involve spending, I shared with the House a list of bills that caused the Chair some concern. Without making any decision on these bills at that moment, hon. members were invited to present arguments as to why, in their view, each of these bills did or did not require a royal recommendation. This practice of preliminary review is one that the Chair intends to continue.

Accordingly, following the replenishment of the order of precedence in November, I have reviewed the additional bills that have come forward for consideration. I can report that only one of these bills, Bill C-265, An Act to amend the Employment Insurance Act (qualification for and entitlement to benefits), standing in the name of the member for Acadie-Bathurst, gives the chair some concern, given the spending provisions it appears to contemplate.

The Chair would encourage hon. members who would like to make arguments regarding the need for a royal recommendation for this bill to do so at an early opportunity.

I thank the House for its indulgence in this matter.

Tax Conventions Implementation Act, 2006
Government Orders

10:25 a.m.

Whitby—Oshawa
Ontario

Conservative

Tax Conventions Implementation Act, 2006
Government Orders

10:25 a.m.

Calgary—Nose Hill
Alberta

Conservative

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
Government Orders

10:35 a.m.

Liberal

Massimo Pacetti Saint-Léonard—Saint-Michel, QC

Mr. Speaker, I understand from the hon. member's speech that investment is an important part of why we sign tax treaties. It is important for the flow of goods and services, but for investment as well.

I wonder if the member opposite has any idea of how much foreign direct investment there is in Canada, in particular by the U.S., or about why these tax treaties important, because they do lead to additional investment.

Tax Conventions Implementation Act, 2006
Government Orders

10:35 a.m.

Conservative

Diane Ablonczy Calgary—Nose Hill, AB

Mr. Speaker, foreign direct investment in Canada this year was $433.8 billion. That is nearly half a trillion dollars.

In fact, foreign investment in Canada is increasing. By the end of the second quarter of this year, foreign direct investment in Canada had increased by $7.5 billion. This is an enormous part of our economy. It is why these tax treaties facilitating this kind of investment and international cross-investment are so important to our country and to the international marketplace.

Tax Conventions Implementation Act, 2006
Government Orders

10:35 a.m.

Liberal

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
Government Orders

10:45 a.m.

Calgary—Nose Hill
Alberta

Conservative

Diane Ablonczy Parliamentary Secretary to the Minister of Finance

Mr. Speaker, my colleague has sat as chair of the finance committee. I know he has a real interest in investment in Canada. He asked me a question about that. Could he share with the House, on the basis of his experience on the finance committee, additional details about the importance of international investment in Canada and the benefit to our country of treaties like this to facilitate investment?

Tax Conventions Implementation Act, 2006
Government Orders

10:45 a.m.

Liberal

Massimo Pacetti Saint-Léonard—Saint-Michel, QC

Mr. Speaker, we agree on this one. Any type of treaty legislation that will enhance Canada's place in the world will benefit all Canadians. I travelled with my colleague across Canada and saw that Canadians live on trade. Whether it is the exporting of manufactured products or natural resources, Canada has to be more competitive.

We talked about keeping a competitive tax structure or maintaining our social programs. Those are all important aspects of keeping Canada competitive. We live in a global economy and a global world and the tax treaties represent only one aspect of the whole competitive package that Canada has to maintain on the international stage.

Tax Conventions Implementation Act, 2006
Government Orders

10:45 a.m.

Bloc

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
Government Orders

11:10 a.m.

NDP

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
Government Orders

11:30 a.m.

NDP

Wayne Marston Hamilton East—Stoney Creek, ON

Mr. Speaker, I always look forward to hearing the comments of the member for Winnipeg North. I was struck during her speech that at one point we only had 11 members present in the House. We barely have quorum at this moment. When we consider the fact that both the opposition Liberals and the government of the day seem to have a reluctance to deal with this particular issue, perhaps that is why.

Tax Conventions Implementation Act, 2006
Government Orders

11:30 a.m.

NDP

Judy Wasylycia-Leis Winnipeg North, MB

Mr. Speaker, I appreciate my colleague from Hamilton pointing out the poor attendance in the House, although I know we are not supposed to talk about who is or is not here.

This is a very important issue and it needs a full and complete debate. We should not simply let the government off the hook because the legislation it brought to us is routine and perfunctory. We should not simply allow the government to skirt through the legislative process without being reminded about its promises.

In the end we are going to support the bill. However, we still have not received any indication from the government as to why it has not addressed the tax loopholes and why they continue to exist. We still have not received any indication from the government as to why it has not closed the Barbados tax haven, which it has talked about for many years. If the debate continues, I will ask the Conservatives about this. This issue begs for the full attention of the House. It requires a major commitment on our part to deal with this very egregious situation.

The statistics about these tax havens and offshore investments indicate that not only did the increase in the use of offshore financial centres go up eight-fold, but the largest growth in Canadian direct investment occurred in the Barbados, the very tax haven the Conservatives talked about vis-à-vis the member for LaSalle—Émard's Canadian Steamship Lines. Is this something that is useful in a pre-election period only and then dropped like a hot potato because the government is afraid to take on the corporate world? Is the government afraid to take on the wealthiest in our country? Perhaps this is what we really are talking about.

There is no evidence in the last budget or the minister's most recent economic update to indicate that the government is committed to finding a way to reduce the burden on ordinary working families. There is no evidence that the government is prepared to provide the supports and services that working families need in order to be productive members of our society. Every day we hear about people struggling. Every day we hear about people dying on the streets, about the homeless in Vancouver and Victoria who have no shelters. There has been no commitment on the part of the government to treat this as a serious emergency situation. It is mind-boggling.

Here we are in the comfort of this place while people are basically dying on the streets in cities that have no preparations for emergency response in terms of serious weather conditions, yet the government will not close a tax haven that causes us to lose billions of dollars. If we could get our hands on that money or if the government had the commitment to reign it in, it could be put to good use.

Canada is a wealthy country, yet people are dying on the streets, aboriginal people are living in third world conditions and Status of Women offices are being totally eliminated. The North End Women's Centre in Winnipeg, which provides services for women to help them become financially knowledgeable so they can build a future for themselves and their families, was totally eliminated because the government did not have a couple of hundred thousand dollars to support it.

That is the dilemma we face today and that is why my colleague's question is so important. This is a serious issue. It is about how we build a country. It is about our priorities. If we can sit back and let that money disappear through our fingers because we do not want to trouble the big corporate entities or big families like the Bronfman's, which was named in the project loophole, and we do not want to touch issues around Canada Steamship Lines any longer, then we will continue to be in a disgraceful and embarrassing situation for Canada on the world scene.