Mr. Speaker, Bill C-10 allows Canada to ratify income tax treaties with Sweden, Lithuania, Kazakhstan, Iceland and Denmark. It also ratifies changes to existing treaties with the Netherlands and the United States. These treaties set out a framework for taxes on investment income flowing between Canada and other countries. They provide mechanisms to avoid double taxation and prevent tax evasion.
Over the past several years Canada has negotiated tax treaties with over 70 countries. These agreements deal with problems that arise when residents of one country earn income in another. They are based on the model double taxation convention prepared by the Organization for Economic Cooperation and Development.
A key problem these treaties address is that of double taxation. This occurs when the same person or business pays comparable taxes in two or more countries on the same taxable income for the same period of time. For example, double taxation would occur if a resident of one country were taxed in both Canada and that country on dividend income received from a Canadian company.
Preventing double taxation helps facilitate investment. To prevent double taxation these treaties limit the application of each country's respective tax laws and ensure that the taxes paid in one country are recognized in the other. Limits on withholding taxes in the country where the income is earned are set. An exemption is provided for certain income that would otherwise be taxed in the country where it is earned.
The treaties outline the maximum withholding taxes that may be charged on different forms of income such as dividends, royalties and interest. Specifically under the tax treaties included in Bill C-10 a general rate of withholding tax of 5% will apply to dividends paid to a parent company on branch profits.
Second, a withholding tax of 10% will apply to interest and royalties. Software, patent and knowhow royalties, except in the treaties for Lithuania and Kazakhstan, will be exempt in the country in which payments arise.
The withholding tax on other dividends is set at 15%. When the income is then received in Canada double taxation is prevented by subtracting the tax already paid from what would otherwise be payable on that income. The treaties contain measures to prevent double taxation of income earned in Canada by residents of the countries concerned.
Another problem addressed by tax treaties is that of tax evasion, where income earned abroad is not reported in Canada. To prevent tax evasion the treaties provide for the exchange of information. Changes to our treaty with the Netherlands include an article on assistance and tax collection.
This article, which is similar to that approved with the United States two years ago, ensures that Canada and the Netherlands will not be used as a refuge for those seeking to avoid taxes in other countries.
Bill C-10 deals with a problem that arose as a result of recent changes to the way our tax treaty with the U.S. treats social security payments. Under changes made law in 1995, social security payments made to residents of other countries were to be taxed by the government that issued the cheque. Previously the country of residence taxed that income.
The U.S. then imposed a flat 25.5% tax on all social security payments made to its former residents now living in Canada regardless of other income. This created hardship for low income seniors, many of whom saw their cheques cut by one-fourth.
Under Bill C-10 Canadian residents will no longer, retroactive to 1996, be subject to the United States flat tax of 25.5% on social security payments. Under the changes 85% of such income from the U.S. will be added to Canadian taxable income and will then be subject to the normal tax rate of Canadians.
Similarly U.S. residents receiving Canadian social security benefits will only be taxed in the United States. Bill C-10 also preserves each country's exclusive right to tax its residents gains on shares of companies that are not resident in other countries. The government agreed to a change in the Canada-U.S. tax treaty that let the U.S. tax this income. Unfortunately the Liberals did not bother to find out at what rate it would be taxed or whether there would be relief for low income earners.
The U.S. chose to apply a flat 25.5% tax regardless of the income of the recipient, resulting in hardship for low income earners. When that income was instead taxed by Canada our rules required that only half of it be applied to taxable income.
This resulted in a considerably lower tax rate than 25.5%; as low as zero in the case of low income seniors and about half for most others. With great fanfare in the House of Commons the Liberals today announced that they have fixed the mistake they made two years ago.
Canada and the U.S. have agreed to return to the old rules whereby social security and CPP are taxed by the country where it is received and not by the country that pays. The change is retroactive. A refund cheque will be issued. About 50,000 people will be affected.
The Progressive Conservative Party would like a firm commitment from the government. Before entering into further tax treaties on social security the government should determine exactly how the other country intends to tax and at what rate.
