Mr. Speaker, I rise today to speak to the motion raised by my honourable colleagues in the opposition regarding our tax convention with Barbados.
I would like to make clear at the outset that I cannot support this motion, not just because of the importance of tax conventions in the international context but because of Canada's strong, longstanding relationship with Barbados.
I would like to focus my remarks on why Canada signs tax conventions with other countries around the world. These treaties are designed to protect taxpayers from double taxation and to assist tax authorities in their efforts to prevent fiscal evasion.
For the past several decades, Canada along with other nations of the Organization for Economic Co-operation and Development, OECD, have sought ways to avoid double taxation and protect against fiscal evasion and their corrective efforts have resulted in model double taxation conventions prepared by OECD.
Canada's tax treaties, while tailored to address our particular needs, are generally patterned on this document and are in accord with international norms in this area. Canada imposes tax on the worldwide income of Canadian residents and on the income from Canadian sources of non-residents. In other words, all income of Canadian residents, whether earned in Canada or abroad, is taxable in Canada. Non-residents, on the other hand, are only subject to Canadian income tax to the extent that they participate in the economic life of Canada or receive income from sources in Canada.
In this regard, these two fundamental features of Canadian income tax that have been with us for several decades and our tax system functions in accordance with international norms.
When our system was overhauled in the early 1970s, one of the results was the expansion of Canada's network of tax treaties with other countries. We have constantly made efforts to update and expand our network of tax treaties and we will continue to do so in the foreseeable future.
Our network of tax treaties is one of the most extensive of any country in the world. At present, Canada has tax treaties in force with more than 70 countries. As well, Canada has tax treaties in force with all of its major trading partners and with almost all of the 30 members of the OECD.
The tax treaties adopted by Canada have been developed with two main purposes in mind. First, they are designed to protect against double taxation and to offer a degree of certainty about the tax rules that apply to international transactions. The issue of double taxation arises when a taxpayer resides in one country and earns income in another. Without a tax treaty, both countries would claim income tax and would have a claim on that income. Double taxation treaties therefore insure that income is not taxed twice, a situation that would be extremely unfair to the taxpayer who is caught between two jurisdictions.
Our tax treaties accomplish this goal in three ways: first, they allocate the right of taxation of between Canada and its treaty partner over different categories of income; second, they set out rules and procedures for resolving dual claims about a taxpayer's residential status and source of income; and third, they allow taxpayers who feel that they have received unfair treatment under the terms of a tax treaty to present their case to tax authorities.
The second goal in participating in tax conventions with other nations is to encourage cooperation between governments to prevent tax evasion or avoidance. This is achieved in a number of ways including: first, the allocation of profits between parties on an arm's-length basis; second, ensuring that domestic law applies in cases involving transfer pricing and other international avoidance practices; third, providing for information exchanges between respective national tax authorities; and fourth, in some cases, allowing for mutual assistance in the collection of taxes.
Let me take a moment and explain why it is important that Canada provide relief from the burden of double taxation.
Tax treaties have a positive effect on the Canadian economy, particularly because they help facilitate international trade and investment by removing tax barriers to cross border dealings. This is significant because, as members of the House know, Canada's economy relies to a significant extent on trade with other nations around the world. Exports are the lifeline of our economy, accounting for almost half of our GDP and providing jobs for hundreds of thousands of people right across the country.
At the same time, Canada's economy is also stimulated by inflows of foreign investment, which include information, capital and technology. In other words, by eliminating tax impediments and by creating more predictable tax results for traders, investors and other taxpayers with international ties, our tax treaties promote opportunities at home and international trade, and investment abroad.
As recent events have shown, Canada's economy is becoming more integrated in the global economy. This means that now more than ever eliminating tax impediments in cross border trades is a crucial element to our long term prosperity.
I would like to point out that there can be economic disadvantages for countries that do not enter into tax agreements with other nations.
The absence of such agreements can have harmful effects on the economic relations between the countries because without a tax treaty in place setting out tax rules, income is at risk of being taxed in both countries. This outcome stands to produce unfair results and can very adverse economic impacts. It is fair to say that tax treaties help promote certainty and stability, and in doing so they help produce a better business climate.
I would like to turn to another element of the motion presented before us today and that is the question of ending our tax convention with Barbados, which the motion describes as a tax haven. I cannot support such a move and I would certainly disagree with the description of Barbados in this manner.
Once again, a bit of background is in order so that members can understand the position. First, we need to recognize that while Canada taxes the income of Canadian based corporations whether they earn it in this country or abroad, it also taxes in some situations the income of their foreign subsidiaries as well. Canada's rules must therefore take into account that the income of those companies could be subject to a foreign tax as well as the tax payable here in this country.
There are two basic ways that countries around the world deal with foreign taxes in these circumstances. One way is to have taxpayers claim a foreign tax credit, which reduces their home country tax by the amount of the foreign credit, or simply to exempt the foreign source income from taxes in the home country.
Our Canadian system combines these two methods. The Canadian corporation's direct foreign source income and portions of the income of its foreign subsidiaries are eligible for foreign tax credits. This reduces Canadian tax on that income. At the same time, Canada exempts certain kinds of foreign income of foreign subsidiaries from Canadian tax.
The rules are complex, but essentially it boils down to the fact that an exemption is usually given for the active business income of a foreign subsidiary that is resident in a country with which Canada has a tax treaty, provided the income is earned in such a country.
In 1992 the Auditor General raised questions relating to the possibilities of tax avoidance by foreign subsidiaries for some Canadian companies. In response to these questions, the government proposed a number of amendments to its existing foreign subsidiary rules.
These modifications were first unveiled in the 1994 federal budget and affected the definition of active business income, the deduction of business losses and computing foreign accrual property income and the list of countries where foreign subsidiaries can earn exempt and active business earnings from which dividends might be received tax free in Canada.
The question before us now, and one that has been raised a number of times in the House is why, when the government revisited certain aspects of these rules several years ago, was the exemption left in place for a particular kind of subsidiary resident in Barbados that did not pay a substantial rate of tax?
The answer has several important elements.
First, it is not clear that abruptly curtailing the exemption would have benefited Canada. In a world of tax planning opportunities there is no assurance that the corporate groups would not simply move the function performed by the Barbados subsidiary to another jurisdiction where similar results could be obtained and, in that case, the corporation would not pay any more Canadian tax.
Second, Canadian business is interested in maintaining its international competitiveness. Decisions that disrupt the operation of Canadian corporations abroad can have repercussions on their competitiveness. I would say further, forcing businesses out of Barbados could actually be counterproductive. As a tax treaty partner, Barbados gives Canada's tax authorities far more information and assistance than many other jurisdictions do.
Last, as hon. members know, Barbados is a good friend to Canada, a fellow Commonwealth member with which we have deep ties. The tax treaty that formed the basis for giving this exemption to these Barbados corporations has been in place since 1980. Indeed, Barbados has also been a strong ally in the efforts of OECD to combat tax havens around the world.
In February 2002 the OECD and Barbados concluded discussions on this issue. At that time the organization concluded that Barbados has transparent tax and regulatory systems. The country also agreed to increase its information sharing efforts with other OECD members, including those that did not presently have tax treaties in place.
The Barbadian parliament also passed new money laundering legislation in 1998 and updated it in 2000 and 2001. Under this legislation, assets obtained from criminal activities are subject to freezing orders and all financial institutions are required to report suspicious transactions and to maintain records of transactions worth more than 10,000 Bahamian dollars for five years.
An anti-money laundering authority and a financial investigation unit was established in August 2000 and has cooperated with similar agencies around the world since its inception.
The evidence is clear. Barbados has a fair and transparent tax system in place and is cooperating fully with its international partners. In light of this situation, it was entirely correct for Canada to maintain the longstanding exemption for income from these Barbados corporations.
This does not mean, however, that the matter is closed entirely. We continually review our tax treaties with Barbados and others and the relevant income tax regulations to ensure that they fit into our tax policy goals. If it is deemed to be necessary, the appropriate authorities will make considered decisions.
However let me absolutely clear. If changes are implemented, they will be the result of careful and thorough analysis on the part of the Canadian tax officials. The government will not make a hasty decision that could be costly both for Canada and for our tax treaty partners.
Let me state further that Canada will continue to abide and respect its existing over 70 tax treaties with other nations. They are an important element of our efforts to develop and maintain a fair and equitable tax system. We must have a tax system that provides the government with the revenues it needs to support the social and economic programs that Canadians want. At the same time such a system must also be reasonable and flexible to adapt to the changing global environment. Canadian businesses and foreign investors who helped build our economy deserve nothing less.
For these reasons and for those outlined by my colleagues during the debate, I cannot support this motion. I would urge that it be defeated. It is not in Parliament's interest to allow this motion.
