Treaties Act

An Act to provide for the participation of the House of Commons when treaties are concluded

This bill was last introduced in the 36th Parliament, 2nd Session, which ended in October 2000.

Sponsor

Daniel Turp  Bloc

Introduced as a private member’s bill. (These don’t often become law.)

Status

Not active
(This bill did not become law.)

Elsewhere

All sorts of information on this bill is available at LEGISinfo, an excellent resource from the Library of Parliament.

Income Tax Amendments Act, 2006Government Orders

February 21st, 2007 / 4:50 p.m.
See context

Bloc

Thierry St-Cyr Bloc Jeanne-Le Ber, QC

Mr. Speaker, I will continue to address tax evasion and the tax havens used in Barbados.

As my colleagues who spoke before me have said, Bill C-33 is somewhat technical and contains a number of provisions to prevent circumvention of the tax rules and to prevent tax evasion. It responds to a number of requests made by the Auditor General. The Bloc Québécois will therefore support the bill. However, as I said in the question I asked earlier, I think that it does not go far enough in dealing with tax havens. Contrary to what my colleague from the Liberal Party said, we are not talking about people committing tax fraud, we are talking about people who avoid tax and find legal schemes so that they do not pay tax. The reason they can do that is that the existing legislation lets them.

In my presentation, I will try to explain how these people operate and what has to be done to stop this. On the question of tax havens, I would like to tell the House about a comment made by the Auditor General on February 27, 2001. He said that one of the biggest threats to the tax base lies in the international activities of Canadian taxpayers, particularly the use of tax havens.

Tax havens are countries that have a zero or very low tax rate and loose tax rules. That combination is an incentive for taxpayers to settle there or transfer a portion of their activities there in order to be exempt from the Canadian tax system and not have to pay taxes here. Most of the time, these are countries that are notable for their absolute bank secrecy, which makes it impossible to trace all the movements of capital that take place there.

Because of that bank secrecy, it is difficult to measure this phenomenon. In 1998, the OECD estimated that from 1989 to 1994 foreign direct investment rose three times faster in tax havens then elsewhere. That is not a small matter. The OECD drew up a list of tax havens based on four criteria: no or only nominal taxes; lack of effective exchange of tax information; lack of transparency in the operation of tax laws; and no substantial activities in the country where operations are purported to occur. Thirty-five countries met those criteria. The OECD pointed a finger at 47 other countries which, while they were not tax havens, had provisions worthy of a tax haven in certain areas. It should be noted that Canada was on the list of 47 countries because of its tax policies relating to the international shipping of goods.

In 2001, that list was amended by a group of 13 OECD member countries, including Canada, to remove the no substantial activities criterion, which brought the number of tax havens—on paper, obviously—down to 7 from 35. Those countries have not ceased to be tax havens; they are still tax havens.

In 2002, Barbados was removed from the list of countries regarded as tax havens by the OECD. However, Barbados has not changed its fiscal practices; quite the opposite is true. The tax system in Barbados is interesting. I hope that the fact that I am talking about it will not encourage any Quebec or Canadian companies to move there, despite the wonderful conditions it provides, such as a fixed fees of $250 per year and a tax rate of only 2.5% on the first US$5 million in profits. It then declines gradually, to 1% after $15 million. For a company that does not want to pay income tax, this is extremely advantageous.

In Canada, the tax system is tailor made, expressly for Barbados. Let us look at how it operates. The general rule is that all income earned in Canada or abroad is taxable in Canada. However, if income is earned in a country with which Canada has signed a tax treaty to avoid double taxation, that income may not be taxable.

If the foreign subsidiary is deemed to be non-resident in Canada and the tax treaty prohibits double taxation, the general rule that all income received by a Canadian is taxable is bent. It is then the tax treaty that applies.

In theory, in the case of Barbados, the treaty does not apply to subsidiaries that have a tax rate of virtually zero. Like the tax treaty with Cyprus, the Canada-Barbados tax treaty specifically excludes what is known as international business companies or any other similar kinds of companies that enjoy the favourable tax treatment I referred to earlier in Barbados. If we exclude these companies and consider only the normal tax rate in Barbados, which is approximately 40%, virtually all the Canadian companies with a subsidiary in Barbados have established it specifically to enjoy favourable tax treatment. For the most part, these have been established under the Barbados International Business Companies Act and are therefore excluded from this convention.

The companies covered by this provision of the tax treaty are therefore considered under the Income Tax Act to be resident in Canada and therefore subject to Canadian taxation. 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. So far, so good.

There are, however, provisions in the Income Tax Regulations which are specifically designed to enable companies to circumvent this difficulty and transfer profits from Barbados tax-free in Canada. I will spare you the whole list of provisions; suffice it to say that paragraph 5907(11.2)(c) of the Income Tax Regulations, if anyone feels like looking it up, renders moot article 30 of the tax treaty, the one that excludes international business companies. It sets out a series of criteria for a company to be considered non-resident in Canada and therefore not subject to tax. Thus, Barbadian subsidiaries of Canadian companies fall into that category.

By invalidating article 30 of the tax treaty, the regulation allows the dividends of Barbadian subsidiaries of Canadian companies to be tax exempt in Canada. Incidentally, through the Access to Information Act, 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.

In July 1994, Wallace Conway, of the taxation policy branch of the finance department, confirmed the following to Craig Cowan, who was employed by the accounting firm Arthur Andersen:

Be advised that proposed paragraph 5907(11.2) is intended to ensure that a Barbados international business corporation which is a foreign affiliate will remain eligible to earn an exempt surplus.

So, the bill 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 both 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. The behaviour of the Canadian government, particularly under the Liberals, was all the more deplorable considering that Canada even worked to undermine all the efforts being done by the OECD, this to ensure that Barbados would not be deemed to be a tax haven.

This work to get Barbados off the list was done in two stages. In 2000, the notion of tax havens was replaced with the notion of non-cooperative tax havens, following a recommendation made by a 13 member committee, which included Canada.

Secondly, that same committee changed the criteria to determine whether these countries were cooperative or not. Now, a tax haven simply has to commit to being transparent and to sharing tax information with other countries to be taken off the list. That is really very little.

The tax treaty is essentially based on the exchange of tax information. Thus, once a tax treaty is signed with a tax haven, it is virtually automatically removed from the list. That change made the working group on harmful tax practices completely pointless, and Canada, as a result of what the Liberal government of the time did, was a major participant in weakening it.

For years, the failure to act could be laid at the doorstep of the Liberal Party. We must now recognize, however, that the Conservative government has proposed nothing to fix this. I hope it will soon do so. Probably the budget will be an appropriate opportunity to do it.

The Auditor General has repeatedly deplored Canada's failure to act. She first did this in 1992. In 1996, she took up the issue for the second time; in 1998, for the third time; in 2001, for the fourth time; and ultimately, in 2002, for the fifth time. Still there has been no action by the government, no action by the Liberals at the time and still no action by the Conservatives today. In fact, Canadian investments in tax havens continued to multiply over the same period when the Auditor Generals were issuing us their warnings.

From 1990 to 2003, Canadian companies invested major and growing amounts in countries recognized as offshore financial centres, particularly in the Caribbean. Between 1990 and 2003, Canadian assets in those countries grew by a factor of eight, rising from $11 billion to $88 billion. In 2003, the five main OFCs I referred to earlier were among the 11 countries where there were the most Canadian assets, and so on.

We must realize, from the various reports on television that have dealt with the subject, that this is a situation in which there is more and more money being invested in tax havens, despite the warnings from the Auditor General and, of course, from the Bloc Québécois. The government has never done a thing and we still see nothing being done about this. This is particularly unfortunate from the Conservatives, who claim to want to stand up for taxpayers. What are they waiting for, to ensure that big businesses pay their fair share of taxes, by preventing them from using tax havens?

The Bloc Québécois proposes that all tax treaties go through the House of Commons, which they do not do at present. Bill S-5, which provides for tax treaties to come into force, shows the importance of international treaties in everyday life.

These treaties do not need implementing legislation to be passed. In this case, no treaty will be submitted to Parliament, quite simply.

The federal executive controls all phases of the process of adopting an international treaty. The executive is also responsible for what takes place in negotiations—which are for the most part secret. Nothing is made public during negotiations.

The provinces are seldom consulted, and in many cases they are completely excluded from those negotiations, even though, because of something that falls under their jurisdiction, they often have an interest in the negotiations.

Today, there is no democracy at all when an international treaty is involved. It is worth noting that there is no complete collection of treaties published. The government makes them public on a sporadic basis, and we do not even know whether it discloses all of them. Even the treaty section of the Department of Foreign Affairs does not have a list that we can consult. This is quite incredible, when you think about it.

The government is not even required to table them in the House. It is not even required to inform the House or the people when it signs or ratifies treaties. I find it incredible that in 2007, in our democracy, a government can sign an international treaty without even informing the population. Obviously, the House does not approve them, yet since 2002, in Quebec, the agreement of the National Assembly has been required for Quebec to sign any treaty. This improvement was brought in by the Parti Québécois at the time. It would be interesting to propose such an improvement in this House.

Not only does the House not approve international treaties, but the members are not involved in any way in the process. All we can do is consult with the people and try to obtain their approval.

As I said earlier, the government is not required to consult the provinces even when treaties concern areas of provincial jurisdiction. It is totally absurd that no consultation mechanism is in place. This situation is completely unacceptable.

It used to be that international treaties governed relations between States and had little or no impact on how society functioned or on the lives and rights of citizens. At the time, it was acceptable for the government to unilaterally sign or ratify treaties.

Now, however, international treaties, especially trade agreements, affect the power of the State, the workings of society and the role of citizens. Furthermore, they often have an even greater impact than many bills.

The Canadian treaty ratification process is not in line with this new reality. The people's representatives must be involved in decisions that affect the people they represent.

During the election campaign, the Conservatives promised to bring treaties before the House prior to ratifying them, but they still have not kept that promise. Recently, the government signed an investment protection agreement with Peru. I would note that the agreement still has not been put to the House and that it was already signed before the members could approve it. This agreement is based on chapter eleven of NAFTA, which has been criticized by many.

When the House presses the government to honour its international commitments, as it has done in the case of the Kyoto protocol, the government does what it pleases, with no regard for the will of the people or the promise it made when it signed the treaty.

It is rather paradoxical that the Kyoto protocol is probably the most important of all the treaties this House has approved, yet the government is refusing to acknowledge and implement it. This is a far cry from the Conservatives' promise to submit treaties to the House. I do not know whether the Conservatives meant that they would submit treaties to the House, but would not abide by the House's decision or respect its will. They may have forgotten to mention that when they made their election promises.

The government should have treaties approved and then enforce them.

Not involving representatives of the people is an anachronism in treaty ratification. I would like to point out that Canada is less democratic today than it was in the 1920s.

In fact, in 1926, Prime Minister Mackenzie King introduced a resolution that was unanimously adopted by the House of Commons. It read as follows:

Before Her Majesty's Canadian ministers recommend ratification of a treaty or convention involving Canada, Canada's approval must be obtained.

In 1941, Mackenzie King reiterated his commitment to this approach:

With the exception of treaties of lesser importance or in cases of extreme urgency, the Senate and the House of Commons are invited to approve treaties, conventions and formal agreements before ratification by or on behalf of Canada.

Over the years, the House of Commons had been consulted less and less, and even when it gave its approval in the case of the Kyoto protocol, the government refused to implement it. Nothing in the rest of the industrialized world can compare with that.

I said earlier that Canada was lagging behind Quebec. In Quebec, treaties signed by the Government of Quebec are approved.

On three occasions, the Bloc Québécois has introduced a bill on treaties to modernize the whole process of concluding international treaties. I am referring to Bills C-214, C-314 and C-260. Each time, the federalist parties have rejected the bill. This is very unfortunate.

In conclusion, this bill should be improved—