Mr. Speaker, it is wonderful, in the spirit of Christmas, how things are moving along quickly here today. We know that all hon. members want to get home to their families to celebrate Christmas. It is wonderful to see everyone working together here this morning.
We do have some business to finish up, so I rise today to speak to Bill S-2 at third reading. The passing of this bill, once it receives royal assent, completes Canada's role in the ratification of an agreement to update major elements of the Canada-U.S. tax treaty.
The U.S., for its part, must also ratify this agreement before it comes into effect.
As the House may know, Canada and the U.S. have had a tax treaty in place since 1980. Since that time, there have been four updates or protocols to this treaty. This is to ensure that our respective tax systems evolve to reflect economic and social changes.
Bill S-2 represents the fifth update to the treaty. Canada has numerous tax treaties with other countries as well. However, given the unique relationship we have with the Americans, the Canada-U.S. tax treaty is generally viewed as the one of most importance.
This treaty is part and parcel of the government's plan to create a tax advantage for Canada and we have a long term economic plan for Canada's future called “Advantage Canada”. This plan was designed to improve our quality of life and to make Canada a world leader for today and for future generations.
“Advantage Canada” promotes five competitive economic advantages we need to succeed in today's global economy: a fiscal advantage, a tax advantage, a knowledge advantage, an entrepreneurial advantage and an infrastructure advantage. Each of those advantages does not stand alone. Rather, they stand interconnected with each other. In other words, we are creating a Canadian advantage on those five fronts.
Given that we are talking about a tax treaty today, it is creating a tax advantage that I would like to highlight today. A Canadian tax advantage will help individuals, families and businesses to get ahead and stay ahead. Moreover, it will reward initiative and make Canada the global investment destination of choice. A tax advantage starts with reducing taxes for Canadians. Of course, taxes pay for Canada's important public services but high taxes limit Canadians' opportunities and choices.
With a more focused government, we can both lower taxes to create better incentives for Canadians to succeed and provide significant funding for priorities.
A tax advantage is about reducing taxes in all areas to stimulate investment and economic growth. This includes reducing personal income taxes to improve rewards from working, from saving and investing in new knowledge and skills. It includes creating a business tax advantage that will encourage businesses to invest in Canada. In turn, this will spur innovation and growth leading to more jobs and higher wages for Canadian workers.
The government also continues its commitment to restoring tax fairness. Canadians deserve to know that everyone will pay their fair share of taxes. That is what tax fairness is all about.
Indeed, tax fairness is key to the “Advantage Canada” plan. This plan will make our tax system simpler, fairer and more competitive. This will help us to compete in the global marketplace. We have taken significant action in that direction.
Most recently, this fall's economic statement proposed broad based tax relief of almost $60 billion for individuals, families and businesses over this and the next five fiscal years.
Combined with previous relief provided by the government, total tax relief over the same period is almost $190 billion. These dramatic tax reductions and initiatives will benefit families with children, workers, seniors, persons with disabilities and others.
They will also strengthen our tax advantage to help all Canadian businesses compete and succeed in the global marketplace. These important initiatives will help attract investment to Canada. Moreover, this action will increase productivity and economic growth and create more and better jobs for Canadians.
What, one may ask, does this have to do with tax treaties? Tax treaties and tax fairness are inextricably linked. Our tax treaties help contribute to the growth of the Canadian economy, particularly by encouraging trade. This is principally important because exports account for more than 40% of Canada's annual GDP.
In addition, tax treaties help attract investment in Canada. This investment means inflows of capital, technology and information, all of which contribute to Canada's economic growth, job creation and the well-being of our citizens.
In short, our government must ensure that Canada's system of international taxation is competitive. We have worked to ensure that our network of bilateral tax treaties is up to date in order to help Canadian companies and investors to prosper and succeed.
One important function of tax treaties to keep in mind when considering this bill is that they help eliminate double taxation. I trust that hon. members would agree that there is little that can have more of a negative impact on the expansion of our trade and the movement of capital and labour between countries than double taxation.
The potential for double taxation comes about when a taxpayer resides in one country and earns income in another. Without a tax treaty in place, both countries can claim tax on that same income.
One of the goals for Canada, therefore, in negotiating its tax treaties, is to remove the potential for double taxation. This not only helps provide incentives for investment, it promotes fairness in our tax system. That is why one of the proposals in Bill S-2 would allow taxpayers to demand that otherwise insoluble tax issues be settled through arbitration, thus ensuring that there is no double taxation of immigrants' gains.
Given the special relationship that Canada has with the U.S., it makes sense that our tax treaty would also be special. Indeed, Canada's income tax treaty with the United States is vital. It helps to ensure the efficient flow of trade between our two countries. These changes to the treaty, signed in September, will stimulate further trade and investment and make our tax systems more efficient.
Canadians and Canadian businesses will benefit from this treaty update in a number of ways. They will see reduced borrowing costs and a more competitive lending market with the elimination of withholding tax on interest paid on all arm's length debt.
Since treaty benefits will be extended to limited liability companies, the protocol in Bill S-2 would provide better access to U.S. capital. With further harmonization of the tax treatment of pension contributions in the two countries and new rules to clarify the treatment of stock options, this proposed legislation would also provide more mobility for Canadians working in the U.S.
Furthermore, these changes would, among other benefits, reduce the cost of cross-border financing and would have a positive effect on investment and, above all, simplify the tax system. All of these benefits, in turn, support the competitiveness of Canada's multinational enterprises. These are important considerations that we need to keep in mind when debating this bill.
One of the most important aspects of the Canada-U.S. tax treaty is the proposal respecting withholding tax. Reaction from taxpayers to this measure has been particularly positive.
Following the signing of the treaty, the director of the C.D. Howe Institute said:
And our research suggests that the bilateral elimination of withholding taxes will substantially improve the efficiency of capital markets, attract foreign direct investment to the country, and help Canadians penetrate the North American market on a more competitive basis.
Reaction from the other side of the border has been equally supportive. Treasury Secretary Paulson, at the signing of the agreement in September, said that updating our treaty enables us “to move even more swiftly in the global economy”.
Canadians will particularly benefit from easier cross-border investment as the withholding tax is removed from interest paid between non-arm's length persons between Canada and the U.S.
I will explain why this is a good thing for Canadians. Canada and most other countries levy a withholding tax on passive forms of income earned by non-residents. This fifth protocol will eliminate the source country tax on cross-border interest paid between unrelated persons and will gradually eliminate the maximum withholding rate for interest payments between related persons.
For unrelated party interests, the withholding tax is zero as soon as the protocol becomes ratified. An example would be in the interest that banks pay to a depositor. For related party or non-arm's length interest, the tax will be eliminated in three stages: from 10% to 7%, then to 4% and finally to zero after three years. This could be, for example, between a Canadian company and its subsidiary in the U.S.
With these important tax reductions for payments to and from the United States, the government is in a position to remove the withholding tax on all arm's length interest payments to non-residents, regardless of where they reside.
This initiative announced in budget 2007 represents a major step forward in Canada's international tax policy. The legislation to implement this measure contained in Bill C-28 is currently going through the parliamentary process, as we have watched in the last few days. Once passed, this measure will increase access to foreign capital markets. It will reduce costs for Canadians and Canadian businesses that borrow from foreign lenders.
It is important to point out here that the government had originally planned to tie the effective date of this general tax reduction to the Canada-U.S. tax treaty protocol. However, given the uncertainty of when the protocol will be ratified on both sides of the border, the government proposes to give the domestic rule a fixed start date of January 1, 2008. This will provide certainty for Canadian investors so that after 2007 they will no longer need to withhold interest on tax paid to arm's length persons in any country.
Summing up, this tax treaty bill, like others that preceded it, is directly related to international trade and investment. These bills have a significant and a direct benefit to the Canadian economy. This is no small consideration in a world where Canadian exports, as I said earlier, account for more than 40% of our annual GDP.
Furthermore, direct foreign investment, as well as inflows of information, capital and technology, represent the lifeblood of Canada's economic wealth. As a result, eliminating tax impediments in these areas, as this bill proposes to do, is of utmost importance, and that is why passing this bill is also of utmost importance.
I, therefore, encourage the hon. members from all parties to pass this bill into law quickly.