Bill S-2 (Historical)

An Act to amend the Canada-United States Tax Convention Act, 1984

This enactment amends the Canada-United States Tax Convention Act, 1984 to implement a Protocol that amends the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital and adds Annexes A and B to it. The major change contained in the Protocol is the elimination of all withholding tax on cross-border payments of interest. The elimination is immediate for arm’s length payments of interest and phased in over three years for non-arm’s length payments. Other changes to the Convention include new rules for the treatment of “limited liability companies” (LLCs), pensions, stock options, corporate continuances and taxpayers who change residence from one country to the other. Annex A to the Convention clarifies the interpretation of a number of provisions of the Convention. Annex B to the Convention provides for a binding arbitration procedure.

Canada-United States Tax Convention Act, 1984

[Louise Thibault, Independent, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Mr. Speaker, I have three brief questions for the member who just addressed the House regarding this bill.

First of all, if I understood correctly, the provisions of this bill will allow employees and cross-border workers to benefit from the same advantages as resident workers. Is that the case?

Second, if I understood correctly, this would be valid while they are working; but will they also be protected when the time comes to retire, with respect to their pensions?

Third, I listened carefully to my colleague and I heard only positive comments. But it is important to look at the other side of the coin. Does this bill in fact have any negative aspects?

[Ted Menzies, Conservative, Macleod, AB]

Mr. Speaker, in answer to my colleague's second question, I have not heard any negative aspects mentioned here in the debate. What I do hear is positive comments and that it is very important to investors.

As for the hon. member's first question about working on one side of the border and living on another, this is one of the most critical improvements that we can make. There are many places in the country, such as in New Brunswick and in the Windsor-Detroit corridor where people are back and forth across the border. On the lower mainland of British Columbia many people live in the U.S. and work on the Canadian side and vice versa.

As for the hon. member's question, it does carry on beyond their working days. Many pension contributions have been ineffective or focused on one side of the border. This treaty would allow people, who work for a corporation that has entities on both sides of the border, to continue to contribute to their pension and be able to do that on both sides of the border. That is one very important aspect.

[Brian Masse, NDP, Windsor West, ON]

Mr. Speaker, it is a very important bill. However, what people should understand is that the bill has come from the Senate, which is an issue in itself, but second to that, there has not been a single witness about this bill and tax treaty, and that is very important.

I want to be clear about this in my question for the parliamentary secretary because we are getting contradictory information about this.

Is it the government's interpretation that the bill would eliminate all double taxation of U.S. social security recipients? Is the parliamentary secretary 100% sure that constituents, like myself, who are collecting U.S. social security, will not get double taxed anymore and that this would rectify a historic problem that we have had with double taxation for U.S. social security recipients? Is he clear that the bill would end that practice?

[Ted Menzies, Conservative, Macleod, AB]

Mr. Speaker, I will remind my hon. colleague that it is very important for his constituents to have this treaty in place because it will protect pension benefits. Many employees of the auto industry can be transferred from one entity to the other and so the protection of their pension benefits is one of the important aspects.

One of the other important aspects that we do need to remind hon. members about is the arbitration process that this brings into play. We have all heard horror stories of dealing with the tax departments on both the Canadian and the U.S. side. We all would like to think it could work better but when there is an issue this would provide a mandatory process of appeal that was not in place before, which can impact residents on both sides of the border, and this would allow them to have their concerns heard by an independent arbitrator.

This has many important aspects to it and the sharing of making social security benefits taxable only in the recipients country of residence is one of the important aspects.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Mr. Speaker, of course the Standing Committee on Finance studied this bill. The committee also looked at other tax treaties, including the treaty with Barbados regarding tax havens.

The government took action on this matter, although this bill comes from the Senate. Before it was elected, the government said—and it repeated this at the Standing Committee on Finance—that it would take action on the matter of tax havens and the tax evasion that goes on in Barbados, for example.

I would like to ask him a very specific question. Can the parliamentary secretary give us a date on which the government will come forward with a proposal to resolve the tax haven issue?

[Ted Menzies, Conservative, Macleod, AB]

Mr. Speaker, my hon. colleague plays an active role on the finance committee. He also played a very active role last night in our voting procedure as a parent. We all recognized that he was doing his fatherly duty by having his child with him. We applaud his courage for bringing his child into the House. Remembering our families is what it is all about at this time of year.

The government has a s great concern about tax avoidance and we are doing everything within our power to bring in legislation that will stop the avoidance of taxes. As our Prime Minister has said, there is no such thing as a good tax, but we all recognize that taxes are necessary.

This government has gone to great lengths to ensure that the main point that we are driving forward is tax fairness. Anyone who thinks they can continue to avoid paying taxes will be met with new types of legislation, such as the one we have brought forward which would ensure that people do not pay more than their fair share and that they do not avoid paying their fair share.

[Brian Masse, NDP, Windsor West, ON]

Mr. Speaker, I would like to ask the parliamentary secretary to be clear on this because we are getting mixed information from research. Is it the government's interpretation that this bill would eliminate all double taxation of U.S. social security recipients who are living in Canada but who have worked in the United States? Would this bill eliminate the double taxation that historically has taken place? Would it meet the provisions in Bill C-265, the private member's bill put forward by the member for Essex?

I want the parliamentary secretary to be on the record for the government . Would Bill S-2 achieve that goal?

[Ted Menzies, Conservative, Macleod, AB]

Mr. Speaker, in the 1997 tax treaty protocol, Canada and the U.S. agreed to make cross-border social security benefits taxable only in the recipient's country of residence. My understanding is that has already been dealt with in a previous tax treaty.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Mr. Speaker, it is a pleasure today to speak to Bill S-2, An Act to amend the Canada-United States Tax Convention Act, 1984. We are now on third reading, which happened quite rapidly earlier today. I think the cooperation in this House seems to be quite rampant at this time of year.

The Canada-United States Tax Convention Act was last updated in 1997 and, prior to that, in 1995 by the former Liberal government. It is important that these conventions get reviewed and updated regularly. In fact, the former Liberal government had already started negotiating this new tax convention with the U.S. even after the adoption of the last convention.

Like any tax convention or tax treaty, these agreements are important to the economic success of a country and, in particular, under current conditions where countries and all stakeholders need to compete on the international scene.

This particular convention is important since it is with our largest trading partner, a country with over $50 billion of trade on an annual basis.

While international tax law, especially in this place, 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.

We have had tax treaties in place with many countries for many years and, as with most laws, there comes a time when they need to be amended in order to reflect the changing times. This is one of those situations where we see a more rapid change in the actual conditions than the actual conventions themselves. Consequently, this bill presents some routine amendments that I believe will help to ensure Canada remains a leading participant in the global economy.

International arrangements, such as these, allow for relatively free movement of people and capital across borders, contributing greatly to the rich, multicultural nature of the country.

Some members in this House think that tax treaties are signed as a way of avoiding taxes. In fact, if these treaties are well written and properly understood, they make the taxation system more effective and promote trade—the exchange of goods and services—and do not add an administrative burden. Everyone benefits from treaties that are well written and signed in due form. They encourage foreign investment and increase trade, as I was saying.

Bill S-2, in turn, would also be a valuable tool to help certain industries improve Canadian productivity. Even though the latest Conservative measures, such as reducing the GST, do not improve productivity, nothing is even close to being fair about some of the Conservative latest tax planning or tax initiatives that they have come up with.

The worst example in the last couple of weeks is their tax policy or tax system where in the 2006 budget they raised the lowest personal income rate to 15.5% and now have announced that they will bring the rate back down to the original Liberal rate of 15%. People can all try and figure that one out.

Another advantage of Bill S-2 is that it would eliminate source country withholding tax on cross-border interest payments. Canadians who borrow money, and I would say mainly large corporations that borrow money from American lenders, would no longer need to withhold and remit Canadian tax on the interest payments.

Bill S-2 would also provide an advantage for Canadians to better access the U.S. debt market. Sometimes we see larger corporations having difficulty in accessing capital here in Canada. The Americans have a larger capital base and I think that will help the opening up to the debt market. We will see what happens in the short term with some of the crisis that we are seeing in the U.S. right now. However, this convention should definitely provide an easier flow of obtaining some debt for some of the Canadian companies. It also will be easier for companies to finance their expansion and, hopefully, their expansion into other markets other than here in Canada.

The bill would also allow taxpayers to require otherwise unsolvable double tax issues to be settled through arbitration. This arbitration rule is an important element of the bill because it would increase taxpayers' confidence that the tax treaty will resolve potential double taxation situations. These convention tax treaties, the basic purpose, in normal circumstances, is to avoid double taxation, should solve the fact that no double taxation of gains or even deemed gains of immigrants to Canada will arise.

The bill would also extend treaty benefits to limited liability companies by removing a potential impediment to cross-border investment which arises from private equity funds and their comings and goings. I will probably address this point later on in my speech because this point was brought up at the finance committee during the prebudget consultations in the past. This would make it easier for companies to bring their products from the research stage to the actual market commercialization phase. Hopefully, this will result in more research and development work to be completed in Canada and potentially for exporting to other markets, in this case the U.S. market.

More and more workers are temporarily being reassigned outside the borders and apparently more into the U.S.

Bill S-2 would give mutual tax recognition to pension contributors. In other words, provided certain conditions are met, cross-border commuters may deduct, for residence country tax purposes, the pension contributions they make to a plan or arrangement in the country where they work. People who move temporarily from one country to the other for work reasons can, subject to certain conditions, get tax recognition in their temporary new home country for pension contributions they continue to make to their original employer's pension plan. This proposal would facilitate the movement of personnel between Canada and the U.S. by removing a possible disincentive for commuters in temporary work assignments.

That is definitive a positive step. There is also an advantage for clarifying how stock options are taxed or, in other words, the harmonization of the rules in both countries. There are a whole bunch of other technical amendments in this bill that if we have some additional time I will get into.

I want to address the importance of these conventions. These conventions are great, fine and dandy. We can improve them, ratify them and pass them into law in this country, but the fact that they are international tax agreements, we require an entity on the other side to also sign these conventions. These conventions and tax treaties are not worth the paper they are written on if we cannot get the other countries to ratify them.

I wish that this particular legislation had been brought forward to the finance committee. Instead, the present government decided to bring it before the international trade committee. I am not sure why it went through without too many witnesses. We would have probably looked at ensuring that there was a willingness on the other wide to have this treaty ratified and signed quite rapidly.

There are some tax treaties that we signed in the past that have yet to be signed by other countries. I know of many in particular that have been negotiated with Italy. I think there are some agreements that are at least five years old that have not been signed by the other country to the agreement, so there are pending issues in terms of double taxation where there are people who are being taxed in Canada and other countries. Again I would caution the present government to make sure that even though we ratify these conventions or enact the legislation, the government make it a priority to have the other country ratify the agreement or convention as well.

Since I have some time, I will explain how some of the amendments got into this bill. I would like to take credit for some of them. I chaired the finance committee in 2004, and we did a very thorough job. There were a lot of presentations made before the committee in terms of what Canadians and Canadian businesses were looking for when doing business in the United States.

We devoted practically a whole chapter of our report to business growth and prosperity. We included in it some of the testimony given by witnesses. There is one paragraph I would like to read into the record where witnesses urged that changes be made to the non-resident withholding tax regime to ensure that Canada remained competitive. This was in 2004 and three years later we are still at this.

It was suggested, for example, that the Department of Finance negotiate a new provision with the U.S. to eliminate withholding tax on all dividends and interest to both related and unrelated parties. They mentioned a recent study which claimed that the elimination of withholding taxes on all dividends and interest would result in increased capital investment in Canada of $28 billion. Even a fraction of that would help certain sectors of this country, especially the manufacturing sector. It would also result in increased income of $7.5 billion annually. It was pointed out that while there would be a federal fiscal cost associated with eliminating withholding tax, the economy would benefit in the long run. Again this was in 2004. The committee also heard that Canada's dividend tax rate is now much higher than that in the U.S., with a 15% federal tax rate.

As a result of that, I am proud to say that in 2004 we made over 30 recommendations. Of those, there were at least five that pertained to items that needed to be addressed when it came to the Canada-U.S. tax treaty. I will read into the record one of the recommendations that I thought was important:

The federal government ensure that the effective tax rate for Canadian corporations is competitive with that in the United States and elsewhere. Within that context, the government should: review the timetable for elimination of the federal large corporations tax; review the timetable for the tax changes for the resource sector; consider immediate elimination of the corporate surtax; and review the corporate income tax rates and other taxes paid by corporations.

Recommendation 13 reads:

The federal government, bearing in mind Recommendation 16 regarding a review of capital gains, review the current federal tax treatment of dividend income and non-resident withholding taxes with a view to ensuring that the tax treatment in Canada remains competitive with the rest of the world, particularly the United States, and that the tax treatment does not distort investment decisions.

Another recommendation that was applied in the U.S.-Canada convention is that the federal government revise Canada's cost allowance rates such that the Canadian rates are similar to rates for comparable asset classes in the United States and other countries. In fact, this one has not been addressed yet by the current government.

Recommendation 24 was that the federal government undertake a comprehensive review of the personal taxation system in Canada, including the value of the basic personal amount and other particular aspects of the Income Tax Act, but always taking into account that the review should be undertaken with a view to ensuring that Canada's personal taxation system is both fair and as competitive as possible with other countries, particularly the United States.

We have seen the importance of this convention in the past. Other recommendations were made that also referred to making sure that we are competitive with the United States.

In the finance committee's 2006 prebudget report, everything is recapped in one little passage which states, “The federal government expedite the review of the tax treaty between Canada and the United States. This review should specifically address Canadian recognition of the United States limited liability corporations” . This is one of the items that is in the bill right now.

[Brian Masse, NDP, Windsor West, ON]

Mr. Speaker, my colleague is quite right that there probably should have been some witnesses to come forward and speak about this tax treaty. Also, the bill went to the international trade committee and not the finance committee.

I would ask the member why, at that committee, did the Liberals join with the Conservatives to block witnesses? The NDP member for Burnaby—New Westminster asked for witnesses to be brought forward and the Liberals and the Conservatives blocked that from happening. Why did his party take that position?

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Mr. Speaker, that was my point. This bill should have been sent to the finance committee. It should have been sent to the proper people to look at this bill in a proper fashion.

Why did the Liberals not ask for witnesses? As usual, the bill was probably presented at the last minute and they were probably not ready. The finance committee at that time was travelling and I think it just shows the lack of preparedness on the side of the Conservative members.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Mr. Speaker, the hon. member is right when he says that this tax treaty with the United States was not given its due.

However, the Standing Committee on Finance spent a great deal of time examining the tax treaty with Barbados. When the current government was in the opposition, it was in favour of rapidly plugging the loopholes that allow people to bring money back to Canada from tax havens without having to pay tax. Now that it is in government, it seems to be well-intentioned, but we are still waiting for results.

It was the Liberal Party that was responsible for creating these loopholes in the first place. In fact, it was the former minister of finance and current member for LaSalle—Émard who did so. He even had Parliament pass retroactive legislation to allow money to be repatriated from Barbados tax free.

I would like to know whether the Liberals, now that they are in opposition, have changed their minds and are willing to cooperate with the other parties to resolve the tax havens problem.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Mr. Speaker, I want to thank the hon. member for his question. We are both members of the Standing Committee on Finance.

I would like to point out something to follow up on what I was saying earlier. Some hon. members still do not understand the tax treaty concept. The purpose of these treaties is not to create tax havens, but to enhance and facilitate international trade with full respect for these agreements.

I would like to remind the hon. member that the motion presented by the Bloc Québécois in the last session, calling for an examination of the tax treaty with Barbados, did in fact receive support from the Liberal Party. When it came time for a report on the matter, there was not a word from the Bloc members. I think they still do not understand what a tax treaty is.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Mr. Speaker, I did not ask a question because I knew that I would have the opportunity to reply to my colleague from the Standing Committee on Finance. I am pleased to see that he wishes this committee to examine this issue once again. An agreement will be reached readily given that the government has already stated that it supports continuing with the review already begun by the Standing Committee on Finance.

I now know that the Liberal Party also supports proceeding and I have no doubt at all that the NDP would also like to examine the issue of companies that use tax havens such as Barbados, the most well known example, to avoid paying their fair share of tax.

I would like to spend most of my time on this subject. The tax agreement with the United States covered by the bill under consideration is not a problem. We all know that the United States is not a tax haven. The bill gives cross-border workers the same tax benefits as resident workers. It will institute a bipartite tribunal or board to settle tax disputes and to tighten rules for certain types of companies, making it more difficult to use various tax loopholes.

The bill eliminates certain provisions pertaining to double taxation of capital gains. We support this and I believe it has a great deal of support from parliamentarians. I do not wish to go into too much detail about this matter.

However, it is surprising that the government has time for such matters. That is fine, we are not criticizing them, but we are questioning their unwillingness to shut down tax havens.

I would like to backtrack a bit to have a better understanding of what is at issue. There is a general rule among various countries that sign tax agreements. If tax is paid in one country, it is not paid a second time on the same income when the money is repatriated to the country of origin. According to this principle, the same income is not taxed twice.

That said, in order to know whether companies have paid taxes in their country of origin, Canada negotiates tax treaties with other countries. Among other things, these treaties provide for the exchange of information about taxes paid in another country, so that Canada knows whether or not the money should be taxed when it is brought back here. If there is no tax treaty or exchange of information, Canada assumes that taxes were not paid and claims the corresponding taxes when the money is brought back.

In the past, in the Liberal days, a bill was introduced by the finance minister at the time, the member for LaSalle—Émard, to establish a tax treaty with Barbados, telling our companies that do business in Barbados and pay taxes there that they should not also pay taxes in Canada. At issue was a famous example of a company doing business in Barbados, Canada Steamship Lines International, which was of course owned by the family of the member for LaSalle—Émard.

Up to this point, everything is fine and seems to make sense. The problem is that the tax rate for international companies in Barbados is 2%. Obviously, it is rather ridiculous to say that these companies paid taxes in Barbados, since they paid 2%. Really, it was getting a gift. Then, companies such as Canada Steamship Lines are allowed to bring back to Canada the money they had earned from having their head office in Barbados, without having to pay taxes here.

There is another loophole in this mechanism that the Liberals themselves introduced. Obviously, the act requires there to be a real place of business in Barbados. It also states that the revenues must genuinely be earned in Barbados, and that they must not simply be a financing scheme to avoid paying taxes.

Members will probably remember the very telling report that aired in Quebec, aptly called Les évasions barbares, or The Barbarian Evasions.

A journalist went to Barbados, to the building that is home to the head offices of hundreds of companies that supposedly do business there. The journalist found that the building has about a hundred tiny rooms just big enough to accommodate a secretary and two filing cabinets. Obviously, the journalist demonstrated by this very fact that it would be impossible for a company that generates millions of dollars to really have a head office there, in such a small partitioned office with only a desk, a typist, a computer and two filing cabinets.

In reality, the decisions made by those companies are made in Canada or elsewhere around the world. Their activities take place in Canada or elsewhere around the world, but their financing is such that all revenue is artificially declared in Barbados and is subject to a ridiculously low tax rate, only 2%. They then send the money back to Canada, maintaining that they have already paid taxes in Barbados and therefore should not have to pay taxes in Canada.

This scheme is possible because of the negligence of the Liberal government at the time and we hope that the Conservative government will be proactive in this file, as it claims it will. At the time, the Liberal government was negligent and even had the audacity to adopt retroactive measures with respect to the tax treaty with Barbados. In fact, when the bill was adopted, the provisions were that the treaty would apply retroactively to 1995. By a curious coincidence, that was the same year that Canada Steamship Lines was established in Barbados. That was a rather interesting situation, especially since, when it comes to retroactivity, both the Liberals and the Conservatives seem to adopt a double standard.

Obviously, the guaranteed income supplement is a perfect example. For years, the Bloc Québécois has been fighting for the seniors who have been swindled out of the guaranteed income supplement. They are owed money because they were misinformed and were unable to claim the money at the appropriate time. They must be given full retroactivity, that is, they must be given the money that is owing to them. It is not a gift; they are entitled to this money. Yet, this is not being done.

Naturally, when people have to pay taxes because they have forgotten to declare income over the past five or ten years, retroactivity applies. Those at fault cannot tell the tax man that he caught them too late, so they should only have to pay for the past 11 months. If they get caught, they have to pay taxes for the past five or ten years.

The same goes for Barbados. New legislation was retroactive. No big deal, it provided tax shelters to companies so they could get off without having to pay any taxes. No big deal, retroactivity applied. In contrast, when it comes to reimbursing seniors, when it is time to give them the money they are entitled to, the government says too bad, it cannot be done.

The Liberals did not want to budge when people were asking them to. We challenged them on the fact that they were offering full retroactivity in terms of tax breaks for the richest companies, but were not doing the same for seniors. During the election campaign, the Conservatives said that they would grant seniors full retroactivity. Now they are refusing to do it because they say they are in charge and things have changed.

What does it mean for politics when a member or a minister says that now that he is in government, things have changed? Does it mean that he said whatever he wanted beforehand? Does it mean that the government has the right to withhold the truth and mislead the public? That is a very strange way to operate.

I really want to take this opportunity to emphasize something to all parties in this House. Even though the Bloc Québécois supports the bill before us concerning the tax convention with the United States, we want to re-examine issues related to other tax conventions between Canada and other countries, conventions that are designed not to help workers, but to enable companies to pay next to no tax in Canada and opt out of their fair contribution.

We will continue this work after the holidays. If the Liberals want to work with us, so much the better. I hope that the Conservative government will act as quickly as it says it will.

[Roy Cullen, Liberal, Etobicoke North, ON]

Mr. Speaker, I would like to comment on what the member for Jeanne-Le Ber said. He said some things that are incorrect, in my opinion.

First, when the member for LaSalle—Émard was the finance minister and then the prime minister, the Bloc Québécois members tried to tarnish his reputation because it was in their political interest to do that, and they are still trying to do it.

I will highlight a few facts for the member.

First, the former finance minister would have recused himself from any discussion around shipping that would have come before him from the Department of Finance or in cabinet. This was a very clear requirement and he followed that rigorously.

Second, all his assets were in a blind trust at that time, so he did not know what was transpiring with respect to Canada Steamship Lines.

Finally, any reasonable person, who understands the world of shipping, would understand that an international shipping company is always set up in a place where there are flags of convenience and where there are tax havens. All these companies operate in that way. If they do not operate that way, they will not be in international shipping for very long. It is a total legal transaction and it is done by everyone.

When is the member for Jeanne-Le Ber going to read the information, get the facts and stop trying to tarnish the reputation of the member for LaSalle—Émard?