Evidence of meeting #82 for Finance in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was corporations.
A recording is available from Parliament.
Noon
Liberal
John McCallum Liberal Markham—Unionville, ON
Finn, would that be your position? I think you said that.
May 10th, 2007 / noon
Director of Research, C.D. Howe Institute
Yes, that's certainly consistent, John, with what I said.
Noon
Liberal
John McCallum Liberal Markham—Unionville, ON
Does anybody not have that position?
I get three out of three on all my points.
I rest my case, Mr. Chairman. Thank you.
Noon
Conservative
The Chair Conservative Brian Pallister
Thank you.
I'd like to chip in a little bit here.
At this point, I think we have consensus that lower tax rates would reduce the incentive somewhat for money to go offshore. We have the consensus that paying taxes makes us less competitive. Ultimately, if there were no corporate taxes, we'd be really competitive.
Now, that being established, what I'm concerned about is more the fairness aspect of this. My understanding, like that of Mr. McCallum's, is evolving as we have these discussions. I understand that we have tax treaties with a number of other countries. Mr. Hines alluded to that. The intention of these tax treaties was to avoid double taxation, essentially. The principal intention was to make sure that once we enter into a tax treaty with another country.... As you've said, their sovereign authority over the taxation of the income rests with them, and we allow the money to be repatriated tax free.
What we've created then is a circumstance where companies, whether offshore or locating here, are Canadian, can lever, tax-deduct, reduce tax obligation in Canada, shift the money offshore, earn the money there, and then repatriate earnings back to Canada, with certain definitions being complied with, tax free.
Is that a fair overview?
Hearing no objection, I will proceed.
So we sign a tax treaty with Barbados when they have a comparable tax rate, and then they subsequently change it so that you can set up a Barbadian corporation and pay 1% tax. We keep the treaty intact and we see a 4,000% increase in the establishment of Canadian dollars going to Barbados, where they pay 1% tax, or perhaps in some extreme cases 2%. These same companies can then bring the money back to Canada, having deducted and reduced their Canadian tax initially, so paying essentially no tax at all. And none of you are saying that's a problem.
I'd be interested in hearing a little more intensive discussion on specifically the issue of havens. We're talking about OECD-defined tax havens with Barbados and Cyprus, who have been the principal attractions of increased Canadian outflow. I'm interested in knowing how you perceive that as fair in any way, shape, or form.
Does somebody want to comment?
Mr. Raizenne.
Noon
Osler, Hoskin & Harcourt
I guess I would reply by taking what is a very good question and sort of pushing it forward, which is to say that it's not true that Barbados is a tax haven in the common-sense use of that term. They are a high-taxing jurisdiction. They have certain features of their tax system that in certain circumstances allow for low tax, just like Canada, which is a high-taxing jurisdiction, has numerous features of its tax system that allow for low tax or no tax, in certain circumstances.
Noon
Conservative
The Chair Conservative Brian Pallister
Sir, I'm not disputing that there are different provisions for reduced tax in different jurisdictions, but I think the Stats Canada data on this are indisputable. There's been an amazingly large increase in the outflow of cash to Barbados. Despite its being an attractive sun spot, a place with half the population of Ottawa isn't drawing that much money for any reason other than it doesn't tax very much. Okay?
12:05 p.m.
Richard A. Musgrave Collegiate Professor of Economics and Professor of Law, University of Michigan
Oh, I agree, that's certainly why the money is going to Barbados. And the same process happens with American companies, I should add. You see basically the same phenomenon--not surprisingly, because the economies are very similar.
The thing to remember is that the income earned when an investor puts money in Barbados or Cyprus is not actually earned in Barbados and Cyprus. There are hardly any factories or employees there--a small number. Basically, those are conduit destinations that then take that money and invest it in Europe or South America or wherever the thing may go. And in those destinations, it is taxed. It all depends on where, of course. But I think it's only looking at the first piece of the puzzle to see where the money goes initially.
The Statistics Canada data you're correctly representing really looks at the first place the money is going, but then it's turned around. It's sort of like saying if I put money in the bank, it goes into my local corner bank, but of course that's not really where it goes, because then the bank turns around and loans it to a company somewhere else.
12:05 p.m.
Conservative
The Chair Conservative Brian Pallister
Mr. Hines, I appreciate that. So the money goes to Barbados, and then it goes to this other jurisdiction you speak of, which taxes it at a certain rate. However, the money is redirected to that jurisdiction, and the expense or carrying charges are deducted in that jurisdiction as well--the double-dipping model, correct? So the money goes to another jurisdiction. It is borrowed by that corporation. It reduces its tax obligations there to nil, or virtually nil, and then recycles the money.
I'm not disputing that the recycling of the money creates jobs and wealth. What I'm asking you is whether we should continue to be complacent, as has been the case for a number of years under various political leaderships, and be accepting of tax treaties with jurisdictions that charge virtually no tax, when in fact the intention of tax treaties was originally to avoid double taxation. We create no taxation when we honour tax treaties with countries that do not tax money at any significant rate. Isn't that correct?
12:05 p.m.
Richard A. Musgrave Collegiate Professor of Economics and Professor of Law, University of Michigan
But it's not bad for Canada or the United States to have Canadian or American companies face low foreign tax obligations. It's better for us, because that saves you money, compared to the alternative.
12:05 p.m.
Conservative
The Chair Conservative Brian Pallister
Sure it saves people money because they don't have to pay when they deduct money, the interest charges here, and they don't have to pay on the earnings elsewhere. I understand that. I understand that there are many tradespeople and farmers and teachers in this country who would be more competitive if they didn't pay tax too.
What I'm getting at is this. Do you think it's fair to continue to honour a tax treaty after the provisions have changed? In other words, when we signed the tax treaty with Barbados, as Mr. Raizenne accurately pointed out, they had a tax jurisdiction that was generally acceptable by Canadian standards. Now, implicated in your earlier statement, you're saying we should leave it to them to tax the way they want, but in fact we haven't changed the tax treaty subsequent to their making available reduced tax rates of 1% and 2% to corporations, which are now massively relocating there.
Isn't that laissez-faire approach a kind of benign neglect, and isn't it really, in a way, a kind of race to the bottom in terms of the reduced revenue generation capabilities that occur as a consequence?
12:05 p.m.
Richard A. Musgrave Collegiate Professor of Economics and Professor of Law, University of Michigan
We have no evidence that there is reduced revenue generation in North America or around the world as a consequence of this.
The second thing I would say is that to fight against that is going to make you poorer.
12:05 p.m.
Conservative
The Chair Conservative Brian Pallister
Yes, well, that contradicts what the Auditor General's office has certainly reported in numerous reports to us. It also contradicts what Mr. Mintz's report for the previous government referred to back in about 1996.
In any case, I see my committee members also want to ask questions.
Monsieur Carrier, cinq minutes.
12:05 p.m.
Bloc
Robert Carrier Bloc Alfred-Pellan, QC
Thank you, Mr. Chairman. I will share my time with my colleague.
Since I am not a regular member of the committee, I want to underline that I appreciate the only document we have received in both official languages. This helps me understand your answers better. I am referring to the document of the C.D. Howe Institute. Thank you, Mr. Poschmann.
I have a general question for all of you, gentlemen. I would like to know what you think of the Canadian tax system as far as competitiveness is concerned, which is an issue that has been raised today. What countries have a more attractive tax system for investors? I am asking this question to see how Canada compares with the others. What would be our rank? Should Canada improve the competitiveness of its tax system or are we average on that score?
Who would like to answer?
12:10 p.m.
Partner, Price Waterhouse Coopers
I'll start this time.
I would rank Canada's system as being relatively favourable, more favourable than a lot of the other systems that other countries have throughout the world. In many respects the system that Canada has, in particular its exemption for foreign business income and the safeguards it has to protect the tax base, are those that a number of other countries today are looking to emulate to a large degree. You have countries such as New Zealand, the U.K. most recently, saying that they are looking at studying and moving toward more of an exemption type of system, in many respects much like what Canada has.
In various types of studies of transactions that could take place in an international arena, comparing where would a favourable jurisdiction be to have as the top company, Canada has come out very well on those types of studies, with respect to the U.S., with respect to some of the other European countries. It's tough to kind of categorize it specifically, but I would say overall it's very favourable.
12:10 p.m.
Dean, Rotman School of Management, University of Toronto
Considering there was some complaint of a lack of disagreement earlier, why don't I weigh in and disagree? I think, in terms of its overall tax structure, Canada has one of the least attractive and least intelligently constructed tax structures in the industrialized world.
What we've decided to do, overall, is to tax at below the OECD average, so we're not actually a high-tax jurisdiction, but we've decided to tax the things we want more of very heavily and the things we want less of lightly, and I don't think that's a good idea.
So for business investment, which we would like more of, to create better and more jobs that are more productive, we've decided to tax that very highly. Countries like Sweden and Denmark, interestingly the more socialist countries, have figured out that what they want to do is try to make their companies as productive as possible and collect the taxes from the people who have high-paying jobs in those companies and the investors in those companies.
I think we have it completely wrong, and the only thing that saves us is that the United States has an unattractive structure as well. They do it all at a lower level, but the day the United States wakes up and takes their taxation of corporate investment down is the day that Canada is in big trouble. So I think we have a vulnerable position because we've decided to tax corporate investment so high, and I think that's not an attractive system.
12:10 p.m.
Conservative
12:10 p.m.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
You are asking a lot. If the choice is between lowering corporate taxes or maintaining access to tax havens or to those jurisdictions that have lower rates of taxation, what would be your preference?
12:10 p.m.
Partner, Price Waterhouse Coopers
I'm not sure that those are necessarily mutually exclusive. Nobody here is advocating the use of the tax base--
12:10 p.m.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
I would like to know what you would do if you had the choice. We all have to make choices as parliamentarians and that is also the case for the government. If there is no choice...
12:10 p.m.
Conservative
The Chair Conservative Brian Pallister
Merci.
C'est clair that the choice is not going to be made today.
We will move to Mr. Dykstra now.
12:10 p.m.
Conservative
Rick Dykstra Conservative St. Catharines, ON
Merci.
I have a question for Mr. Martin. I want to take your comments a little further and clarify the need to take direct aim at corporate tax rates. These are things we heard in our pre-budget consultations. Is what we need to do with respect to lowering them specifically what you're speaking to?
12:10 p.m.
Dean, Rotman School of Management, University of Toronto
Yes. And in particular I mean the impact of taxation on the propensity for Canadian corporations to invest in machinery, equipment, hardware, software, innovation, building the companies. Our corporate tax rate is unhelpfully high.