Finance Committee on May 10th, 2007

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Thank you, Mr. Chair.

I think what everyone in this committee wants to do, no matter what our political stripe, is to have tax fairness in a way that ensures that Canadians' quality of life and standard of living remains high.

I was struck by you, Mr. Martin, and your passionate argument for no taxes for corporations. Let's suppose we all agree with that, which I doubt, but let's suppose we all do. I think we would all know we couldn't do that overnight.

As you know, our government wants to give Canada both a tax advantage through lower personal and corporate taxes and also a regulatory advantage by cutting the compliance burden in a whole number of ways, including tax reporting.

The tax loophole and tax haven argument is designed to get to lower regulation, lower taxes, in both the personal and corporate sense. So things like closing the double-dipping, the double claiming of a particular exemption for one expense, is one of the things we're doing.

I guess we picked that one partly because it has such widespread support. We've had the Auditor General say this should be eliminated, we had the Mintz committee saying it should be eliminated, we had this committee of the House saying it should be eliminated, and the public accounts committee as well. So that's where we're starting. But in the paper Mr. Poschmann co-authored, he talked about beyond this we have to concentrate on tax distortions that encourage debt dumping into Canada.

In the context of wanting to make the whole system fair for everybody, Mr. Poschmann, I wonder if you could just expand on that a little bit. How would this tie into our study on tax loopholes and tax havens?

[Finn Poschmann]

Thank you, Mr. Chairman and Ms. Ablonczy--terrific.

There is just one point about the Mintz committee. The 1998 report did recommend a change roughly along the lines of that proposed by the March 19 budget, absolutely. However, the report went on to say you would only do this in the context of fairly generous grandfathering rules and a carefully considered and fairly lengthy transition mechanism, because it would be a substantive change.

I have another comment on your preamble, if I may. I think lower personal tax rates make a lot of sense for Canada. We are not seeing any shortage of revenue on the part of the provincial government, so I am fully supportive of measures that would lower corporate and personal tax rates over time as well as loosen up on regulation. My concern is that we are going to have to look to the next budget for that, I think, because there wasn't a lot of evidence of that in the past budget. So I think that is something worth getting on the table.

As to debt dumping, I referred specifically to debt-to-asset ratios. The general approach is called thin cap. This is a set of rules that several countries use. Canada uses them in some instances in a limited application. It limits the amount of debt relative to equity or relative to earnings that a corporation books in Canada. Above that threshold, interest is no longer deductible.

That certainly would get at the debt dumping we've talked about. I certainly see such a measure as consistent with the minister's aims. I would encourage the committee and the finance minister to look at these mechanisms as something that would make sense for Canada.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Okay. Thank you. That's helpful.

[The Chair, Conservative, Brian Pallister]

Thank you.

Mr. Poschmann, perhaps you could elaborate a bit on your knowledge of what other countries are doing. My understanding in respect of the repatriation side of things here, where we allow the deductibility in full for offshore investment, is that in some cases it is not taxed to any degree and then is allowed to be repatriated, or earnings are allowed to be repatriated. Are other jurisdictions addressing this? If so, who, and how?

[Finn Poschmann]

The exemption model would apply to France, Germany, Japan--pretty much--and Italy. The U.K. uses a model whereby you have a taxation and a credit for taxes paid abroad. These models all do exist out there; there is a range of them in place. I believe one of the witnesses at the table mentioned that the U.K. is considering shifting towards the exemption system, in which case they would be confronted with this very question of whether interest would be deductible.

[The Chair, Conservative, Brian Pallister]

Then it's fair to say we are not entirely alone in terms of allowing repatriation fully and tax-free, but a number of our competitors do have more restrictive or less preferential policies in place right now.

[Finn Poschmann]

That's right, Mr. Chairman. In France, Germany, Italy, Japan, and the U.K., there are different variations on thin-cap rules of one sort or another with respect to foreign investment. The U.S. has a quite different system, but trust me, you do not want to know about it.

[The Chair, Conservative, Brian Pallister]

Thank you for not telling us.

Go ahead, Mr. Thibault.

[Robert Thibault, Liberal, West Nova, NS]

Merci, monsieur le président. I thank all panels for their presentations today.

It seems to me that we're in an age in which our corporations are having increased competitiveness globally. It is more difficult to compete, and we have a tax measure here, or an announcement of a potential tax measure, that ties us to the porch. It reduces our competitivity. It doesn't define how, but it sends the message out to the corporate world that their competitivity will be reduced, without giving the outline on how. It will be sometime in the future. I believe it was a measure that he never thought he'd implement. He thought it was a good 20-second sound bite that he could go into an election with, on competitive taxes and on tax fairness.

He followed that with income trusts and followed that with original equipment manufacturer contracts with the ISS, or in-service supply mode. You see a lot of hollowing out. There were companies being sold abroad, economic assets being sold abroad, so it makes me quite nervous on that competitivity thing.

You said, Mr. Pantaleo, that there were deals already that had fallen apart because of this thing. Do you see this contributing to Canadian corporations leaving, or to corporations not establishing themselves in Canada?

[Nick Pantaleo]

I certainly see that it will end up being a consideration that these companies will be looking at. Deals were in process, as the companies are always engaged in new activities, so certainly it had a very immediate effect on those companies and created some uncertainty as to how the new rules would apply to them, because of course there was no draft legislation introduced along with the budget.

[Robert Thibault, Liberal, West Nova, NS]

Someone made the argument that I've heard used by the Conservative members on occasion. It is that the system we have now.... And I recognize its weaknesses; I realize that there are people taking undue advantage of it. Some will typify it as a race to the bottom because of things like double deductions and things like that, but the measure I see here, without its being completely fleshed out and without its being competitive, might cause us to drown near some ideological top.

What does this mean for us? If we go in this direction, if we stop Canadian corporations that need affiliates abroad, that need raw material abroad, and the only way they can do it is by buying into a foreign company, opening a mine, or opening a process abroad, and they can't deduct their interest in Canada, what does it mean for their competition with the Spanish companies and French companies and American companies that are competing in the same market we are?

[Nick Pantaleo]

One of the things we can look to is that this measure--the ability to deduct interest--was introduced in the early 1970s, and it was specifically to avoid the disadvantages Canadian companies were undergoing in the pre-1972 period. What clearly was seen afterwards with this measure was that the cost of capital for these companies, which would make the acquisitions cheaper for them and prove the overall economics of their acquisitions, was becoming much more favourable. It seems to me that one of the consequences of this particular measure, if implemented as it's drafted, is going to be to reverse that trend. It will just make those types of costs that much more and lead to some of the other considerations you alluded to earlier.

[Robert Thibault, Liberal, West Nova, NS]

Thank you.

[The Chair, Conservative, Brian Pallister]

Mr. Murphy, do you have a quick question?

[Shawn Murphy, Liberal, Charlottetown, PE]

I want to ask Mr. Raizenne and Mr. Pantaleo about the whole issue of uncertainty here. The announcement in the budget was clear and unequivocal that the companies could not deduct interest for foreign acquisitions. There has been some opposition throughout the financial community. There seem to be statements being made now that it's going to be interpreted narrowly and deferred.

I don't want to use the word “confusion”, but I think there is uncertainty in the financial markets. It's almost to the point where the fear of being hanged is worse than being hanged. How do you think that is affecting the financial markets and transactions that are being contemplated?

[Robert Raizenne]

I would answer that by simply pointing out that tax is a very important cost of carrying on business. Business people like to know what the tax rules are. For almost two months we've had this controversy about what this actually means. The minister now seems to be saying it doesn't really mean what the March 19 statement said because somehow the elimination of the interest deduction in Canada is going to be tied to double-dipping. Presumably that means that if there's no double-dipping you're going to get the interest deduction in Canada.

This is a very unhelpful circumstance, where people are effectively reading the National Post daily to see what the latest version of this idea is.

[Shawn Murphy, Liberal, Charlottetown, PE]

Mr. Pantaleo.

[Nick Pantaleo]

I would add that if the proposal is implemented, CFOs or CEOs will be wrestling with what this actually means. Shareholders and analysts need to know these things. In today's environment companies want to come clean about the impact of major developments, and this would be a major development. They are wrestling with exactly what the final consequences of such a measure will be on their companies. This is a concern for them, I know.

[The Chair, Conservative, Brian Pallister]

Thank you very much to the gentlemen in Toronto and here for your participation today. We really appreciate it.

The clerk gives her best wishes to you, Mr. Martin. Thank you for participating.

[Proceedings continue in camera]