Finance Committee on May 10th, 2007

[Rick Dykstra, Conservative, St. Catharines, ON]

Just to take that further--and maybe Mr. Poschmann can respond to this as well--I would like to talk about the whole aspect of fairness. I understand that all of you are here today to argue that the lower we go with respect to corporate tax rates the better, especially those that have a positive impact on the economy, or at least on investment in Canada. I don't think any of us are going to argue with that.

Where the difficulty comes in is with respect to tax fairness. I'd like to get your comments on that. You specifically spoke about corporations and allowing them to have a low tax rate to be able to rejuvenate and reinvest. The difficulty I have is with the fairness. How much should individuals have to pay to be able to provide the services that all of us expect in this country? Further, where does that line get drawn with respect to corporations and business? While you argue, Mr. Martin, that they are not physical life specimens, they are entities. In fact those folks who own the companies, or those of us who are shareholders, do have a direct responsibility to share in the fairness of who pays taxes in this country.

[Dr. Roger Martin]

I agree with the last part. I just think it's a very fractured logical structure to ask the question of whether it's fair, as between people and inanimate objects. I mean, we have this notion that it's...I don't know, sort of a post-Marxist overhang thing that likes to characterize corporations as fat cats, which suggests they're animate.

[Rick Dykstra, Conservative, St. Catharines, ON]

No, no. That's not--

[Dr. Roger Martin]

I'm interested in the people who own corporations paying their fair share of the tax burden, definitely--the people who get dividends from them and who own corporations. You can create absolute fairness that way in taxing this intermediary.

[Rick Dykstra, Conservative, St. Catharines, ON]

Mr. Martin, I respect what you're saying. We can get into the argument.... It makes for a good laugh around the table when we talk about corporations being inanimate objects and individuals being people, but at the end of the day, someone owns those corporations and someone signs a cheque to transfer money with respect to tax paid.

Maybe, Mr. Poschmann, you can comment on this, as well. The fact is that there has to be a balance and there has to be fairness so that individuals aren't overburdened with respect to tax. I think you were alluding to that in your opening comments.

[Finn Poschmann]

Thank you.

I don't have to disagree with you. What I'd like to get across, though, is a sense of caution. We're talking about a specific tax measure, which on some axes of fairness and equity makes perfect sense. On other axes of fairness and equity, it doesn't necessarily make a lot of sense. You can't hit them all at once. It's simply impossible in the international tax system. You can't hit everything all at once.

But the other point, and this is where there is special caution, is do you really think that with this proposed measure there will be a net long-run increase in government revenue? Will you build economic activity in Canada? Will it really generate revenue from government over the long haul? I'm not sure about that, and that's why I recommend a careful look at it.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Poschmann.

We continue with Massimo Pacetti now.

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

Thank you, Mr. Chairman.

Thank you to the witnesses for appearing. Only the crew of witnesses that we have before us could make a complex issue like this even more complex, so I'm going to try to make it a little bit easier.

If we could just stick to the motion, where we're looking at tax havens and tax avoidance and how we can even work on this interest deductibility, there's an easy solution. We have one in Quebec, where people cannot deduct interest expense if they don't have offsetting interest income. So wouldn't that be the solution for the interest deductibility where—I think, Mr. Poschmann, you alluded to it—it has to be against Canadian income? Would that not be an easy solution to fix all of this?

[Robert Raizenne]

It might be easy, but it would be pretty ill-advised in the sense that the idea of so-called restricted interest expense was first put forward, I think, in the 1981 federal budget. I don't believe anybody has suggested that it is an appropriate rule in a corporate context. We don't have that principle whether Canadian corporations are investing in Canada, we don't have it whether they're investing offshore, the theory being that interest expense is a real and immediate cost.

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

It's real, and you can actually track it. You can actually see where the money is being invested, so why can't we track the money coming in? It's logical.

[Robert Raizenne]

We have never tried to do that on the basis that it's just too uncertain, and we want to use the interest expense as an incentive.

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

Let me ask a question to Mr. Pantaleo, because our time is limited.

Mr. Pantaleo, you're an accountant. Can we easily track that interest income and interest expense?

[Nick Pantaleo]

In a large corporate structure it's not at all easy to do. Funds get commingled together, they get used for different purposes, they come in from different directions. It might be easy for you and me to trace where our one source of income goes, but for corporations with multiple entry points for cash and exit points, in fact it is very difficult to track that in a very accurate fashion, assuming that is something you want to do in the first place.

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

Revenue Canada does it for people who have investments in investment properties. They can't re-mortgage their investment property and use the money for personal purposes, so the logic doesn't.... Why do corporations have to be exempt where individuals have to be accountable to the CRA? It's probably more complex for individuals, who don't have a proper set of books, who don't have a CFO or even any basic accountants on their staff. The logic doesn't hold, I'm sorry. I think that's one of the solutions.

I don't want to spend too much time, but I'd like to ask maybe you and Mr. Raizenne, what are the tax structures, what is the tax planning, what are some of the structures that are being put in place now in your firms from an accounting point of view and that of law firms? For corporations that come to you for tax planning advice, are you suggesting that they go and invest in tax havens, or are you more leaning toward places like Barbados that are lower income, or perhaps Ireland? What is the tendency there?

[Nick Pantaleo]

Sir, the first thing to remember is that the corporations are looking for the ultimate area where their funds are going to be invested and where they are going to be most productive and create the most value for the corporation and for its shareholders. Nobody thinks about Barbados or some of these other jurisdictions in the first instance. It's a way to achieve your ultimate goal, and as tax advisers, we obviously are required and asked by our clients to help them to devise the most tax-effective structure that could--

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

Again, our time is limited. It might not be the first thing on their mind, but obviously the proof is in the pudding; we've seen the statistics go up. It might be the second or third thing. When they are devising places to invest, will they choose a place like Barbados, where they have a treaty with Canada, or will they choose another tax haven? I'll use an example: Bahamas, where there is no tax treaty with Canada.

[Nick Pantaleo]

They will typically look for jurisdictions that have tax treaties with Canada.

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

Does that benefit Canada, the way that the tax system is in place here?

[Nick Pantaleo]

Currently, and to get back to a point the chairman was alluding to earlier, another thing the tax treaties allow Canada to do is in effect to track taxpayers as to where they are going. The treaties do serve other purposes, exchanges of information and the like, which in today's environment is equally important—

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

Are they doing it because they don't want to be subject to having information verified with those tax treaty countries, or are they working with tax treaty countries?

Can I go to Mr. Raizenne, please?

[Robert Raizenne]

No, I would say absolutely not. We have very extensive rules. We have all of these tax treaties. We're trying to enter into exchange of information agreements with most of the countries we don't have tax treaties with. That era of CRA not knowing what's going on is ending.

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

We had CRA here the other day, and they said there are some corporate structures they can't access, they can't see through. They said they were getting pretty decent cooperation, but not on every single corporate audit do they get the whole organizational structure.

[Robert Raizenne]

There may be individual instances, but they're making huge efforts to try to ensure they know what's going on and that taxpayers in Canada are complying with all these different rules.

[The Chair, Conservative, Brian Pallister]

Thank you, gentlemen.

We will continue with Madam Ablonczy now.