Finance Committee on May 10th, 2007

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

Allow me to interrupt because you are answering my introduction which was only aimed at establishing some context. What I really want to know is if you think that we should tolerate double dipping.

Secondly, can it be identified? If we wanted to allow single deductibility but not double or triple deductibility, would we have the technical means to detect it and to forbid it?

[Robert Raizenne]

I would go back to my opening statement, which is to the effect that we have very extensive rules that go to determine whether the income in question is actually earned in the foreign country. So there's no issue of shifting around income in an improper way. We have very extensive rules dealing with that particular issue. Our basic tax policy is that if we're talking about active business, as opposed to investment-type income, if we're talking about actual business activity, we're inclined to leave the rate of taxation up to the jurisdiction in which the income is earned.

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

Thank you.

[Nick Pantaleo]

If I could just add to that, I mentioned in my opening statement that there are basically two objectives of the system we have for taxing foreign income. One is to make sure that Canadian companies are competitive in the global marketplace but we're doing so in a way--at a reasonable cost--that we're not giving away the domestic tax base.

With respect to double-dipping, I see that more in the first objective. That is, allowing Canadian companies to be competitive means ensuring that they're playing on a level playing field with other global companies. If they have the ability to engage in such transactions as well, for the reasons Robert is articulating, then to deny that benefit to Canadian companies is to take away from one of the objectives the system is intended to generate and to do so in a way that it does not, in itself, reduce or take away from that first objective: reducing the domestic tax base.

[Finn Poschmann]

Can I get a word in here, Mr. Chairman?

[The Chair, Conservative, Brian Pallister]

Certainly, sir.

[Finn Poschmann]

Thanks.

I just want to point out, on one practical aspect with respect to foreign multinationals, that we literally cannot prevent the double-dip. We can prevent a dip being taken against income earned in Canada through rules roughly like those proposed by the minister. The broader question, though, and it does, I understand, go back to your preamble, is whether we would want to and whether we would want to using rules such as those proposed by the minister. I get very uncomfortable about the idea of raising the cost of capital for Canadian firms.

When Canadian firms expand abroad--I'm not a champion of the national champion model--it makes no sense at all for the Canadian economy to hobble our firms in the international marketplace.

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

In answer to the first part of my question which was whether you believe that it would be a good thing to prevent double dipping, I seem to have understood that most of you were opposed to that.

As to the second part of my question, which was whether we have the tools required to prevent it, you said, Mr. Poschmann, that you do not think there is a way to prevent that. We do not have enough information to be able to forbid double dipping.

Am I correct?

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. St-Cyr. Unfortunately...

[Finn Poschmann]

It is correct that we cannot abandon the double-dip. What we can do is prevent one of those dips being taken in Canada, should we so choose.

[The Chair, Conservative, Brian Pallister]

Thanks, Finn.

Unfortunately, the time has elapsed for Monsieur St-Cyr.

We'll go to Mr. Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

Thank you, panel, for appearing before us today.

I just wanted to establish a couple of things here. First of all, we, as the government, happen to agree with Mr. Martin and the panel. But we believe that corporate taxes are too high in Canada. We've signalled that the government is moving towards the lowest corporate tax rates in the G-7. That's in Advantage Canada. We've reduced corporate taxes to 18.5% by 2011. That's a commitment by the government. And there's a further commitment to reduce those to 17%.

I also wanted to make the comment that the government, the CRA specifically, made it very clear that it is working in partnership with countries like Australia, the United States, Germany, France, Great Britain, and others on the rules regarding low-tax jurisdictions or tax havens. So we are going to be going about this with a process that will level the playing field among G-7 nations and other OECD nations.

Mr. Poschmann, we've heard a couple of comments on double-dipping. We had a presentation by the CRA the other day on a case in which a Canadian company—this was an actual court case they took to court and lost—borrowed money from a tax haven. They borrowed $200 million at 10%. They claimed a $20-million interest expense against Canadian taxes. They then loaned that money to another tax haven and put it out into a subsidiary company in the United States. Both companies claimed the same interest deductibility of $20 million in both countries. The CRA lost that case, indicating that as far as they're concerned, according to current tax laws, that was a legitimate claim, even though they did not experience a taxable interest expense against their Canadian income. Do you think that's appropriate?

[Finn Poschmann]

Do I think it's appropriate? I think the way to look at it is to ask what the costs are and what the benefits are. It's a policy analysis approach that applies to this case, as to any other. It's not clear what the costs to the Canadian revenue base are. And it's not clear what exactly the benefits of flowing investments through conduit entities or through low-tax jurisdictions are. This is an area that needs work.

What we do know, though, is that sudden tax changes certainly can affect the ability of business to compete in the world, and that's an issue.

[Dean Del Mastro, Conservative, Peterborough, ON]

Right.

I think what's being underlined here is that cracking down on what we would consider the illegitimate use of tax havens or low-tax jurisdictions is not going to be an easy task. It's going to take some precision to do that.

The minister has indicated that we're looking to crack down specifically on double-dipping, which I think is easy in this specific case. It's a very simple example to determine what the cost was to the Canadian economy. If you work on a 20% tax rate and they claimed a $20 million expense that they did not have, the cost to the Canadian tax purse in this case would have been $4 million in unpaid taxes. And then they also claimed that again in the United States.

I think that Canadians in general would have a problem. This type of example is not creating any economic spin in Canada. All it's doing is reducing the overall responsibility to pay Canadian taxes.

Ultimately, what we're looking for is broad-based tax fairness so we can bring that corporate tax rate down as soon as possible, because I'm sure that everyone on the panel here today will agree that the lower corporate tax rates are in Canada, the less incentive there is to use a low-tax jurisdiction. In fact, as Canadian tax rates drop, there is virtually no incentive to use low-tax jurisdictions. And I'm sure you'd agree with that.

[Dr. Roger Martin]

Yes, and I would encourage you to ask the fundamental question--and I'm sure if Dr. Hines put his great analytical capability to bear on it, he'd come up with the right answer--and that is, why do we think that corporate income taxation at all is a good idea?

Corporations are not animate objects; they're legal constructions. People own corporations. People get dividends from corporations. I don't think there's actually any logic supporting the notion that the taxation of corporate income is really good for any economy. And I think that slowly but surely, through international tax arbitrage, it's going away. I think the only question facing Canada is whether we want to be the last country in the world to get on board with that, or be somewhere closer to the front of the line.

[Dean Del Mastro, Conservative, Peterborough, ON]

Mr. Martin, we're probably getting into a discussion that's a little broader than what the focus of the committee is, which is to specifically look on tax havens and tax avoidance use in Canada.

I just wanted to ask you a really quick question on hollowing out. We saw Statistics Canada release some reports today that said that far from hollowing out, what we're actually seeing is a thickening in Canada. Hollowing out is not real. It's not something that we see.

I just wondered if you had any specific comments on that. In addition, in yesterday's National Postthere were some comments by Andrew Coyne, who spoke about the 90¢ Canadian dollar and how that is also working to Canada's benefit to prevent hollowing out from occurring.

[Dr. Roger Martin]

The work I've done on it would suggest that we are thickening up more than we are hollowing out, so we're growing globally competitive, Canadian-owned, Canadian-headquartered companies at a much faster rate than we're losing them.

That doesn't mean I'm not concerned about our Canadian companies being taken over. And I think this is why we have to have policies that make sure that they've got every chance that any other companies have to invest in upgrading and becoming competitive.

I think the data does not suggest we are being hollowed out. So I would concur with Statistics Canada on that front.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thanks, gentlemen, very much.

[The Chair, Conservative, Brian Pallister]

We'll continue now with John McCallum. You have five minutes, sir.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

Thank you to all the witnesses for being here, or for being with us by video.

I may be wrong, but I seem to detect an unusually high degree of consensus, even unanimity, in this group of witnesses. I would like to test that. I have only five minutes, but I want to test three propositions and see if you all agree with them.

First, if you take the budget at its word, which says, in a blanket statement, “eliminate the deductibility of interest”, then given the impact of that action on competitiveness, it would not be a good idea to proceed with this at this time. Is there any disagreement on that?

Silence means you're okay.

Second, I think you've been saying that it would be a good idea to develop some kind of task force composed of tax experts and economists, perhaps business people, to look at the international Canadian tax system and to make recommendations that take into account both competitiveness and a possible need to tighten it up in certain areas where it might need tightening.

Is that a reasonable proposition?

[A voice]

Yes.

[John McCallum, Liberal, Markham—Unionville, ON]

Okay.

On the third one there might be more disagreement.

I'm not a tax expert, but I'm a little more expert than I was a few months ago, because I've been speaking to a number of experts. If there were such a task force, I get the feeling, particularly in the case of Finn Poschmann—this also coincides with what I've heard elsewhere—that a more fertile field for going after abuse to protect the tax base would be debt-dumping rather than double-dipping. By that I mean, as I think Finn expressed it, foreign affiliates coming into Canada, borrowing lots of money to reduce their taxes, and investing in third countries is a more important challenge to our tax base and something to be gone after, more important than double-dipping, which at least one or two of you said was as much a competitiveness issue.

Is that proposition agreed to?

[Robert Raizenne]

Sir, just to put that in its context, that is tax-rate-driven. The reason foreign multinationals dump debt into Canada is that Canada has a high corporate tax rate. They can save more money if the interest expense is parked, if you wish, in Canada rather than being in some other jurisdiction that has a lower tax rate.

[John McCallum, Liberal, Markham—Unionville, ON]

So I think we'd all agree that over the medium term, we would like to get the tax rate down. But if for the moment we take that tax rate as a given, then what you just said implies there's a significant incentive for foreign affiliates to do that. It could be a significant drain on the tax base, so therefore it would be something that such a task force should look into, perhaps more than double-dipping.

Is that correct?

[Nick Pantaleo]

That would certainly be my position, sir. And it certainly would be consistent with the approaches that other countries have taken in looking at this particular issue.