Evidence of meeting #83 for Finance in the 39th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was barbados.
A recording is available from Parliament.
General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
Well, again, I don't believe that's the case.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
If a company decides to challenge, that's something else, but what we're talking about is that all of a sudden double-dipping seems to be a legal form of deduction, but it's not. And we're talking here of interest, but it's the same for anything, any type of expense in Canada.
General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
I'm not sure it is the case that all of a sudden it is legal. I think it has been the case that a borrowing made to invest in shares of a foreign affiliate by a Canadian firm is generally deductible in computing the taxable income and tax payable of a Canadian firm.
What you see in a classic double-dipping case is that the investment in those foreign affiliate's shares has been turned into a loan from that foreign affiliate to another country, and that country is also allowing a deduction for it.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
I understand the mechanics, but if the double-dipping were proven, it wouldn't be deductible and the CRA would not allow it.
My other question would be--
Conservative
Dean Del Mastro Conservative Peterborough, ON
Yes, thank you, Mr. Chair.
We had witnesses last week from the CRA who specifically illustrated an example of double-dipping that they went to court on and lost.
Conservative
Conservative
Dean Del Mastro Conservative Peterborough, ON
But Mr. Pacetti is saying double-dipping is not currently allowed. They demonstrated an example where it was.
Conservative
The Chair Conservative Brian Pallister
That's not a point of order, Mr. Del Mastro.
Mr. Pacetti, continue.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Thank you, Mr. Chairman.
The other aspect I want to address is whether this is really an anti-tax-haven initiative, or is it about double-dipping? Which one is it? If we're going to say it's anti-tax-haven, it's one point; if it's double-dipping, it's another point, but we seem to have contradictory statements both by the minister and now in the department's press release. Can you address that point, please?
General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
Thank you for the question. Yes, I hope so.
People are projecting a definition onto the term “tax haven”, and it's probably useful to speak to that for a moment. As the backgrounder to our material mentions, you can conceptualize or define a tax haven in at least one of two ways. One way is simply as a low-tax jurisdiction with nothing else, and some people think of tax havens in those terms. In that context, a number of countries in the world have low or no tax rates, but that's--
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
I understand that. We went through all that this morning, and my time is limited.
I'm asking that question because you seemed to infer when you were answering Mr. McKay's question that the U.S. was a tax haven. I just want to make sure we're not contradictory.
Even in your press release, one of the points you bring up is reaching an agreement in principle on the Canada-United States tax treaty. I'm not comfortable with the way the minister and the department have been shifting their position.
General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
I'm not aware of any connection between us signing the tax treaty and there being a tax haven angle to it. But it was the second point that I wanted to draw out.
In addition to simply having low tax rates, one can arrive at having low or no tax through lack of concordance in two countries' tax rules. That's the tower structure illustrated in the materials that were issued yesterday. It's a structure that's exclusively between Canada and the United States and involves no other country. But the effect of it is to achieve a deduction in Canada and a deduction in the U.S.
So I'm not calling us a tax haven and I'm not calling the U.S. a tax haven, but the effect of it is perhaps even better than one can get with some low-tax jurisdictions.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
I have a quick solution to the problem. I asked the lawyers and the accountants. In Quebec we have a system where interest expense can only be deducted against interest income. Can we not do the same for interest deductibility and apply it only if there's revenue to offset it?
General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
It would have much different effects from the proposal as currently constituted. It would say that a foreign investment funded with debt in Canada would not be allowed any interest deduction unless and until any income were returned home, and it would--
Conservative
The Chair Conservative Brian Pallister
Sorry, Mr. Pacetti's time is up. Try to work it into a subsequent response.
Mr. St-Cyr.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
Thank you, Mr. Chairman.
Let me continue with the issue of double dipping. The department has not yet implemented its measures, and we still do not have the text of the notice of ways-and-means motion. According to the legislation that we have, is double dipping legal? Can a company apply to Canada and to the United States at the same time?
General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
Subject to these proposals, the current law would in some instances allow a corporation to claim a deduction in Canada and a deduction in another country.
Bloc
General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
It's not a question of evasion; it's a question of legal compliance with the rules.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
Should we use technical means to get the exchange of information that we need with the countries involved in this, so as to detect and prevent such cases?
General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
The question is largely yes, and there are some qualifications to that.
Double-dips work best with treaty countries, because the income you generate in the intermediate country is exempt surplus that can be brought home free of tax. From a tax planner's point of view that's the ideal result. So with our tax treaties we like to think and believe we have a good exchange of information procedures, and if necessary we can obtain the information necessary to validate what's being done.
You can do a double-dip with a non-treaty country. It doesn't work as well because the income generated will ultimately be subject to tax if and when it's brought home. In that case there may be more issues or greater issues with exchange of information. But in general terms, if they're limited to treaty countries, exchange of information is not an issue.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
Professor Lareau, who appeared before this committee earlier, told us that in the United States, in England and in other countries, if I remember correctly, the disclosure of aggressive fiscal planning is always mandatory. He said that this is not the case in Canada.
Is there any reason why we do not follow that procedure? Has the Department of Finance already considered the possibility of following it?