Finance Committee on May 15th, 2007

[The Chair, Conservative, Brian Pallister]

This isn't a point of order, as you well know, so we'll move back now to Mr. Del Mastro.

I want to make it clear to the viewers in Peterborough that Coke in no way compensated anybody here on the committee for the product placement of that Coke can that was in the picture momentarily. It was an accident.

Mr. Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

The record will show that is Mr. Dykstra's Coke can.

Mr. Ernewein, once again, isn't this exactly what the finance department, the finance minister, is trying to crack down on to bring tax fairness--this abuse of the current tax arrangement?

[Brian Ernewein]

Thank you for the question.

I do want to stay clear of any potential cases that are under litigation or any similar cases that are currently in appeal or before the courts, but I think I'm still able to answer your question. Yes, there are certain circumstances. The illustrations in the material we provided at the beginning of today demonstrate or provide examples of certain situations in which a deduction may be claimed in Canada and in another jurisdiction under the law as it's written today--perhaps not in every case, but it's not a hypothetical situation. The rules announced yesterday are intended to take that on and limit the ability to claim a double deduction.

[Dean Del Mastro, Conservative, Peterborough, ON]

The case has been made that this will somehow impede Canadian multinationals from being able to make strategic investments that will impede their growth, that it will cost employment, that it will cost foreign investment in Canada. Does any of this hold water? Do you feel that is the case? Ultimately, if none of us paid taxes, we could all spend more money, but that would hardly support our social safety net.

Do you feel this argument is legitimate, or are we hearing a lot of huff and bluster from Bay Street?

[Brian Ernewein]

I wouldn't land on either spot specifically. I would say that a situation in which you get a double deduction can provide real value to you. There's a question, in terms of balancing competitiveness with tax fairness and neutrality, of whether that's the regime you want to allow or whether you want to draw the line at allowing a deduction in Canada for a foreign investment, if that's what someone proposed to do, but not allowing them to do that along with a deduction elsewhere as well.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

Thank you, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Del Mastro, for that non-compensated commercial opportunity.

We have Mr. Thibault now. Over to you.

[Robert Thibault, Liberal, West Nova, NS]

Merci, Monsieur le président.

Thank you both for your appearance at the committee today.

Just to start off, we've been talking a lot about Barbados today, but would I be right to assume that if all financial arrangements with Barbados ceased tomorrow, IBCs would locate somewhere else? There are other low-tax jurisdictions that our corporations would take advantage of.

[Brian Ernewein]

Barbados does not hold a monopoly on a low-tax regime. That's right.

[Robert Thibault, Liberal, West Nova, NS]

Okay.

When we look at this question, and we started when the budget first came out, we looked at it as a huge area. Now we're down to the double-dipping. That's what we're talking about. But there are a lot of elements within it that are difficult to understand. It seems to me to be a little risky to launch a budget and then have to flip-flop. That study or that analysis was not done. What we heard was when the full elimination of foreign investment interests for tax deductibility...when Mr. Flaherty was talking about that, he said the increase would be $40 million of revenue. The corporations out there and the tax experts told us the loss in national revenue because of the disadvantaged competitiveness would be in the billions.

Now we see the latest proposal by flip-flop Flaherty that by going to only the double-dipping, way out into 2012, the revenue generated to the treasury will be offset by a reduction in revenue from corporations within Canada. What are those amounts? If $40 million was the full amount that turned out from a loss of billions, what is the anticipated win here?

[Brian Ernewein]

Thank you for the question.

I have two points in response.

First of all, $40 million was not the full amount. The estimates in the budget material referenced a $10 million revenue associated with the proposal in the first year and a $40 million revenue gain for the government associated with it in the second year. Those were based in years during which, in the first year, the proposal would only apply for three months of that year and only to new debt. For the second year, it would largely apply only to new debt and some non-arm's-length debt. The proposal was to have come into effect in full in 2010, beyond the two-year budget projections, and there are no numbers that reflect it.

The second point is largely an historical footnote, because the proposal is to now apply as of 2012 to all debt, irrespective of its term or when it was entered into, as long as it's connected to a foreign investment double-dip. Today we don't have a revenue estimate for what it will produce in 2012 or beyond.

There will be some challenges in establishing it, because people will make plans and react to the proposal within the next five years. But as we get closer to the date, we will be striving to get a better handle on the associated revenue effects of it and, as I mentioned earlier, to make sure it translates into further corporate tax savings.

[Robert Thibault, Liberal, West Nova, NS]

Wouldn't it be possible there would be no additional revenue generated and the investments in foreign markets would change in structure or in the way they remain competitive? Isn't it a possibility, on the other side, we'd be disadvantaged competitively and would reduce our revenue in that manner?

[Brian Ernewein]

It's probably a regret for our society that we have some very bright people employed in such things as tax planning, but we do have them, and they are very inventive.

There will be issues that will take place or new structures identified in the next few years that will have to be taken into account. We're also going to have to stay on top of it to ensure the rule is effective, but your point is well taken.

[Robert Thibault, Liberal, West Nova, NS]

The flip-flop was a dream. Thank you.

[The Chair, Conservative, Brian Pallister]

Yes, it's fair to note that a dead fish never flips or flops as well. The previous government's inaction on this file speaks well to that.

Mr. Dykstra.

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

Thank you, Mr. Chair.

I have a couple of questions related to one of the things on companies. I shouldn't say “companies”, because Mr. Martin made a good point that companies are not human beings. They are not entities that speak or talk back to us.

The point is that a lot of representatives from larger companies ask why the government should care about double-dipping, because it doesn't have an impact on them anyways. As long as they're receiving the money and as long as they're receiving tax revenue from the multinational company, why should you really care?

Why should the Government and Canadians be concerned about what some other country may or may not offer with respect to a tax loophole? I say “loophole”, but I mean it in the very gentlest wording.

[Brian Ernewein]

Thank you.

I tried to speak to this earlier. A little of what you hear now will reprise that earlier point.

That kind of analysis would be valid if you take as a given that the Canadian tax deduction is fixed and the second deduction is the extra deduction. But if you've set up a regime, as I said before, where you're required to make a choice on where you take a tax deduction, then you can have a fair fight, if you will, and where you end up taking the deduction will be dependent on the competitiveness of your tax structure versus that of the other country.

You mentioned Mr. Martin saying we have to do more. It's true that we're already in good shape in relation to some countries in terms of our rate structure. As against those countries, with a rule that says you will be required to take the deduction or it will be in your best interests to take the deduction where it's worth the most to you, lower tax rates here mean it will be worth more to you to take it in the other country.

But there will be a discipline imposed on us. If and when other countries cut their rates further, there will be a discipline on us to be responsive to it to make sure we're not the ones bearing the debt and the expense.

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

Our continued aggressive approach with respect to the reduction of corporate tax rates is going to at least continue to put us in a position where we may not be the end-all and be-all, but we'd certainly be the envy of all when it comes to either the G-7 or trading relationships with countries that may not be in the G-7. By that, I mean they will actually choose to pay their taxes in Canada, because it's going to mean that as a corporation they will be able to keep more of their money rather than paying tax on it.

[Brian Ernewein]

That's a regime we're trying to install and enhance to make everything you said true, and truer all the time.

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

Are we getting there?

[Brian Ernewein]

Well, this last budget noted that actions included in that budget, and perhaps in combination with 2006's--I've frankly forgotten, I'm sorry--will move us from the third-highest tax rate in the G-7 to the third lowest. And with other possible changes, including movement at the provincial level in respect of capital taxes and possibly sales tax harmonization, we could conceivably have the lowest marginal effective tax rate in the G-7.

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

I have just one final question. How many years has the ministry tried to move in this direction with respect to addressing this specific issue? Are there some in finance who have continued to come forward, regardless of who is in power and who is the government, to make these types of recommendations?

[Brian Ernewein]

It's been noted, I think by a private tax practitioner in the press, that these rules have been in place for about 35 years. I think the emergence of double-dips didn't occur the very first day. During the 1980s, largely, is when they started to take hold, and they've probably been the subject of commentary since then. As we know, and as I mentioned earlier, the 1992 report by the Auditor General identified an issue with them. So we have had it at least since that point in time.

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

Thank you.

[The Chair, Conservative, Brian Pallister]

Mr. Pacetti and Mr. McKay are going to share some time. We'll go to Mr. McKay, to begin.