Finance Committee on May 17th, 2007

[Sheila Fraser]

Yes, I believe there were cases where investment revenues were transferred to Barbados.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

You're referring to the $500 million indicated in point 9?

[Sheila Fraser]

Exactly.

That case involved a foreign corporation which transferred $500 million in capital gains from Canada to Barbados. I think it was an asset transfer.

[Madam Vicki Plant]

I think it was a share transfer. Because of the transfer, the capital gains were not taxed in Canada.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

So, enough red flags were popping up to justify the investigation in question.

[Sheila Fraser]

I think so, yes.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Do you intend to reassess this issue shortly or would you prefer to wait for the department's results or for the findings of a more broad-ranging committee who would have the mandate to do this work?

[Sheila Fraser]

We just issued our report on the follow-up, in February 2007. We essentially made the same recommendations. We will see what comes of the study announced by the Minister of Finance, and we will look at other developments. Either way, we do not intend to revisit this matter any time soon.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Do you share my opinion in that between 2002 and 2007, given globalization, free trade agreements and the WTO, this taxation issue has become increasingly important?

[Sheila Fraser]

Absolutely.

We are talking about international tax matters, not only about tax havens and transactions which undermine Canada's tax base. Issues such as transfer pricing are becoming increasingly more complex. Canada must carefully assess the risks and threats involved. The country must get up to speed by retaining people who have appropriate experience in this area. It must also be able to identify these situations in order to take the necessary steps to deal with matters.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Can it be said that our tax system is lagging behind when we look at global economic activity?

[Sheila Fraser]

I don't think we can say that, but it is possible that our tax rules may be slightly behind global practices. Indeed, people are looking for ways to reduce their taxes. It takes a certain amount of time to implement legislative changes which means that there may always be a little bit of a delay.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Have you had any—

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

We'll continue with Mr. Del Mastro now.

Mr. Del Mastro, for seven minutes.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair, and thank you all for attending.

Ms. Fraser, we've heard a lot of these remarks. We've heard a lot of outcry, particularly from Bay Street and from the chief opposition party, that there are legitimate reasons for allowing tax avoidance and that we don't want to be the only boy scout out there trying to make sure people are paying their fair share of taxes, or aren't skirting the corporate tax regime we've put in place.

In your opinion, just broadly, if all nations followed that pattern, if all OECD nations said, well, we don't want to be the only boy scout who tries to make sure everyone pays their fair share of taxes, wouldn't that ultimately lead to a downloading of the tax burden onto individuals in, basically, all countries?

[Sheila Fraser]

I'm really not quite sure how to respond to that. To me it seems so hypothetical that the countries would ever actually agree to something like that. I guess at the end of the day, potentially it would end up being—

[Dean Del Mastro, Conservative, Peterborough, ON]

But if countries don't have the courage, for fear of corporations pulling out or of fire sales of multinationals in their home countries, to stand up at some point--I do want to talk about double-dipping, and I will get to that--and say specifically that we have to make sure we maintain the integrity of our tax base, then ultimately the tax burden has to shift somewhere. We know there are services that taxpayers rely on.

[Sheila Fraser]

Yes, absolutely. Taxes have to be generated from somewhere. There are, obviously, different taxes, but I think it's a basic principle of fairness and integrity in the tax system that everyone should pay their share.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

In your report in 2002 you talked about double-dipping strategies. I want to quote you for a second:

Double-dip financing structures encourage foreign-based multinationals to shift debt into Canada from a country with lower tax rates. However, to get the two interest deductions—one in Canada and one in a foreign jurisdiction—the investment and related jobs must be located outside Canada.

I have two questions related to the quote. First, can you provide a practical example of how that would work? And second, do you believe that's still the case five years after the report? Is it still widespread?

[Sheila Fraser]

We have not done any update of that. I believe that was actually from a study done around that time that raised this as an issue.

I'm not aware of any studies that would have been done, but I think we can presume, since there have been no legislative changes, that the situation is still occurring today.

[Dean Del Mastro, Conservative, Peterborough, ON]

Okay. And I was encouraged to hear that you thought the approach taken by the minister, with regard to setting up a panel for consultations, was a positive step.

Lastly, I want to talk about the issue of tax fairness and lower taxes in general. One thing I have worked to establish with all witnesses, and one thing that has rung true, is the idea that as we lower tax rates, there is less incentive to try to circumvent them. It takes a lot of work, and certainly some of the schemes we've heard about that...or certainly there have been rumours. Companies invest a lot of money in tax planning, in coming up with means of skirting taxation. But if we reduce taxes, there is less incentive to try to come up with these schemes.

Would you agree with that?

[Sheila Fraser]

That's really a policy issue. But when we're talking of transactions of $500 million and $600 million, 1% is a lot of money. These are very large transactions being talked about here, and I think there will always be an incentive to try to save taxes on those kinds of transactions.

[Dean Del Mastro, Conservative, Peterborough, ON]

One thing that strikes me, and that you noted in your 2002 report, is that Barbados has a corporate tax rate of 40%, but on international business the rate is only 1% to 2.5%. They have in effect two tax books. They're attracting investment into Barbados by basically inducing corporations to set up there that really would have no interest to set up there at all without this low tax rate. We heard the other day that they are listed as a cooperative tax haven by the WTO; they're not actually listed as not being a tax haven.

We've heard how these types of set-ups make businesses more competitive. Ultimately every business in Peterborough, I can guarantee you, would be more competitive if they didn't have to pay taxes. These aren't really positive things for Canada in that if they didn't exist at all, and no nation used them, everyone would have a level playing field and that would be great. They're only positive for Canada because other nations are using them.

Can you make a recommendation as to how we might work, moving forward, with other OECD partners to make sure that tax fairness becomes a little bit more of an issue broadly?

[Sheila Fraser]

I'll let Mr. Rossetti respond to that.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.