Finance Committee on May 17th, 2007

[John Rossetti, Assistant Auditor General, Office of the Auditor General of Canada]

Mr. Chairman, in response to the member's question, I might just mention that the OECD actually is working on this problem. There is a document, the Seoul Declaration, signed by all the OECD member countries last fall, that identifies international tax compliance as a major concern of all these countries. They signed this declaration with a commitment to undertake certain actions, primarily focused on enforcing each country's own tax administration rules so that you don't have this situation where one country is being played off against another.

So there is this kind of international effort. There's an international recognition of the problem, an international effort to work to improve information exchange, the training of auditors, and the cooperation of countries with each other. There is this positive action that's taking place, at least among the 30 OECD member countries.

[Dean Del Mastro, Conservative, Peterborough, ON]

So Canada is not trying to be a boy scout.

[John Rossetti]

I don't think so, no.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Del Mastro.

We continue with Madam Wasylycia-Leis, for seven minutes.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you, Mr. Chairperson.

Thank you, to you, Madam Fraser, and to all your staff for being here on a long-standing issue that as far as I can tell goes back at least 20 years.

In your 1992 report you referenced the fact that the Department of Finance had committed in 1987 to review this whole area of tax rules on interest deductibility. Here we are in 2007, 20 years later, wondering what we've ended up with.

As I read your 1992 report and your 2002 report, my understanding is that in fact you were concerned about the general issue of interest deductibility when it came to foreign affiliates. It wasn't strictly a matter of double-dipping, although that was part of the concern.

You said in your 2002 report that your concerns were in 1992, and still were, that:

When a Canadian corporation carries on business outside Canada to a foreign affiliate, the interest expense charged on the money borrowed to invest in the operations of the foreign affiliate can be deducted in Canada [...].

That was your concern then. Is that true? Was that your concern then, and is it still your concern?

[Sheila Fraser]

The major concern we've had over the years is foreign-owned Canadian corporations that then invest in a foreign affiliate. The studies have indicated that there has been in fact debt that has been moved into Canada because of that, yet the jobs and the salaries are abroad. It's really the issue of debt being transferred into Canada, which then reduces Canadian taxable income in Canadian taxes.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Was it your understanding that Budget 2007 attempted to deal with that issue, that it made a commitment to deal with that broad issue?

[Sheila Fraser]

My understanding is that what was announced in Budget 2007 was much broader than that. It was not simply foreign-owned Canadian corporations, but generally interest deductibility, so it was much broader.

This is an issue that has been around for a very long time. There has been draft legislation introduced numerous times. We have consistently recommended throughout that there really needs to be a good analysis and study done and a decision taken on this. There is a lot of confusion and a lot of uncertainty, too, about what these rules are, and there needs to be certainty in legislation about this.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

I would like to be clear, and maybe I'm just not grasping the words. Are you concerned about the fact that a Canadian company that has invested in a foreign affiliate abroad borrows money in Canada, is able to deduct the interest for that company, but that affiliate does not pay any income tax in Canada?

[Sheila Fraser]

It was raised as an issue, but our main concern was with foreign-owned Canadian companies. What they would do in their corporate structure was move debt into Canada. There were very few benefits to Canada by doing that. One can argue there is a difference between a Canadian-owned corporation that invests abroad...and then ultimately there can be some benefits back to Canadian shareholders.

I think we had examples in some of our audits. Most of the examples we had were U.S. corporations, but U.S. corporations that have a Canadian subsidiary. If that Canadian subsidiary has debt, perhaps even to the parent company, and then invests abroad, and the interest is deducted in Canada, well, the benefits are not ultimately going to come back to Canada.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

A similar situation occurs, though, if you have a Canadian company that has a foreign affiliate and uses the Canadian tax system to deduct interest on loans, but doesn't pay any tax on that foreign affiliate. In fact, Canada, again, subsidizes operations abroad that may help foreign workers abroad and economies abroad, but it does nothing to help Canada.

[Sheila Fraser]

That is true, except that one might argue that ultimately the Canadian shareholders of that company could benefit if there is expansion of that corporation internationally. There could be potentially some benefit there, at least to a Canadian shareholder of that corporation, whereas if it's foreign owned, there is none.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

With respect to your specific concern about the foreign-owned company, do you feel that the Minister of Finance's announcement this Monday addressed that issue?

[Sheila Fraser]

I'm sorry. I'm not aware of all of that.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

On Monday, the minister announced that this was the application of the budget commitment to deal with interest deductibility. Through his measure, establishing the short-term panel, and legislation that will come in five years, he will fix the problem that you presumably identified.

[Sheila Fraser]

What I'm being told, and I'll ask Ms. Plant to be more explicit, is that what the minister announced deals only with double-dips, double deduction of the same interest expense. What we're referring to is potentially a different issue.

Perhaps, Vicki, you want to—

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

There's a part of this whole issue, which has been ongoing for many years, that hasn't been dealt with. We need to get to the bottom of this and try to resolve it.

He announced a major anti-tax haven initiative on Monday, suggesting that the concerns, raised by you, the opposition, and for many years by all kinds of organizations, are being dealt with in this initiative. Do you believe that this announcement, this anti-tax haven initiative, addresses your concerns?

[Sheila Fraser]

I'll ask Ms. Plant to—

[The Chair, Conservative, Brian Pallister]

Unfortunately, you have time for only a very brief answer.

[Madam Vicki Plant]

My understanding of the changes to the rules on Monday is that a double-dip would be disallowed. So where there's an interest deduction claimed in Canada and in another jurisdiction, the Canadian deduction will be disallowed.

The other part of the initiative was to convene this committee of experts to do further research.

[The Chair, Conservative, Brian Pallister]

Thank you very much.

On behalf of the committee, I want to note the presence of a delegation of Pakistani parliamentary participants in our audience today. We welcome them and thank them for their interest in being here.

[Some hon. members]

Hear, hear!

[The Chair, Conservative, Brian Pallister]

We continue now with Monsieur Thibault.

Monsieur Thibault, pour cinq minutes.

[Robert Thibault, Liberal, West Nova, NS]

Merci, monsieur le président, and I hope our friends from Pakistan will find something to invest in while they're visiting Canada.