Finance Committee on June 5th, 2007

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

Given the limited scope the bill is dealing with, do we have the enforcement capacity to actually deliver what the bill promises, given the Auditor General's concerns, given the problems CRA is having in terms of international enforcement? Do we have the capacity to fully implement Bill C-33?

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

That's a good question. I defer to Mr. Lalonde.

[Gérard Lalonde]

Yes, the Canada Revenue Agency has obviously been aware of these provisions for some time, and they've geared up for them. Over the last couple of budgets, they have been allocated additional funds for the administration of the international tax system, and international tax compliance in particular. They also belong to an organization--well, “organization” might be a big word--or a group that includes people from the Canada Revenue Agency and people from the tax administrators of other countries, including the United States. It keeps a very close eye on what is being developed in the tax community so they can stay abreast of what's happening with developments.

[The Chair, Conservative, Brian Pallister]

Merci, Madame.

We will just ask the committee members to note that the deadline for amendments is 5 o'clock Wednesday, June 6, and we will do clause-by-clause on Bill C-33 on Thursday.

Now we continue with the talented Mr. Pacetti. Mr. Pacetti, it's over to you.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

You say that with a serious face.

I have just two quick questions. I just want to know why this bill has been hanging around since 1999. I understand there have been press releases since 2001 and so forth. Could you answer that question quickly?

[Gérard Lalonde]

Well, the bill is a combination, as I mentioned, of a couple of proposals. You started off with the 1999 budget, in which we announced--we being the government of the day--the changes dealing with FIEs and NRTs. That budget did not give details of what those changes would be. It's a very complicated area, as you'll see from the size of the portion of the bill--approximately half the bill, and it's a pretty big bill to start off with--that deals with those.

Proposals were put out in 2000 for consultation. They generated a lot of commentary. Again, in 2001, another draft was put out. There was another draft in 2002. The bill was eventually tabled as a notice of ways and means motion in 2003, but then because of events in Parliament, that bill did not proceed. Eventually there was a different government that took the reins. The different government had its agenda to propose, and it did so. It did so in those budgets, and it also took notice of these outstanding amendments and put them forward in this bill.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Is there any similar type of legislation hanging around out there that would affect the subsequent budgets, like 2000, 2001, and so forth?

[Gérard Lalonde]

I think this is probably the oldest piece. Again, the technical amendments that show up here are outside the budget.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I understand that. After 1999, the subsequent budgets after that date, are there technical amendments to be made there as well?

[Gérard Lalonde]

There are some proposals outstanding that aren't that old, but there is some question about the deductibility of interest expense that still remains open.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

From what year?

[Gérard Lalonde]

I can't recall offhand. I think it was about 2003.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I have just a quick question. Would any of the items in this legislation affect the tax treaties we have with other countries?

[Gérard Lalonde]

Do you mean in terms of forcing us to amend the treaties?

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Yes.

[Gérard Lalonde]

No.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Great.

Thank you, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Pacetti.

Monsieur St-Cyr.

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

Thank you, Mr. Chairman.

I would like to take this opportunity to welcome our clerk back from her vacation, on behalf of all members. I hope she had a wonderful time. I do not know if her return has anything to do with the beautiful unanimity that we enjoy today in this committee. Let us hope it will last.

Returning to our subject, I have a question that deals not so much with the bill as such, but more with tax avoidance in general. In previous meetings of this committee we had several presentations which discussed extensively the issue of double dipping. Members of the committee were told how this scheme works and what kinds of strategies are being used.

Officials also talked about a method called tower structure in English. I do not remember the word in French. Could one of you explain this instrument and tell us how it allows, on a practical level, a corporation to reduce the tax it pays?

[Gérard Lalonde]

Wally, that sounds like something that would just please you.

[Wallace Conway]

The double-dip structures and the tower structures that you are referring to are culminated in the rules dealing with foreign affiliates, which have nothing to do with this bill. Under a tower structure or a double-dip structure, basically, interest paid by one foreign affiliate to another--a foreign affiliate of a taxpayer--is treated as being active business earnings. The reason for that is that the interest expense paid reduces the active business earnings of one foreign affiliate, so we increase the active business earnings of the other foreign affiliate to keep the affiliates' group active business earnings flat, at the same amount. That's the reason for the provision.

The effect of that provision is being used by Canadian corporate groups to essentially move income out of a high-tax jurisdiction into a low-tax jurisdiction. That really doesn't affect the Canadian treasury; that affects foreign treasuries. From that point of view, it's not offensive from a Canadian tax policy point of view.

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

With regard to double dipping, I understand that it is legal, that it is presently allowed by our legislation, but nevertheless it is a structure that has the sole objective to minimize taxes paid in Canada and other jurisdictions that have a high tax rate. I am just trying to understand how these schemes work. I understand double dipping pretty well but there is also the method called tower structures.

Could you explain how corporations use this scheme to minimize their taxes. How does it work?

[Wallace Conway]

You want to know how they use it to reduce tax?

What they would do is set up a finance company in a country that has a low tax rate. They would loan money to a foreign affiliate in a country with a high tax rate. The high-tax-rate company would pay interest to the low, so they would be reducing income at a high tax rate and paying tax at a low tax rate. That's how they save the foreign tax.

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

This was the double dipping issue. As for the tower structures that were discussed, they involved Canada and the United States. They are based on the fact that an affiliate corporation is not treated the same way in Canada and in the United States. This was explained in documents that were provided to the committee. Do you know about this structure?

[Wallace Conway]

So you want to know how the tower structure works?