Evidence of meeting #90 for Finance in the 39th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was brown.
A recording is available from Parliament.
Gilles Larin
I can go first.
Mr. McCallum, I agree with your earlier comment that the problems associated with debt dumping are more serious than those associated with double dipping. Double dipping is less serious, mostly because of the rules
which Mr. Brown referred to by it's English name, which is the Canadian capitalization rules.
This deprives Canada of more revenue than double dipping.
Gilles Larin
As to your second question, it is clear that if a deduction is allowed in Canada, and if Canada has a higher tax rate than other countries where the deduction can be claimed, this will have a negative effect on the Canadian tax base. This is the principle of communicating vessels in operation.
Conservative
The Chair Conservative Brian Pallister
We'll now ask Mr. Brown to respond.
Mr. Brown, could you respond to Mr. McCallum's questions, please?
As an Individual
I think that both debt dumping and double-dipping are important problems. We don't have any statistics on how much money is available. You can't find that out. But I think they're both substantial, and they both require action.
With respect to coming down to only borrowing money once and only getting a single deduction that you might take in Canada, well, all these companies are taking their single deduction in Canada anyway. So I don't think we would lose any additional revenue by restricting double-dipping. I think people will arrange their borrowings for a number of reasons, which include consideration of foreign currency risk, financial markets, and so on. And as long as they get one deduction, I think they've been treated fairly.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
Thank you, Mr. Chair.
I would like to look at the question of country of residence and the possibility of bringing offshore profits back to Canada. An investigative journalist who came before the committee told us that shipping companies claim to run their business from Barbados so that they can then bring their tax-free profits back to Canada. But if you go there, you find nothing but a little desk in a law office. You can see right away that no real decision-making is done in Barbados.
Since this is the current situation, is it because of a legal loophole or is it because the law is not being enforced? Mr. Brown or Mr. Larin can answer.
Does the law presently allow profits from a company located in Barbados to be brought into Canada, even if that company is nothing more than a straw entity, an empty shell?
Did you hear the question, Mr. Brown?
As an Individual
Yes, I did.
In broad terms, yes, that's the result of the combination of the legislation and the tax treaty between Canada and Barbados. There are large types of income that have been taxed only very lightly and that can be repatriated to Canada.
I don't think that in itself is such a terrible thing. There are lots of places where income is not subject to the rates as high as in Canada. As just one example, if you put a hotel in Bermuda, you find out that Bermuda doesn't have an income tax at all. But it has all sorts of other taxes and it has a developed social security system for its people. Your hotel is going to be paying room tax, labour charges, import duties, and what have you, and in the end it's going to wind up being fairly heavily taxed. So just because it doesn't pay an income tax doesn't mean it isn't taxed.
I do agree that the use of the present tax treaty with Barbados, the present legislation, is an open door to having companies create this double-dip structure, which, one, is unfair, and two, is economically unsound. It gives you an incentive to borrow as much money as you can. That's not good economics. That's not the way we should run the economy.
Therefore, I think that is wrong. There needs to be some additional scrutiny of that in our attack on what is going on with Canadian investment abroad.
Bloc
Thierry St-Cyr Bloc Jeanne-Le Ber, QC
Yes, but in the case of that hotel you mentioned in Barbados, it can be said that there are commercial activities going on in Barbados, Bermuda or wherever. But with a company that does not really conduct commercial activities, and has nothing but a legal structure in order to avoid paying taxes under the current laws, could the government of the day use the fact that no real commercial activities are being conducted to deny tax-exempt status when the profits are repatriated?
Conservative
The Chair Conservative Brian Pallister
Thank you very much, Mr. St-Cyr.
We have to move on to Mr. Dykstra.
No, Mr. Brown, I'm sorry, Mr. St-Cyr used his time in preamble. We unfortunately will have to move away from him now. If you'd like to work a response into this next question, I invite you to do that, but we have to move to Mr. Dykstra now.
Mr. Dykstra, four minutes.
Conservative
Rick Dykstra Conservative St. Catharines, ON
I may share a little bit of my time with my colleague, the member for Peterborough.
One comment made was that this was about a revenue grab, and I just wanted to state that what this is about is pure policy, trying to move forward to make sure that we have tax fairness and that we don't have a revenue grab, as indicated. Part of this in terms of fairness, obviously, is international tax fairness.
One thing we have committed to--and I wanted to get your thoughts or comments on this, Mr. Brown--is having an international panel on tax fairness put together so that we could actually look at these issues. I wondered if you were familiar with that. And just based on the comments you made about how to improve our deal with the United States--in your opinion, there are some improvements we need to make--I thought you might be able to comment on what some of those improvements might be and whether or not you think the panel could address some of those issues.
As an Individual
We need to consult with our colleagues in other countries in order to get an overall tax system that's fair. The point is that different countries have different rules. If a taxpayer wanders blindly into this maze, a taxpayer can get stuck with double taxation, and that's unfair, but he can also perhaps find his way through and get away with no taxation.
The OECD and other international bodies have been very active in trying to harmonize. The problem is that it seems to take forever, even between two countries. Canada and the U.S. have been trying to revise their tax treaty for over a dozen years. It's taken a long time, although we may be close to getting somewhere within the next couple of months.
There are things we could do with the United States that would protect the tax revenue of both countries, and I think these things can really help. I believe the important thing is that you have to work at this issue all the time. You can't fix the tax system and go away for 10 years and expect that people won't find new devices. It requires constant attention, and perhaps we have not given it the attention it deserves.
Conservative
Dean Del Mastro Conservative Peterborough, ON
Mr. Brown, this is Dean Del Mastro again.
There was a comment made a few minutes ago that interest deductibility would always be claimed in Canada, and that to crack down on double-dipping would thus not be effective. That's not in fact the case. The interest deductibility will always be taken in the country with the highest-tax jurisdiction, which would have the biggest benefit to a multinational corporation.
Advantage Canada specifically spoke about our moving towards the lowest taxes in the G7. That would clearly not lead to all debt being claimed in Canada. Would you agree?
As an Individual
Yes. Given other factors and a lot of other considerations—foreign currency risks, financial markets, and so on—you'll tend to take the deduction where the tax rate is highest. Canadian rates are, for example, substantially higher than those in the U.K. or in most European countries. That's one factor in determining where the deduction would be chosen.
Conservative
The Chair Conservative Brian Pallister
Thank you.
We'll continue with Mr. Pacetti, briefly, and then go over to Mr. Thibault.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Mr. Brown, let me ask you about the money being invested that's moving out of Canada versus the money that is being repatriated, back into Canada, through a tax haven; for example, Barbados—or perhaps even a country with which we don't have a tax treaty.
Which way is the money going? Is it Canadian income that is being laundered through the tax haven? Or is it vice versa, where it's money earned internationally that is being repatriated to Canada?
As an Individual
The total value of Canadian investment in foreign corporations and enterprises is higher than the value of foreign enterprises investing in Canadian enterprises. Despite that—we only arrived at this position in the last few years—the income flow is actually the reverse. The inflow of money into Canada—dividends and so on from foreign affiliates—is of about the same order of magnitude as the dividends and interest and other payments from Canadian companies to foreign parent companies abroad. That hasn't caught up yet.
So the money flows both ways, and you're part of an international financial system that moves along relatively easily.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Mr. Brown, I understand that the money flows both ways. But is there a bigger tendency, because Canada technically has a higher tax rate, for taxes to be avoided here in Canada on money earned in Canada, and then repatriated through a lower tax haven? Multinationals need to invest in Canada. Will they show less income here and more income somewhere else, and then eventually repatriate the money back here?
I'm not sure whether you understand my question.
As an Individual
A foreign multinational with headquarters outside of Canada would have some tendency to try to move debt into Canada by getting the Canadian subsidiary to borrow money, perhaps to invest in shares abroad or something else, on which you will get very little in the way of dividends, but which will get you a deduction in Canada and reduce the Canadian tax base. When the money moves out of Canada, it goes to a tax haven, and ultimately it may move around and go back to the parent outside of Canada.
Again, it's a very complicated issue, and that's only a very simple and elementary description.
Conservative
Liberal
Robert Thibault Liberal West Nova, NS
Thank you.
Mr. Brown, I want to follow up on a question, but first I have to explain these reading glasses that you might have seen going around. A lot of my colleagues have achieved middle age, but their vanity precludes them from actually seeing their eye doctors and getting the proper eyewear. So they've been borrowing these glasses from an officer. I'm quite comfortable with my vision majority and I have my own reading glasses.
My question relates to the question that was put by Mr. McCallum and Mr. Del Mastro on double-dipping and the area of jurisdiction with the highest tax rate. If you're assuming there are a number of jurisdictions in which Canadian businesses would be making transactions that have lower effective corporate tax rates than Canada, you can assume that the tax relief would be taken in Canada. Therefore ending the double-dipping would not have the effect of increasing taxes to Canada in those circumstances, but would reduce the competitive edge of Canadian corporations operating in those jurisdictions and competing with other national corporations. They'd lose an advantage that they now enjoy.
That is the premise of the question put by Mr. McCallum, and I invite you to comment.
As an Individual
Again it's a complex field. There's a certain amount of truth in that, because if Canada has the highest rates then you take the deduction in Canada. But the problem is that with a double-dip structure you get such an incentive to borrow that you borrow more. I've seen layers where you can get a triple deduction, and in effect the more you borrow the more money you can make.
That's artificial. It distorts the economy and induces people to borrow money they wouldn't otherwise borrow. So it's not quite true that it wouldn't have any effect on the Canadian tax system. But if you reduce it down to a single deduction, that may wind up in Canada and give you much the same effect as you have now.
I put it to you that it's wrong economics to allow the double-dip to proceed, because it simply distorts international investment.
Conservative
The Chair Conservative Brian Pallister
Thank you, Mr. Brown.
Thank you, Mr. Brown and Mr. Larin, for your participation in our hearing. We very much appreciate it.
We will now suspend briefly for lunch and then reconvene to deal with clause-by-clause on Bill C-33.
Conservative
The Chair Conservative Brian Pallister
Pursuant to the order of reference of Monday, May 14, 2007, we are studying Bill C-33, An Act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that Act.
(On clause 2)
All in favour of clause 2?
Mr. McKay.
