Ladies and gentlemen, good morning. Thank you for the invitation.
In light of the length of Bill C-48 and of the short notice for its analysis, I was allowed to focus my opinion on a specific section of the bill.
I chose the upstream loans rules, because according to Department of Finance officials who appeared before this committee at a previous meeting, they are one of the main elements of the bill you are studying.
In order to understand these rules, we need to know that the Canadian multinational companies that do business in tax havens are taxed according to the following basic principles, which I will present in a very summary way. If the multinationals earn income, Canadian income tax is levied as soon as that income is made. If the multinationals earn business income, it is during the year wherein that income is brought back to Canada that Canadian income tax becomes applicable.
In order to get around this repatriation income, multinationals and their affiliates set up in tax havens used to put strategies in place involving loans, that is to say that rather than paying taxable dividends to bring the income back into Canada, the sums were simply lent to Canadian multinationals.
The purpose of the rules on upstream loans initially proposed in 2011 was to put a brake on these strategies by considering such loans as dividends, as explained several times before this committee during the previous weeks. On their own, these rules are very sensible, to such an extent that one wonders why tax authorities waited so long to propose them. However, when they are analyzed in light of the Income Tax Act as a whole and recent amendments made to it, these rules lose all relevancy, and even though they may appear to have teeth, their effect on public finances may well turn out to be quite minimal.
In fact, while these rules on upstream loans were being introduced in order to catch Canadian multinationals who attempt to bypass repatriation income tax, amendments to subsection 5907(11) of the Income Tax Regulations were implemented. May I remind you that it is by virtue of these amendments that Canadian multinationals no longer have to pay income tax on the business income they make through affiliates they have set up in countries with whom Canada has signed an agreement to exchange tax information, that is to say Anguilla, Aruba, the Netherlands Antilles, the Bahamas, Bermuda, Costa Rica, Dominica, the Isle of Man, the Cayman Islands, the Turks and Caicos Islands, Jersey Island, Saint Kitts and Nevis, Saint Martin, St. Vincent and the Grenadines, and Saint Lucia. The list may get even longer since negotiations are currently underway with other tax havens including Antigua and Barbuda, Bahrain, Belize, Brunei, Gibraltar, Grenada, the Cook Islands, the British Virgin Islands, Liberia, Liechtenstein, Panama, Uruguay, etc.
This total tax exemption on income earned by Canadian multinationals in these tax havens, which represent most of those with whom Canadian businesses do business, calls into question the purpose of putting in place tax regulations for the purpose of ensuring that taxes on repatriated income will be complied with, since that income tax is in the process of disappearing. In fact, since January 1, 2013, that form of taxation no longer exists on Canadian income exported to several tax havens.
To conclude, despite the limited practical scope of the rules on upstream loans, and despite the dangerous complexity of Bill C-48 as a whole, I recommend, in these circumstances, that the bill be adopted because the time has come, frankly, in this time of economic crisis or pre-crisis, for our public servants to do something different. They have to rethink tax laws and adapt them to the realities of the 21st century. In order to be able to do so, we have to avoid mobilizing them around this technical bill whose adoption or non-adoption will do little to arrest the force of the global movement toward legal tax exemptions on vast corporate and personal fortunes.
Thank you. I will be happy to reply to your questions.