Evidence of meeting #129 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was treaties.
A video is available from Parliament.
Senior Chief, Tax Treaties, Department of Finance
That's correct. Although it's not because you don't have a need for the information that you cannot provide it, but the automatic exchange of information is about the systematic collection of information in order to share it.
Conservative
Randy Hoback Conservative Prince Albert, SK
That's right. You need systems to align. You need apples to speak to apples, not apples to oranges. Is that fair to say?
Senior Chief, Tax Treaties, Department of Finance
Obviously, it is different.
Conservative
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
My first question is for Mr. Castonguay.
You are in large part responsible for the negotiations and process for the tax agreements. In the case of these six countries, how long did the negotiations take? How long did each one take?
Senior Chief, Tax Treaties, Department of Finance
In the case of Namibia, we began in 2005 and finished in 2006, when I arrived.
In the case of Serbia, negotiations began in 2003 and also concluded when I took up my position.
The negotiations with Poland began in 2008 and lasted two years.
In the case of Hong Kong, we began in June 2011 and concluded that same year.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
Okay.
I ask the question because I assume it takes a lot of energy to get to the point of signing these bilateral agreements. And, we may wonder about the outcome.
As we said when we did our study on tax havens, there is a lot of doubt about whether bilateral treaties are really the best way of handling this issue. It's better to have them than not, but the progress made is still minimal.
You are probably aware of the article that appeared recently in The Economist. I would like to quote something from it. Unfortunately, it's only in English.
Now accountants can shuffle intangible assets such as intellectual property, and the profits they generate, from one jurisdiction to another with ease. A confusing thicket of bilateral tax treaties lets them play off national rules against each other.
They give an example of the “double Irish with a Dutch sandwich”, which you might be aware of.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
In terms of treaties, we are spending a lot of time signing bilateral agreements but, in the end, don't you think the time should be spent on something else? Shouldn't we be taking on bigger problems, like the lack of transparency and double taxation or, as my colleague said, double non-taxation?
Senior Chief, Tax Treaties, Department of Finance
The problem you are referring to has to do with tax avoidance, meaning planning to ensure that some income is sent to places with low or no taxation. That refers to what I was talking about earlier. In English we call it base erosion and profit shifting.
Is a multilateral agreement the only response to that? I don't think so. I think this problem has many facets and must have many solutions. We can think about national laws and tax treaties. One thing can certainly be done when it comes to tax treaties, which is to protect the integrity to ensure that third country residents do not have access to the treaty benefits. For example, the treaty with Hong Kong reflects this reality because it includes provisions that ensure that the benefits are available only to residents of the territories that signed the agreement.
That is part of the solution. The solution is not limited to tax treaties, be they multilateral or bilateral. There are also issues relating to national legislation that come into play here.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
The problem raised by The Economist is a recurrent one. Most experts are raising it. With respect to the agreements and treaties we are discussing, among the six countries, some of them have an automatic transfer of information and others do not. It will probably be the same for all of our agreements. Yet that gives rise to some inconsistency and inefficiency. The rules differ depending on the agreements and countries involved.
Besides, these countries, be it Hong Kong, Switzerland, Namibia, Serbia or Poland, may even be signing agreements with other countries that are different from the ones they sign with Canada. Ultimately, we end up with a tax treaty system that is impossible to navigate and that eventually goes against the objective.
My main concern about these treaties is that the government could very well say that it has done its part, that a bilateral agreement has been signed and that that's where it ends, when there are other blatant problems, including the issue of dummy corporations or shell companies. My colleague will likely address that issue later.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
Some organizations that want to engage in tax avoidance or tax evasion use it as a front.
Do you understand my concern?
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
Do you think the government could simply use that to say that it has done its job and won't take it any further, when in reality the problem is much larger?
Senior Chief, Tax Treaties, Department of Finance
The issue you are raising has been discussed in The Economist and in other publications. I think that some governments, including our own, have voiced concerns about this. The OECD has undertaken some very serious and very ambitious work to determine what could be done in this regard.
As I mentioned, if we take on this kind of problem, we should not just consider one or two solutions, but rather a set of solutions. This will take a little time because it is fairly complicated. Lastly, since this is being done by the OECD, an agreement between the countries is required. It may or may not lead to a multilateral instrument. It is much too early to say.
NDP
Raymond Côté NDP Beauport—Limoilou, QC
Thank you very much, Mr. Chair. It is much appreciated.
I would like to thank the two witnesses for being here.
Before addressing the issue of shell companies, I would like to ask you what kind of follow-up you do after such a tax treaty has been signed.
Do you analyze the impact? Are there any figures you can report?
Senior Chief, Tax Treaties, Department of Finance
Not really. First of all, Canada Revenue Agency is responsible for applying tax treaties. Obviously, if there are problems with one treaty in particular, the agency brings it to our attention. That is why treaties can be renegotiated if some facets aren't clear or a new problem arises and needs to be addressed.
NDP
Raymond Côté NDP Beauport—Limoilou, QC
If the Department of Finance doesn't do this analysis, does CRA?
Senior Chief, Tax Treaties, Department of Finance
I think the people at CRA are able to tell us if the treaty is working as expected or if there are some interpretation issues at the start. We can be made aware of it at that point.
NDP
Raymond Côté NDP Beauport—Limoilou, QC
Following on what my colleague, Guy Caron, said, when we sign this kind of treaty, we often focus on the countries we are signing the treaties with, but we also need to look in our own backyard. Are we good students?
Professor Jason Sharmon, who wrote a very good article that appeared in National magazine, the official journal of the Canadian Bar Association, did a very good study on that. It is very interesting because it shows that Canada, like the United States, has its own system of secrets when it comes to front companies. It's a huge problem because we can't preach the adoption of good behaviour if we act just as appallingly.
This goes through companies that can set up front companies. Professor Sharmon mentioned Canada in particular. He quoted an example. In almost half the cases that were studied, very little if not no information was requested. In this specific case, he indicated that the company that offered its services to set up a front company clearly explained the risks. Despite everything, personal information was requested only if a credit card was going to be used to make a payment.
Canada has been a part of the financial action task force on money laundering since 1990. The group's criteria are very clear: Canada, like other member countries, must ensure that information is collected on owners who benefit from this type of front company.
What can you tell us about that? How do you explain all the gaps in Canada?
Senior Chief, Tax Treaties, Department of Finance
I'm not an expert in this area. However, I would say that in its 2013 budget, the government showed that it intends to hold consultations on the issue of beneficial owners of companies so that we can one day revise our statutes and meet international standards.
In the case of companies suspected of illicit activities, the Income Tax Act contains provisions that enable the Canada Revenue Agency to ask questions and obtain underlying information when necessary.
NDP
Raymond Côté NDP Beauport—Limoilou, QC
Yes, but beyond that, this basic information must really be collected and even that isn't being done. It's far from systematic. There are huge gaps and we have known about it for a long time.
Thank you, Mr. Chair. I will touch on this again with other witnesses.
