Finance Committee on June 17th, 2013

[Brigitte Alepin]

In 2005, I had a research contract for Harvard University. The objective was to determine how to adapt our tax regimes to globalization. All those issues, which are current problems, were not very well known at the time. This research contract led me to conclude that we must slowly work towards global tax co-operation. That will probably be the only way to replace this tax competition between countries, which is at the very root of the problem.

[The Chair, Conservative, James Rajotte]

Okay. Merci.

Merci, Monsieur Caron.

Ms. McLeod, go ahead, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

Again, I appreciate the conversation. I like the way Mr. Rosenbloom keeps bringing us back to what this legislation is and what it's not. Predominantly, the double-taxation issues and the issues around international trade are some of the key parts of it, and of course there are some tools in terms of the tax-evasion issue.

I have to say, just because the issue of tax evasion keeps coming out so often—and we talked about the tools in the tool box and this being one of them—that with the recent budget, we have the new mandatory reporting of international electronic funds transfers of over $10,000; we have reporting requirements for Canadian taxpayers with foreign income or properties; we have the streamlining of a judicial process that provides the CRA authorization to obtain information from third parties such as banks. As well, we now have a whistle-blower program, with awards of up to 15% of the federal tax collected for information leading to tax assessments exceeding $100,000; and, again, we have what we like to call our new SWAT team, as well as the additional dollars that are really focused in on targeting that evasion. The tool box still has room for more tools, but certainly, our government is very committed.

I really want to go back to what this specific piece of legislation is designed to accomplish. As we develop relationships and treaties with countries, that is often the start of a relationship that then progresses. Mr. Cockfield or Mr. Ernewein, do either of you have any comments about how we see things evolving with time and how to really have some of those key elements in the first place? We're talking about the government-to-government or official-to-official level perhaps helping us move towards more robust opportunities.

[Prof. Arthur Cockfield]

I can address that question.

As I mentioned in my opening comments, I agree that the treaties are largely non-controversial. They do a lot of good stuff, as Professor Rosenbloom also mentioned. I didn't mean to suggest that the Department of Finance had rushed these particular negotiations. They're certainly consistent with the Department of Finance's traditional treaty policy, and so there are no real radical changes.

I was just going to highlight this very recent trend towards automatic information exchange and how we're seeing some large financial centres—Hong Kong, Switzerland, and Luxembourg—pushing back. They don't like this regime through which we're moving toward greater global transparency. Perhaps they wouldn't have signed the treaty, as I think Mr. Castonguay suggested, without these particular amendments, so they're mainly a good thing.

But, as other witnesses have mentioned, they probably don't go far enough.

[Brian Ernewein]

Thank you.

If I may just take one second to make the comment about the reference to the OECD Convention on Mutual Administrative Assistance in Tax Matters, Canada has not ratified that. Canada has not ratified that, because it requires a technical amendment found in Bill C-48, which, fingers crossed, will be passed very soon, after which we will be able to ratify that. We have signed it and indeed we have signed the protocol to it as well.

Very quickly, in response to your question, treaties are important for their own sake to regularize the tax rules that apply between two countries and the investors between those countries, and that's our primary objective. But they certainly have broader effects economically in terms of increasing investment, hopefully, between the two jurisdictions and in having a stronger relationship economically as well as politically between the two countries involved.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Taking this back to my health background, I look at it the same way I did when we realized that smoking was a problem. Then we looked at how things changed over time in terms of public health policy. I think to some degree we're seeing here the same evolution of identifying a problem that, I think, is becoming more acute. As time goes on, we're developing more skills and more tools.

I think no one would disagree with the comment that it's absolutely critical to work internationally. I know it's nice to say we want to get all the way in one stop, but I think sometimes you have to accept the evolution as we move to deal with this very important issue. Looking at our voluntary disclosure program, I know a lot of Canadians are starting to get very nervous with the work we're doing, and I think we're seeing a lot of uptake in terms of people coming to the table now rather than later.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. McLeod.

Mr. Côté, you have the floor.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

I want to thank the witnesses for their willingness to answer our questions.

While I was listening to your presentations, I could not help but think back to a joke made by a security expert several years ago. He was showing me a Frost fence around a company, and said that this was the best way to prevent honest people from illegally entering the premises. I thought that was an excellent commentary, as the fence was also a measure that applied to people who did not have the means to circumvent it. That is the case of my mother, who has only her basic retirement income. It is another story for much wealthier people.

My question is for you, Mr. Howlett. I will come back to shell companies and the situation I started talking about.

The Australian authors of the study asked 3,700 intermediaries, in 182 countries, to create a shell company to facilitate the process. I am proud of being Canadian, but certain situations may have a negative effect on our pride. In Canada, the average number of attempts needed to establish a shell company, which is practically impossible to trace, was under 5—it is apparently 4—while the number of attempts necessary for access to tax havens was 25 on average.

Clearly, international pressure—and more specifically the pressure exerted by developed countries—has resulted in tax havens being more accountable than Canada.

Would you like to comment on that data as it relates to our study?

[Dennis Howlett]

When I had information from reliable sources in the U.K. about Canada's objection to the proposed beneficial ownership rules under the G-8, I was scratching my head in trying to figure out why this could be.

One of the possible reasons is that some of the practices in some jurisdictions in Canada may not come up to the proposed new international standard of really ensuring that the ultimate beneficial owner is clear when registering companies. Also, in our system you can register a company federally, but also provincially. The federal government may not want to undertake what it can't deliver in terms of provincial jurisdictions.

However, as I understand it, some of the pressure on the federal government, which was actually credited in budget 2013, comes from provincial governments that want the federal government to do more in terms of going after tax havens. I would think that if there is need for some reform in this regard in Canada, provincial governments would be willing to do this because they stand to benefit as well from additional tax revenue that may be generated from stronger international rules around beneficial ownership.

So I'm hoping, and the latest information I'm getting from the U.S. is that Canada maybe has moved somewhat on this issue. If that is the case, and we'll find out tomorrow, I would be very pleased to hear that, if the Canadian government in fact is going to support the proposed G-8 action plan.

[The Chair, Conservative, James Rajotte]

You have one minute left.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Would any other witnesses like to comment on this?

Yes, Mr. Deneault?

[Alain Deneault]

What surprises me in what I am hearing is how much this bill's problems are reduced to technical issues, while today, tax avoidance is largely related to those double taxation agreements. If we recognize that the double taxation agreements are actually double non-taxation agreements—as those agreements help individuals invest capital in subsidiaries located in tax havens and repatriate them to Canada without paying taxes—we see that those agreements play a part in the phenomenon of tax leakage.

Why are Canadians now “investing” some $53 billion in Barbados annually? It is because we have a double taxation agreement that allows Canadians, under the guise of investment, to play a game of circumvention and repatriate the capital. We are well aware that, if someone invests capital in Barbados, they do so strictly to take advantage of the legislation in terms of tax-related regulatory benefits. That is exactly what will happen with countries like Hong Kong. Under the pretext of investing in Hong Kong, people will act like they are paying taxes there, when, if any taxes are paid, they will be minimal. People who invest in Hong Kong often do so to benefit from the low tax rate and the pressure put on wages in those countries. That's outsourcing, which costs us a great deal politically, socially and economically. Since company outsourcing can be explained by this phenomenon....

[The Chair, Conservative, James Rajotte]

Merci, Monsieur Deneault.

Merci, Monsieur Côté.

I just wanted to follow up with Professor Cockfield. I realize that your invitation here was given on very short notice, but you talked about automatic information exchange, request on demand, and spontaneous exchanges. Have you had an opportunity to review article 25 in Bill S-17?

[Prof. Arthur Cockfield]

Article 25 of which treaty?

[The Chair, Conservative, James Rajotte]

It's dealing with exchange of information. It's article 25 in Bill S-17. It's in schedule 1.

[Prof. Arthur Cockfield]

I looked at the individual article on the exchange of information provisions. There are different ones in each treaty, and they were all consistent with article 26 of the OECD model tax convention.

[The Chair, Conservative, James Rajotte]

Okay. So you're satisfied with the language generally with respect to exchange of information?

[Prof. Arthur Cockfield]

I am.

I raised concerns about these additional amendments, or protocols, or whatever you call them. They'll become part of Canadian law once Parliament adopts Bill S-17. Traditionally, you negotiate a treaty, and then you might have a protocol to amend the treaty, but these are notes that in any event are going to be part of the law, and they cut back on article 26 of the OECD model tax treaty.

As I mentioned, the commentary pursuant to this article says that it should envision three types of information exchange, whereas we have new language in these amendments, with the three treaties at least, that suggests we will only use information upon request. Again, that's understandable, given the bargaining power of each side and what Canada is trying to achieve. But for these amendments, presumably the parties would not have entered into an agreement with Canada.

Nevertheless, I do have concerns about the amendments.

[The Chair, Conservative, James Rajotte]

Okay. I appreciate you putting those concerns forward.

Mr. Ernewein, could I get you to respond to those concerns?

[Brian Ernewein]

Well, it's as I said before. The Canadian position, where the circumstances warrant—where we think the other country is in a position to both collect the information to provide to us and to receive the information and respect its confidentiality—is to consider automatic exchange of information with that country.

But it's not a bottom line at this point. Most of our treaties provide authorization for that to happen but don't make it a requirement. That's the discussion point now at the G-8 and elsewhere: whether or not we should, as an international standard, move towards that.

[The Chair, Conservative, James Rajotte]

Is it fair for me to say, though, with respect to all of these bilateral negotiations and with respect to the treaties, that Canada is going as far as the other country will go and that we are in fact pushing as far as we can? Basically, if we're not getting as much as we would want, it's that the other country would not agree to it.

[Brian Ernewein]

I think that is fair. To explain the point, the general exchange of information provision in our tax treaties authorizes automatic exchange of information but does not require it. So for any country that seeks to do it with us—and if we're prepared to do it with them—the authority is already there.

As Mr. Castonguay has already explained, our tax information exchange agreements are a different animal, contemplating only exchange of information on request. If those were to be updated to allow for, or require, automatic exchange of information, changes would be needed.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Rosenbloom, I wanted to return to a point. You finished your remarks by talking about a U.S. convention with Cyprus. I only have a couple of minutes of my round left, but my understanding is that the convention was from the mid-1980s.

I don't know if it has been updated since then, but this seems to be a unique case with respect to U.S. conventions. If so, why is it unique?

[H. David Rosenbloom]

It's unique in protecting the U.S. tax base from foreigners using Cyprus to invest in the United States. As I indicated later, that may not be as big a problem in Canada as it is for us, because we will generally reduce our tax down to zero, certainly on interest on royalties down to zero, and increasingly we're doing that on dividends. Canada maintains a substantial tax on the foreigners investing in Canada, so your concern is less important than ours.

I just mentioned it because, remember, my statement was prepared before I knew what you were going to focus on here. I would have thought that for us, in doing a treaty with Hong Kong, we would be very concerned about people investing in the United States, not about U.S. multinationals using Hong Kong abroad.

You might have more of a concern about the foreign investment, as was mentioned earlier—in other words, people putting money in Barbados and Hong Kong to invest outside Canada—but that's not because of the treaty. That's because your domestic statutory law allows people to repatriate tax from treaty countries free of further Canadian tax. We do not do that, so we have very little concern on the outbound side of treaties. We have much more concern on the inbound side of treaties; I think our situation may be different.

The answer to your question, however, is that the Cyprus treaty was deemed by the multinational community to be too general and too vague to be used in subsequent amendments. Since then, we've had all different manner of limitations on benefits provisions. Cyprus is unique, and it has not been changed.

[The Chair, Conservative, James Rajotte]

I appreciate that clarification.

Mr. Ernewein, could you just briefly add your thoughts there?