Thanks, Mr. Brison.
We'll go to Mr. Allen, please.
Evidence of meeting #56 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site.) The winning word was measure.
A video is available from Parliament.
Evidence of meeting #56 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site.) The winning word was measure.
A video is available from Parliament.
3:50 p.m.
Conservative
3:50 p.m.
Conservative
Mike Allen Conservative Tobique—Mactaquac, NB
Mr. Chair, I have a few questions, one on the technical amendments package, which is in part 1.
The comments say that these are mostly relieving in nature, but can you confirm with me that these are a follow-through on draft technical amendments that were released for comment over the summer period? Have they been released for comment by the public?
3:50 p.m.
Director, Tax Legislation, Tax Policy Branch, Department of Finance
Yes, the technical measures in the bill have all been released for comment previously. The largest component of them was released on July 12, 2013, as a consultation package.
3:50 p.m.
Conservative
Mike Allen Conservative Tobique—Mactaquac, NB
Okay.
Some of this relates to comfort letters that were being given by CRA. Can you inform the committee how long some of these things have been managed by CRA?
3:50 p.m.
Director, Tax Legislation, Tax Policy Branch, Department of Finance
It is for several years, certainly, and in a few cases as long as 10 years.
3:50 p.m.
Conservative
Mike Allen Conservative Tobique—Mactaquac, NB
Okay. Thank you very much for that. That's helpful and helpful for businesses as well.
I'd like to ask you a couple of questions on the exchange of information for tax purposes, which in the briefing binder is item E in part 1 (Other). Can you elaborate a little on that exchange for tax information purposes? Specifically, how often is the tax information shared, and how do you perceive this exchange as helping us with tax evasion measures?
3:50 p.m.
Director, Tax Legislation, Tax Policy Branch, Department of Finance
In 2007 the government announced a policy of seeking to enter into tax information exchange agreements particularly with countries that Canada did not have a tax treaty with, typically low-tax or no-tax jurisdictions. Part of that policy included incentives to enter into such an exchange agreement as well as disincentives for countries that refused to act on an invitation to enter into such an agreement. The measure in the bill addresses a timing gap.
British Virgin Islands in particular took all necessary steps to enter into a tax information exchange agreement but through no fault of its own missed the deadline to avoid the disincentive tax measure.
The policy of entering into these tax information exchange agreements is relatively recent. There are 21 or so in place now. I understand that CRA is beginning to receive information under them, but it is fairly new. Officials, I think, believe that the fact of the information sharing in itself helps to discourage tax evasion, because taxpayers know that the information will be coming from low-tax and no-tax jurisdictions, so there's a lot of enthusiasm for this new initiative facilitating the provision of information to the Canada Revenue Agency.
3:50 p.m.
Conservative
Mike Allen Conservative Tobique—Mactaquac, NB
In this case you've said that it is not specific but is more or less intended for the British Virgin Islands. From what I'm gathering, this change will allow us, if we have other jurisdictions that are low-tax, to implement those agreements too without having to come back to the well with other legislation.
Is that true?
3:50 p.m.
Director, Tax Legislation, Tax Policy Branch, Department of Finance
In fact Canada has recently entered into...I always forget the name, but the Multilateral Convention on Mutual Administration Assistance in Tax Matters. This is a multilateral agreement with many countries, and all countries participating in it will be able to exchange information with each other. The hope and expectation is that information exchange will become still more efficient and more the norm for the Canada Revenue Agency.
3:50 p.m.
Conservative
Mike Allen Conservative Tobique—Mactaquac, NB
Thank you. I'm glad you didn't have an acronym for that.
The last question I have on this is about the back-to-back arrangements. In this legislation there's an anti-avoidance rule concerning these. Can you tell me a little bit about this? Are these used as a common tax evasion scheme for which we're going to close a loophole?
3:50 p.m.
Director, Tax Legislation, Tax Policy Branch, Department of Finance
The existing income tax rules have two relevant rules related to interest payments.
One regime is called the thin capitalization regime. That restricts the deduction of interest, by corporations typically, in circumstances where their debt to equity ratio is too high. The assumption is they're using excess debt to create tax deductions in Canada and reduce the Canadian tax base. That's one set of existing rules.
We also have withholding taxes that can apply on payments of interest across the border to non-residents of Canada.
The back-to-back loan measure in budget 2014 addresses structures that avoid either of those sets of rules, essentially by interposing an arm's-length non-resident, typically a foreign bank. In essence, the structure is a Canadian subsidiary, for example, a foreign parent company, a loan arrangement between the two, that would be subject to the thin capitalization rules and/or the withholding tax rules, potentially both. By interposing a foreign bank as a conduit for the interest payments, taxpayers could avoid those rules.
We don't have data precisely on how prevalent the structure was, but we did have information that it was being observed in the private sector.
3:55 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you.
Thank you, Mr. Allen.
We'll go to Mr. Rankin, please.
November 5th, 2014 / 3:55 p.m.
NDP
Murray Rankin NDP Victoria, BC
I think this question is best directed to Mr. McGowan. It builds on some of the things Mr. Brison was asking about in the context of international shipping.
I want to ask about clause 74. It amends the Income Tax Act in a number of ways to allow investments in trusts and partnerships involved in international shipping.
This defines “international traffic” to include “passengers or goods”. Does that include oil, commodities like oil? That's on page 183.
3:55 p.m.
Senior Chief, International Inbound Investments, Department of Finance
Yes, and if you go to the definition of “international shipping”, which is on page 185, and in particular, proposed paragraph 248(1)(g) of the definition, there's an exclusion from what qualifies as international shipping that applies to “oil and gas activities”, and that's refining something offshore. We specifically point out that the transportation of oil can include—
3:55 p.m.
Senior Chief, International Inbound Investments, Department of Finance
That's right.
3:55 p.m.
NDP
3:55 p.m.
Senior Chief, International Inbound Investments, Department of Finance
That's right. It's an exclusion from an exclusion.
3:55 p.m.
NDP
Murray Rankin NDP Victoria, BC
An exclusion from an exclusion is a better way to put it.
I'm a little confused about how the residence of an international shipping corporation would be determined if these amendments come in, and frankly, what the reasons would be for justifying non-taxation of income earned in Canada by one of these international shipping corporations. What's the policy rationale?
3:55 p.m.
Senior Chief, International Inbound Investments, Department of Finance
The residency of an international shipping corporation, under these rules, is determined by.... If you fall within the rules, you're deemed to be not resident in Canada even though you might otherwise be. The determination of where a corporation is resident is often a question of fact, where you look to not just the place of incorporation but rather to where the mind and management of a corporation lie.
If you had a corporation that had been incorporated in another jurisdiction, but that really had its mind and management in Canada, it could, under the common law test for determining residency, be considered resident in Canada. What these rules do is say that if you're a qualifying corporation involved in these qualifying shipping activities and your income and your assets meet the tests in the rule, and you are incorporated outside of Canada, the rules would apply to say that you're deemed to not be a resident of Canada—this corporation.
The policy in general behind our non-resident shipping rules...and these have to be understood in addition to the rules in I think section 81 that say the income of a non-resident corporation carrying on business in Canada, the shipping business, is going to be exempt from Canadian tax if the country of residence where this corporation is resident grants a similar exemption. There's an element of reciprocity in that, and it's also an international norm with Canada and our trading partners.
3:55 p.m.
NDP
Murray Rankin NDP Victoria, BC
If it happened that this international shipping corporation was incorporated in its mind, and business was in a low-tax or no-tax haven, how does it work then?
3:55 p.m.
Senior Chief, International Inbound Investments, Department of Finance
Just so I understand your question, you have a corporation, and I don't mean to pick on the Cayman Islands—
4 p.m.
Senior Chief, International Inbound Investments, Department of Finance
—incorporated in the Cayman Islands and its mind and management are there as well; they have their headquarters, CEO, the people making the real decisions in the Caymans. Then I guess in general terms, it would not be subject to Canadian tax, unless they're undertaking some Canadian business.
4 p.m.
NDP
Murray Rankin NDP Victoria, BC
Even with respect to income earned in Canada, they would keep all the money in their tax haven...?