Finance Committee on Feb. 5th, 2019

[The Chair, Liberal, Wayne Easter]

I think that's more a political or policy decision, and I don't think Ms. Smith can answer that last question. I think she answered clearly that in the future, it's by order in council that a decision would be made.

We're turning, then, to Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair, and to the witnesses for the presentation.

Any time we start talking about tax treaties, we have to expect that it's going to be very complex and complicated, but the goal here, I guess, is to ensure that everybody pays their fair share of taxes. We look at ways to deal with corporations, individuals or organizations that try to avoid paying taxes, but I'm struggling a bit with how widespread this problem is.

How much money are we talking about? I hear many numbers being thrown out here, and I'm not sure if we have a really good indicator of how much money we're talking about. What is slipping through our fingers, so to speak, in terms of dollar amounts? Is there any way you can give us an indication of what that number is?

[Trevor McGowan]

I'm sorry. We don't have that data on hand, but we can look into it and see if we can provide it to the committee.

[Michael McLeod, Liberal, Northwest Territories, NT]

Well, I think it's very important that we have something to work with in terms of what is actually happening in this country and other parts of the world. My next question was going to be based on how much money we're losing out on in terms of taxes, but....

We're introducing some new legislation through the changes in this act. What is the expected effect? Do we know what effect this act would have on the percentage of what's slipping through our fingers? Do we have a target? Is there a plan and a target? We don't know how much money we're losing out on, but for the changes here, what is the intentional effect? Are we going to cut our losses by half, by three-quarters...?

[Stephanie Smith]

Unfortunately, we don't have specific numbers with us here today. I think one of the things that we can do is to provide some numbers with respect to a couple of recent cases the government lost in respect of treaty shopping, and cases for which we would hope that the anti-abuse rule in this treaty would be applied by Canadian courts. There's one that's currently on appeal.

I think we would hope that this would provide more tools for the courts, but beyond that, we can go back and discuss this with our colleagues and see if there are other numbers that are available.

[Michael McLeod, Liberal, Northwest Territories, NT]

I would appreciate that. I think it's important for us as MPs to have that kind of information. We have to explain legislation to our constituents.

My next question is about whether or not Canada can withdraw from implementing certain provisions if these provisions have unintentional results and significant negative impacts on our Canadian economy.

[Stephanie Smith]

The way the multilateral convention works is that once you have opted into provisions, you cannot then change your mind and withdraw from them. The other impact is that the government would always have the choice to terminate the MLI, and would stop on a go-forward basis any amendments being made to our tax treaties. However, the effect of the MLI on the tax treaties that had already had a match and been covered would continue in the future. The government and another state are always free in the future to enter into bilateral negotiations to make any updates to the bilateral relationship that the parties desire.

[The Chair, Liberal, Wayne Easter]

Mr. Julian.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

I'd like to keep going on the very pertinent questions that Mr. McLeod asked, because we're all struggling with the the extent to which this treaty or convention would actually make a difference. There are a whole range of countries that are notorious tax havens that seem to be excluded from it. The tax information exchange agreements are excluded, and most of the notorious tax havens are linked to Canada through the tax information exchange agreements.

How many of these tax information exchange agreements, which are not covered by the convention, has Canada signed? This helps us, because if we take the Canada Revenue Agency figure of $250 billion in overseas tax havens, that's a massive amount. It could mean billions of dollars in tax revenues every year invested in schools, seniors, and veterans programs. However, that money leaves the country and isn't provided as part of that common basis, that common investment about which I think Canadians feel very strongly. Canadians who pay their taxes believe that all of us should be contributing, yet some aren't.

It's important to know to what extent this actually changes things. We thank you for answering the questions, but it doesn't appear, at least on the surface, from these initial discussions that it really would do much. The agreement really tends to work with countries that already play by the rules. The countries and entities that don't play by the rules are excluded, so materially speaking, Mr. McLeod's question is a very good one. To what extent would this actually make a difference, make a dent, in what is massive overseas tax evasion using overseas tax havens? That is really the relevant question.

Coming back to the tax information exchange agreements, how many has Canada signed, and are they all excluded from the purview of this convention? I assume they are.

[Stephanie Smith]

Canada has signed 23 tax information exchange agreements. With respect to the scope of this multilateral convention, no, it's not going to solve all of the problems of tax evasion. It's important to note that the scope of this convention is to deal with situations where inappropriate treaty benefits have been granted, and it's trying to deal with that scope of the problem. Tax information exchange agreements are not part of the scope of this agreement because they do not themselves provide any tax treaty benefits.

For example, with regard to the provision on obtaining the lower rate of withholding tax with respect to the Cayman Islands, there is nothing in the tax information exchange agreement, the TIEA, with the Cayman Islands that provides for a reduction of the dividend withholding tax. A dividend paid to a resident of the Cayman Islands is subject to the domestic rate of 25%. The tax information exchange agreement only provides for the exchange of information between the two jurisdictions.

There are no treaty benefits in and of themselves in the TIEA, and that's the reason for its being outside the scope of this agreement. It would have no impact. Even if you had it as part of the tax information exchange agreement, there are just no provisions to which it could apply. A tax treaty and a tax information exchange agreement are different. They're just very different instruments with different purposes.

[Trevor McGowan]

If I could perhaps add, as has been stated, this is a very complex subject area. Perhaps it would be useful to provide a more concrete example to get at your comment—and again follow up on some of Mr. McLeod's questions—of a situation to which we might think that the protections afforded under the MLI might apply.

My colleague, Stephanie, mentioned some previous tax cases that had been lost by the Crown where the tax planning involved was the kind of tax planning this bill is seeking to prevent. In one such case, you had a Cayman Islands corporation that had shares of a Canadian company. If it had sold those shares, it would have been subject to Canadian tax because, of course, Canada does not have a tax treaty with the Cayman Islands that would have exempted it. The fact of Canada's having a tax information exchange agreement with the Cayman Islands isn't relevant, because the TIEA would not have provided that tax exemption on the sale of the Canadian shares.

What the company did then was essentially move or continue into another jurisdiction, Luxembourg, with which Canada does have a tax treaty, in order to avail itself of.... The Crown's position was that it was in order to avail itself of the benefits of that treaty and, as such, to avoid Canadian tax on the disposition of the Canadian shares. I forget the exact quantum in dispute of taxes. It strikes me that it may have been in the tens of millions, although that's something that we can look into and get back to the committee with.

These are some of the sorts of transactions that we have seen and that we have challenged and that we would hope that the multilateral instrument would address. Again, hopefully that example highlights in a practical, real-world situation the differences between the benefits afforded under a tax information exchange agreement and one of our treaties.

[The Chair, Liberal, Wayne Easter]

We have time for a fairly short question, Peter. We're way over time, but go ahead.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Okay. Thank you very much, Mr. Chair.

I don't doubt there's some benefit to this. I think what Mr. McLeod's questions get at, and mine as well, are to what extent the iceberg is still out there and what we need to tackle next. So, with regard to the question Mr. McLeod and I are asking, I guess we're pitching that you come back with some sense of how much is excluded from the overall impact of this convention so that, as the finance committee, we can look at further steps.

Thank you.

[The Chair, Liberal, Wayne Easter]

After listening to this discussion, I would ask that you simply put in layman's terms what the bill will do and how it can assist in preventing tax evasion. We're way down into the weeds, and rightly so, but in layman's terms so that people can understand, can you just say what this bill means and what it will really do?

[Trevor McGowan]

In—

[The Chair, Liberal, Wayne Easter]

I know we won't solve all of the problems of the world, but it's a step. It's just so we can put on the record in simple terms what it will do.

[Trevor McGowan]

Canada has a very large treaty network—close to 100 treaties. Certain benefits can be obtained under these tax treaties. These could be reduced withholding tax rates; they could be exemptions from tax, say, on the sale of properties. Internationally, as part of the base erosion and profit shifting process, a number of countries came together and looked at how best to address problems created by multinational or international organizations shifting their profits into low- or no-tax jurisdictions and thereby inappropriately obtaining benefits under these treaties. All sorts of benefits can be obtained in the tax world; not all of them are delivered under treaties, but some are.

As part of this process, a number of countries came together and looked at ways to address this base erosion and profit shifting. This particular measure deals with treaties. A couple of issues came up. One is that many of the treaties say that their purpose is to prevent double taxation but don't specifically mention preventing no taxation. Two, many of them don't have anti-treaty abuse provisions. Those are the two big anti-avoidance ones.

With the number of countries involved, one can imagine the number of treaties involved. Canada alone has close to 100, as I said. It would have taken a tremendous amount of time and resources to update all of our treaties. Of course, if you could picture trying to squeeze a handful of sand, if we updated a small number of treaties, tax planners could then move to the ones we haven't got to yet. So a coordinated effort was undertaken and this is the result. In an efficient manner, and only in respect of countries with whom we have a bilateral match, it would update our tax treaties to prevent this type of inappropriate tax planning and help protect the tax base.

[The Chair, Liberal, Wayne Easter]

Okay, thank you.

I'll give five minutes to Mr. Sorbara and five minutes to Mr. Poilievre. Then we'll have to go to committee business.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Welcome, Trevor and Stephanie.

Thank you for the testimony to date. First, I'm going to refer to article 8 of the MLI and our decision to opt in on the dividend transfer transaction. Originally we did not opt in, and then we decided that we would.

Can you give us some colour on that?

[Stephanie Smith]

In some senses, I think the government took a very prudent approach originally, because there was a relatively short time frame between the completion of the multilateral convention and the initial signing ceremony and there was a desire to ensure that there would be sufficient time to appropriately review the treaty network to ensure that implementing such a provision through the MLI would be appropriate in all of the treaties that were likely to be covered, and also to have some time to ensure that the Canada Revenue Agency thought they could administer it.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Canada has entered into a number of tax treaties with many governments around the world to ensure that certain tax avoidance strategies that are deemed illegal are not utilized, and tax evasion doesn't take place. We know that our government has invested a lot in the CRA—over a billion dollars—to stem the tide. Ongoing investigations have been reported in the media, and when I think about this on a holistic basis, this MLI, this multilateral instrument that our government has entered into with regards to base erosion and profit shifting and shifting back even.... If you think about the global financial crisis in 2008-09, whether it's the FASB, G20, G7, the number of agreements—the Basel II, III new capital guidelines, new liquidity guidelines, for banks—this is just one of the things that have come out of the 2008-09 financial crisis.

How much teeth does the MLI have in taking us forward to combat tax evasion, tax avoidance strategies that are basically illegal and that cost the government many billions of dollars in revenue around the world, not just here in Canada?

[Stephanie Smith]

One thing to clarify is that generally speaking I think for the convention itself, it's main target is actually tax avoidance as opposed to tax evasion. It's generally looking at transactions that, while legal, push the boundaries and go beyond the intention of what the parties wanted.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

One of the things we don't want to have is treaty shopping and jurisdiction shopping, and a race to the lowest common denominator with regard to withholding taxes. I've read the briefing book, and to my understanding the MLI does deal with those types of issues to a certain extent.

[Stephanie Smith]

Yes, it does. I think the main feature of this is to provide for an anti-treaty abuse rule, in this case the principal purpose test. Combined with the new language to be included in the preamble of tax treaties, I think that's a significant tool for Canada that, hopefully, our courts will use to help us address these situations.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

It is another step and tool in the fight against tax avoidance, specifically aggressive tax avoidance strategies.