Finance Committee on Feb. 5th, 2019

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

They would be excluded from this. This doesn't change materially our relationship and the current use of the Cayman Islands, for example, as an overseas tax haven.

[Stephanie Smith]

It would have no impact on the Cayman Islands. That's correct.

[The Chair, Liberal, Wayne Easter]

We'll likely have time for another round, Mr. Julian.

Mr. Fragiskatos.

[Peter Fragiskatos, London North Centre, Lib.]

Thank you very much, Mr. Chair, and thank you to the officials for being here this morning on what it is truly a technical matter, but a very important one.

Mr. Julian has cited a number now. I believe he said it was $240 billion to $250 billion. I can't remember exactly. It's one of the two, Mr. Chair. I think the implication is that this is what the Canadian government does not see on an annual basis because of tax avoidance. That number actually comes from the OECD and is an estimate on the global situation, on what all governments are missing out on when it comes to tax avoidance. I think that's important for the record to reflect and—

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

On a point of order, Mr. Chair—

[The Chair, Liberal, Wayne Easter]

It's probably a point of information, but go ahead.

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

—this comes from the Canada Revenue Agency.

[Peter Fragiskatos]

I wasn't—

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

It's the last report that was published at the end of June. It's a Canadian figure and it comes from Canada—

[Peter Fragiskatos]

I'm not saying you're misleading—

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

—for Canada.

[Peter Fragiskatos]

I'm saying that the substance of your comments could imply what I said. That point of information on the OECD comes from the Library of Parliament, which we're very fortunate to have with us and briefing us on these issues, Mr. Chair.

First of all, if I could, I wanted to go over with you this entire process. It unfolded through the OECD. It's multilateral in nature, obviously. Could you speak about how that makes things more efficient? I know that this is a very general question, and perhaps a simple one, but I'm thinking about this issue from the perspective of the Canadian taxpayer who might not want to delve into the technicalities. From an efficiency perspective, I think they're well-served here, but I would love to hear your view.

[Stephanie Smith]

When the OECD and G20 launched this BEPS process and some of the outcomes of the process required changes to tax treaties, it was recognized that for all states to include those in their tax treaties would be a very lengthy and time-consuming process, due to the requirement of bilateral negotiations. The process of having a multilateral convention was explored, which would update bilateral tax treaties to therefore streamline the process to include and provide updates to tax treaties.

I do think, especially for a country like Canada with a large treaty network, that it is a very efficient process to be able to update a number of treaties with the negotiation and signing of one instrument.

[Peter Fragiskatos]

Thank you very much.

Indeed, that is what it appears to be. When countries pool their resources and work together in this way, I think we have a more efficient process that serves the citizen in a much better and effective way.

Again, thinking from a constituent's perspective—and I note here the press release from back in June of 2018 that speaks about this particular bill. It does say in the second paragraph that, “The Government of Canada has taken the next step in the fight against aggressive international tax avoidance.” Could you, from your perspective, tell us—and I want to separate the essentials from the accidentals, if you like—what is the key thing in this bill that gets us to that place in the fight against tax avoidance internationally?

[Stephanie Smith]

In my view, the two key aspects in this bill and in this convention are articles 6 and 7. Those are two of the rules that go towards preventing the abuse of tax treaties.

I think article 6 will be very important in helping our courts interpret our tax treaties and this anti-abuse rule, because it makes a clear statement endorsed by both treaty partners that, while the common intention is to eliminate double taxation, it's not to create opportunities for non-taxation or reduced taxation.

Article 7 itself contains the anti-abuse rule, and through Canada's choice and the choice of our treaty partners, all of the tax treaties that will be covered by the MLI will be updated to include a principal purpose test. The test provides that a treaty benefit shall not be granted if it's reasonable to conclude that the obtaining of the benefit was one of the principal purposes of an arrangement or transaction, unless the benefit is in accordance with the object and purpose of the relevant provisions of the convention. It provides protection against taxpayers using bilateral tax treaties to obtain benefits that were not intended for those particular taxpayers.

[Peter Fragiskatos]

Good.

I think my constituents like to hear the words “protection” and “taxpayer” put together, so that's very helpful.

I have one final question for you relating to mandatory binding arbitration. Would the Canada Revenue Agency need additional funding to meet the obligations set out in the arbitration provisions of the convention, in your view?

[Stephanie Smith]

Our understanding is that, no, they will be able to manage such a process within their existing budget. They already have responsibility under all of these tax treaties to engage in a mutual agreement procedure, and the binding arbitration is just a final point to ensure that there is a decision so that the taxpayer can be relieved from double taxation.

[Peter Fragiskatos]

What would be the implications if this bill didn't exist, to sum everything up? From an efficiency perspective—I go back to the point that I started with.

[Stephanie Smith]

From an efficiency process, it would require a bilateral update of our tax treaties. Canada is a member of the OECD and the G20 and has made a commitment at the highest political levels that it endorses the outcome of the OECD/G20 project, and that it will implement the minimum standards that were established during that process. Signing the MLI allows us to meet the minimum standards with respect to the treaty-based provisions.

[Peter Fragiskatos]

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Richards.

[Blake Richards, Banff—Airdrie, CPC]

The government actually made some changes to the optional provisions it was having reservations about. I'm wondering if you could walk us through the changes that were made there and the reasons those changes were made.

[Stephanie Smith]

The negotiation of the MLI was concluded in November, 2016, and it was open for signature afterwards. Thereafter, a first signing ceremony of the multilateral convention was announced for June 2017.

The government had indicated a desire to be among the first group of countries to sign this instrument. In preparing to sign, the department undertook an analysis of the provisions and of the relative benefits of the provisions and was aware that a provisional indication had to be listed in June 2017, but that it could be updated at a later date.

The government took a very prudent approach on signature and picked up all the minimum standards in the convention, in addition to binding arbitration, with the view that it would continue to study the other detailed provisions of the MLI and how they interacted with the large treaty network with a view to updating its position prior to ratification.

Following that review the government took the decision to adopt additional optional provisions that will be proposed to be adopted on ratification of the treaty. They were announced by the government in the press release that came out, I believe, the day the notice of ways and means motion was tabled in the House.

[Blake Richards]

Can you briefly walk us through the effect of some of those choices in those optional provisions?

[Stephanie Smith]

The ones that we have chosen?