Finance Committee on Feb. 5th, 2019

[Tom Kmiec, Conservative, Calgary Shepard, AB]

What types of effects will that have? Mexico is a party to this. Also, we have the USMCA that was negotiated as well.

What types of effects could it have for companies operating in all three jurisdictions when only two of the jurisdictions are presumably seeking to ratify it and put this treaty into force, whereas the United States, the bigger one, the bigger partner in the USMCA, is not?

[Stephanie Smith]

Generally, the USMCA itself would not be impacted by anything in this tax treaty. Generally speaking, the USMCA provides that, to the extent that there's a tax treaty in place, the tax treaty should apply, as opposed to the USMCA.

The fact that the United States is not going to sign this convention should not have any significant impact. That is because the U.S. already has in its bilateral tax treaties with all of its partners the main provisions contained in this multilateral convention. For example, on the treaty anti-abuse rule, the United States for some time has had a policy of including a treaty anti-abuse rule in its tax treaties, which is generally referred to as a limitation on benefit test. That test is included in the Canada-U.S. tax treaty. It is also included in the U.S.-Mexico treaty. My understanding is that it is in all of the U.S. treaties with the exception of two, and I think it has already renegotiated those treaties, although they have not yet been ratified, and in one case, one may not be signed.

We don't think there will be significant impact, because they already incorporate many of these anti-abuse rules in their treaties.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Okay.

The government has tabled Bill S-6 from the Senate. It's a tax treaty with Madagascar. Is Madagascar a party to this multilateral instrument? Will that then fall into this if this is put into effect, into force? Will this apply to that treaty as well?

[Stephanie Smith]

Madagascar is not a signatory to this multilateral convention and, to my knowledge, has not indicated its intention to sign the treaty. As a result, the treaty with Madagascar, if ratified, would not be covered by this instrument.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

You mentioned that there's the core body of it, and there are a bunch of optional components to it. In my office we were trying to figure out which ones Canada has opted into and which ones we have not.

Can you give me a list of the optional provisions that we have opted into by article name?

[Stephanie Smith]

I think we had a briefing binder that was distributed. In the news release the government issued when the notice of ways and means was tabled, the backgrounder also set out which provisions Canada proposes to opt into at the time of ratification.

That would be opting into article 4 in respect of dual resident entities; article 5 in respect of application of methods for elimination of double taxation; article 6, purpose of a covered tax agreement; article 7, prevention of treaty abuse; article 8, dividend transfer transactions; article 9, capital gains from alienation of shares or interest of entities deriving their value principally from removable property—

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Can I just stop you right there for a moment?

What about article 3 on transparent entities? What's the reason for Canada not opting into it?

[Stephanie Smith]

Currently, Canada has not proposed to opt into article 3. Canada has a reservation in respect of the OECD model tax convention where such a provision is also contained. It was developed, generally speaking, by OECD member countries. It extends to include situations where there may be a transparent entity in a third jurisdiction.

In Canada's view, the provision would be better applied and could avoid some unintended effects if it applied only with respect to entities in the two contracting states. We have found, through our experience with the United States, that Canada has the most instances of transparent entities being relevant to transactions. To the extent there is an issue with a particular jurisdiction, it may be desirable to bilaterally negotiate such a provision for the situations particular to the two jurisdictions.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Would the effect be that Canada wouldn't have to negotiate with each individual country based on activities such as financial transactions that require it? Can you help me understand why we're not participating? Is it a better method through the OECD?

[Stephanie Smith]

No, the provision that is in the multilateral instrument is a provision that would allow for treaty benefits in certain circumstances where a transparent entity exists. It would clarify those situations. It would also provide for benefits when that transparent entity is in a third jurisdiction, not in one of the two contracting states. In our view, that can lead, in certain circumstances, to an inappropriate grant of treaty benefits as a result of this third jurisdiction having a transparent entity. Our view is that it should be limited to entities in one of the two contracting states.

To my knowledge, the CRA has not had significant issues with transparent entities, except in the context of the United States. We also don't see that it's a situation where there is a strong need for such a provision. To the extent there were a need for such a provision, we would have to bilaterally negotiate with the other state to include that provision.

[The Chair, Liberal, Wayne Easter]

We're out of time.

There will be other rounds, Tom.

I wonder if you might finish your articles. You mentioned article 4, 5, 6, 7, 8, and 9. What other ones are we enacting? You were up to 9, just so everyone is clear.

Then we'll go to Mr. Julian.

[Stephanie Smith]

We have article 16, mutual agreement procedure, and article 17, corresponding adjustments. We have also opted into part 6 that includes articles 18 to 26. That is mandatory binding arbitration.

[The Chair, Liberal, Wayne Easter]

Thank you.

That's the list.

Mr. Julian.

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

Thank you very much for coming here today.

This is a very important subject, of course, because Canadians lose billions of dollars a year to overseas tax havens. Some estimates are $3 billion or $4 billion, with some as high as $40 billion a year. That's money that could go to increase seniors' pensions, to provide for housing, or to provide supports for our health care system and our education system. This is a very important discussion that we're having here, because Canadians lose so much from the widespread use of tax havens.

I appreciate your coming here today so that we can start going through this bill.

My first question is in terms of the ministry itself. What is your estimate of the amount of money that is invested through offshore tax havens now and the amount of money that we lose? Estimates have varied.

[Trevor McGowan]

I'm sorry, but we don't have that information with us right now.

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

Perhaps you could provide it to the committee. The Canada Revenue Agency has estimated that there are $250 billion in offshore tax havens, so I'd be interested in knowing. Perhaps you could get back to the committee about what your figures are. Of course the PBO is doubling down on this too, so we should get some estimates over the spring.

In terms of the number of tax treaties to which the convention applies, it is 75, if that's correct. How many tax treaties does Canada have, and which tax treaties are excluded from this convention?

As my colleague mentioned, the United States is not there. I didn't see Switzerland, which is a notorious tax haven, of course. Do you have a list of the tax havens with which we have agreements and to which this convention does not apply? I'm just looking for a ballpark number. It seems to me that some of the most notorious tax havens are not included.

[Trevor McGowan]

As my colleague is looking it up, I would say that we of course have the information on which countries Canada has tax treaties with, and also on which countries are involved in the MLI.

With regard to the status of a country being, I think the term was, a “tax haven”, that's not a specific tax term. Some countries have what are known as blacklists. They have lists of countries they consider to be tax havens. There's a bit of vagueness. I don't know if there's a list of countries that definitively qualify or don't, and so it's difficult to answer that aspect of the question.

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

The question I'm asking is which countries or entities with which we have tax treaties does this convention not apply to? Very clearly, as you mentioned, there is the United States. I see Switzerland. What other countries or entities are excluded? If we're looking at the Cook Islands or the Cayman Islands, of course, they're part of broader entities, but they're both notorious tax havens. Which tax treaties do we have to which this convention does not apply?

[Stephanie Smith]

Currently, the way the convention works is that on signature, countries deposit a provisional list of tax treaties to which they would like this convention to apply. On signature, Canada provisionally listed 75 tax treaties. It is expected that on ratification this number would increase to 84, because the basis on which the list was developed was that it would include all countries participating in the inclusive framework on BEPS, namely the countries that are engaged in this work and have therefore indicated a willingness and a desire to sign this convention. Also, the countries that are part of the inclusive framework are those that have been identified by peer countries as being at risk for base erosion and profit shifting.

The countries that have not been covered are Switzerland and Germany. The reason for these two not being covered is that on the day Canada signed the multilateral convention, the government also simultaneously announced that bilateral negotiations had commenced with the two countries. The expectation is that these two tax treaties will be updated on a bilateral basis.

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

Could you read the others? We have 93 tax treaties, right?

[Stephanie Smith]

We have 93 tax treaties.

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

Could you read for us the other 16 that are not included?

[Stephanie Smith]

I will give you the other 16, and I'll also indicate the ones that we would expect would be covered on final ratification.

Those not currently covered but that we would expect would be covered on ratification in the final notification would include Algeria, Armenia, Ivory Coast, Kuwait, Oman, Papua New Guinea, Peru, Trinidad and Tobago and the United Arab Emirates. Those are nine additional countries that it would be proposed to cover. Those not covered would be the following nine: Equador, Germany, Guyana, Kyrgyzstan, Switzerland, Taiwan, the United States, Uzbekistan and Venezuela.

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

What status, then, do we have with tax havens like the Cayman Islands and the Cook Islands? How would you categorize those tax agreements?

[Stephanie Smith]

We do not have tax treaties with the Cayman Islands or the Cook Islands. We have tax information exchange agreements with those two jurisdictions. Because tax information and exchange agreements deal only with exchange of information and this treaty itself deals with entitlement to treaty benefits, they are not within the scope of agreements that can be covered by this multilateral convention.