I'm from Alberta.
Evidence of meeting #196 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was barbados.
A recording is available from Parliament.
Evidence of meeting #196 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was barbados.
A recording is available from Parliament.
11:25 a.m.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
—but it can apply across industries, just to be clear.
I'm going to simplify, as much as I can, international tax and try to translate from tax to English, but please excuse me if I don't get fully out of tax.
What tax treaties do is to really allocate taxing rights between a residence country and a source country. For a source country, generally, if you have a permanent establishment, then you're carrying on business in that country, and that country has a right to tax, really the primary right to tax. The residence country would then give a tax credit to avoid double taxation. That's the normal process.
So right now, if Canada is both a residence and a source country by virtue of Canadian resources being sold around the world, Canada is taxing 100% of the profits and the foreign countries where those resources might be consumed are not taxing the profits from that business. If in turn the Canadian company does have a permanent establishment in those foreign countries, then those foreign countries would have the primary right to tax those profits—any income attributable to that permanent establishment. Canada would then lose the tax revenues, because instead of taxing 100% of the profits, Canada would be giving a foreign tax credit and ceding some of that tax to the foreign country.
The articles you just referred to relate principally to what we call an “agency permanent establishment”. Under the current treaties, that occurs if contracts are concluded in a particular jurisdiction. In my resource example, if the contract to sell the resources is concluded out of Canada, then only Canada is taxing those profits. If the contracts are concluded in the foreign jurisdiction or if somebody in the foreign jurisdiction is concluding those contracts on behalf of the Canadian company, then the foreign country would have the ability to tax some of the profits.
These changes take away that bright-line test of whether that agent in the local country is concluding contracts, and it changes it to ask in general—there are a few options—whether the person in that foreign country is conducting activities that assist in or facilitate or generally result in the conclusion of contracts, and if so, that's enough to have a permanent establishment.
It's very ambiguous what level of activity is needed in that foreign jurisdiction in order to create a PE, so the concern again is that if you had somebody in a foreign jurisdiction helping to find a purchaser for your products, depending on their level of activity and their involvement and whether it leads to contracts, that could be enough for the foreign jurisdiction to say that that Canadian company has a permanent establishment in their country and so they're going to tax the profits. Then, if Canada also taxes the profits, we either have double taxation or we go potentially through binding arbitration or a mutual agreement process to determine how much profit should be allocated to the foreign country, and then those foreign taxes take away from the Canadian revenue because we provide a credit for those taxes.
11:30 a.m.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Those scenarios would only happen, though, if Canada were to participate in articles 10, 12 and 13?
11:30 a.m.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
That's correct.
11:30 a.m.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Then articles 12 and 13 are those we have reservations about from what the officials from the department said, in that there aren't many participating countries in them and therefore Canada won't participate. I would assume that if this were to change, there potentially would be a review of the situation in the future.
Does the fact there are not many participants in it give you any confidence that this probably won't be used in the future? There are not many participants today, and maybe many countries are having the same discussions with their tax experts and saying this is not worth going into because of this potential tax leak—I'm not sure if that's the appropriate term for it—or tax losses that would be incurred.
You talked about the change in process here, where Parliament would no longer be deciding whether we can participate in any of these particular clauses. There will be an order in council process, which is something that I dug into with the officials a bit more. Can you elaborate a little more about your concerns around that?
11:30 a.m.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
Sure. My concern is that those changes, the permanent establishment changes in particular, in my view, would be significant changes to our tax treaties. They're not just minor changes that would only affect a couple of companies and a couple of industries. It could affect virtually all cross-border businesses and could result in Canadian companies having to file tax returns, for example, in many countries around the world and having many countries around the world having a right to tax those Canadian profits.
Also, then, in many cases it could result initially in double or triple taxation or an infinite level of taxation. It would result in much more administrative compliance and much more difficulty in determining where your profits ought to be allocated, but also in many more disputes and, as I said, to the extent that profits are allocated to those foreign countries, it could result in a loss of revenue in Canada.
I think the reason that many countries have reserved on those rules is really for those exact reasons.
I think these are only the countries that would be confident that they would always win on expanding the PE threshold because, obviously, investment can be inbound and outbound. If a country is of the view that you're always going to win—perhaps if it's not resource-rich, for example, I guess, or if they think there are more capital inflows than outflows—then they might be inclined to make those changes.
11:30 a.m.
Conservative
11:30 a.m.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
Yes, Luxembourg—
11:30 a.m.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
I'm not sure if they're participating. It's just an example. It's not a resource-rich country but has large capital flows.
11:30 a.m.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
Right, but I believe they have a lot of capital inflows and outflows, so I'm just not sure what their position would be.
11:30 a.m.
Liberal
11:30 a.m.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
Thank you, Mr. Chair.
I'm pleased to be back at the Standing Committee on Finance and to discuss my favourite topic.
So far, the interesting thing about the debate on Bill C-82 is that the government is confirming, and admitting, that tax treaties are useful to people who want to abuse the Canadian tax system. It said openly, on Tuesday, and this is also found in its documents, that tax treaties can be abused. This is indeed the case, and I have two quotes in English to prove it.
The first quote is from a lawyer with the Rogerson Law Group, located on Bay Street, in Toronto. The lawyer explained how to take advantage of the tax treaty with Barbados. His article is entitled
“Taking Advantage of The Double Tax Treaty with Barbados”.
At the end of the article, in describing how to take advantage of this, he says:
The net result of the above is as follows. A Canadian resident corporation establishes a foreign affiliate in Barbados in the form of an IBC. The IBC makes $100 profit. Barbadian tax on the profit is levied at 2.5% leaving $97.50 to be remitted by the Barbadian foreign affiliate to its parent company in Canada. The parent company receives the dividend completely free of Canadian taxation.
An IBC is an international business corporation.
It's clear. The fact is, it's so clear that you don't even have to read between the lines. It's legal to do that.
Another proof of this is from what's called “Barbados Offshore Advisor”. An adviser based in Barbados says:
The foreign office must have “mind and management” on the island to qualify for attractive tax incentives. By providing an out-of-the-box solution with a full team at your disposal, service providers eliminate the human resource hassles and expensive start-up costs involved when opening an overseas office. Our team is responsive to your company's needs, providing rapid turnaround and dedicated management.
At this time, the most well-known and abused treaty is the treaty with Barbados. Do the witnesses also believe that tax treaties, such as the treaty with Barbados that has been in effect since 1980, are being abused, and that, as a result, Canadian taxpayers have lost billions of dollars in tax revenue?
11:35 a.m.
Liberal
The Chair Liberal Wayne Easter
Who wants to take that on? My question in addition to Mr. Dusseault's is, can that really happen legally? Can it be done under this act?
Who wants to respond? Toby?
11:35 a.m.
Executive Director, Canadians for Tax Fairness
Sorry. Was that a question about whether this...?
11:35 a.m.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
The question is, do you characterize those conventions as potential places to abuse the tax system? Those examples are openly accessible on the Internet, how to abuse the Canadian tax system with the Barbados and Canada convention.
11:35 a.m.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
Our responses might be quite different.
11:35 a.m.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
Okay.
I'd start by saying that the Canadian tax system cannot be abused by just shifting profits, passive income, into Barbados or any country. That isn't affected at all by this multilateral instrument or Bill C-82. It's our detailed foreign accrual property income, or FAPI, rules.
We have a detailed anti-deferral system that has been developed and enhanced over several decades. It's aimed at taxing in Canada on a current basis any passive profits or income with sufficient connections to Canada, immediately in Canada, whether it's in a tax treaty country such as Barbados, a tax information exchange agreement country such as the Cayman Islands, or a country in which we have no treaty whatsoever. I don't find abusive in any way the fact that some countries impose low rates of tax.
A good example would be that if you want to open a hotel in Barbados, you might pay a low rate of tax in Barbados, but that allows you to compete with other hotels in Barbados, and that's a very appropriate result. Our FAPI regime is for stopping investment activities in foreign countries, and that's what our other anti-deferral rules are for. That has nothing to do with the tax treaty process.
11:35 a.m.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
Do you agree that some Canadian companies use Barbados as a place to do offshore business in other countries? Instead of doing their business from Canada, they use an offshore company in Barbados to do all the offshore business. Do you agree that it's how we characterize the use of Barbados?
11:40 a.m.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
Maybe it's the ambiguity in your question in the sense that I don't know what type of business you're talking about. If it's an active business, then Canada does not tax the profits. If it's passive income, Canada does tax the profits. That's the case whether it's in a treaty country or a non-treaty country. The system really just derives off whether it's an active business or not. Again, you can earn active business income in, say, the Cayman Islands, where we don't have a tax treaty, and Canada is not going to tax those profits. That's separate from the tax treaty process.
11:40 a.m.
Executive Director, Canadians for Tax Fairness
There is a ton of grey area in the application of legislation and our rules, but whether things constitute aggressive avoidance or evasion in different areas, 50% of Canada's foreign direct investment overseas is in the finance and insurance sector and 25% of our foreign direct investment is in countries that are considered to be tax havens in those ways. Certainly they're being used to avoid taxes in Canada in different ways, and there are complex arrangements around the world to do that.
11:40 a.m.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
It's certainly no coincidence that, according to the foreign direct investment statistics, Barbados ranks second or third each year, behind the United States or Great Britain. I've never received an explanation for why Barbados is the country where Canada makes the most foreign direct investments. Apparently, it's very profitable to build hotels in Barbados, which is why so much money is invested in the country.
However, the real reason is as follows, and it's even explained by the lawyers who work in the field and who help companies. Companies conduct foreign trade in countries with low tax rates rather than remaining strictly Canadian companies. The companies open subsidiaries in Barbados for all their foreign trade rather than remaining Canadian companies without subsidiaries anywhere in the world. Companies use the low tax rates in these countries, regardless of whether Canada has information exchange agreements or treaties with the countries.
11:40 a.m.
Liberal
The Chair Liberal Wayne Easter
We'll have to see if we can get fairly short answers here because we're well over time.
Patrick.
11:40 a.m.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
I'll just be very quick. I think your question is largely addressing our broader domestic international tax system and not the tax treaty network, which is what this addresses. I think your question is more aimed at our FAPI regime and our domestic anti-deferral regime. I just don't think it touches on Bill C-82.