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.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
They're also the most exposed to it, on the other side, because they also do more business overseas—
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
—and so they have transactions they're doing everywhere.
Mr. Marley, can I ask you, then, with these arbitration panels, what would be a side effect of making the process more public? Have you participated in such arbitration panels in the past with different countries?
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
I have not, but I can say that, from the Canada-U.S. treaty perspective, they are not public. Neither Canada nor the U.S. publicizes the decisions. I believe, under U.S. law, once they've had a certain number of decisions, they're required under U.S. law to say what the statistics are.
I think the reason that countries have not made these public is to ensure that the process works effectively. In a sense, it's baseball-style arbitration, with each side coming in with one particular number and then the arbitrator chooses between one or the other. That's the process that Canada has followed.
I believe that style of arbitration works best if it's not public. What you want is for each side to come in with what they think is the realistic right answer and not, if it's for public consumption, be thinking about what impact that position might have on other taxpayers in other circumstances. Then they might be less willing to compromise and come to a result in that particular case.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
I think that's why it should not be public.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
Thank you, Mr. Chair.
I have a question for you, Mr. Marley. Canada has already adopted general anti-avoidance rules. How is the situation different from the situation surrounding the multilateral convention?
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
Sorry, but I don't speak French.
What's different in this treaty? You're right, we do have a general anti-avoidance rule that does apply to tax fees. You mentioned tax evasion. Tax evasion is criminal activity, which isn't impacted at all—
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
You're absolutely right. Sorry, I didn't mean that, I meant that we must look for the best return. We've adopted rules to ensure that people pay their taxes, right?
The multilateral convention has created an international agreement. What's the difference between the two provisions?
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
I think the rule in the treaty is very broad and similar to our domestic GAAR. I think, as Stephanie and Trevor mentioned two days ago, in the government's view this is going to expand on our domestic anti-avoidance rule, and will therefore capture more circumstances like the one that Trevor mentioned in the MIL case.
This is new, in the sense that it expands on that domestic anti-avoidance rule.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
If that's the case, then adopting these provisions is the same thing, in principle. Why do you have specific concerns regarding the multilateral convention?
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
There are two specific concerns. One is that because we're introducing this identical wording in so many treaties around the world, I think it subjects Canada to the uncertainty of following tax decisions of foreign countries around the world interpreting the identical provision in similar circumstances. It adds more uncertainty in international jurisprudence and how it might interpret it. Also, with our domestic general anti-avoidance rule, we have a few decades of jurisprudence. We know when it applies. We know who has the onus for proving different things. The onus is on the Crown to show the object and purpose of a particular rule under our domestic rules. That's appropriate because the Crown is drafting those rules. They're in the position to know the object and purpose.
In the multilateral instrument, it's unclear who has the onus of proving that. I think that's just one example of additional uncertainty that will arise, because if a taxpayer has to prove the object and purpose of a particular treaty provision, that will be very difficult because the taxpayer wasn't the one who negotiated the treaty to begin with. I think the onus should remain on the Crown, but it's unclear how that will be interpreted.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
Mr. Sanger, do you have any comments or do you want to answer my questions?
Executive Director, Canadians for Tax Fairness
Your question was partly, what is the point of this? I agree with Mr. Marley that it's important to have some consistency in international agreements on this.
I do have concerns about some of the suggestions he's had in some of the reservations in these areas. I recognize there may be some jurisprudence in that. It's also important that we have some international consistency in these rules as well, so that the whole multilateral instrument itself doesn't become a piece of Swiss cheese.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
I left out one important part.
The CRA has said that they intend to apply the domestic GAAR and this principal purpose test simultaneously.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
I gather that the CRA said that it would apply both simultaneously, until a list of decisions has been developed at the international level, which could be added to our Canadian rules.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
Domestically, we have safeguards in place in the sense that we have a GAAR committee that is designed to ensure our domestic GAAR is applied consistently across the country. The hope is that same GAAR committee would also consistently review all applications of the principal purposes test to have those domestic safeguards in place.
As you said, I think CRA's published position to date is that they would apply both at the same time. This would cause a significant increase in tax dispute litigation time and expense, fighting two different rules as opposed to one in determining whether one or the other applies.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
Mr. Chair, just for the information of the colleagues, in case the translators didn't capture it, GAAR is the general anti-avoidance rules.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
I was going to ask what GAAR was, so thank you. That's very helpful.
I'm getting a little worried, because it's now all starting to make sense. I start to get worried when anything tax law-implicated starts making sense and I'm down in the weeds a little too much.
Can I ask you something I asked the officials? They said they had no real concerns about it, but my question is about the USMCA and how this convention would apply to agreement, because we are highly integrated in the North American market. The government has completed negotiations on it. It awaits ratification. However, the United States is not a party to this, and we do have a tax relationship with the United States. Mexico is a party to this.
Mr. Marley, I'm looking at you, because you come from the company side here. Will there be an impact? Is there an impact? What are some of the points at which this particular treaty's provisions will not fit well with either the new provisions in the USMCA or some of the old NAFTA provisions? Are there any touch points there that we should be looking at, as well?
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
In short, this should not impact the USMCA. I believe the Department of Finance officials mentioned it.
From a U.S. perspective, the U.S. has detailed an objective and “easy to understand whether they apply or not” limitation on benefits rules in their treaties both with Mexico and Canada. For cross-border investments with the U.S., then, it's just an exercise of going through those detailed rules and determining whether treaty benefits apply, and you will know whether they apply or not.
With respect to Canada and Mexico, we're going to have a principal purposes test once this is ratified in both Canada and Mexico. For investments between those countries, then, it's going to be the ambiguous principal purposes test to determine whether treaty benefits apply.
That's separate, as you said, from the USMCA, though, because I think the USMCA just does not impact on whether treaty benefits apply between Canada, the U.S. and Mexico.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Our relationship then with the United States is clear just on the principal purposes test. It will be less clear with Mexico after this is ratified through our parliamentary process.
Co-Chair of Tax Group, Osler, Hoskin & Harcourt LLP, As an Individual
That's correct, because it will be less clear whether treaty benefits apply in any particular circumstances. In other words, there will be a risk that the tax authorities in either Canada or Mexico could seek to deny treaty benefits, and then you would have to go through the expensive and time-consuming process of going to court to prove them wrong.
