Finance Committee on Feb. 7th, 2019

[Tom Kmiec, Conservative, Calgary Shepard, AB]

I want to pick up where Mr. Dusseault left off in his round, in talking about Barbados, because Barbados is one of the signatories to this convention. I went through the list of countries, looking at who was signing on and who wasn't. I see that the People's Republic of China has signed on. I see South Korea—and not Korea in general—the United Kingdom, and some really major countries.

However, just from my time on the foreign affairs committee, I know that places like Barbados—and there are other countries out there too—sign on to a lot of international agreements, but they never really go through the ratification process. What will be the impact of several countries in this not going through the ratification? They just sign on, and then they stop right there and don't continue with ratifying it.

[Patrick Marley]

I think the OECD has established a process to ensure that this doesn't happen, in the sense that, because there were certain minimum standards agreed to, the OECD also established a peer review process whereby they would review each country to determine whether it has complied with the minimum standards. Really, the stick, so to speak, is pressure from the OECD and other jurisdictions to ensure that the countries abide by the minimum standards in one of the different optional ways they can do so.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Can you explain what the minimum optional ways are?

[Patrick Marley]

I'm sorry. With respect to this main treaty-shopping point, the optional ways are either a detailed limitation on benefits route, which is what the U.S. has done, or a principal purposes test-type rule, which is what Canada and Barbados have signed on to in the MLI.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

You've talked a lot about the principal purposes test and your worries around the extra ambiguity in the text that will be the result of it. I'm almost afraid to ask you, but can you give me a simple example?

[Patrick Marley]

I'll give you an overly simplified example, so we'll take it with that caveat.

When you invest in an RRSP in Canada, you might ask what your purpose is of investing in an RRSP. Is it to save for your retirement, or is it to avoid tax by getting a deduction on your RRSP contribution?

If you ask 10 different individuals, they might give 10 different answers. Some might say they did it just for retirement. Some might say they did it because they wanted the deduction. Many would say they did it for both reasons.

What this principal purposes test would do, if it applied to an RRSP deduction, is allow the government to step in and determine whether it thought the tax savings was one of your principal purposes, and if it were, then it would deny that deduction.

But I just use that as an example where it's difficult to determine at what point a purpose becomes a principal purpose, and whether it's one of your principal purposes. Quite frankly, in making any investment in any country around the world, if you don't take into account the tax result, you're negligent. It's part of computing your after-tax returns.

Because tax is always considered, it's very difficult to determine at what point you just considered the tax results and at what point it became your principal purpose.

And finally, on my RRSP example, I would say that it shouldn't matter in that example whether one person's purpose was retirement savings and another person's purpose was to get the current deduction. We should treat them equally, regardless of what their purposes were.

That's my other concern with the test is that it doesn't necessarily treat equal taxpayers equally because it bases the result on what their purpose was, as opposed to what they objectively did.

[The Chair, Liberal, Wayne Easter]

All done?

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Quite.

[The Chair, Liberal, Wayne Easter]

Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you to the witnesses here today.

Mr. Chairman, it's not very often that we have witnesses who come to present to us who are familiar with the Northwest Territories, and even less often do they know the community where I come from, called Fort Providence. It's a small aboriginal community along the Mackenzie River. But today we have a witness who has family who will be visiting my community. I was shocked to hear that, and I really hope she has a good visit.

There have been some comments in your presentation that point to the positive nature of this change. I think you said it was a positive step forward. I also heard that this was a positive measure.

I also heard Mr. Sanger mention $1 billion in Canada. I think that was the number you used.

Over the last while when we have talked to our witnesses, we have tried to see how big the problem actually is. Is there any way you can frame that for us, to the best of your knowledge? What impact would this piece of legislation have on that? I'm trying to get a handle on how well this would work? Do you expect it to cut it in half?

[Toby Sanger]

Well, it all depends on what provisions are included or not. Just following up on the discussion about the principal purposes test, it's an essential part of this and I hope that it isn't weakened going forward.

The estimates from some people in the industry are that it might increase payments from corporations by about 10% or 15%, so it's on a really significant bed. It's going to involve some patchwork in certain areas, but certainly it doesn't get at the magnitude of the problem.

It's hard to determine this, partly because a lot of this information is kept secret. We don't have information on where assets are kept and how corporations book their profits, as you probably know. A company like Apple, which I happen to have had the fortune to get some stock in, years ago, claimed it didn't have permanent residence in any particular country at that time. This is a significant thing.

The lower-end estimates from some international experts for how much Canada loses in this area are about $8 billion in revenue. Now that's not all related to corporations, but about two-thirds of that is corporations. It's a significant amount.

But it's an even higher share of the revenue from lower-income and developing countries. There is concern about the mining sector in Canada and preserving that, but it is the lower-income countries that lose out by taking advantage of these tax laws.

We can look at things in our own self-interest, but I do think we really do need to adopt some rules that are uniform, in the same way that we have in Canada, which we agree are fair for everybody involved around the world.

[Michael McLeod, Liberal, Northwest Territories, NT]

I'm not sure who mentioned it, but there was also a reference to the lack of binding arbitration, I think it was, in this provision.

Can you give us an example where its used in other agreements that maybe some other countries are using and where it works well?

[Patrick Marley]

Maybe I'll start with what it was modelled after, which was major league baseball. I think it's working extremely well there. When baseball players were up for free agency, there used to be a long and drawn-out process, and it was very difficult to get the players and the owners to agree.

What especially works well here is that, because we're following that baseball style, each country is required to come out with a final offer that's reasonable and likely to be accepted by the arbitrator.

The arbitrator can't saw it off in the middle; they pick one side or the other. Even without getting into the arbitration process, the two countries are forced to make compromises and settle cases before even reaching arbitration.

Without that process in place, countries could just continue to disagree, not compromise in any way, be completely deadlocked, and then the taxpayer would have to pay tax in both countries. It's an effective way of forcing Canada and the other country to compromise and agree on solutions.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Dusseault, we have a three-minute round, if you want to use it.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Yes, thank you.

I want to continue the conversation on Barbados. I still have major doubts about whether the country is sincerely willing to implement the multilateral convention.

Mr. Marley, I want to ask you a question that has been on my mind for a long time and that has never been answered. Do you know why, for many years, Barbados has ranked third among all the countries in the world when it comes to Canadian direct investments abroad?

[Patrick Marley]

I don't know why Barbados is our third country. I don't know whether that's true, but I'll defer to you on the accuracy of it. In the case of investments from Canada in Barbados, I suspect that in many cases it's a case of using Barbados as a holding company for investments in other jurisdictions.

As I think I mentioned before that that doesn't result in any loss of Canadian tax. If Canada invested directly in any of 93 countries we have tax treaties with or any of the countries we have tax information exchange agreements with, which I think adds another 25-or-so countries, the profits would all come back to Canada tax-free. It thus doesn't impact the tax in Canada at all.

In many cases, investments might be made in Barbados because they're not adding an extra layer of tax; you're not being double-taxed or facing increased taxation compared with what you would have paid if Canada had invested directly in those countries.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Isn't the main reason the existence of the tax treaty between Canada and Barbados? As a result of the treaty, funds can be repatriated to Canada tax-free, as stated by the lawyer from Rogerson Law Group, located on Bay Street. The lawyers call this asset protection. There are a number of options.

They mention choosing an offshore tax haven, an offshore trust, segregated funds, IBCs and LLCs protecting your domestic assets, private foundations—always for asset protection.

I want to know whether your law firm also does this type of asset management or protection. Do you have any issue with the fact that Canadian companies or individuals use foreign countries to protect their assets? I'll quote the lawyer from the Rogerson firm:

“Asset Protection”:

Protection from what? Think of asset protection as a type of insurance policy covering a future risk of claims against you from financial predators.

He then made a list of financial predators.

He mentions:Others who could seek to stake a claim on your wealth include business creditors, the CRA, and dependents, in the case of your death.

How do you characterize lawyers who do that kind of stuff?

[Patrick Marley]

I'm not familiar with that lawyer, their firm or their marketing materials, but you asked a couple of questions there. I think you asked, first, if our firm provides similar services. No, we do not, in the sense that we practise exclusively Canadian law and U.S. law in our New York office. I'll just get back to the point that if somebody is using a Barbados company to evade tax, that's a criminal activity and we have laws in place now that aren't impacted by this treaty.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

They don't evade; they avoid tax.

[Patrick Marley]

If it's tax avoidance, again, I think that's addressed in our domestic FAPI regime. Canada already taxes income through that regime, whether it's in a tax treaty country like Barbados or in a non-tax treaty country like the Cayman Islands.

Again, I'm failing to see the connection between Bill C-82 and.... I think what you're getting at is that you would like to see our foreign affiliate regime expanded, but that's separate from our treaty network. That's more a question for the Department of Finance and whether they ought to believe in their FAPI regime as is, or to expand it to other areas.

[The Chair, Liberal, Wayne Easter]

We'll have to leave it there. We have to turn to committee business.

On behalf of the committee, I just want to thank both you, Mr. Marley and Mr. Sanger. I think that you've shed considerable light today on what is a complicated issue. I really appreciate your bringing your knowledge and experience before the committee on this issue, so thank you very much.

[Patrick Marley]

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

With that, do you want to go to committee business right now, or do you want to suspend for a couple of minutes?

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Right now.