Finance Committee on April 2nd, 2019

[Michael McLeod, Liberal, Northwest Territories, NT]

We have this bill in front of us, and there's another bill, Bill C-82, which is supposed to prevent base erosion and profit shifting. Can you explain the difference and why there was a need to have these two separate bills?

[Trevor McGowan]

Thank you for the question. I would be happy to.

This bill relates to a bilateral tax agreement between Canada and Madagascar. It's intended to both improve the administration of our tax system and reduce barriers to trade between two countries on a bilateral basis.

The base erosion and profit shifting project was born out of a multilateral effort to deal with global tax avoidance—the base erosion, profit shifting and moving income around. It was determined as part of that process that a number of bilateral tax treaties, such as with Madagascar.... Of course, we have them with 93 countries; this would be the 94th. Renegotiating all of those bilateral treaties would take a tremendous amount of time and effort by all of the countries involved. The multilateral instrument is itself a treaty. It serves to modify the application of existing bilateral treaties, so it can update a large number of treaties all at once by virtue of being entered into by a number of countries on a multilateral basis.

Here in Bill S-6 we have a bilateral income tax convention. The MLI in Bill C-82 affects and updates the application of Canada's existing multilateral treaty networks, as well as the networks of the other participants in the MLI.

[The Chair, Liberal, Wayne Easter]

You have time for a small one.

[Michael McLeod, Liberal, Northwest Territories, NT]

Does that mean we're going to see other tax treaties where we have agreements with other countries? Are we going to see a number of them requiring updating and expansion also?

[Stephanie Smith]

To date, most of Canada's tax treaties will be updated through the multilateral convention, however—

[Michael McLeod, Liberal, Northwest Territories, NT]

That is Bill C-82.

[Stephanie Smith]

Yes. However, there are some treaties where, largely by decision of our treaty partner, they preferred to update those on a bilateral basis. In particular, we are engaging at this time in some bilateral negotiations. Those include Germany, Switzerland and Brazil.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

Mr. Deltell.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you, Mr. Chair.

I want to welcome everyone to your House of Commons.

As you know, we support the principle of Bill S-6 and trade with the different countries. This agreement isn't a free trade treaty per se, but an information treaty that relaxes tax rules to provide for better trade.

This isn't new. There are 93 agreements of this nature. We know that Madagascar isn't the United States, but our trade with this part of the world is still worth over $100 million. We can only encourage this type of exchange between Canadian and Malagasy companies. We obviously want Canadian companies to live up to the honour and dignity of our country.

That said, one goal of the bill is the avoidance of fiscal evasion or, if we refer to the specific title of the bill, the “prevention of fiscal evasion with respect to taxes on income.”

The prevention of fiscal evasion is a major undertaking. All the countries in the world must make an effort to achieve this goal.

Ms. Smith, you told my colleague Mr. McLead earlier that this would provide for a more effective exchange of information among the various revenue departments. This is a step in the right direction, but it doesn't seem sufficient to prevent fiscal evasion with respect to taxes on income.

Does this bill implement or could it implement more specific measures to prevent fiscal evasion?

[Stephanie Smith]

In particular, for tax evasion, the main provision in the tax treaty that will help with that is the exchange of information and the collaboration between the two tax administrations, to try to ensure that there's full information with respect to the investments between the two jurisdictions so that both can apply their own domestic tax laws.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Okay. Let's get some real facts.

If there is a company in Canada that would like to do business with Madagascar, who will call the shots? Will it be the Madagascar's specialist of fiscal issues who will ask us specific questions about this business, or will we allow them to investigate this company and to touch other issues than those that are concerned with the Madagascar issue?

[Stephanie Smith]

The tax treaty itself does not provide this, particularly if you're talking about visits from Madagascar's tax officials to Canada in terms of reviewing the affairs of the particular business in Canada. It does not specifically deal with that type of co-operation. Typically, it deals with responding, if there has been a request made from one jurisdiction to the other to the extent that it's relevant and meets the requirements under the act. Canada—or in the vice-versa situation—would provide the information that's requested. It also allows Canadian tax officials to spontaneously exchange information. If they find information that they believe would be relevant to the tax officials in Madagascar, they would have the ability to exchange that information on a spontaneous basis without there being a request for that information.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

I have one last very specific question for you.

If Malagasy experts uncover an offence committed by a Canadian company, which laws apply and what are the penalties?

[Stephanie Smith]

I guess it depends on what it is. If it is Madagascar applying its domestic law in respect of a Canadian company that had operations or some investment in Madagascar, it would be the Madagascar domestic laws that would be applicable.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Okay.

Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Welcome, again, Trevor and Stephanie. It's always a pleasure.

My first question is this. We have 93 tax treaties with various jurisdictions. How important is it from a transparency investment proposition, and also to ensure that tax avoidance and tax evasion do not happen, that we have these agreements in place?

[Stephanie Smith]

I think this goes back again to the importance of the provision that allows for the exchange of information between the two jurisdictions, which would certainly help to avoid both tax evasion and tax avoidance when it allows the Canada Revenue Agency access to the information it requires to appropriately apply Canadian domestic laws, in particular the Income Tax Act.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Trevor, do you have any follow-up?

[Trevor McGowan]

Just to add from the business perspective, when a foreign corporation is looking at where to invest or where Canadian companies are looking to invest abroad, items like certainty and predictability are tremendously important. For example, as we discussed earlier, knowing that withholding taxes on dividends would be capped at 5% provides additional certainty. Knowing there would be tie-breaker rules for residency and dispute resolution processes provide certainty, so when businesses are looking at where to make their decisions, it's better to invest in a country with a tax treaty than in one without.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

In our time in Parliament in the last three years, we've also finished and completed the agreement with Taiwan, for example. It was a similar agreement allowing for flows of investment dollars to go back and forth. Certainty on taxation and investment allows corporations and individuals to decide whether to invest in Taiwan or here in Canada.

It's all on the same lines as what Bill S-6 is, if I'm not mistaken.

[Trevor McGowan]

Generally speaking, yes. Of course the agreement with Taiwan is not a multilateral convention between nations, but the agreements are similar in effect.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

My next question is with regard to Ms. Smith's allusion to the CRA's ability to collect information and how important that is to ensuring that all entities are paying their fair share of taxes. Our government has put over $1 billion in funds in the CRA to boost its services.

Recently we've had some action with regard to the Panama papers when some news came out that CRA is taking action. I think it's a good step, because we need to make sure that Canadians understand that everyone is paying their fair share of taxes to fund the services we depend on on a daily basis.

With regard to Bill S-6 and the way that multilateral organizations work in regard to transfer pricing and double taxation, how important is it that CRA be able to collect that information, use it properly and verify it?

[Stephanie Smith]

I think it's very important to being able to verify and ensure the application of the Income Tax Act. This provides them with the tool and the co-operation of the tax officials in Madagascar to provide them with the information that is needed.