Finance Committee on April 2nd, 2019

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

I asked the question because, at first glance, it seems that the convention favours one side over the other. You said in your presentation that it would encourage Canadian investment in Madagascar. Since it seems that this convention will boost Madagascar's economy more than Canada's economy, I was wondering whether Madagascar started the negotiations.

I have a related question. Based on the investments of both countries, have you calculated or estimated Canada's potential tax losses and gains under this convention? I would be surprised if we made any gains, by the way. Do you have these figures?

[Stephanie Smith]

Consistent with other tax treaties, and I think the general approach of countries worldwide, it's almost impossible to calculate the total costs and benefits of a tax treaty. That's because a tax treaty looks to improve trade and investment between two countries, and it's very difficult to attribute increased trade and investment specifically to one thing, such as a tax treaty. We have not done estimates with respect to Madagascar, but that's consistent with the rest of our treaty network. My general sense is that, internationally, there's no accepted or understood method to be able to price the costs and benefits of a tax treaty with any degree of certainty.

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

I understand that it may be difficult to speculate on the losses or gains that would result from the ratification of the convention. However, at this time, how much income from companies in Madagascar is being transferred to Canada and is therefore not subject to any convention?

[Stephanie Smith]

We have not done any economic analysis of the existing situation with respect to trade and investment with Madagascar, or attempted to cost that.

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

If you could calculate them, it would be good to know the expected and potential tax implications of the ratification of the convention, on the assumption that the current situation between Canada and Madagascar remains unchanged. The committee would find this information useful.

[The Chair, Liberal, Wayne Easter]

Do you have an answer to that question, folks? You're slightly over time, Pierre. That's fine.

Are there any answers from Mr. McGowan or Ms. Smith?

[Trevor McGowan]

My colleague, Ms. Smith, made comments relating to the difficulties quantifying the economic impacts of a bilateral tax convention. I think it's generally perceived that having bilateral tax conventions between two nations improves the atmosphere for trade and breaks down barriers to trade, but it is quite difficult, if not impossible, from international experience, to precisely quantify the economic effect of a particular bilateral agreement.

We do have some information, which from an earlier question I understand was included in a briefing note, setting out the details of the Canada-Madagascar economic relationship for the years 2013 to 2017 and providing some idea of the trade between the two countries. Vegetable and mineral products dominate imports in Canada from Madagascar, and the largest category of items exported to Madagascar from Canada is machinery, mechanical and electronic products.

That brings me back to a point we discussed earlier. It is very much a bilateral agreement, so while I may have been guilty of making comments regarding Canadian investment in Madagascar, it is bilateral in nature. There's trade going both ways and benefit in both directions.

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

Can I clarify something?

[The Chair, Liberal, Wayne Easter]

Go ahead.

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

I don't necessarily want to focus on the goods traded between the countries, but on the income, interest and royalties generated in Madagascar and transferred to Canada. These amounts could be used for the calculation.

[The Chair, Liberal, Wayne Easter]

I think Mr. McGowan had mentioned that those numbers might be nearly impossible to gather.

Am I correct?

[Trevor McGowan]

We don't have the specific data on the amount of Madagascar withholding tax or taxes imposed on dividends, interest and royalties paid to Canadian taxpayers, if that's the specific question. We don't have that.

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

Would they have to report what they gathered in Madagascar when they come back to Canada?

[Trevor McGowan]

Right.

I'm just working through that in my head. You would have, for example, dividend income from a Canadian firm from Madagascar. The question might be how much foreign tax was imposed on it that would generate support for a foreign tax credit. We can ask our colleagues in our international business income tax division to see if they have that data. We don't have it on us.

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

Thank you.

[The Chair, Liberal, Wayne Easter]

We went well over time there, but I figured we needed to finish the round.

Mr. Fragiskatos.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you to the witnesses for being here and for your service, of course.

Mr. Richards raised a number of points related to SNC-Lavalin and offered a rationale for doing so. If I accused him of playing political games, I think he would respond by saying that he was exercising his parliamentary duty. I've had very good interactions with Mr. Richards over the past three years, so I might take him at his word on that.

Unfortunately, he left a few points out. If we consult the website of the Office of the Commissioner of Lobbying of Canada, from 2011 to 2015, under the previous government, there were no less than 25 meetings that took place between SNC-Lavalin and the Department of Finance at that time.

I wonder, Mr. McGowan or Ms. Smith, if you would know the contents of the meetings that took place, again during the previous government? There were 25 meetings in all. Would you be able to point to anything of relevance there?

[The Chair, Liberal, Wayne Easter]

The same as it was in regard to Mr. Richards, I don't believe Mr. McGowan or Ms. Smith are in a position to answer those questions.

[Peter Fragiskatos, Liberal, London North Centre, ON]

I just thought I would take a stab at it, Mr. Chair.

That is appreciated.

If you can't shed any light on that, I think the record should reflect the fact that 25 meetings took place from 2011 to 2015, again under the previous government, involving SNC-Lavalin.

I thank my colleague, Mr. Fergus, for his work on that as well and for bringing that to light.

Now, perhaps we could get back to Bill S-6. I want to take my parliamentary duty seriously, so I will stay focused specifically on that. You say in your brief here that the objective of Bill S-6 is to encourage trade and investment.

There are a number of bullet points listed and in particular, in number one, you say that it “provides greater certainty to taxpayers regarding their liability to tax in the other country”.

In laypersons' terms and for those folks who are not immersed in Parliament but who are looking at this and want to know the gist of the bill, how does this improve upon the current situation?

Give me an example of why there's a problem now and how Bill S-6 helps to provide “greater certainty to taxpayers regarding their liability to tax in the other country”.

[Trevor McGowan]

Maybe I'll give you two simple and concrete examples.

A Canadian firm investing in Madagascar or vice versa would be interested to know what the withholding tax rate is on, say, dividends paid from a Madagascar subsidiary to the Canadian parent, or again, vice versa. The Canadian firm would want to have certainty as to the rate going forward over the term of the investment

As noted, this treaty would ensure that the maximum withholding dividend rate on income or dividends paid by a Madagascar subsidiary to a Canadian firm, as long as they have substantial investment in their Madagascar subsidiary, would not exceed 5%. That provides cost certainty in terms of their exposure to dividend withholding tax on their investment.

In Madagascar, another example would be where you have an entity, let's say a corporation or an individual, that could be considered under both the laws of Canada and the the law of Madagascar to be resident in both countries. The treaty provides more clear tie-breaker rules to help establish where that entity is resident. This can make a big difference in terms of the imposition of, say, income tax, which Canada imposes on their residents on their worldwide income.

[Peter Fragiskatos, Liberal, London North Centre, ON]

You also say that Bill S-6 prescribes a method for the elimination of double taxation. What's the key way it does so?

[Stephanie Smith]

The key way it provides for elimination of double taxation with respect to Canada is that there will be a foreign tax credit provided to a Canadian company that incurs tax in Madagascar, and that is determined in accordance with Canada's domestic foreign tax credit rules.

[Peter Fragiskatos, Liberal, London North Centre, ON]

The third bullet point has basically been dealt with.

The fourth issue I want to ask about is where you say that Bill S-6 “contains a mechanism to resolve disputes involving cases where a taxpayer may have been subjected to taxation not in accordance with the Convention”.

Does that anticipate possible disputes, or does it recognize that disputes have existed in the past and seek to provide a remedy?

[Stephanie Smith]

In general, it anticipates that there could be a dispute. That's because the convention itself allocates the taxing rights. It's through, sometimes, the allocation of the taxing rights that there can be a dispute as to who has appropriately applied the tax.

Sometimes there's a shared taxing right; sometimes there's a maximum taxing right; and sometimes, in cases of transfer pricing, there can be a dispute in terms of the application of the arm's-length principle. Thus, it does provide a mechanism whereby the two tax authorities of their respective countries can get together to resolve the dispute and determine the taxation in each country so that there's no double tax for the individual, or the taxpayer.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Public policy should be proactive as much as possible, so I appreciate that it is built into the bill.

You said it “reduces the risk of 'burdensome' taxation that may arise because of high withholding taxes.”

Is that the situation now? Is this what has been learned through consultation in the lead-up to the bill?