Finance Committee on April 2nd, 2019

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

We, as a government, have obviously maintained our promise of entering into free trade agreements around the world. We've completed CETA and CPTPP and renegotiated USMCA. All of the countries we have trading relationships with are covered by tax conventions or multilateral tax treaties.

I would argue that it is along those lines that the Canadian economy benefits, that the investment flows between countries benefit, and that Bill S-6 is another step in that direction. Madagascar may not be a household name to all Canadians at home today, but nonetheless it is a country that we do trade with and have an investment relationship with.

Without the tax convention, how difficult would it be to undertake those trade and investment flows with a country like Madagascar?

[Trevor McGowan]

I think that leads back to some of our earlier discussions about certainty for businesses. Of course, there's always the ability to invest abroad, but in making investment decisions, certainty is incredibly important for businesses. While not having a tax agreement in place doesn't prevent investment in a foreign jurisdiction, having such an agreement in place provides additional certainty and makes it more appealing for businesses, because they know there's that kind of framework in place.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

Mr. Dusseault, and then back to Ms. Rudd.

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

My question is very quick, Mr. Chair, because I know I went overtime in my first round.

[The Chair, Liberal, Wayne Easter]

That's okay.

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

I'm sure you won't have the information with you, but if you can get your hands on it, would it be possible to have data from the T1134 form, the information return relating to controlled and not-controlled foreign affiliates, and also the data from the filing of T1135, the foreign income verification statement, and of course the data coming from Madagascar?

This is all related to Madagascar, and maybe, if possible, can you go back to 2011? I don't know if that's possible for you in the Department of Finance or the Canada Revenue Agency.

[Trevor McGowan]

Of course, due to privacy laws, I can't imagine that we could provide information from any specific taxpayer's T1134 or T1135, but I take it—

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

The total amount.

[Trevor McGowan]

—what you're looking for is aggregate data. As you guessed, we don't have that information on us, but we can ask our colleagues if that is something we would be able to obtain.

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

Yes, please.

[The Chair, Liberal, Wayne Easter]

If you can respond to the committee in writing with the information, that would be great.

Ms. Rudd.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

I appreciate your coming once again. I always enjoy listening to your testimony. I always find that I learn so much about things that I think the general public have no idea about.

In regard to some of the questions by my colleagues and the testimony, can you explain a little bit about the average person who buys shares in a company? I know you talked about the percentage of withholding tax, etc., but what would that mean to a Canadian who maybe invested their RRSP in a company this tax treaty would apply to? What would that look like for them? I think we have a tendency to talk about things in the scope of the big picture, but what would it mean for them?

[Trevor McGowan]

Getting into some of the technical details, I'm working through your question.

In your situation, if an individual invested in a Madagascar company, when dividends are paid out of that company, they would be subject to Madagascar's dividend withholding tax. I believe the rate is currently 20%, and under the treaty that would be reduced to 15%. That's based on the assumption that an individual making a portfolio investment would not be able to qualify for the lower 5% rate, which is more for a parent-subsidiary type of relationship.

It's zero? I'm sorry, I was thinking about the withholding tax rate on dividends on interest.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

See, if we're confused, imagine the average person.

[Trevor McGowan]

It's just the numbers. Madagascar doesn't impose withholding tax on dividends, but on interest, if you had a bond issued by a Madagascar company, then the numbers I mentioned would be correct. It would be reduced from 20% down to 10%.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

And when the Canadian individual filed their income tax, that's where it would be adjusted.

Is that correct?

[Trevor McGowan]

Withholding tax is imposed by the foreign state, so it wouldn't be on the Canadian tax return. It would just be how much foreign tax you're paying.

It's a bit of a tricky question, because of the specific facts. It might be more likely for a Canadian to invest, say, through their RRSP, in a publicly traded company that might have business activities in Madagascar. Of course, if it's in an RRSP, it would be received tax-free, or free of Canadian tax, and then the specific tax consequences would follow, based upon whether it's a Canadian company with business in Madagascar or a public company in Madagascar that's traded on a public stock exchange. That's one of the conditions that generally has to be met for funds to go into the RRSP.

It's a surprisingly complicated question, depending on the facts, and a number of unstated variable [Inaudible—Editor], but the general idea is that on these investments, you'd have a certain cap for withholding-tax rates, for example, that could be imposed by the foreign government. You'd have certainty on the most they could charge, and so you'd know better what your after-tax yield is going to be on your investment. Of course, if you have a hundred-dollar bond that earns a 5% rate of return, then you say, “Well, okay, what's my after-tax rate of return going to be?” You can figure out what your Canadian taxes are going to be—zero, if it's in your RRSP or TFSA, or whatever your marginal rates are if you hold it personally. Then you add, on top of that, foreign taxes that could be applied.

In determining the foreign tax consequences, this would provide some certainty. I think, for individuals, not corporations, another important factor is the residency and the rules that can apply in the tax treaty when you go to work abroad at a facility in Madagascar, and you want to know that Canada's not going to be taxing you on your worldwide income at the same time that Madagascar is. Really, for individuals or normal people, as opposed to corporations, that's one of the big uncertainties addressed by this bill.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

You mentioned the mechanism that resolves tax disputes. Let's use the example of a person who is working in Madagascar as a Canadian. If there were a dispute about that, is that something that we as the Government of Canada would provide assistance with, through this treaty?

[Stephanie Smith]

We would provide assistance if it were a question of the application of the tax treaty. If it were with respect to a particular dispute purely on Madagascar tax—

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Of course.

[Stephanie Smith]

—we would not, but if it were a question of the application of the treaty and ensuring that there was no double tax, yes, the individual could seek assistance from the competent authority, which for Canada, under this tax treaty, is the Canada Revenue Agency.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Do I have one more minute?

[The Chair, Liberal, Wayne Easter]

Go ahead.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

I may have missed this. I know when the treaty was signed, but when did the negotiations start? You mentioned that there were some challenges with governance in Madagascar. When exactly did the negotiations start? How long did this process take?

[Stephanie Smith]

We don't have the exact timing—