Finance Committee on Dec. 5th, 2016

[Brian Ernewein]

Again, if I could call it a legal matter, the scope of the arrangement with Taiwan is limited to Taiwan. In terms of whether or not there's any sort of indirect effect, such as a choice of investment in Canada over a choice of investment someplace else because of the existence of this arrangement, I hope that happens. It's a positive if it has that consequence. But no, I don't see, apart from those very, very indirect effects, an impact on other jurisdictions or other countries.

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

Am I correct in saying that this arrangement with Taiwan is consistent with the Trans-Pacific Partnership Agreement, which was concluded just over a year ago?

[Brian Ernewein]

Thank you for the question. To our knowledge, at least, there's no necessary connection between this and the trans-Pacific partnership. This stands on its own as an agreement in relation to taxation. Other trade agreements could have consequences, but as I say, there's no linkage between the two, one way or the other.

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

Thank you, Mr. Chair.

You understand that our questions are intended to reassure people and to tie up all the loose ends. We do not want any nasty surprises. Nor do we want to realize, after agreeing to this, that we have forgotten to look into something. We might realize that our main economic partners in Asia are not happy and are also surprised. If we are fortunate enough to ratify the Trans-Pacific Partnership and what you are asking us to do today makes it null and void, we would not be pleased, to say the least.

Let's cross a continent now and talk about Israel. First of all, you said that this will update agreements dating from 1975. Does that mean that there have been no updates in the trading relationship between Canada and Israel since 1975?

[Brian Ernewein]

I confess to not knowing what, if any, other trade arrangements we have between Canada and Israel and whether they've been in place since before 1975 or since, or have been in place since before 1975 and changed since. This is really focused, again, as with Taiwan, on the tax arrangements or tax agreement between Canada and Israel.

I may ask my colleague to spend a moment to talk about the differences between what the 1975 treaty does and what the new treaty with Israel would do.

[Stephanie Smith]

I'll just highlight a couple of the aspects that are included in the convention with Israel, which updates it from the version that was signed in 1975. The biggest changes, probably, are with respect to the reduction of the withholding tax rates to bring them more in line with what Canadian and Israeli policies are today. Generally, over time, there has been a reduction in what those agreed amounts are. The vast majority of the rates in the 1975 treaty were at 15%, and now, in accordance with more current treaty policies, we've reduced the rate for dividends to 5% when it's between a parent and a subsidiary, and to 15% in all other cases.

With respect to interest and royalty, the maximum withholding rate is 10%, but in certain situations that rate has been reduced to zero. The treaty has been updated to include a provision to ensure that any double taxation is relieved in respect of an individual who leaves Canada and becomes resident in Israel. The Canadian departure tax rules would apply in such a situation. Those rules were not in place in 1975. This treaty includes a provision under which Israel agrees to recognize the fact that Canada would have taxed any increase in value of that capital property on...emigrating from Canada. As I mentioned earlier, it also includes a mini anti-avoidance provision in articles 10, 11, 12, and 13 to ensure that it does not facilitate treaty shopping arrangements. It also updates the exchange of information provision to include the international standard for the exchange of information on request.

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

I see you have done a very detailed analysis of the legal impact. Have you also done a financial analysis? How great would the economic impact be on trade with Taiwan and Israel?

[Brian Ernewein]

We don't have an analysis of the trade impact. You can't assess, or at least I'm not aware of how one would be able to assess, the reaction of investors to putting in a lower tax regime. We think we can say with some confidence that it would be positive, but we aren't able to quantify it beyond that.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Champagne, you wanted to make a point there in answer to his question. We'll let you do it.

[François-Philippe Champagne, Liberal, Saint-Maurice—Champlain, QC]

I just wanted to provide elements of a response to Monsieur Deltell, my great colleague on the other side, that Canada has double taxation conventions with China and Japan. I just wanted to clarify that issue, because there was a question from the officials as to what could be the impact.

My point is just that we have similar conventions with trading nations in Asia, and I wanted to clarify that for my colleague.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Dusseault.

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

Thank you, Mr. Chair.

When I read the proposed conventions between Canada and these countries, I did not see a problem initially, because these countries have individual and corporate tax rates similar to those in Canada. When I saw, however, that a tax convention is proposed to avoid double taxation, I immediately thought of the tax convention between Canada and Barbados. There is something that I repeat often and that always seems to surprise people. In 2014, Barbados ranked as the second most important country for direct investments by Canada, after the United States. People wonder why Barbados ranks second.

The most common reply is that Canada has an accord with Barbados to avoid double taxation. The problem is that the corporate tax rate in Barbados ranges from half a percent to 2.5%. I do not necessarily see a problem as regards Israel and Taiwan, because their tax rates are similar to those in Canada.

The title of the bill includes the words “avoidance of double taxation”. Is there not a danger that such conventions or accords concluded with countries that have very low tax rates could in fact lead to tax avoidance, which is what you are trying to combat?

[Brian Ernewein]

Thank you for the question.

We do have a tax treaty with Barbados, as do many other countries. In fact, Barbados is one of the countries with which we have a long-standing relationship inasmuch as it was covered by the first treaty we had with the U.K. until Barbados acquired their own sovereignty. Then we entered into a treaty with Barbados directly.

I think the point you're making is that Barbados has a low tax rate. We don't tax the business income, if it's business income in question, that's earned in Barbados as it's earned or indeed even as it's repatriated. We do of course tax passive investment income earned in Barbados or elsewhere if it's earned by a Canadian, a Canadian individual or a Canadian company, but not business income. In that respect, we're like almost all of the rest of the world with almost the singular exception of the United States, which is going through its own debate as to whether this remains appropriate.

Every other country alongside Canada doesn't tax foreign business income as it's earned or when it's repatriated. I think that decision has been informed, in Canada's case and in other countries' cases, for reasons of competitiveness. If we sought to tax foreign business income of subsidiaries, foreign subsidiaries of Canadian firms, one might reasonably expect there would be a lot less foreign business income earned by Canadian firms.

I think that's sort of the basic premise. It's not the treaty itself that's the issue that you raise. I think it's the domestic decision of Parliament and our domestic law to provide this exemption for foreign business income. As I say, people can have different views about that, but I do think it's consistent with what almost every other country does in the same circumstance.

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

Thank you.

I would like to move on to a related topic.

There are a few articles in the convention that refer to information sharing, but they are not as strong as the agreements on the sharing of tax information that Canada has concluded with tens of countries around the world.

Why have you not considered including an accord on the sharing of tax information rather than simply a few articles related to information sharing?

[Stephanie Smith]

I think it's the exact same standard that is in the model convention, article 26. In our particular treaties, I think it's in article 24 in one of them; I'm not sure specifically the article in the other.

One is shorter in length than the other, but they both do the exact same thing in terms of the standard for exchange of information on request, the difference being the exchange of information agreements specifically because they typically were with jurisdictions that had less experience with exchanging information. They are more explicit about some of the rules—for example, what must be contained in a request for information, and all of that is specified. It is not specified in the same level of detail in a double taxation treaty. However, the same basic rules are there in terms of it having to be information that's foreseeably relevant, the requirement to provide that information and not use bank secrecy and domestic tax interest as a reason for not providing the information. Those are both encapsulated in the double taxation treaties, and in fact the standard is the same.

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

Thank you.

My colleague spoke about the economic benefits, but for my part I would like to talk about the lost tax revenues. An accord to avoid double taxation will mean that Taiwanese and Israeli citizens will not be taxed here.

Have you assessed the tax revenues that will be lost as a result of the agreements that Canada is going to sign?

[Brian Ernewein]

In point of fact, Canada doesn't tax on the basis of citizenship. Again, I seem to be picking on the United States, but it's the only country that actually taxes—with a possible footnote for Eritrea—on a citizenship basis. We tax on a residence basis.

It's true that we try in our tax treaties to have a provision to make sure that in the case where two jurisdictions both claim a taxpayer as resident there are rules to resolve that, to figure out in which of the two countries or jurisdictions the person truly is resident. It's not as though there would be tens of thousands of people in those circumstances, however, who would fall out of the tax net as a result of the treaty changes. As we said in our opening remarks and have touched on since, the tax treaty provides certainty in that respect—rules to make sure we can figure out when a person is resident and where they are resident.

In point of fact, the essential point is that for most taxpayers that answer will be clear. What the treaty does is ensure that there are limits on each country's right to tax and that there's an ability to get a credit, or an exemption, but in the case of shared taxation to get a credit for the tax that's paid in the other country to eliminate double taxation.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Thank you all for being here.

I have a few questions. First, can you elaborate on what the difference is between the “convention” and the “arrangement”? Why is one a convention and one just an arrangement?

[The Chair, Liberal, Wayne Easter]

Don't get into a Trump situation here, if I could advise you.

[Voices]

Oh, oh!

[Brian Ernewein]

You've read my mind, Chair.

The situation with a convention or an agreement is very straightforward. It's an agreement between sovereign states whereby both countries, as countries, are committed internationally to the agreement. Our infrastructure, if you will, and our tax laws are all built around that. When we enter into a new tax treaty or tax convention, it plugs rather neatly, with this implementation bill, into our tax laws.

The one China policy means—I'm trying not to make a foot-fault here—that Canada recognizes the People's Republic of China. As I understand it, Canada takes note of China's position with respect to Taiwan but does not do more than that. I think functionally, as I understand it, that means we don't treat or deal directly on a state-to-state basis with Taiwan. What was done in this case to try to implement a tax treaty-like relationship with Taiwan was to have an agreement or arrangement between the trade offices that each jurisdiction could implement—in Canada's case, that Canada could implement—domestically. So while it might not hold the status of an international treaty, by virtue of the changes or the legislation we have here we can give it the same effect in Canada while respecting our position with respect to both China and Taiwan.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Great. Thank you for that explanation.

To follow up on the questions from Mr. Deltell, what are the benefits to Canadians? I guess to simplify it, you mentioned that the costing is somewhat difficult to do. Is it the fact that, yes, these agreements really in essence go both ways, so it would really encourage investment here to eliminate that double taxation? Perhaps to explain this type of bill to the average Canadian, is this really the benefit as to why Canada would be interested in these types of agreements?

[Brian Ernewein]

Well, without trying to quantify it, but speaking to it at a higher level, I think that, yes, it is the case that both Canada and Taiwan or Israel....

Let me simplify my response by just talking about Canada. Canada benefits from being able to invest in the other place with a lower withholding tax or other taxes applying, with greater certainty as to when taxes apply. That's a benefit for our outbound investors. It's also a benefit for people who are working as consultants or the like to know when it is that they might be taxable in the other's jurisdiction and when not. Similarly, it can be a benefit for Canada on inbound investment if the investors in the other country have greater certainty as to what the Canadian rules are that would apply to them. So there are benefits in that respect.

The reason we can't quantify this is that we don't know really the behavioural response. We could take today the amount of interest dividends or royalties paid to Israel, for example, and apply a differential tax rate to it to say that it will cost us such and such an amount to have a lower tax rate in place, but that really wouldn't tell you the story. It really wouldn't tell you how much additional investment you're going to get as a result of the lower taxes or the greater certainty from having a treaty in place.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

Could you just elaborate as to why the amendments for the Hong Kong agreement are part of this bill? Is it just the timing of this, or is there more we should know about those amendments?