Finance Committee on Dec. 5th, 2016

[Stephanie Smith]

Thank you for that question.

In working on the arrangement with Taiwan, because it was set up as an arrangement and it's not between two sovereign jurisdictions, in order for the Income Tax Act to apply appropriately, we needed to have certain provisions in the implementing act to ensure that it is functionally equivalent to a tax treaty so that the Income Tax Act rules work. It was in reflecting on this that the question of Hong Kong arose.

Now, Hong Kong has been in place for a couple of years. The Canada Revenue Agency has issued an interpretation to make it clear to all Canadians that, yes, residents of Hong Kong and investments in Hong Kong do get the benefits that are accorded to a tax treaty under the Income Tax Act. It has been working just fine. However, we were concerned that perhaps in light of making very particular amendments to address the different situation that exists with Taiwan—because it is a different relationship, with China, relative to the relationship with Hong Kong—we decided that for greater certainty it was appropriate at this time to include similar clarifying amendments with respect to Hong Kong, to avoid any adverse inference being raised from having done the specific...with respect to Taiwan and not Hong Kong. However, nothing in this should be read into as having any change or any difference in respect of the interpretation provision and how it has worked since it has entered into effect in Canada.

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

Thank you.

To elaborate on Mr. Dusseault's question in terms of privacy, when we talk about gaining information between two countries in terms of addressing tax avoidance, how do we further reassure Canadians that their privacy will be protected? I know you already mentioned, in your response, the requests for that information, but as you can imagine, Canadians doing business abroad want to ensure that if they're doing things properly this information is still being protected under Canada's privacy protection laws. Can you maybe elaborate, to help Canadians doing business abroad, on how they are protected?

[Brian Ernewein]

I'll say first of all that the privacy and security of tax information is paramount to us and to other countries. It would undercut the benefits or the utility of a self-assessment system, even domestically, if taxpayers couldn't be assured of the security of their information. It's perhaps doubly important, I suppose, when we're sharing information with other jurisdictions. The Canada Revenue Agency takes great pains to assure itself that for the information it shares under the exchange of information provisions of our tax treaties and our tax information exchange agreements, the other country or jurisdiction with which it has that relationship will use the information only for tax purposes, and has processes and security features in place to protect and secure the confidentiality of that information.

That works both ways. Other countries are also keenly interested in knowing that the Canada Revenue Agency will protect that information as well. I think the CRA holds a good reputation in that respect, but it's a concern on all fronts.

[The Chair, Liberal, Wayne Easter]

Thank you both.

We're going to five-minute rounds.

Mr. Albas is next.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

Thank you to our witnesses for the work you do for Canadians. I'll start by thanking you for bringing your comments in both official languages. That's a great courtesy to the committee.

Obviously, Canada works with the OECD on a number of different fronts, and most of these are based on conventions for tax treaties that have been negotiated or articulated at the OECD level. Is there anything in Bill S-4 that is different from the standard tax treaty as proposed by the OECD?

[Brian Ernewein]

Let me start, but I may well want to defer to my colleague.

The general answer is that Canada is a member of the OECD and seeks to follow the OECD model. That's essentially the template or text of the OECD model tax convention. It's not that we follow in every respect the tax rates that apply under the OECD model. For example, the OECD might propose a general exemption from withholding tax on interest and royalties, whereas Canada reserves the right to impose a lower rate of tax but a positive rate of tax on such income.

Also, in the negotiations, the other country's position will be taken into account. They might want changes that diverge as well. I can also think of a couple of specific things that Canada seeks as part of its base negotiations. For example, since 1972 we've had a departure tax, a tax applying to people who emigrate from Canada, and it was strengthened quite a lot in 1996. To try to relieve double taxation, Canada has, since 1996, sought to have in all its treaties a provision to essentially step up the tax cost for the person moving to another country so they won't be exposed to double tax in that other country. That's an example of a divergence.

There are a number of those. We basically follow the model. I don't know that I could go through them all with their differences.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

That's fine.

Are there provisions in Bill S-4 that have not appeared in previous tax treaties?

[Brian Ernewein]

We could verify this, but we don't believe so. Stephanie has talked about the anti-avoidance provisions that apply for our withholding tax. Those are not novel; we have those in other treaties.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

When it comes to the single clause when it comes to the Hong Kong agreement, per se, just updating it so that it's more specific, to me that doesn't seem to be much more than a housekeeping clause. Is that correct?

[Brian Ernewein]

We think so, yes. As Ms. Smith explained, with respect to Taiwan, we thought it was necessary to have a provision to essentially provide that Taiwan is to be treated as a country for the sake of making sure that our domestic rules in relation to tax treaties all apply. Having done that, we thought there could be a question arise in relation to Hong Kong. When we did the Hong Kong agreement, we didn't think it was necessary to have such a provision, but having done one with Taiwan, for greater certainty we've proposed the inclusion of one here.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

What is the difference between an arrangement and an agreement?

[Brian Ernewein]

Please don't treat me as being irreverent, but an arrangement is not an agreement. In finding another term that did not imply a contractual agreement, the word “arrangement” was landed on. Beyond saying that it's something less than an agreement, I don't know that I can offer any help.

By labelling it as an arrangement and making changes in the treaty bill to give it the same effect as an agreement or treaty—that was the objective.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

[Inaudible--Editor] dance you're doing here, so I appreciate that.

[The Chair, Liberal, Wayne Easter]

[Inaudible--Editor] Dan, but this would have the same legal authority.

[Brian Ernewein]

In Canada, as a consequence of the changes being packed in around it, yes, we believe that's the case.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

[Inaudible--Editor] practical matter, though, is dealing with the issues of double taxation, so I do appreciate the answer.

Specifically.... I lost the question I was going to ask. It was a very good question that the analysts had put together.

Oh, yes: earlier, Ms. Smith, you mentioned that you have different provisions internally for saying which of the 92 different countries we should look to modernize with. You said there are some of your own internal criteria. I would hope that GDP would be part of that. Obviously, if we are seeing an increase in exports to a particular market, and as Mr. Ernewein had said earlier, Taiwan is one of our twelve largest trading partners, does trade materially allow that prioritization, or is it by some other criteria?

[Stephanie Smith]

Absolutely trade would be one of the criteria that impact the prioritization of negotiating priorities.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

When we say that there are 92 other different tax treaties, obviously there have been some experiences Canada has had, obviously on emigration out, so it did not create those double taxation issues. What other issues have appeared in the past 20 or so years, or that we've learned as we negotiate these treaties, that are of benefit to Canada? Can you share any experiences of problems that we've seen that need to be corrected or issues that are coming up that new tax treaties need to resolve?

[Brian Ernewein]

One that I would speak to we've already referenced, but it's an important one that bears repeating. That's in relation to exchange of information. We've had exchange of information provisions in our treaties for a very, very long time, but they were only on request and they were not covering some of the often-labelled offshore financial centres. We didn't have treaties with those jurisdictions. We didn't have any other way to gather information from those other jurisdictions. About 10 or 12 years ago, there was the advent of the tax information exchange agreements where, notwithstanding the absence of a comprehensive tax treaty, we engaged in and the rest of the world engaged in negotiations to put in these so-called TIEAs, tax information exchange agreements, with those countries. That was a very important development, but it was still information on request, meaning you had to have some sense of there being a particular taxpayer who had an investment in a particular place to know to ask the question, which had its own limits.

More recently, sort of following the U.S. FATCA legislation, which has its own issues particularly because of U.S. citizenship taxation, the OECD and G20 developed this common reporting standard for the automatic exchange of information. We've had the automatic exchange of information with a number of countries, maybe 20-some countries, for the past several years, but the standardized approach for a broader range of countries has been very important. Although the treaty language itself hasn't had to change to authorize this, it has been a very important development.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Ouellette.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you very much, Mr. Chair.

I was just wondering what would happen if the convention didn't come into effect on January 1. What are some of the roadblocks you might see? For instance, it's also in the Senate, and I understand the Senate is having some issues. So what would be the consequences of that?

[Brian Ernewein]

Very basically, it is as I said in my opening remarks, which is that if it were delayed until next year for implementation, then the effective start of the treaty will be the calendar year following. If it actually can be passed this year, and the notices to the other jurisdictions, both sent and received, take place, then both of these, the agreement and the arrangement, can take effect for the beginning of 2017. Failing that, it would be the beginning of 2018 or later.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

I'm just wondering why it has come so late in the calendar year.

[Brian Ernewein]

Well, the bill was—

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Essentially you've given us two weeks, and with what's going on in the Senate....

It's not a criticism, I guess. It's just a question.