Finance Committee on Dec. 5th, 2016

[Brian Ernewein]

It's a fair question, first of all, to be sure.

The point is that Taiwan was signed earlier in the year. Israel was only signed in September. The bill was tabled, I think, November 1st, and that's where we ended up. I don't have any other explanation than that.

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

Okay. Thank you.

I was just looking at some of the information provided by the Library of Parliament. Our exports to Israel are diamonds, computer parts, accessories, and newsprint. Exports to Taiwan are coal, lumber, and copper ore. Exports to Hong Kong are gold, ginseng roots, and nickel. Our imports from Israel are medications, diamonds, articles of cement, concrete, artificial stone; imports from Taiwan are electronic integrated circuits, screws, bolts, nuts, hardware, diodes, transistors, similar semiconductor devices; and from Hong Kong the imports are iron and non-alloy steel bars, rods, jewellery, printed books, brochures, directories, and booklets.

This is all very interesting, but you know, we send a lot of our products there. How much will this trade treaty then improve the level of trade? Will Canada have a greater ability to send more of our finished product to countries like Taiwan or Hong Kong or Israel?

[Brian Ernewein]

It is important to note that this is not a trade agreement, per se. It's a rule governing the application of taxes in both jurisdictions.

As Ms. Smith acknowledged a moment or two ago, the level of trade between countries matters, but it's actually more of an investment focus. That is to say, when you make investments there's income hopefully generated on those investments. These rules govern how much each country can tax the return on those investments. It can also affect people employed, moving elsewhere, or moving from one jurisdiction to another.

Trade matters, but it's less about trade than it is about investment. Investment can produce trade, but it's a secondary effect.

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

Based on your experience to date, to what extent have multinational corporations located in Canada, and in countries with which Canada has tax treaties, shifted profits and losses around in those countries in order to reduce the tax burden, both here in Canada and overall?

[Brian Ernewein]

That's a very large question. We do cleave to our view expressed earlier that tax treaties are beneficial. I don't mean to qualify that at all. However, there is a concern sometimes, and this is the point that you're seeking to lead to, that there can be tax minimization by multinationals, not just Canadian multinationals but also multinationals from other parts of the world.

Indeed, the OECD has been very concerned by this, and it launched an exercise three years ago on base erosion and profit shifting, which is concerned with that sort of issue on transfer pricing and other matters. They came out with a report in September 2015 that had a number of recommendations to limit treaty abuse, to tighten the rules for transfer pricing, and to introduce country-by-country reporting for large multinationals so as to give each revenue authority a better picture of the sources of multinationals' incomes.

I hope I'm landing on your question. It is a concern in some respects, not necessarily connected to our treaties, although there are some treaty connections and work is being done on that. The Canadian government in its last budget spoke to what it's doing in relation to the so-called BEPS work.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Liepert.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

I have a couple of questions that may be peripherally related to this, but help me out on the rules around residency. What are the rules around residency for where you claim your taxes?

[Brian Ernewein]

We're speaking of individuals rather than corporations?

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Yes.

[Brian Ernewein]

For individuals, very generally it's where you have the closest connections. There are “deemed” rules where if you spend so many days in Canada you may be treated as a resident, or if you're a member of the diplomatic corps you may be deemed to be a Canadian resident. Apart from that, it's all factually based.

Colloquially, sometimes it's where you hang your hat, where you have your driver's licence, your club memberships, where you own your home, and other factors such as those.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

If you have equivalency in both countries, you can self-declare?

[Brian Ernewein]

You can start with that, and then countries may challenge you on it.

I'll ask my colleague to speak about the special rules, the specific rules we have in both of these treaties.

[Stephanie Smith]

As described by Brian, it starts with domestic laws in terms of determining who is a resident for tax purposes. Then you look to the treaty rule, which sets out a general rule on where you are resident. It is possible that you could be found resident in two different jurisdictions, and for that the treaty has a tie-breaker rule that has a number of different steps to take in breaking that tie.

The first one you would look to is where you have a permanent home available to you. Very often that is where the tie is broken. If it's not broken there, it then looks to your economic and social ties to determine where there are closer ties between the two jurisdictions, and then it cascades to a couple more criteria if you can't break the tie with either of the first two. It ensures that you're only getting benefits under the treaty in respect of being resident in one jurisdiction and not in both.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Yes, I understand that. I guess what I'm getting at is that we seem to have....

I happen to come from Alberta, so we get double-whammied. People in the higher-income category get hit provincially and now they're getting hit federally. This is more as it applies to the United States and since the election of President-elect Trump, who is now talking about reducing taxes in the United States. I'm hearing more and more about Canadians with high income who float between the two countries and who are looking at declaring U.S. residence.

In this particular case, if the same thing applied, would it have any impact on these two treaties? If you have individuals who effectively can claim residency in Canada and one of the other countries, is there any impact there as a result of this particular initiative?

[Brian Ernewein]

I don't think there are any issues unique to either of these agreements, or arrangement. It is possible for somebody, first of all, to make a claim to be resident in two or more countries. That's probably not something they would generally be inclined to do. It's possible for two or more countries to assert resident status with respect to somebody. What tax treaties seek to do is to resolve the conflict because it's generally not much fun, from a tax perspective, to be subject to full residence tax by two or more jurisdictions. What would happen in those circumstances is that the treaty would seek to produce an answer where you would end up with only one country taxing you as a resident. But in terms of taxpayers trying themselves to assert residence in one jurisdiction or another, it is possible to successfully change residence, and if they take enough pains, they will be able to do that. However, it does require them to give up their home and other connections in order to achieve that.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

We've started to see a little bit of that. It was well publicized in the media that Murray Edwards has done that, leaving Calgary and moving to London, England. I'm just wondering whether, as professionals in the tax field, you have any concern about that.

[The Chair, Liberal, Wayne Easter]

[Inaudible--Editor] related to this bill, Ron? I kind of don't think so.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

It's related to politics in general, Mr. Chair, and that's what we're doing.

[The Chair, Liberal, Wayne Easter]

Mr. Dusseault, you had a very short question. Then we'll go to Mr. Sorbara.

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

Thank you, Mr. Chair.

My response is that anyone can move anywhere, from one day to the text.

In the case of Hong Kong, you said that the bill would be retroactive to June 19, 2013. You can appreciate that we, as law-makers, closely examine why a bill will be retroactive.

Can you tell the committee why you have decided that this technical change will apply retroactively rather than from the time the bill is passed by the House of Commons?

[The Chair, Liberal, Wayne Easter]

Ms. Smith.

[Stephanie Smith]

If I understand the question, yes, we have proposed that the clarifying amendment with respect to Hong Kong would have retroactive effect, and specifically that it would come into force June 19, 2013, which is the date that the Canada-Hong Kong agreement entered into effect. Because it's for greater certainty and that's how the CRA had been administering it, we thought it made sense to go back to the date that it actually did enter into force.

[The Chair, Liberal, Wayne Easter]

Thank you for that.

Mr. Sobara, you can wrap it up.

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

Thank you, Mr. Chair.

How long do I have, about two minutes?

[The Chair, Liberal, Wayne Easter]

You have as fast as you can make it.