Evidence of meeting #64 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was agreement.
A recording is available from Parliament.
Liberal
The Chair Liberal Wayne Easter
Let's come to order.
Before we start the official agenda for today, we do have a request for a project budget, which is basically to look after the costs of this hearing. The budget is in the amount of $6,000 for the subject matter of Bill S-4.
Does somebody want to move that?
Liberal
Liberal
Robert-Falcon Ouellette Liberal Winnipeg Centre, MB
It's for video conferencing. Are we doing video conferencing?
The Clerk of the Committee Ms. Suzie Cadieux
When we built the budget, we didn't have the final list of witnesses or their availability yet. We usually include one video conference when we are not sure where the witnesses will be coming from.
We'll end up spending less than that.
Liberal
December 5th, 2016 / 3:35 p.m.
Liberal
Liberal
The Chair Liberal Wayne Easter
Now we turn to the official business of the day, pursuant to Standing Order 108(2), on the subject matter of Bill S-4, an act to implement a convention and an arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and to amend an act in respect of a similar agreement.
We'll start with the Department of Finance witnesses: Mr. Ernewein, Mr. McGowan, and Ms. Smith.
The floor is yours. Do you have an opening statement?
Brian Ernewein General Director, Tax Policy Branch, Department of Finance
Yes, thank you, Chair.
My name is Brian Ernewein. I am the General Director of the Tax Policy Branch at the Department of Finance. I am joined by Stephanie Smith, who is the Chief Tax Treaty Negotiator with the Department of Finance, and Trevor McGowan, who is the Chair of our Legislative Drafting Unit.
I have an opening statement, but I haven't proposed to read it. I am happy to do so, if you would like me to read it. If not, I don't propose to. I understand that the clerk has received it and perhaps circulated it to members.
The only comment I would make is that I understand we are here, in some sense, to study the subject matter of Bill S-4. It was considered by the Senate committee last Friday. I don't think it has actually been reported back to the Senate or voted on third reading, but we are happy to take any questions. The subject matter is, of course, a new tax treaty with Israel, an arrangement with Taiwan that would have the same intended effect as a tax convention or tax treaty, and one clarifying change in relation to the tax agreement we have with Hong Kong.
Liberal
The Chair Liberal Wayne Easter
Members, we do have an hour with the Finance officials.
There is good information in the paper you handed out. I think there are some people monitoring the committee and what the bill really means, so if you could just give us the highlights, Brian, that might be best, and then we'll go to questions.
General Director, Tax Policy Branch, Department of Finance
Certainly. That would be fine.
Again, we are here to talk about Bill S-4, which includes two new or revised income tax agreements with other jurisdictions.
Canada actually has one of the most extensive networks of income tax treaties in the world, with 92 treaties currently in force. Of course, there's an ongoing need to update and modernize our network of tax treaties with foreign jurisdictions. That's essentially what Bill S-4 proposes to do with respect to two jurisdictions.
The first part of the bill is a convention between the Government of Canada and the State of Israel for the avoidance of double taxation and the prevention of fiscal evasion with respect to income taxes. The second portion is an arrangement, so-called, between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada for the avoidance of double taxation and the prevention of fiscal evasion. The bill would also amend the Canada-Hong Kong Tax Agreement Act, 2013, in order to add to it, for greater certainty, an interpretation provision.
There is currently no double taxation arrangement between Canada and Taiwan, although it is a significant trading partner for Canada, ranking as our fifth-largest trading partner in the Asia-Pacific region and twelfth worldwide in 2015. In keeping with Canada's “one China” policy, the double tax arrangement with Taiwan has been concluded as an arrangement, as I say, between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada, as opposed to an agreement between sovereign countries. Once implemented, and with the legislation that accompanies the convention or arrangement itself, this bill is intended to constitute a functional equivalent to a tax treaty.
Bill S-4 would also implement a revised double tax convention with the State of Israel to replace the existing tax treaty, which dates back to 1975. This convention has been updated to make it consistent with Canada's current treaty tax policy.
As I mentioned earlier, the double tax convention and arrangement will facilitate cross-border trade, investment, and other activities between Canada and each of its signatory jurisdictions. Our tax treaties are all designed with two general objectives in mind. The first objective is to eliminate tax barriers between two jurisdictions in order to promote bilateral trade and investment. Obviously, removing barriers to trade and investment are paramount in today's global economy. Investors, traders, and others with international dealings want clear information on the tax implications associated with their activities both in Canada and abroad. Equally important, Canadians with business interests or investments abroad want to be sure that they receive fair and consistent tax treatment. It follows that one of the objectives of Bill S-4 is to remove uncertainty about the tax implications associated with doing business, working, or investing abroad.
Bill S-4 would also reduce double taxation and encourage investment by reducing withholding taxes. It would provide for a maximum withholding tax rate of 15% in the State of Israel and the jurisdiction of Taiwan on portfolio dividends paid to non-residents—that is, paid between Canada and Taiwan, or between Canada and Israel. For dividends paid by subsidiaries to their parent companies, the maximum withholding tax rate under these agreements is reduced to 5% in the State of Israel and 10% in the case of the jurisdiction of Taiwan. Finally, on withholding taxes, this bill would also cap the maximum withholding tax rate on interest and royalties at 10% and on periodic pension payments at 15%.
The second objective, generally, of treaties is to prevent tax avoidance and evasion. A key element of Canada's tax treaties is their provisions authorizing the exchange of information relevant to administering domestic tax laws, helping to combat tax evasion. Bill S-4 would allow Canadian tax authorities to do so.
The final point is one on timing. Both of these, the agreement and the arrangement, would apply for the year following the year in which they are brought into force. If the Senate, the committee, and the House of Commons should approve this bill this year, and if it's possible to get the required notices in place between ourselves and Taiwan and Israel respectively, the treaty can have effect beginning at the start of 2017. That would make it important, if it were possible, to have it enacted this year. Failing that, if it should be enacted only sometime in 2017, it would only take effect for the following year.
I'll stop there. Thank you.
Liberal
The Chair Liberal Wayne Easter
Thank you very much for that, Mr. Ernewein. I think that was a great overview.
We'll start the round of questions with Mr. MacKinnon.
Liberal
Steven MacKinnon Liberal Gatineau, QC
Thank you.
Thank you for being here, and for all of your hard work.
I would like to start off with a few general process questions.
How does Canada determine the order in which it negotiates bilateral agreements with a country? There are 92 treaties and you are saying they need to be modernized. How do you prioritize them?
General Director, Tax Policy Branch, Department of Finance
Thank your for the question. I'll offer a couple of observations, and then I'll turn to my colleague to see if she wants to add any more.
There are a number of different considerations, but most of them are economic-based—that is, the level of investment between Canada and another country is probably the primary driver of whether to have a treaty or not. We seek to prioritize the countries with which we have the greatest investment, or they in us, as treaty partners or for treaty updates.
The age or vintage of our treaty is also a factor, so in the case of Israel, it's a 41-year-old treaty. As a consequence, it's not surprising it's a little bit out of date with respect to current Canadian treaty policy and presumably in relation to Israel as well. That is a factor in identifying our priorities.
The other consideration, of course, is a shared interest. We may be very interested in having a negotiation with another country, but it might not be interested in having one with us, or vice versa. There needs to be that mutual desire for treaty negotiations to get those launched.
Liberal
Steven MacKinnon Liberal Gatineau, QC
Please tell us a bit about the negotiation process. How is it initiated? Is it when a party expresses an interest to another party?
Stephanie Smith Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
In general with the negotiation process, as Brian has described, we do develop our own priorities in terms of which treaties we would like to update and whether there are new treaties, as with Taiwan. Typically, the engagement can start in two different ways. It can be at a meeting at the officials level on international issues, where we speak informally with colleagues in the other jurisdictions to gauge their level of interest and also their availability of resources in terms of taking forward negotiations. Sometimes those negotiations commence at a more senior or political level, where there have been discussions or approaches at, for example, bilateral meetings on the sidelines of a G20 or a G7 meeting. The direction would come down to officials that this was seen as a priority and that an approach was made.
Once it's determined that, yes, we will go forward with negotiations, the first stage is to exchange model treaties, or the treaty that we would ideally be looking for. The other jurisdiction does the same with us. We typically would then have some back and forth, at which time there would be a date set for a face-to-face meeting to commence those negotiations. Typically, at the start of one of those face-to-face meetings, we would have an exchange and a general discussion on our respective tax systems so that we ensure that the research we have internally done is correct about the other jurisdiction and vice versa.
Typically, we would proceed through the text of the agreement on an article-by-article basis, leaving open provisions for which agreement could not be obtained on the first go-round. While rare, it is possible to conclude in only one round. It is more typical that there would be a second round, which would take place after some bilateral contact by email, further refining the outstanding issues. There would then be a second face-to-face, at which time negotiations at the negotiators level are concluded. We would domestically move through processes, with a “legal scrub” by Foreign Affairs. That's done on both sides to ensure that the treaties themselves respect legal standards in Canada and the other jurisdiction.
Then we would go through the process of obtaining cabinet approval for signature. There would be a signature. Then we would have, as we have before us today, an implementing bill with respect to the particular treaty, which would allow us to implement it into domestic law and to resolve any conflicts of law that might otherwise occur.
Liberal
Steven MacKinnon Liberal Gatineau, QC
Since I have just two minutes left, I will keep it brief.
We have spent a lot of time at the Standing Committee on Finance talking about tax evasion and tax avoidance.
Can you explain how this bill in particular and treaties in general, such as those you describe, help reduce tax evasion and tax avoidance?
Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
In general, I think the most important aspect of tax treaties that can help give the Canada Revenue Agency the tools to combat tax avoidance and tax evasion is the exchange of information with another jurisdiction. Both this arrangement and the tax treaty contain the current international standard with respect to the exchange of information on request, and therefore it allows the Canada Revenue Agency to request information that's foreseeably relevant to administering Canada's domestic tax laws.
Second, in particular, these treaties contain mini anti-avoidance clauses—in articles 10, 11, and 12, dividends, interest, and royalties—which ensure that someone can't abuse the treaty by trying to access the benefits of the treaty for a reduced withholding tax on any of those particular items of income.
I think those are the two main aspects of a tax treaty that help fight tax avoidance and evasion.
Liberal
The Chair Liberal Wayne Easter
Thank you, Ms. Smith and Mr. MacKinnon.
I'll turn now to Mr. Deltell.
Conservative
Gérard Deltell Conservative Louis-Saint-Laurent, QC
Thank you, Mr. Chair.
Dear colleagues, ladies and gentlemen, welcome to this House of Commons parliamentary committee.
To begin, let me say that our political party agrees with the general principle of creating and updating agreements with our trading partners. Clearly, we are not talking about a blank cheque. We have to do our homework, verify things, and that is what we will do today.
Let us begin with Taiwan. After that, we can talk about Israel.
I would like to know if Japan and China, two important partners and economic players in Asia, are affected by the agreement that you are proposing today in Bill S-4.
Have those impacts been measured and, if so, what is your assessment of them?
General Director, Tax Policy Branch, Department of Finance
In terms of the agreements, if we're speaking of the arrangement with Taiwan, that's with respect to Taiwan itself. It does not have application to Japan, China, or any other country, for that matter. The question would be measuring the effects in Canada and in Taiwan in terms of having the arrangement between the two jurisdictions.
Conservative
Gérard Deltell Conservative Louis-Saint-Laurent, QC
Okay.
If I understand correctly, these two important actors were not involved in the process and it will not have either a short-term or long-term effect on our trading relationships with them.