Thank you for your question.
It has retroactive effect largely because it is a clarifying amendment. It does not seek to change substantively the bill. Rather, it clarifies the application of the Canada-Hong Kong treaty.
A number of factors are looked at when deciding whether a retroactive amendment is appropriate. In this case, as I've said, it's a clarifying amendment. It is not intended to be a substantive change. In addition, it is in every case relieving from the taxpayers' perspective for there to be a treaty. It's not a tightening change, so it would not have an adverse impact. Also, it is, as I said, not just clarifying; it codifies and puts into law how the Canada Revenue Agency and taxpayers have been treating the treaty since it was introduced.
The question of whether or not a convention or an agreement is a tax treaty arises most commonly in the context of outbound investment. That's typically where you have a Canadian multinational investing in a foreign subsidiary around the world. For investments in these subsidiaries, if they earn active business income, they can be returned or repatriated to Canada free of Canadian tax, provided they're paid out of exempt surplus and the country in which they're operating either has a tax treaty or a tax information exchange agreement. It is, for many taxpayers—Canadian multinationals operating abroad—very important to have a tax treaty.
The act itself contains numerous references to treaties, conventions, treaties with other countries, and so on. In some cases, they say “treaty” or “agreement”, but not in every single instance in the Income Tax Act. With the introduction of the Hong Kong treaty of a few years ago, the act was considered to work reasonably well.
The appropriate approach to interpreting any statute, but including a tax statute, is that you look at the text, context, and purpose of the words that you're reading to determine what their meaning is. In this instance, when you look at the text, and in particular with the context and purpose behind it, you can get to the answer of whether or not the Hong Kong treaty should be treated as a treaty, because clearly that was the intent.
This amendment, essentially following on what's being done with the Taiwan treaty, provides greater clarity for the actual text of the rules. So while on a textual, contextual, and purposive interpretation of the existing provisions of the act, we think you get to the right result, and it's agreed to by the Canada Revenue Agency's policy and also taxpayers, this clarifies the text so that it provides additional certainty.
As well, it does not raise any questions that might arise as to why you would have a special interpretive rule for Taiwan and not for, say, Hong Kong, when they're both, at least in certain respects, of the same nature. It's clarifying, it's relieving, in the sense that it does not adversely affect taxpayers, and it goes back to how the rule has been interpreted and applied since its introduction.
