Evidence of meeting #66 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was taiwan.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Trevor McGowan  Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
Stephanie Smith  Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

3:30 p.m.

Liberal

The Chair Liberal Wayne Easter

I call the meeting to order. This meeting is called pursuant to the order of reference of Thursday, December 8, 2016, in regard to 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.

With us we have Ms. Smith and Mr. McGowan, who we seem to see a fair bit of at this committee. Welcome, both of you.

If anybody has any questions on the bill generally, we can start with that or we can go to clause-by-clause consideration.

Pierre.

3:30 p.m.

NDP

Pierre-Luc Dusseault NDP Sherbrooke, QC

Thank you, Mr. Chair, for giving me the opportunity to ask this question.

I asked it the last time we met the witnesses, but I am not sure I understand the meaning of subclause 4(2).

Can you explain why the bill must absolutely be retroactive to June 19, 2013? I know that June 19 is the effective date of the agreement with Hong Kong, but would there be a problem were we to proceed as we normally do, and have the legislation come into effect when it is passed and given royal assent?

3:30 p.m.

Liberal

The Chair Liberal Wayne Easter

Mr. McGowan.

3:30 p.m.

Trevor McGowan Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

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.

December 12th, 2016 / 3:35 p.m.

Liberal

The Chair Liberal Wayne Easter

Are there any further questions?

Mr. Grewal.

3:35 p.m.

Liberal

Raj Grewal Liberal Brampton East, ON

I have a practical question. I was having a discussion on the plane last night. If a Canadian company is doing business in Taiwan and it pays taxes on its worldwide income and it pays in Canada, does it no longer have an obligation in Taiwan?

3:35 p.m.

Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

I understand the question. Just to be precise, when you have a Canadian company carrying on business in Taiwan, do you mean directly through a branch and not through a foreign subsidiary?

3:35 p.m.

Liberal

Raj Grewal Liberal Brampton East, ON

Yes.

3:35 p.m.

Stephanie Smith Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

What a treaty does would depend on the nature of what the company is doing in Taiwan, but if a Canadian company is operating in Taiwan and it hits the threshold of what is called the permanent establishment, which is set out in article 5, then the treaty sets out that yes, Taiwan would have a certain taxing right in respect of income that is sourced in Taiwan, so there would still be obligations in Taiwan and if, under the treaty, Taiwan has a certain obligation, then it would be Canada that would give a tax credit. However, if the activity in which it engages in Taiwan does not meet the threshold of a PE, permanent establishment, then it would have no obligations in Taiwan.

3:35 p.m.

Liberal

Raj Grewal Liberal Brampton East, ON

Okay. If it's through a foreign direct subsidiary, then how does it work? Then it would operate like a foreign direct subsidiary and would pay taxes in Taiwan and the headquarters would pay taxes in Canada? Then would the agreement not come into play at all?

3:35 p.m.

Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Stephanie Smith

Depending on the nature of the relationship, the agreement would come into play. If it was a subsidiary corporation operating in Taiwan, then the agreement would come into play with respect to the transfer pricing of transactions between them, because the treaty provides that things must be priced at arm's length. That would come into play in determining the relative profits for any transactions between them. It would also come into play with regard to any payments between the two of them, like interest, royalties, or dividends, because one of the other advantages of the treaty is that it does generally reduce domestic withholding tax rates. The treaty would come into play in respect of those payments as well.

3:35 p.m.

Liberal

Raj Grewal Liberal Brampton East, ON

In a practical example, if I as an individual do business all over the world but I reside in Canada and I pay taxes in Canada but I have income from Taiwan, how would that work in this agreement? I didn't pay taxes on my Taiwanese income, but I declared it in Canada and paid tax on it. Under this agreement, would they have a claim on the income I generated in Taiwan?

3:40 p.m.

Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Stephanie Smith

In general, there is nothing in the treaty that is going to give Canada or Taiwan any additional rights to tax income. Effectively it allocates those rights between the two jurisdictions. There are no taxing rights in the agreement itself. If there were no obligation taxwise with Taiwan prior to the treaty, this would not create any taxing rights for Taiwan in respect of a Canadian resident.

It does allocate who is able to tax that income and, again, depending on the level of activity being engaged in in Taiwan, it would or would not meet the threshold for a permanent establishment. This ensures there is no double tax. Prior to a treaty, both Canada and Taiwan could have asserted taxing rights. Canada is the residence country; Taiwan is the source country. Then the taxpayer himself is in a situation of double tax to the extent that domestic laws through foreign tax credits do not fully credit the tax paid in a different jurisdiction. This ensures both cannot tax the same income.

3:40 p.m.

Liberal

Raj Grewal Liberal Brampton East, ON

Thank you.

If there's a difference in the tax rates, then under the agreement, can the other jurisdiction get the additional margin? Let's say, for argument's sake, that we're paying 10% here in Canada and it's only 5% in Taiwan but they choose Taiwan as their host country and Canada was the source. Then Canada loses out on 5% because they're saying that under the agreement they shouldn't be double taxed.

3:40 p.m.

Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Stephanie Smith

Generally, for tax credits, you look at where a person is resident, and that's generally a factual determination as opposed to a pure choice. In certain cases, for payments of interest, dividends, and royalties from a source country, there is a cap on what the source country can tax at, and then you would get credit for that. However, if effectively it's a foreign tax credit, you would only give a credit up to and not exceeding what your own tax was. If the rate is 10% in Canada and 5% in Taiwan, and Taiwan is the residence country and is granting a foreign tax credit, it would only give a tax credit up to that 5%. It's not going to have to reimburse more Canadian tax.

In the reverse situation, if Canada is the residence and 5% tax was paid in Taiwan, assuming there's no cap on what we can tax, Canada would only give a credit of 5%.

3:40 p.m.

Liberal

Raj Grewal Liberal Brampton East, ON

Then you would still be on the hook for the additional 5% in Canada, right?

3:40 p.m.

Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Stephanie Smith

That's correct.

3:40 p.m.

Liberal

Raj Grewal Liberal Brampton East, ON

Okay. Perfect.

Thank you.

3:40 p.m.

Liberal

The Chair Liberal Wayne Easter

Is there any further discussion before we move to clause-by-clause consideration? Is everyone all settled?

There are no amendments. We'll skip the short title until we deal with the rest.

(Clauses 2 to 4 inclusive agreed to)

Shall the short title carry?

3:40 p.m.

Some hon. members

Agreed.

3:40 p.m.

Liberal

The Chair Liberal Wayne Easter

Shall schedule 1 carry?

3:40 p.m.

Some hon. members

Agreed.

3:40 p.m.

Liberal

The Chair Liberal Wayne Easter

Shall schedule 2 carry?

3:40 p.m.

Some hon. members

Agreed.

3:40 p.m.

Liberal

The Chair Liberal Wayne Easter

Shall the title carry?