International Trade Committee on Dec. 6th, 2007

[Brian Ernewein]

Thank you. I'm pleased to answer this question as well.

What we understood we were asked for the other day was a description—I think the term was a “clause-by-clause description”—of the bill itself, and I know reference was made to that being only one page. In fact, the clauses to the bill comprise, themselves, only a page or two, a page and three lines. It's really the annexes and appendices to the bill that represent its content. So I think we have done justice to the clauses themselves. We could certainly elaborate or take members through what we've provided, if that would be helpful.

On the content of the annexes and appendix, the protocol to the treaty and the exchange of notes between the two countries that are part of it are not part of the clauses themselves. They are, however, described in materials that the committee received earlier. In particular, I believe we included a copy of the September 21 news release announcing the signature of the treaty, and to that was attached a backgrounder, several pages in length, that describes in some detail, but tries to keep it in plain language terms as well, the principal provisions of the amendments to the treaty.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

That's actually not what I asked you, but I appreciate you describing what was in the package.

Essentially, with the tax treaty, there is duplication, because it's an exchange of notes. It's 44 pages. We have a few pages of description, but what is missing is the fiscal impact of each of these measures.

So I'll ask my question again. Was the Department of Finance involved in the preparation of an impact study on these decisions? What does the impact study reveal? Is it the actual fiscal ramifications of what's contained within the bill and in the protocol?

[Brian Ernewein]

Forgive me, I thought you'd asked two questions and I'd answered the first.

With respect to the costing, the fiscal impact, we don't generally cost the effects of our tax treaties, but in announcing a change to our income tax treaty policy in this year's budget, we included cost figures for that.

The revenue numbers for the elimination of a withholding tax on interest, which is the biggest cost item in the package, was estimated to be small for this fiscal year—$10 million—and $180 million for 2008-09.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Could you say that again, please?

[Brian Ernewein]

I apologize. I'm not in full voice today.

The estimates included in the 2007 budget for the elimination of a withholding tax were $10 million for 2007-08, and $180 million for 2008-09.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

What were the amounts actually received under the withholding tax for 2005-06? The 2006-07 figures may not be available yet, but if they are, it would be useful to have them.

[Brian Ernewein]

I'm sorry; do you mean the collection of withholding tax in respect of interest, or withholding taxes generally?

[Peter Julian, NDP, Burnaby—New Westminster, BC]

I mean withholding taxes in respect to interest, in respect to this particular provision.

[Brian Ernewein]

I don't have those figures with me. I believe we could obtain them.

I could tell you in very rough terms that the withholding tax in respect of Canada-U.S. interest payments is approximately half of the world total, so very generally you'd take these numbers and double them and you would end up with the withholding tax associated with interest generally worldwide--or were you asking specifically about the figures for the U.S. in the last couple of years?

[Peter Julian, NDP, Burnaby—New Westminster, BC]

I'm thinking specifically of Canada. If the estimate was $180 million and for 2007-08 it's $10 million, those figures are a bit problematic, right? If we're looking at $10 million for 2007-08 and at $180 million for 2008-09, one has to wonder how those figures are calculated. We're being pressed to bring this in by the end of December, which would mean we're looking at one quarter of withholding taxes essentially being waived. If it's $180 million for 2008-09, I find it difficult to understand how it could only be $10 million for the last quarter of 2007-08. That doesn't make sense; it would presumably be $45 million.

[Brian Ernewein]

That would be a fair assumption, except for one important fact, which is that the numbers are a combination of withholding tax for both arm's-length and non-arm's-length payments.

The treaty proposed--and the budget contemplated that the treaty would propose--that the withholding tax on arm's-length interest would be eliminated immediately, as of January 1, 2008. It assumed, however, that non-arm's-length interest would only be eliminated over three years, going down from 10% to 7% to 4% to its elimination at 0% after three years. Those factors mean that the $180 million figure can't simply be divided by four to come up with a three-month figure, which you've done for the January to March amount. You need to take one-quarter of the arm's-length component plus 30% times one-quarter of the non-arm's-length interest to come up with the number. I think that's how the $10 million was arrived at.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Okay.

That ignores the question over the following three years, then, because we're looking at a phase-out. What I hear you saying is the vast majority of the withholding tax is actually for non-arm's-length payments. Am I correct in that, or have I misunderstood?

[Brian Ernewein]

That's right. Because of the exemptions already in place, less money is collected in respect of withholding tax on arm's-length payments than on non-arm's-length payments.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Okay.

Since the phase-out takes place over three years, as you've mentioned, what is the impact on 2009-10 and the fiscal year 2010-11?

[Brian Ernewein]

Those numbers have not been published, but I can undertake to see if we can provide them.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

They would be greater than $180 million, I would think--

[Brian Ernewein]

I would say so, yes.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

--so we're looking at a graduated scale. In 2008-09 it's $180 million. That's a significant amount of money. It surprises me that there were no discussions at the Senate level of the actual fiscal impact. We're presumably talking about three years; would it would be fair to say $500 million?

[Brian Ernewein]

I'm sorry; do you mean for an individual year, or in the total?

[Peter Julian, NDP, Burnaby—New Westminster, BC]

I mean over the three-year period, forgetting about the last quarter of 2007-08; it would be for 2008-09 through to 2010-11.

[Brian Ernewein]

Again, I don't have those numbers with me today. I believe estimates have been made; I don't believe they've been public. I can undertake to see if we can provide them.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Half a billion dolars is a considerable amount of money.

I did want to ask you about the implications around the LLCs, limited liability companies, with the same question in mind. What are the fiscal impacts of those provisions?

[Brian Ernewein]

It has not been the subject of a revenue estimate, but I think I can confidently speak to it nonetheless. I would suggest that the revenue cost is not that significant, because in the main people were not using LLCs because of the problems that arose under the Canada-U.S. treaty with their use. They were doing other things. They were investing directly or through ordinary corporations or through ordinary partnerships, for which treaty benefits were assured.

What the treaty has done now is extend to LLCs the benefits that U.S. residents could get by investing directly, by investing through a corporation, or by investing through an entity that was recognized as a partnership by both Canada and the United States. It wasn't a question of greater treaty benefits being provided, but of greater flexibility in obtaining the same treaty benefits; I therefore don't believe the cost associated with it will be significant.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

We can assume that if the negative aspects of using LLCs are diminished through this tax treaty, there would be more call to use that entity.

[Brian Ernewein]

Yes, I agree with that, but they would be used instead of something else. That is, if an American investor wanted to invest in Canada, knowing that the LLC was the ideal way to make that investment because of its flexibility for U.S. tax and commercial purposes, the problem they ran into under the current Canadian tax law meant that the LLC simply wasn't used. I don't think it meant that the investment wasn't made.

Now that LLCs are there and are recognized as being eligible for treaty benefits, it seems to me they will be used more often. But I don't think you can judge that increased take-up that I'm predicting to reflect a revenue loss.