International Trade Committee on Dec. 6th, 2007

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

I'll come back to my initial question, because these are surprising impacts. I think we can all agree on that. And it hasn't been anything that's been examined in any detail through Bill S-2's movement through Parliament thus far.

There was an impact study done that would presumably show not only the tax impact for the end of this fiscal year and next fiscal year, but also for subsequent years. It would be actually based on what the actual withholding tax amounts were in previous years. Right?

Is that study, then, something this committee can receive? Because I think that's something on which we would all want to consult our various caucuses. If we're talking about a half a billion dollars over three years, presumably that's over $1 billion in the next five or six years. That's a lot of money. I don't think anyone would want to take a snap decision when we're talking about that large a fiscal impact.

Are those studies something that can now be released to the committee, since we're the ones who are charged to study this--though I'm sure Mr. Pallister regrets that we were given that responsibility.

[Brian Ernewein]

I can only repeat my previous answer. I will undertake to see if that is something we can provide to the committee.

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

Well, Mr. Chair--

[The Vice-Chair, Liberal, John Maloney]

Have you finished your questioning, Mr. Julian?

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

Well, yes, though I would suggest we move on to Canada-Korea. We're talking about substantial fiscal impacts. I certainly don't feel comfortable ramming this through right now.

[The Vice-Chair, Liberal, John Maloney]

I would appreciate any comments of other persons.

My feeling on the consensus is that we move ahead with this clause-by-clause consideration. If that consensus is inaccurate, let's hear from it.

You may take your position, Mr. Julian, and we appreciate that. Of course, it has to go back to the House for report stage and third reading, and your concerns and the concerns of anyone else can be voiced at that time.

Mr. Cardin, any questions?

[Serge Cardin, Bloc, Sherbrooke, QC]

We were told earlier that there would be negative effects. Could you tell us the three main ones and what consequences they would have? You mentioned a negative difference of $180 million in 2007-2008.

U.S. companies whose interest was subject to withholding tax could normally claim foreign tax credits in their country in their income tax return. However, they could claim 100% of the credits. Does that mean that Americans did not claim a refund of the entire foreign tax withheld by Canada, and what caused the gap?

I'd like you to give me some clarification on that point and to tell us about the negative effects for Canada. I know there are many positive effects, particularly for individuals working in the United States. They will now be able to deduct amounts that are normally deducted.

[Brian Ernewein]

First of all, I don't think we necessarily regard a tax cut as being a negative repercussion. Reducing the taxes by $180 million means there's $180 million more in incentives to invest in Canada, because there's less tax applying to the investment.

You've raised a very perceptive question with respect to the foreign tax credits, and it points up that the answer I gave you before requires some elaboration.

The point, when answering your question before about getting a credit for foreign taxes, was that this is the theory. When a withholding tax on an interest payment is imposed in Canada, the theory is that the U.S. lender, in our example from before, is able to calculate U.S. taxes payable and deduct the full amount of the Canadian tax withheld against U.S. taxes payable.

The reality is, particularly in the banking industry, that there isn't enough room or spread on a loan to absorb a 10% gross withholding tax. If you have an 8% loan, just to pick an interest rate, and a 10% withholding tax represents an 80-basis-point cost on that transaction, there often won't be 80 basis points of profit in those transactions for the tax to be absorbed. Indeed, for it to be fully absorbed, there would have to be something in the order of 200 or 250 basis points of spread to calculate the tax, to use up the full 80 basis points. So the tax, while theoretically creditable in the U.S., often is not.

That's what leads to the point my colleague raised earlier. In point of fact, what often happens with a withholding tax is that rather than being absorbed by the non-resident, it's in fact added to the cost of the Canadian borrower. By eliminating the withholding tax, once again we can help reduce the cost for Canadian borrowers.

[Serge Cardin, Bloc, Sherbrooke, QC]

Is that calculated in the $180 million impact?

[The Vice-Chair, Liberal, John Maloney]

Excuse me, Monsieur Cardin. There's a point of order.

Mr. Pallister.

[Brian Pallister, Conservative, Portage—Lisgar, MB]

Mr. Chairman, just in the interests of efficiency, each of these questions could be asked in the context of the clause-by-clause as we go through it. I think that might give more structure and efficiency to the way we're conducting our inquiry today.

I would like to move that we go to clause-by-clause now. If members have questions, then certainly they can continue to raise them.

[The Vice-Chair, Liberal, John Maloney]

I suppose that motion is debatable. The whole idea was to provide a forum for questions to be put to our officials, and we departed from our ordinary rotation. I thought we had in fact exhausted the questions on the actual bill.

I was asking for consensus that we proceed to clause-by-clause. Your continuation of questioning, Mr. Cardin, would indicate a lack of consensus.

We can sit here and debate this, and I think Mr. Pallister's point is well taken. If someone were to make that motion, then we could vote on it.

Mr. Julian.

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

Thank you, Mr. Chair.

[The Vice-Chair, Liberal, John Maloney]

Mr. Pallister, we can't move a motion on a point of order, but we—

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

Mr. Cardin was exercising his right to ask questions of the witnesses who are before this committee, so I don't believe the motion is in order.

[The Vice-Chair, Liberal, John Maloney]

There's been, I think, a very positive suggestion on how to deal with further questions, as we go through the clause-by-clause.

Mr. Dhaliwal.

[Sukh Dhaliwal, Liberal, Newton—North Delta, BC]

Thanks, Mr. Chair.

I would like to clarify this. You say the motion is not in order. In fact, Mr. Pallister brought in the motion to go clause by clause, and the witnesses will stay, and if we have questions on a particular clause, that is the clause we will pose questions on.

Is that the intent?

[Brian Pallister, Conservative, Portage—Lisgar, MB]

Let me respond, Mr. Chair.

I believe, if you check with your clerk, you'll find that I was on the speaking order earlier. I deferred to Mr. Cardin when he raised his questions, despite the fact that I was there.

I was going to make the motion earlier. I've certainly tried to encourage latitude here, as you are doing, Mr. Chair, but I think it is time to move to clause-by-clause. I think we just need to move on here.

I concur with Mr. Julian's observation, for perhaps the very first time, that we want to set aside time to deal with Korea. We have as a committee said that's a priority, so let's move on here.

[The Vice-Chair, Liberal, John Maloney]

The clerk has confirmed that you in fact were on the speaking list before, Mr. Cardin, which I wasn't aware of. But you have the floor now, and it's now in order to make the motion, if you wish.

[Brian Pallister, Conservative, Portage—Lisgar, MB]

Thank you, sir. I so move.

[Serge Cardin, Bloc, Sherbrooke, QC]

Is the time allotted to me up?

[The Vice-Chair, Liberal, John Maloney]

Your time was up before the intervention, in fact. You had more than your—

[Serge Cardin, Bloc, Sherbrooke, QC]

I'll put my next questions to Mr. Pallister.

[The Vice-Chair, Liberal, John Maloney]

We have the motion on the table.

Are you debating the motion, sir?

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

Yes, thank you, Mr. Chair.

This is ridiculous. We had a push from the government to ram this through on Tuesday without any of the impacts being known to committee. We've been charged by Parliament to do our due diligence, and now we have Mr. Pallister bringing forward a motion to ram through clause-by-clause consideration.

At no point in the legislative process had the figures that are just being revealed today been brought forward. Would Canadians consider us as doing our due diligence if we simply said that half a billion dollars is being given away, effectively through a tax treaty, without due consideration, without having at least some witnesses come before the committee, and without having the impact studies that have been drafted by the Department of Finance?

I'm sorry that the government has brought this forward in what I think is a very clumsy manner—bringing it forward just a week before we take our Christmas recess. But the government's mistake and the government's clumsiness are not an excuse for our not performing our due diligence. I think it's fair to say that having a session with witnesses to actually go into the implications of what is before us now is the least we can do on behalf of the taxpayers of Canada. We have a responsibility as a committee, and we're clearly not exercising that responsibility if we adopt Mr. Pallister's motion.