I welcome this opportunity to speak on behalf of the Bloc Quebecois in this debate on Bill S-2, which, as the hon. member explained, proposes to implement income tax conventions between Canada and Hungary, Nigeria, Zimbabwe, Argentina and the Netherlands.
The purpose of tax treaties is to avoid double taxation of business profits in the case of companies that have branches or affiliated companies in the other country. These treaties are useful and may, in certain cases, apply to trips by Quebec and Canadian performers who go abroad-or even athletes, including hockey players.
It is clear that tax treaties are not something new. They have always existed, and I have the impression they always will, especially in a world that is undergoing globalization.
Tax treaties establish what is called reciprocal treatment between countries with respect to income tax. However, reciprocity is only possible when tax rates for Canadian businesses and businesses in the countries with which tax treaties are signed are more or less equivalent or at least comparable.
Madam Speaker, the first negative aspect I want to discuss today concerning tax treaties is that, because tax rates on business profits in Canada differ greatly from those in countries that are signatories to such treaties, the system has long been considered to be a standing invitation to tax avoidance by Canadian corporations with foreign affiliates.
In fact, countries considered tax havens, such as Barbados, Cyprus, Malta and Singapore, to name only a few, have signed tax treaties with Canada. The tax rate applied in these tax havens is much lower than in Canada. This means, as was pointed out by the Auditor General in his 1992 report, and I quote:
Income earned in countries that are tax havens-
-like the ones I just mentioned-
-and that are designated by order in council can enter Canada tax free, even if it was not taxed or only taxed at a very low rate.
Still according to the Auditor General, the Department of National Revenue is aware of a number of taxpayers who have used this scheme to be in a position to move $500 million into Canada tax free. Quite frankly, this is outrageous. Earlier, I was amazed when I heard the presentation on Bill S-2, in which everything was sweetness and light, and I sat there wondering whether the members opposite were completely oblivious to the real world of tax treaties.
Madam Speaker, another reason, and this concerns the second negative aspect, why the Bloc Quebecois has been asking for a review of all our tax treaties is to pinpoint cases where tax rates on business profits are comparable to those in Canada and preserve only those treaties. The point is that the foreign income of a Canadian corporation, which is tax exempt or taxed at a very low rate, when paid in the form of dividends to Canadian
shareholders, is eligible for the same federal tax credit as dividends paid by a Canadian company operating in Canada, whose income is taxed in Canada.
We have often raised the problem of tax inequities between individuals, Quebecers and Canadians, but here we are dealing with an unfair tax situation affecting corporations based in Canada who decide to invest in Canada, to create jobs in Canada, to generate profits and to be good corporate citizens. All the while, other corporations decide to set up foreign affiliates and, through their investments abroad, benefit from tax exemptions here in Canada. These exemptions are generous, if not more generous in fact, than those enjoyed by corporations striving to create and fuel economic growth.
These inequities clearly act as a disincentive to economic development here at home. There is no question that preferential treatment is given to foreign investments by Canadian residents.
If this is how we plan to develop the Quebec and Canadian economies and employment, then I think we have taken a wrong turn. This situation is clearly unacceptable.
The third aspect of the tax convention legislation that caught my eye is the fact that pursuant to this act, a Canadian-resident corporation can deduct interest on funds it borrows for the purpose of investing in a foreign affiliate. Here again, investments made in Quebec and in Canada are afforded unfair treatment, all because of tax conventions signed between Canada and various countries considered tax havens.
Corporations that invest in tax havens avoid taxation in two ways: first, they can deduct some of the interest on funds borrowed and second, they can bring their profits, which were either not taxed at all or taxed only sparingly abroad, back into the country.
Mention is made of taxation rates that vary anywhere from 3 per cent to 10 per cent in some cases. These corporations are taxed little, if at all, abroad and enjoy tax-exempt status in Canada. The tax convention system is full of holes and has been for some time now.
According to the Auditor General, and I quote:
That deduction of interest reduces Canada's tax revenue and, at the same time, the related income.
It is precisely this related income which is tax exempt in Canada. Speaking of income related to this investment,
It may be received as a tax exempt dividend and may never appear in the Canadian tax base.
In times of serious financial crisis such as we are now facing in Canada, the government should not be encouraging corporations to invest their money abroad. Instead, it should be creating incentives to promote investment here at home, to develop employment and to fuel economic growth. In almost all instances, tax conventions clearly do not help us to achieve this objective.
Allow me to describe some of the other problems associated with tax havens. Some Canadian companies use stratagems to avoid paying their fair share of tax in Canada such as upstream loans or revenue stripping, as these methods are called in business jargon. Let me explain.
For one thing, these schemes enable Canadian companies to avoid tax by transferring the losses of foreign subsidiaries to the Canadian parent. In other words, if a Canadian company has a foreign subsidiary, the losses incurred abroad are brought home to Canada and included in calculating the Canadian company's tax.
Secondly, they allow Canadian companies to avoid tax by sending the income of Canadian corporations abroad, which works the other way. Some Canadian companies make profits in Canada, export these profits to countries where they have a subsidiary and with which a tax convention has been signed, thus avoiding paying tax in Canada.
Thirdly, these stratagems enable Canadian companies to avoid Canadian tax by making the income of Canadian corporations exempt.
The history of tax conventions between Canada and the signatory countries is full of horror stories which we are unused to reading about in the Auditor General's reports and which enrage us. Let me tell you a few of them, taken from the Auditor General's report for 1992.
A Netherlands Antilles subsidiary of a Canadian company had assets of $865 million and income of $92 million not subject to the foreign income rules. Although the income of the foreign subsidiary has not been taxed at a rate that approximates Canadian rates, it can be transferred to the Canadian parent as tax-free dividends. The offshore income is not taxed on entering Canada, but it carries with it federal tax credits on dividends paid out to Canadian shareholders. The Canadian parent incurred the financing costs for its investment-
-it was still on Dutch territory-
-in the subsidiary and reported a tax loss of $29 million.
With the huge financial problems we have, it is as if we suddenly decided to send $29 million abroad, as if we deliberately drove capital away, as if with all the loopholes in the tax conventions, we deliberately caused a revenue shortfall for the federal government, when the situation could be corrected quite quickly and easily.
Let me give you another of these horror stories, again taken from the Auditor General's report:
A Canadian company transferred $318 million in investments to its Barbados subsidiary. In six months this $318 million brought in revenues of $37 million exempt from foreign income regulations.
Even if the subsidiary's revenues were not taxed at a rate similar to the Canadian rate, namely 3 per cent, they can be transferred to the Canadian parent company as exempted dividends. Foreign income would then be tax-exempt on entering Canada, even if no, or practically no, taxes on this income were paid in Barbados. This net income is not subject to any taxes on entering Canada.
The Canadian parent company of this subsidiary also incurred financing charges for investing in its Barbadian subsidiary and reported-without generating any economic activity in Canada-fiscal losses in Canada. Again, we are losing millions of dollars in tax revenues when we do not need these tax losses. Everyone will agree that we really do not need them. With a $507 billion debt and a deficit that will exceed $40 billion, I think we should not hurt ourselves intentionally. Only masochists can present such tax convention proposals in a sentimental manner. As they say in my riding, no wonder things are not going well at the shop.
No exhaustive studies have been done on the 52 or 53 tax conventions now in effect between Canada and certain countries, but the Auditor General gave us a general idea of the tax losses they can result in. According to him, Canadian businesses that, in 1990, invested close to $92 billion in non-resident companies with which they have a non-arm's length relationship may have benefited a great deal-he does not give the proportion as there are no exhaustive studies on this-but it probably led to tax losses such as I mentioned earlier.
As the Auditor General pointed out, some investments are probably quite legitimate and totally above suspicion, but others are not. They may be legal but they are not legitimate given the federal government's financial position. In 1990, for instance, $5.2 billion was invested in businesses located in Barbados, a well-known tax haven. These investments in Barbados generated $400 million in tax-free dividends.
Here is another example: $10.9 billion was invested in businesses in Cyprus, Ireland, Liberia, the Netherlands and Switzerland, which are also considered tax havens. These investments brought in over $200 million in tax-free dividends, so that Canadian shareholders could benefit from the tax exemption on dividends paid to Canadian residents.
We must realize that much if not most of these so-called investments in these tax havens are made so that Canadian parent companies can avoid Canadian taxes and contribute to the deterioration of public finances already damaged by several years of budget carelessness on the part of successive governments here in Ottawa.
We can reasonably conclude that, as the Auditor General pointed out, the Canadian government-again, they are proving us right by presenting Bill S-2, which renews and introduces similar tax conventions-intentionally deprives itself of hundreds of millions of dollars in annual tax revenues.
The problems related to tax conventions have been known for a long time, mostly by the people opposite. And I would like to point out how long this kind of inconsistency, how long the problem of tax avoidance under tax conventions has been known. You should not laugh because public finance management is far from rosy, as is the way you treat Canadians by maintaining such a shameless system and by cutting social programs by $7.5 billion over the next three years.
The problem of tax avoidance under conventions has been well-known for a long time. For example, in 1987, the Department of Finance announced that it would review the taxation of affiliated foreign corporations. These studies were never carried out.
In 1989, the public accounts committee stated that the Department of Finance should ensure that tax avoidance under tax agreements be closely monitored and that solutions be proposed. Again, that was in 1989 and we are still waiting.
In 1992, in his comments on the Auditor General's report, the Minister of Finance clearly indicated that he had no intention of tackling the problem, even though he was aware of it.
In December of the same year-and the hon. members opposite should listen carefully to this-Jean-Robert Gauthier, a veteran Liberal member of Parliament, who was then chairman of the public accounts committee, said that what really concerned the committee was that the Department of Finance had taken no steps to eliminate, where possible, the tax avoidance schemes used by foreign subsidiaries. Mr. Gauthier, who is still a member of the Liberal Party of Canada, added that, in his opinion, the problem was not a new one; it had simply resurfaced.
Not only does Bill S-2 renew such conventions without an appropriate review of the opportunities for tax avoidance in countries considered to be tax havens but, on top of that, nothing was done by the government since it came to office to try somehow to save even a part of the hundreds of millions of dollars which are lost because of tax avoidance schemes linked to these agreements.
The Minister of Finance was quite pleased with himself when he tabled his first budget-a budget which has since been disavowed by the Prime Minister of Canada. The finance minister then said that his budget included amendments which would enable the government to alleviate the problem related to tax conventions.
However, this was just another performance put on by the stand-up comic that the Minister of Finance is when it comes to our economic policy.
Sure, some changes were made, but not to avoid the loss of hundreds of millions annually, and not to avoid problems which exist and which we have been aware of since 1982.
The measures taken will definitely not solve the problem and I urge the government to review all of the 52 or 53 tax conventions signed with other countries. These countries are not all tax havens, but many are and they deliberately deprive us of tax revenues.
It is a thorough disgrace to maintain such a system without an adequate review, especially when you consider that the system has been criticized for a long time by the Auditor General, by the Liberals when they were in office, and even by the various finance ministers, who pledged to do something but never did. It is unacceptable and it is even a disgrace to tolerate such a flawed system, especially when you consider that the recent budget puts a heavier burden on people who should not have to bear that burden. Indeed, the unemployed will contribute $5.5 billion through reduced benefits and fewer insurable weeks.
The government puts the burden on those who should not have to pay, since these people are already living in poverty because their government is unable to give them jobs to support their families and get their dignity back.
Neither was it necessary to take this other shameful measure, which consists in reducing by $2.5 billion, over the next few years, established programs financing. Again, this is not where the government should have looked to find the money it needs.
Nor should it reduce, cut and even eliminate the tax credit for seniors. These people do not deserve such treatment. They should not have to pay for the financial problems of the Canadian government, considering that they have already contribution so much throughout their lives and that the government persists in tolerating tax avoidance through these tax conventions.
The government also did not have the right to shift the burden of the deficit or to demonstrate such a lack of control and imagination in getting a handle on public finances. There was no need to make the provinces pay for the deficit by capping or freezing equalization payments, for instance. Canadian provinces have already lost $ 1.5 billion.
Bill S-2 has nothing to do with the tax agreement reform we have been calling for since the beginning of the election campaign which saw us become the Official Opposition in this House.
Before endorsing any new tax agreements or renewing any existing ones, I call on my colleagues and on the government to embark on a complete, total, in-depth review of such agreements and of the countries which are party to them.
My colleagues and I have nothing against Hungary, Nigeria, Zimbabwe, Argentina or the Netherlands, but in view of the financial burden Canadians and Quebecers must shoulder, one should not waste money on purpose or create a situation where we lose several hundred million dollars a year in tax revenue. What we need is to develop a sense of responsibility which has been totally lacking since this government came into power on October 25.
These people do not act responsibly. Not only do they shift the burden of the debt onto the shoulders of those who should not have to carry any more but, due to their incompetence, they cause Quebecers and Canadians to lose billions of dollars because of the uncertainty they create on financial markets. As we saw recently, not only did they take money away from people who did not deserve it, they did not even manage to please financial community, which found nothing in this government's first budget that would allow it to put its financial house in order and give some credibility to a government that is completely out of it.
As one of my colleagues said, not only has it failed to close the tax loopholes provided by these agreements, even though it is doing an about-face, having itself condemned this form of tax avoidance in the past, but it is doing nothing to get rid of shameful schemes such as family trusts.
As we said before, it is becoming increasingly clear that this government is starting to behave like the previous one, favouring its friends, and the businesses which pour thousands of dollars every year into the Liberal coffers. As long as the issues of party financing by the public and lobbying are not settled, in a true democratic manner, that is, we will keep on having this kind of inconsistency and tomfoolery which causes us to lose money when we are in no position to do so.
Therefore, Madam Speaker, we will vote against Bill S-2 not, as I said earlier, because we have something against these countries, but because we want the government to review tax agreements as a whole.