Mr. Speaker, as the House knows, this is very important legislation although it may appear to be housekeeping to some. I would like to rise today to speak on this legislation and to urge for its speedy approval.
This is not a bill to command great attention in the public arena. Rather it represents some of the work-a-day measures addressing tax fairness and good international and trade relations that are a vital part of our endeavours on behalf of Canadians.
The purpose of Bill S-2 is to implement reciprocal trade treaties between our nation and Hungary, Nigeria, Argentina and Zimbabwe, treaties that will eliminate double taxation on income tax. As well, the bill implements the protocol to revise the current tax convention between Canada and the Kingdom of the Netherlands.
A tax treaty between countries is an important tool to provide the benefit of certainty and stability regarding tax regimes, benefits that concretely promote and facilitate international trade and investment. Another benefit of such tax treaties is that they also reduce annoyance in the operation of the national tax systems involved in several ways.
First, they eliminate the necessity of paying tax on business profits in the source country if there is no permanent establishment in that country. As well, they provide a mechanism to settle problems encountered by taxpayers.
More important, tax treaties eliminate or alleviate double taxation in the instances where international transactions are involved and may give rise to the same income being taxable in the hands of the same person by more than one nation.
I should remind the House that the treaties enacted by this bill are the latest within a longstanding process. The major reform of Canada's income tax legislation in 1971 required Canada to expand its network of double taxation conventions or tax treaties with other countries. Since that time, negotiations for the conclusion of new treaties or the revision of existing ones have been entered into with almost 75 countries.
In this bill, the four tax conventions under review follow the general pattern of the conventions previously approved by Parliament. The number of Canadian tax treaties in force is presently 52.
For the record, let me remind hon. members of the main elements of the new treaties covered by the bill. These treaties provide generally that dividends may be taxed in the source country at a maximum rate of 15 per cent. However in the case of intercompany dividends, the rate is often reduced if the company receiving the dividends holds a certain equity interest in the company paying the dividends. Such a reduced rate has
been set at 10 per cent for the countries covered here, except for Nigeria where it will be 12.5 per cent.
Regarding interest paid by a resident of one country to that of another country, the rates set out in this bill are 10 per cent in the case of Hungary, 12.5 per cent for Argentina and Nigeria and 15 per cent in the case of Zimbabwe. There are however some exceptions.
Interest paid on a bond or a similar obligation of the national government, a political subdivision or a local authority will be exempt from tax in the country in which it arises. Also, these treaties, except that with Zimbabwe, contain a certain provision that will allow interest paid on loans or credits extended, guaranteed or insured by certain state entities, in Canada for example, the Export Development Corporation, to be taxable only in the country where the recipient of the interest payment resides.
These treaties also address the taxation of royalty payments. They provide for a general rate of source taxation of 10 per cent in the case of Hungary and Zimbabwe, 12.5 per cent in the case of Nigeria and from 3 per cent to 15 per cent in the case of Argentina, depending on the nature of the royalty. Copyright royalties are exempt under the treaty with Hungary.
A number of other matters are dealt with in these tax treaties. First, the treaty provisions dealing with capital gains reflect a standard Canadian position enabling the source country to tax gains arising on the sale of real property, business assets and shares in the real estate companies.
Second, under the conventions, discrimination on the basis of nationality is prohibited. This ensures nationals of one country equal treatment with nationals of another country in the same circumstances. However, this does not prevent a country from providing fiscal incentives, for example, Canada's small business deduction, on the basis of the residence of the taxpayer.
Third, Canada has also preserved its right to tax pensions paid to residents of the countries covered by the bill. However, it is important to point out, especially in light of the upcoming D-Day anniversary, that war veterans pensions are generally exempt from tax under the four treaties.
Fourth, the treaties provide that in Canada double taxation of foreign source income of Canadian residents is alleviated by way of a foreign tax credit, in accordance with the limitations provided for in the Canadian legislation. Reciprocally, relief from double taxation is granted in the other treaty country and in accordance with the method recognized by that government.
Let me turn to a final undertaking enacted by this legislation. Bill S-2 will implement a protocol to the tax convention signed by Canada and the Kingdom of the Netherlands in 1986. This updates the existing treaty to take into consideration changes made to the respective laws and policies of the two countries.
For example, in 1992 Canada announced that it was prepared in tax treaty negotiations to reciprocally reduce the withholding tax rate on direct dividends. This was seen as a valuable incentive to encourage international direct investment. In the 1993 budget, the government stated its willingness to enact bilateral exemptions from withholding taxes on payments made for the use of computer software. I am pleased to say that the Netherlands is the first country with which we have completed such an agreement.
Under this bill, in cases where a dividend recipient holds 25 per cent or more of the capital or 10 per cent or more of the voting power of the dividend paying corporation, the withholding tax will be reduced to 5 per cent from the current 10 per cent. This reduction will take place over a five-year period starting from 1993. As regards interest payments, the protocol reduces the rate to 10 per cent from the current 15 per cent.
As well, the agreement eliminates the withholding tax on royalties for computer software and on interest paid to pension plans.
In simple summary, the four tax conventions and the Netherlands protocol contained in the bill provide some equitable solutions to the various problems of double taxation existing between Canada and certain international partners. Each of these countries hopes to implement the bilateral convention as soon as possible. Consequently I commend this bill to the House and urge its speedy passage.