Mr. Speaker, it gives me pleasure to speak on the amendments being presented by the member for Gander-Grand Falls. I would like to make a few comments on the specifics of the amendments. These questions were addressed not only in the Senate but also in the House of Commons finance committee by witnesses who appeared from the department, including myself, to go through each of these points.
For people trying to follow the logic of the bill, the protocol was required as a result of changes in American tax law in 1988. Once those were put into place it became incumbent upon the Canadian government to revise the tax arrangements between the two countries.
The member for Gander-Grand Falls was quite keen to point out there were witnesses in the American Senate and the House of Representatives who found this bill to be very helpful. It does not surprise me that a bill should come out to be win-win and that there should be supporters in the United States who think this is of benefit to them. That is why the country adopted it. Also on the public record, our department has been very strong and this is also of benefit to Canadians.
It does not only help the wealthy Canadians who certainly are helped by this, but it also helps a number of ordinary Canadians who have second properties in the United States under relatively moderate circumstances. It also helps a number of corporations operating in the United States.
The United States is the largest trading partner we have, not only in the corporate sense but in the personal sense. It is the largest travelling relationship we have. It is the largest second investment for a lot of families. We have to be very careful not to develop a tax regime in isolation while totally not thinking of what happens to people in other regimes. What happens to many Canadians in the United States is a major tax consideration. It is incumbent upon this government to make sure those conditions are matched and that we do the best for Canadians.
As with any treaty and protocol, there are conditions that are more satisfactory to the opposite side. Either we do things to accommodate them or we have no agreement. To think that none of the American interests were reached in this protocol would be a silly assumption. It would also be equally silly to think that none of the objectives of the Canadian government were reached in this bill.
Dealing with the first motion, the 5 per cent withholding rate on direct dividends has been adopted by many of our major trading partners. Zero withholding is the standard among EEC countries. We are perfectly within our legal rights to insist upon higher rates as is suggested in the amendment, but we must recognize in doing so that our ability to attract additional investment and to retain existing investment would weaken with adverse revenue effects.
If we are concerned about the cash flow of the federal government, we must be cognizant of what we do in tax policy which aggravates taxpayers and causes them to engage in tax avoidance. Canadian firms attempting to enter or expand in foreign markets would be at a competitive disadvantage.
A second point on this is that a temporary reduction in the withholding tax rate, as proposed in this amendment by the member for Gander-Grand Falls, would be the least favourable option. First, it would allow corporations to withdraw past earnings from Canadian operations at the reduced rate. The guarantee of higher future rates would create a positive incentive to do so. Second, it would eliminate the value of the rate reduction encouraging U.S. corporations to make any long term investments in their Canadian operations. In other words, it would be better not to go to 5 per cent at all rather than apply the reduced rate for only a few years.
Finally, on the first motion and concerning a point already made by the mover, any change to the protocol will necessarily endanger if not scuttle it inasmuch as it represents an agreement between two parties that can only be changed with the agreement of both parties. If we make changes on our side we have to understand that part of our obligation is to allow parties on the other side who may be dissatisfied with one part or another to make additional changes they would like. We cannot pick and choose among the pieces.
The second motion presented by the member is also opposed by the government. By way of background, most of the benefits of the article dealing with taxes on debt are required to be provided by the United States. Specifically, the U.S. must grant to Canadian residents an estate tax exemption based on the same $600,000 exemption that U.S. citizens receive, rather than the $60,000 exemption currently provided. The U.S. must credit capital gains tax paid by U.S. citizens on properties situated in Canada against the U.S. tax payable by those citizens in respect of that Canadian property.
The only real obligation imposed on Canada by this article is to provide a reciprocal credit for its own residence. That is, Canadians who die owning U.S. property will be entitled to credit any U.S. estate tax owing on that property against their Canadian income tax payable on U.S. properties and income from U.S. sources.
Accordingly, if there is no Canadian tax payable at the outset, there does not seem to be any sort of benefit that Canada would be required to provide under this article. If that reasoning holds, and I do allow for the possibility that what the motion literally provides may not be what the member was looking to accomplish, then the motion makes no substantive change and should be voted down on that basis. If on the other hand members believe the motion does have substantive effect, I would refer to the argument set out in the third point concerning this first motion.