Mr Speaker, I appreciate the opportunity to begin the third reading debate on Bill S-9.
Hon. members will recall that this legislation ratifies the recently signed revised protocol to the Canada-United States Tax Convention.
Tax conventions are routinely modified, and this is essentially routine legislation. It has emerged from committee without amendments, and with good reason. By improving the operation of the Canadian and U.S. tax systems as they apply in tandem, it will result in fairer taxation and a better environment for cross-border investment and trade.
A number of the amendments provided for in the bill are of a technical or procedural nature, an arbitration mechanism, improved exchange of tax information, and provisions for assistance in collecting the taxes of the other country.
But there are also some substantive changes that will benefit Canadians and enhance the fairness of the two systems for non residents.
Let me begin with a provision that has been the subject of some misunderstanding, the application of U.S. estate taxes to Canadians with property there. Our achievement with respect to estate taxes is twofold. First, we are ensuring Canadians with property in the United States do not get a harsher deal at the hands of the American government than do Americans. Second, we are doing what tax conventions are all about, eliminating double taxation.
With respect to the first point it should be borne in mind that U.S. estate taxes do not kick in for American citizens until the value of their estate exceeds $600,000. Under our law enacted in 1988 the threshold for Canadians with property in the United States is only $60,000. In our opinion that is simply not fair. This protocol changes that, ensuring that Canadians are entitled to the same treatment as our American neighbours.
There is the matter of double taxation. For half a century tax treaties have been combating the unfairness and financial disincentives of double taxation. Typically each jurisdiction provides a credit against its own taxes on revenue from the other jurisdiction that has already been taxed in that jurisdiction. The complicating factor in this case is that while both Canada and the United States impose taxes upon death these taxes take two different forms. The U.S. applies an estate tax whereas in Canada the levy takes the form of an income tax on any appreciation of a deceased's property over his or her lifetime.
Bill S-9 simply recognizes the situation and addresses the anomaly that would otherwise result. Without the proposed change combined Canada and U.S. tax on the estate of a Canadian with U.S. property could actually exceed the property value. I do not think anyone in the House would deny that would be patently unfair to the taxpayers.
In other words, any suggestion this provision represents a tax break for the wealthy rests on the confusion about tax treaties in general and this protocol in particular. Wealthy Canadians will continue to pay substantial taxes on property owned at death.
Another important change is the reduction or elimination of the rate of withholding tax that each country will apply to certain types of revenue. The rate on interest payments will be reduced to 10 per cent from 15 per cent. The rate on direct dividends will go down to 5 per cent from 10 per cent and the rate on royalties on computer software and on patent and technological information will be eliminated entirely.
These changes bring the rates under the Canada-U.S. convention into line with those provided in the OECD model tax convention accepted by most of the OECD's 25 countries. More to the point, the reduced rates will facilitate trade and investments between our two countries.
For example, the elimination of the withholding tax on certain types of information technology will make it cheaper for Canadian companies to access technology from the United States and easier for our high tech firms to sell to the United States.
I will mention one further beneficial change provided for in this protocol. It concerns the treatment of social security payments such as old age security and the Canada pension plan. Under the existing convention these payments are not taxable in the source country and only half the benefit it taxable in the other country. Once the protocol is ratified, however, benefits paid from one country will be taxable exclusively in that country.
To sum up, double taxation conventions are a vital part of the legal infrastructure underpinning trade and investment relationships between modern economies. The protocol the bill will ratify will result in fair taxation while enhancing the international environment for trade and investment.
Once again I remind hon. members the bill came out of committee unchanged. I suggest we pass it without further delay.