Mr. Speaker, I am very pleased to join the debate of Bill C-10.
This bill will benefit all Canadians by amending double taxation treaties between Canada and a number of countries. These nations are the United States, Sweden, Lithuania, Kazakhstan, Iceland, Denmark and the Netherlands.
I am particularly pleased to see the amendments to the tax treaty with the United States. We often hear, sometimes in a not very complimentary way, about the role of backbenchers in the government caucus. This agreement responds to the concerns of many members of Parliament who were concerned that many of their residents were paying double taxation on U.S. social security benefits.
Many people in Canada live near the border with the United States and many of these individuals have lived and worked in the United States and then retired in Canada. Many of them are in my riding of Etobicoke North. Over the last while I have had a number of constituents complain that they were being taxed doubly on their social security benefits.
A number of my colleagues and I went to the Minister of Finance. We stated, in a very strong way, that this was not fair. People should not be taxed doubly, particularly low income seniors who were being jeopardized as a result. The finance minister listened. It is because of that we have the amendments to the taxation agreement with the United States.
This area can be a very dry topic. I would like, for the record, to present what the bill does from the government's side. It is important for Canadians who are watching this debate to appreciate what the legislation does and what it does not do. Paying taxes twice on the same income or gain is not very fair. That is why these initiatives will avoid double taxation.
The treaties essentially reduce the rates of withholding taxes applicable to dividends, interest and royalties, and eliminate double taxation by allocating taxation rights between the country in which a taxpayer is resident and the source country of the income or gain. For example, where income or gains remain taxable in both states a convention would normally provide that the state of residence will give credit for the tax paid in the other country.
Other ways to eliminate double taxation would consist of ensuring that the income or gain is taxed only in the source country or the country of residence. This serves to promote trade and investment which, in the absence of a treaty, could be discouraged by the possibility that returns would be taxed twice.
As well the conventions generally include provisions for the exchange of information between revenue authorities to prevent tax avoidance or tax evasion.
Canada now has double taxation conventions in force with 61 countries. While the provisions of each treaty necessarily vary from one country to another, their common denominator is that they benefit Canadian taxpayers.
The Canada-United States double taxation agreement is a case in point. This is the fourth protocol to the convention between Canada and the U.S. with respect to taxes on income and on capital, commonly known as the Canada-U.S. tax treaty.
With the approval of parliament and the ratification of the United States senate the protocol to the convention will deliver significant tax relief to thousands of lower income Canadians who receive U.S. social security benefits which are subject to U.S. tax rates.
Most Canadians and many Americans reside within 80 miles of the 49th parallel. Many have worked in one country and as I said retired in the other. Consequently both Canada and the United States pay social security benefits to large numbers of people in the other country.
To avoid double taxation the Canada-United States tax treaty sets out which country can tax these benefits. Currently the country that pays the benefit can tax all of it while a country where the recipient lives can tax none of it. This results in hardship for many lower income Canadians who receive U.S. social security benefits because the United States taxes outbound social security benefits at a flat withholding rate of 25.5%. This is what constituents came to me and spoke about, this withholding tax of 25.5% which was very high and very unjust.
Conversely outbound Canada and Quebec pension plans and old age security benefits are taxed at a rate of 25%. While the old age security recovery rate applies, any non-resident pensioner can file a Canadian tax return at ordinary Canadian tax. As a result many low income U.S. recipients pay little or no Canadian tax on their Canadian benefits. I would add that other than U.S. citizens and resident aliens the U.S. does not allow non-resident pensioners to file tax returns.
The protocol proposes that the country of residence have the exclusive right to tax social security benefits. That means several thousand low income Canadians will no longer pay any income tax at all. Thousands more will pay less tax than they do now, particularly in light of special rules exempting from tax 15% of U.S. benefits paid to residents of Canada. For U.S. recipients of Canadian benefits, Canadian benefits that are exempt from tax in Canada will also be exempt in the United States.
Prior to 1996 the country that paid a benefit to a resident of the other country could not tax the benefits at all. The country where the recipient lived could include only one-half the benefit in the recipient's taxable income. That meant that one-half of the benefits were tax free. It also meant that those rules did not stand the test of tax equity with neighbours receiving similar levels of benefits but paying vastly different levels of taxes on those benefits.
Under this agreement with the United States the new rule would apply as of January 1, 1996, the date the current rule came into effect. Excess tax collected since then would be refunded to social security recipients in both countries. However there will be no retroactive tax increases for that period.
The government will limit applicable 1996 and 1997 taxes for Canadian residents to ensure that they do not exceed the tax the U.S. collected. For 1998 and beyond the Canadian tax that recipients pay will reflect their total incomes. After ratification both nations will work together to ensure that refunds can be paid out as quickly and efficiently as possible.
A second proposed amendment to the Canada-U.S. tax treaty pertains to the taxation of capital gains. In 1995 Canada proposed to amend the Income Tax Act to tax the gains of non-residents on shares of non-resident corporations and interest in non-resident trusts where most of the value of the shares or interest is attributable to Canadian real estate or resource property. Although it has not yet done so, the United States could under current tax treaty rules impose a comparable tax on residents of Canada.
In a classic quid pro quo the protocol will apply the proposed tax change to United States residents in exchange for United States agreement that its real property interest laws will not for residents of Canada include shares of corporations that are not resident in the United States.
This change which will apply as of April 26, 1995 means that Canadians who invest in U.S. real estate through Canadian companies will continue to pay Canadian tax rather than any possible future U.S. tax when they sell their shares. U.S. investors and U.S. companies that hold property in Canada will still pay U.S. tax when they sell their shares rather than Canadian tax.
Turning to the Canada-Sweden tax treaty, in the bill we propose a small number of amendments to the double taxation and the convention that has existed between Canada and that country since 1984. However while the number of amendments is small the benefits are very real. Taxpayers will pay less taxes as a result of reduced tax rates, which will also result in increased trade and investment between our two countries. The revised convention will enter into force when both Canada and Sweden have approved the amendments and exchanged instruments of ratification. The provisions would then apply on the first day of January subsequent to the exchange.
With respect to Lithuania, Bill C-10 seeks parliament's approval to enter into a tax treaty with that country. As there is currently no double taxation convention in force between Canada and Lithuania, there are a number of double taxation problems for which the proposed convention provides needed and equitable solutions.
The proposed convention does not reinvent the wheel. Rather it generally follows the language and the pattern of other tax treaties Canada has concluded. It also largely reflects the format and language of the model convention prepared by the OECD.
Of more interest than structure are results. In that regard the provisions of the convention will produce results, reduced tax rates leading to increased trade and investment that will mirror those of other concluded conventions and will help to promote economic development in both nations, in particular in Lithuania.
Concerning Kazakhstan, tax relations between Canada and that nation had been governed by the 1986 tax treaty between Canada and the U.S.S.R. However, as of January 1, 1996 Kazakhstan ceased to apply that treaty. Accordingly Bill C-10 seeks parliamentary approval to enter into a tax treaty with Kazakhstan. Again the proposed treaty generally follows the language and pattern of tax treaties already concluded by Canada.
Trade and investment between Canada and Kazakhstan are expected to increase upon the conclusion of the convention which will enter into force on the date of the exchange of the instruments of ratification. Its provisions will apply on or after the first day of January 1996.
The proposed double taxation convention between Canada and Iceland is also a new tax treaty but contains somewhat similar provisions to those I have addressed. For example, it provides for a reduced withholding tax of 5% applicable to dividends paid to a company that controls at least 10% of the voting power in the company paying the dividends and a rate of 15% in all other cases. The rate of the branch tax will also be reduced to 5%.
Entry into force will entail each country first notifying the other that the procedure required to bring the convention into force, the attainment of royal assent in Canada, has been completed. The convention will then enter into force 30 days after the date of the latter of these notifications. The provisions will apply on or after the first day of January subsequent to the entry into force.
The penultimate country included in the legislation is Denmark. A double taxation convention is currently in force between Canada and Denmark. First signed in 1955 and amended in 1964, it is now appropriate the convention referred to as the 1955 convention be amended further to increase trade and investment opportunities between Canada and Denmark. To those ends the current withholding tax rate of 15% on dividends, interest and royalties will be reduced to 5% on direct dividends and to 10% on interest and on royalties. The rate of the branch tax will also be reduced from the existing 15% to 5%. The revised convention also provides for a number of exemptions at source, which I will not go into today.
With respect to pensions, currently all pensions are taxable only in the country of residence of the recipient. The revised convention provides for the opposite. Specifically all pensions including social security pensions will be taxable only in the source country. Moreover, the two year exemption provided under the existing convention for visiting teachers will be eliminated.
The 1955 convention also does not contain any rules for the taxation of capital gains. As a result they are taxable in accordance with each country's respective legislation. Accordingly and in line with rules found in other tax treaties concluded by Canada, the revised convention includes rules for the taxation of capital gains.
With respect to Canada and the Netherlands, which is the last country but certainly not the least that I will be speaking on today, the legislation proposes amendments to the existing convention between Canada and the Netherlands.
The 1993 budget announced Canada's willingness to eliminate on a bilateral basis its withholding tax on royalties on computer software and patent and information concerning industrial, commercial or scientific experience.
Consistent with that statement, the protocol provides that the rate of 10% withholding tax on such royalties in the country of source will be eliminated or remain at zero in the case of computer software, which was already covered in the protocol signed in 1993.
The protocol also introduces a new article in the convention providing for mutual assistance in the collection of taxes in each country. Patterned on the corresponding article found in the Canada-United States tax treaty, it differs only in that it applies regardless of the nationality of the person concerned.
There are other modifications to the convention as well. This protocol will enter into force 30 days after the date on which the governments notify each other that ratification has been completed. Its provisions will then apply in Canada from the date of entry into force of the protocol.
As I have spoken for some time I will keep my concluding remarks brief. I appreciate that for some the matter of international tax treaties may seem arcane, complex and dry. However, that being said, they are extremely important and they have real and direct financial impacts on Canadian taxpayers. I know the legislation will positively affect the taxpayers of my riding.
Clearly my address articulated that in the instance of Bill C-10 its impact on Canadian taxpayers will be overwhelmingly beneficial. As such, I very much urge members of the House to accord speedy passage of the legislation so that those benefits may be realized sooner rather than later.
