Mr. Speaker, I am very pleased to have this opportunity today at third reading of Bill S-16.
The purpose of the bill is to implement income tax conventions that Canada has signed with Chile, Croatia and Vietnam. Currently Canada has tax treaties in force with 64 countries. We have been building and updating this network of tax conventions for almost three decades.
Bill S-16 is part of the ongoing maintenance of Canada's system of tax treaties but that does not mean it is merely a routine housekeeping bill of no importance to Canadians.
In today's environment tax treaties are more relevant than ever to Canada's competitiveness and overall economic performance. Foreign economies are opening up, individuals are becoming more mobile and as the pace of international trade and investment quickens tax treaties are becoming increasingly important to investors and entrepreneurs tapping into these opportunities.
Like all of the other tax conventions that Canada and its trading partners have implemented over the years, Bill S-16 has two overriding objectives. One is to avoid double taxation and the other is to prevent income tax evasion.
The potential for double taxation arises when a taxpayer who is a resident of one country earns income in another. In the absence of a tax convention, both the country of residence and the country that is the source of income would be justified in claiming tax on that income.
Tax treaties address the problem of double taxation in one of two ways. The treaty allocates exclusive taxing rights either to the taxpayer's country of residence or to the country that is the source of the income. Or, if the income would be taxable in both countries, the treaty requires the country of residence to give credit for the tax paid to the source country.
Measures that reduce double taxation also serve the purpose of preventing tax evasion. Laws that limit the potential for double taxation normally include provisions that encourage the exchange of information between the participating countries. It is that sharing of information that helps these countries' revenue authorities to identify cases of tax evasion and in fact act on them.
Another benefit of this legislation is the certainty for taxpayers, certainty that a rate of tax limited under any of these agreements cannot be increased without substantial advance notice of any changes.
In addition there will be a reduced compliance burden for Canadian taxpayers who have investments or business interests in Chile, Croatia or Vietnam.
A key part of any tax treaty bill is the withholding tax rate reductions. In this regard Bill S-16 is no exception. Canada and other countries generally impose withholding taxes on various types of income paid to non-residents. In the absence of a bilateral tax treaty or a unilateral exemption from withholding tax, Canada's statutory non-resident withholding tax is 25%.
Under our network of tax treaties however, there are several rate reductions in effect, and these reductions apply on a reciprocal basis. Where such a tax treaty is in effect, the country in which the taxpayer resides can withhold tax.
Without going into a country by country explanation of the various withholding tax rates proposed, I would like to point out that the rate is generally limited to 5%, 10% or 15% on dividends in branch profits. In addition the withholding tax on interest and royalties is generally limited to 10%.
The exception is the agreement with Chile, which provides for a 15% rate. In some cases royalties on copyright, computer software, patents and know-how are exempt at source.
Another feature of Bill S-16 is that it respects Canada's right to tax pension and annuities paid to non-residents. The agreements with Vietnam and Croatia provide for pension payments to be taxed in both countries with the source country collecting no more than 15% of the total payment. In both Vietnam and Croatia, social security benefits will be taxable in the source country with no limitation. Under the Canada-Chile income tax convention, pension and social security benefits will be taxed by the country from which the payments are made.
Another issue that is addressed by Bill S-16 is the treatment of capital gains realized by non-residents. In these cases the source country would retain its right to tax capital gains on the sale of real property, business assets and shares in real estate companies or interests in real estate partnerships or trusts.
The provisions of Bill S-16 are in fact tailored to the realities of international commerce. Reduced withholding taxes and the other benefits of this legislation are reciprocal in nature. This tax convention entails no revenue loss whatsoever, not for Canada and not for any of the other signatories.
When Bill S-16 received second reading in the House of Commons, it received support from members of all parties. Earlier in the week the bill passed through the finance committee without amendments. It is well understood among hon. members that this is legislation that will prevent double taxation and facilitate trade.
As a nation, we all know that almost 40% of our wealth depends on exports, foreign commerce and direct foreign investment. Tax treaties help to ensure that Canada's tax policies are applied consistently in transactions that reach beyond our borders. They also contribute to an environment of stability and certainty for investors and traders.
Bill S-16 will therefore increase our ability to compete and to harness the opportunities of a vibrant and modern economy. For the reasons I have indicated, I urge hon. members to support this bill.