Mr. Speaker, I rise today to speak to the third reading of Bill S-2, the Tax Conventions Implementation Act, 2002. The legislation would enact tax treaties that Canada has recently concluded with seven countries.
As hon. members know, Canada's economy relies significantly on international trade. In fact, Canada's exports account for more than 40% of our annual GDP. What is more, Canada's economic wealth depends on direct foreign investment to Canada as well as inflows of information, capital and technology.
Tax treaties impact on the Canadian economy, particularly because they help facilitate international trade and investment by improving the tax landscape as it related to cross-border dealings.
This is significant because Canada's economy is likely to become more intertwined in the world economy. Fortunately, Canada is well positioned in that it currently has over 75 tax treaties in force with other countries. Passage of the bill will of course see the number increase.
Canada benefits substantially from having tax treaties in force with other countries. Our tax treaties, for example, assure us of how Canadians will be taxed abroad. At the same time, they assure our treaty partners of how their residents will be treated here in Canada.
On the flip side, tax treaties do not impose tax, nor do they generally restrict countries from taxing their own residents as they see fit under their domestic laws. Rather, tax treaties pay attention to setting out the rules under which one country can tax the income of a resident of another country.
When considering the treaties contained in this bill, it is important to know that the absence of a tax treaty makes unrelieved double taxation a real possibility. Unrelieved double taxation occurs when a taxpayer who is a resident of one country earns income in another and both countries exercise their right to tax the income without offering any form of relief in respect of the foreign tax paid.
Taxation of the same item of income twice without relief is understandably a situation that produces unfair results and which can give rise to adverse economic impacts.
The bill legislates seven tax treaties. The new treaties with Kuwait, Moldova, Mongolia and the United Arab Emirates are the first comprehensive tax treaties Canada has ever signed with these four countries.
In addition, our tax treaties with Belgium, Italy and Norway are updated to ensure that our bilateral tax arrangements are consistent with current Canadian tax policy.
Enacting these seven treaties will provide taxpayers and businesses in Canada and these countries with more predictable and equitable tax results in their cross-border dealings.
Canada's domestic law, like that of most countries, contains provisions that provide relief from double taxation. Our tax treaties give taxpayers the added comfort that Canada and its treaty partners will not depart from providing the relief from double taxation that they have, quite frankly, come to expect.
To alleviate the potential for double taxation, the treaties resort to one of two general methods. They either grant the exclusive right to tax certain income to the country where the taxpayer resides, or the taxing right is shared, but the country of residence is required to eliminate double taxation by providing relief for the tax paid in the other country.
For example, Canada will have the exclusive right to tax the employment income of a Canadian resident employed by a Canadian company who is sent on a short term assignment, say for three months, to any one of the seven treaty countries in the bill.
If, on the other hand, the same person is employed abroad for a longer period of time, such as a year, then the source country can also tax the employment income, and Canada must credit the tax paid in the other country against the tax otherwise payable here on the income.
Beyond the basic commitment to relieve double taxation, the treaties in the bill foster cooperation and establish other important mutual understandings as to how each tax regime would interface with Canada's system and vice versa.
In this vein, a short discussion of how the treaties in the bill affect the rates of withholding tax is warranted. Each treaty establishes limits on the amount of withholding tax that could be levied in respect of certain payments. In all cases where maximum rates of withholding tax are set out in Canadian tax treaties, they are always established at a rate lower than the 25% rate provided under our domestic law.
Withholding taxes apply to interest, dividend, royalty and other types of payments that Canadian residents make to non-residents. For example, a maximum withholding tax rate of 15% would be levied on portfolio dividends paid to non-residents under each treaty in the bill. There would also be a maximum withholding tax rate as low as 5% on dividends paid by subsidiaries to their parent companies.
With respect to interest and royalty payments, each treaty would cap the maximum withholding tax at 10%.
As for periodic pension payments, the maximum rate would be set at 15% for all countries, except that, in the case of Belgium and the United Arab Emirates, no cap has been established. Without tax treaties in place, Canada could tax these particular payments at the general 25% rate, as set out under the Income Tax Act.
Like those that have come before them, the tax treaties contained in the bill are also designed to encourage cooperation between tax authorities in Canada and the treaty countries to prevent fiscal evasion. These treaties would prove to be an important tool in protecting Canada's tax base as they would allow for consultations and exchange of information between our revenue authorities and their counterparts in the seven countries. The tax authorities would be able to deal directly with each other to solve international transfer pricing issues, to reach satisfactory solutions to concerns raised by taxpayers, to complete audits, and to engage in other discussions aimed at improving tax administration.
I would also point out that the new treaty with Norway contains an assistance in collection article that would provide for the mutual assistance in the collection of taxes. Canada has similar arrangements already in place with the United States, the Netherlands and Germany.
In closing, let me summarize some of the benefits for taxpayers and businesses alike that would ensue with the passage of this bill.
Canada would be assured as to how Canadians would be taxed in the seven countries included in the bill. At the same time, these countries would be assured as to how their residents would be treated here.
In addition, the bill provides measures that would facilitate trade and investment, promote certainty and stability, and produce a better business climate between Canada and these countries.
I encourage all hon. members to pass the bill without delay.