Mr. Speaker, I thank the House for the opportunity to speak to Bill S-17, the tax conventions implementation act, 2004, at second reading.
This legislation would implement four new tax treaties that Canada has recently signed with Gabon, Armenia, Oman and Azerbaijan. The bill would also implement a new treaty with Ireland, replacing the older treaty that is already in effect.
These bills are simultaneously quite simple and yet exceedingly complex. For instance, the implementing part of the bill is relatively simple. The first section deals with the title; the second section deals with what a convention means; and the third section, which is probably the most critical section, indicates that the convention is approved and has the force of law in Canada. In effect, we are applying the rule of law to these treaties.
The fourth section deals with any inconsistencies between the tax regimes of these various countries and our own, and methods to resolve those inconsistencies. The fifth section deals with the opportunity for the national revenue minister to make any regulations which he may deem to be appropriate. The final section deals with the notification that the Minister of Finance must give in order to give the bill the force of law.
As I said, the bill is quite simple. There are only six sections in it and yet schedules 1 and 2 run 136 pages. They are sufficiently complex and there are not that many people in the House who would actually understand all of the nuances of those schedules, myself included.
The bill builds on Canada's well established network of tax treaties with other countries, which happens to be one of the most extensive of any country in the world. At present, we have 83 treaties in effect. The passage of Bill S-17 would make that 87. The new treaties would provide taxpayers and businesses, both in Canada and in these other countries, with more predictable and equitable tax results in their cross-border dealings.
Before discussing these treaties any further, I want to provide the House with a brief overview of the importance of tax treaties and why it is necessary for the bill to be passed.
As hon. members know, the government has long been committed to enhancing fairness in the tax system. These tax treaties contribute to that goal. Since income tax was first put in place back in 1917, Canada has taxed both the worldwide income of Canadian residents and the Canadian source income of non-residents.
All income of Canadian residents, whether earned here or abroad, is subject to tax in Canada. Non-residents, on the other hand, are taxed here only to the extent that they participate in the economic life of Canada or receive income from sources of business in Canada.
Tax treaties, or income tax conventions, or agreements as they are sometimes called, are an integral part of our tax system. Basically, they set out the degree to which one country can tax the income of a resident of another country.
The benefits to Canada having tax treaties in place with other countries are significant. We already have 83 in place which attests to this fact. For example, tax treaties provide certainty on how Canadians will be taxed abroad. At the same time, they assure our treaty partners of how their residents will be treated in Canada. Tax treaties also benefit the Canadian economy by contributing to a sound framework for international trade and investment.
There are definite economic disadvantages for countries that do not enter into tax agreements with other countries. The absence of such agreements can have harmful effects on the economic relations between countries. I will explain that.
The absence of tax treaties makes the threat of double taxation a great concern to taxpayers. Double taxation occurs when a taxpayer lives in one country and earns income in another. Without a tax treaty in place to set out the tax rules, the same income can be taxed in both countries without consequential relief. This situation can have a negative impact on the expansion of trade, and the movement of capital and labour between countries.
It is only natural that investors, traders and others with international dealings want to know how they will be taxed before they commit to doing business in the country. For example, when considering doing business in Canada, foreign investors and traders are anxious to know the tax implications associated with their activities in that country. They also want assurances that they will be treated fairly.
Tax treaties establish rules as to how the tax regime of one country would interact with that of another, thus removing much of the uncertainty about the tax implications associated with doing business, working, or otherwise earning income from abroad.
It is important to note the fact that tax treaties are international agreements that require official notice be given before they can be terminated. That in itself adds to a degree of certainty. The tax rules range from an allocation of taxing rights between the two countries to the establishment of a mechanism to resolve tax disputes between those countries.
All these measures promote certainty and stability and help produce a better business climate.
Tax treaties, including the ones enacted in the bill, are especially designed to facilitate trade, investment and other activities between Canada and its treaty partners. They are developed with two main objectives in mind.
The first, and probably the most important, objective of tax treaties is to avoid double taxation and provide a level of certainty about the tax rules that apply to international transactions.
The second objective of tax treaties is to encourage cooperation between tax authorities in Canada and the treaty countries to prevent tax evasion and tax avoidance.
Tax treaties play an important role in protecting Canada's tax base by allowing information to be exchanged between our revenue authorities and their counterparts in countries with which we have tax treaties.
I would like to return to the issue of double taxation. Relief from double taxation is so very necessary and deserves to be discussed in some detail. The potential arises when a taxpayer lives in one country and earns income in another. Without a tax treaty, both countries could claim tax on the income without providing the taxpayer with any measures of relief for the tax paid in the other country. This is simply unfair.
To alleviate the potential for this happening, a tax treaty between the two countries allocates taxing authority with respect to a given item of income in one of three ways: first, the income may be taxed exclusively in the country in which it arises; second, it may be taxed in the country in which the taxpayer resides; or, it may be taxable in both the source country and the residence country, with relief from double taxation provided in some form, usually the country of residence.
For example, if a Canadian resident employed by a Canadian company is sent on a short term assignment, say for three months in any one of the five countries talked about in this bill, Canada has the exclusive right to tax that person's employment income. However, in the case of most items of income and capital, the right to tax is shared, although for certain types of income, such as dividends and interest, the rate of tax that may be imposed in the state of source is limited.
Put another way, the treaties in the bill contain provisions that would alleviate the requirement for taxpayers in one country who carry on business in the treaty partner country to pay tax in the treaty partner country on their business profits earned in that country if they are not meaningful participants in the economic life of that country.
There is another aspect of tax treaties that I want to discuss, and that is the importance of withholding taxes. Bill S-17 provides for several withholding tax rate reductions.
Withholding taxes are a common feature of the international taxation system. In Canada's case, they are levied on certain payments that Canadian residents make to non-residents. These payments include interest, dividends and royalties, for example. Withholding taxes are often levied by a country on the gross amount of certain types of income paid to non-residents and such taxes normally represent the non-resident's final obligation with respect to income tax payable in that country with respect to that particular income.
The tax treaties in the bill all provide for certain reductions in withholding tax rates. For example, without a treaty or other legislated exemption, Canada taxes various categories of income paid to non-residents at the rate of 25%. Most of Canada's trading partners impose a similar level of withholding tax.
However, withholding taxes do not provide for the deductability of expenses incurred in generating income and are imposed on the gross amount of the payment. The taxpayer will therefore be subject to an effective rate that is significantly higher than the tax rate that applies to net income in either the source or the residence country.
To remedy this, Canada's network of tax treaties limits the rate of withholding tax that can be withheld by the source country on various types of income so as to more accurately reflect the level of taxes that would be payable on a net income basis. Consequently, the treaties in the bill provide various limits, usually at the rate of 5%, 10% or 15% on dividends, depending on the circumstances, and 10% on the case of interest in royalties. In some instances, royalties paid for through the use of copyright, computer software, patents and know-how are completely exempt from withholding tax.
Finally, these treaties also implement other measures which ensure that tax consequences of certain transactions are in line with Canadian tax policy. Unfortunately, time does not permit to go into details about these matters today, to the great disappointment of my colleagues opposite.
However, I do want to point out that Bill S-17 is standard routine legislation. Part of the fact is that these treaties, like their predecessors, are modelled on the OECD model tax convention, which is accepted by most countries around the world. The provisions in these particular treaties comply fully with the international norms that apply to such treaties.
Bill S-17 also addresses fair taxation and good, international trade relations.
Fairness in the tax system which, as we all know, is an ongoing priority of the government, demands that Canadians should not find themselves subject to double taxation. Nor should there be any evasion or avoidance of taxes. That is what these tax treaties work to do: eliminate double taxation and prevent tax evasion and avoidance.
Other meaningful benefits will also result once these treaties come into force. The treaties covered under Bill S-17 also address a number of the important tax treaty histories such as the taxation of capital gains realized on the alienation of foreign properties, the taxation of pensions and annuities paid to non-residents as well the prevention of a discrimination based upon a taxpayers nationality.
As I stated at the beginning of my remarks, Bill S-17 represents a part of Canada's ongoing efforts to expand its network of tax treaties with other countries. The benefits of the proposed legislation are clear. I therefore encourage all hon. members to support the bill.