Madam Speaker, the motion as it sits is not really quite clear. Far from my hon. friend's comment about not understanding this, I think I understand this quite well. It seems to be referring to a provision in the income tax regulations which deals with how Canada's tax treaties interact with our domestic tax law with regard to the treatment of foreign subsidiaries of Canadian companies.
The motion calls for changes to the way foreign source income is treated when it is earned by a foreign subsidiary and repatriated to a Canadian parent company. This is a fairly complex area of law and one that is easily misunderstood. With the greatest respect to my friend opposite, I think he added to the mystification rather than to the clarification of this complex area of law. Let me first of all set out how Canada taxes foreign source income of Canadian businesses.
Since 1972 Canada has had a policy of not taxing the foreign source active, and I emphasize active as opposed to passive, business income of Canadian companies if that income is earned through a subsidiary located in a country with which Canada has a tax treaty. In other words, we have 80 of these tax treaties and the fundamental root of a tax treaty is that we do not tax their companies operating here, and they do not tax our companies operating there. This long-standing policy is often called an exempt surplus system and is generally consistent with the practice of many other countries.
Canada is not in this alone; all of the OECD countries, the United States, everyone has these treaties. These treaties are to avoid a double taxation regime. This means that Canadian companies can invest in subsidiaries in all of these foreign markets and bring back profits to Canada in the form of dividends. The Canadian parent company does not pay Canadian tax on the dividends received. The money is earned abroad. It is taxed in that jurisdiction abroad and then it is treated as exempt surplus and returned to the Canadian parent in the form of a dividend.
The income they represent is subject, of course, to tax in two ways. One is it is taxed in the country, and in the case that the hon. member is worried about, it is Barbados. The second is that Canada taxes the income when it is distributed by the Canadian parent to its shareholders.
One of the countries Canada has a tax treaty with is Barbados. In fact Barbados is one of Canada's oldest tax treaty partners. While Canada's existing tax treaty with Barbados was signed in 1980, Canada had an agreement previously with the United Kingdom to extend the 1946 Canada-United Kingdom income tax agreement to cover the British colonies, as they were then known, which included Barbados. Canada and Barbados enjoy a close working relationship bilaterally through the Commonwealth. We represent Barbados at the IMF. We work with Barbados in the Organization of American States. We also represent Barbados at the World Bank.
On the investment side, there are Canadian companies operating in virtually all aspects of the Barbadian economy, in textiles, financial services, building products and software. Canadian companies have located there in part because that is a very profitable area for them to be in, but in part because this is part of their international operations. Madam Speaker, you and I can think of many companies that have subsidiaries in tax treaty countries, including Barbados.
The motion aims to deny exempt surplus treatment to certain Barbadian subsidiaries. Those Canadian businesses have been able to rely on the Canada-Barbados tax treaties since 1980 to obtain exempt surplus treatment. Again, I will emphasize that it is active income earned in Barbados or whatever the other tax treaty country might be. It is taxed in that treaty country and then repatriated as exempt surplus to Canada.
If this long-standing exemption were denied, a number of scenarios could result. If we went through with the motion, this is what could happen.
It could force many of these companies to restructure their operations, for example, by relocating to other jurisdictions that compete with Barbados. All that is being done by this motion is moving from one tax treaty jurisdiction to other tax treaty jurisdiction. There would be a harm imposed on Barbados and there would not necessarily be any benefit to be gained in the other tax treaty jurisdiction. Of course, we would not be collecting any additional tax since we do not tax the exempt surplus in the first place.
I do not know what we would accomplish at the end of the day. It could mean that profits from foreign operations are no longer brought home if in fact that is the intention of the hon. member. Those dividends would not actually arrive in Canadian corporations to be distributed to Canadian shareholders because the exempt surplus would remain offshore.
If the affected Canadian businesses remained in Barbados and continued to repatriate funds to Canada, it could lead to an overall higher tax burden because of course that money that comes in the form of exempt surplus is distributed as dividends, is taxed and would have to be replaced in some other manner. There would be a counterproductive result to this resolution.
In any of these scenarios the change requested would be a significant shift in policy which many would see as contrary to the government's goal of providing a competitive tax system that fosters international trade and investment and ultimately economic growth. I am sure members would agree that Canada wishes, as a public policy, to encourage our international corporations to succeed and they have to succeed in a competitive environment.
One of the elements of a competitive environment is having a competitive tax system. Frankly, if the resolution were to proceed, a lot of those Canadian international operations would just simply go into other jurisdictions. It would be essentially arbitrary and apply only to Barbados without taking into account the ability of companies to restructure and relocate their operations to other treaty countries.
What I have said thus far applies indeed to a regulatory change sought by the motion were it effective in denying exempt surplus treatment. However, that is not entirely clear. This is due to a clause in the Canada-Barbados tax treaty which may have the effect of guaranteeing exempt surplus treatment to all Canadian subsidiaries located in Barbados.
If that interpretation of the treaty clause is correct, then Canada could not ultimately take away the exemption without renegotiating or revoking the treaty. In this case the change in the regulation would only create uncertainty for Canadian businesses as to whether they could or could not earn exempt surplus.