Mr. Speaker, I am pleased to speak to Bill S-5 because this will allow me to talk about something we have not talked about much in this House for the past weeks and months, and that is tax havens.
The bill before us is on tax treaties with Korea, Finland and Mexico. These tax treaties do not pose any problem. The Bloc Québécois agrees with all the parties in this House, I imagine, that we should not double tax taxpayers who earn income in any one of these countries or in two countries at the same time. Tax treaties to ensure information sharing to prevent tax evasion and double taxation are perfectly acceptable.
However, as far as tax havens are concerned—and that is what I want to focus on today—tax treaties do not prevent double taxation, they prevent taxation, period. I am referring to the tax treaty with Barbados, in particular. I will provide some detail on this situation, which we have denounced a number of times in the past.
It is now known, internationally, that Barbados is a tax haven for Canadian capital. The Conservative government has a responsibility to ensure that taxpayers pay their fair share of the taxes that fund our collective tools and our social programs.
There is cause for concern. For example, look at how eager the Minister of Finance was to plug the loophole of income trusts. The issue of tax havens also constitutes a major loophole in terms of our ability to collect all the taxes to which the Canadian government, the provinces and Quebec are entitled. It is a little surprising to see how slow they are to plug this hole.
As I said, we are in favour of Bill S-5 and we will continue to call on the government to find ways to tighten up the use of countries like Barbados and several other jurisdictions that, through their regulations, allow taxpayers in countries like Canada to shirk their collective responsibilities.
Subsidiaries of Canadian companies can be found in Barbados, for instance. Since information sharing is practically non-existent with that country, as with other tax havens, we have good reason to be concerned.
As I said, the previous government did nothing. As we all know, we were even able to prove that the companies once belonging to the former Prime Minister and now belonging to his sons—of course, I am referring to the hon. member for LaSalle—Émard—had used the legislation and regulations in Barbados to avoid paying a portion of their Canadian income tax, through a company called Canada Steamship Lines.
Thus, this is a serious problem. As I mentioned, it is unfortunate that we have not had the opportunity to discuss this more over the past few months, because it is a growing problem.
In 2002, the Auditor General expressed concern that the use of tax havens was leading to the erosion of the tax base, which could call into question the capacity of the federal, provincial and Quebec governments to assume their full responsibilities. In any case, this tax burden, which is evaded by those businesses and taxpayers who use tax havens, must then be carried by all other tax payers who do not wish to or are unable to shirk their responsibilities.
I would remind the House that a tax haven is a country where the rate of taxation is nil or very low and whose tax system is extremely lax. This obviously encourages many wealthy taxpayers to discreetly transfer a portion of their fortune and many businesses to set up subsidiaries and then be able to avoid paying taxes on part of their revenue. It is not just Canadian taxpayers who do this, but Americans and Europeans, too.
Since many of these countries are known for the absolute secrecy surrounding their financial sectors, it is very difficult to know with any certainty the total amounts invested in such places.
Might I remind you that, according to the OECD, a significant proportion of the money used in this kind of tax avoidance is associated with money laundering operations. Recently, we have had discussions about the tools Canada can use to ensure that we avoid this kind of money laundering. States are becoming increasingly concerned about the financing of illegal activities, including international terrorism, mafia activity and international organized crime.
That is why it is surprising that although the issue of tax avoidance via tax havens is becoming a growing concern for us, most governments, including the current government and the former Liberal government, are virtually unconcerned about it.
As I said, in 1998, the Organisation for Economic Co-operation and Development found that from 1989 to 1994, direct foreign investment had grown three times faster in tax havens than elsewhere. That is a sure sign that those investments are not intended to promote economic activity—the production of goods or services—but simply to avoid paying the taxes we all have a legitimate responsibility to pay.
The OECD compiled a list of tax havens in 1998 using four criteria: non-existent or insignificant taxation; no real exchange of tax information; no taxation or legislation transparency; and no significant activity. Companies that set themselves up in these countries must have real activities to be considered productive investments.
Now that Barbados has become the third most popular destination for Canadian investment—I will come back to this—we might well wonder where all that investment goes in a small country with a small population. Clearly, it is not going into actual operations. It is just a way to avoid Canadian taxation and, as I said earlier, that is detrimental to the common good.
In 1998, the OECD established a list of 35 countries that met these four criteria. It also identified 47 other countries that met, in certain areas, one, two or three of these criteria. It nevertheless established a list of 35 countries that met these criteria. Barbados was one of those countries. I will take a closer look at Barbados' tax system because it is the most popular tax haven for Canadian taxpayers who wish to avoid paying taxes. I would like to make it clear that no illegal activities are involved. That is what I said. If I recall correctly, only 20% of this tax avoidance represents money laundering. The avoidance is legal.
However, what makes it legal is the fact that we have established rules for it. This by no means makes it moral or legitimate. Others are made to pay the price of this irresponsibility and unwillingness to assume a fair share of the collective responsibility to pay taxes.
Under the Barbados' tax system, domiciled taxpayers and companies pay a flat tax of US $250 per year. Then, the first $5 million in profit, in US currency naturally, is taxed at a rate of 2.5%. What is interesting is that unlike most tax systems in industrialized countries, the rate diminishes as profits increase. Starting at 2.5% on the first $5 million, the rate drops gradually to 1% on $15 million or more in profits earned by the company or income declared by the taxpayer.
Barbados obviously meets this criterion of a tax haven because of its ridiculously low tax rate. In my opinion, the fact that an individual who pays income tax in Barbados would not have to pay tax in Canada and Quebec is clear evidence that the tax agreement with Barbados is not intended to avoid double taxation, but to help people avoid paying taxes in Canada.
Barbados' tax laws include a special section on international business corporations. This refers to companies that are registered in Barbados but conduct most of their business activities abroad.
For example, the head office of CSL International was in Barbados. I remember a report on Radio-Canada—I think it was on the program Enjeux, but I am not sure—where journalists went to see where CSL International's head office was. They found that it was a law firm where there were approximately 130 different names of foreign companies that are international business corporations. These truly are shell companies.
A company has very few conditions to meet to be recognized as an international business corporation. It must be registered in Barbados, have its headquarters there—as I just mentioned—and hold its board of directors meetings there. A conference call will suffice, however. The company must keep its board meeting minutes in Barbados and make a Barbadian one of its directors. As members can see, these are truly minimal requirements. However, by unanimous decision of the shareholders, this director may have no powers. Registration fees are US$390, plus $250 annually, as I mentioned earlier. These companies are subject to a regressive tax. They are exempted from tax on capital, from exchange controls and from tax on transactions. They can import duty free all the equipment they need to do business.
However, international business corporations must actually conduct business in order to meet the criteria that Canada sets to ensure that a tax agreement avoids double taxation. There has to be productive activity, so that a company does not simply serve as a way to avoid paying taxes. A company must therefore have a business line, receive company dividends and actually conduct business. That is enough to comply with the law, but simply owning an asset such as a building that generates revenue is not.
For example, in the case of a ocean-going fleet of boats, each boat can be considered to be an active business. CSL International was the holding company and received the dividends. These were considered to have been received by a company with real activities, even though that company does not actually operate a boat but rather is the proprietor of companies that themselves operate boats. One can see that by means of this provision it would be easy to avoid tax responsibilities here in Canada. Some 98% of international business corporations are foreign corporations created to oversee the foreign activities of the parent corporation.
So much for the tax system in Barbados. Now, what is the Canadian equivalent? That is interesting because we can see that the tax system in Canada is designed expressly for Barbados. As I have said, it is widely known internationally that Barbados is a tax haven for Canadian financial interests, and there are a great many Canadian banks in Barbados. As a general rule, all income earned in this country or abroad is taxable in Canada, except of course where there is a tax treaty, as we are discussing in connection with Bill S-5. The Income Tax Act provides as a general rule that a Canadian taxpayer will be taxed on all of his or her income, including income generated in the form of dividends from a foreign subsidiary, according to section 90 (1) of the Income Tax Act.
The calculation of income for a taxation year of a taxpayer resident in Canada must include any amounts received by the taxpayer during the year on account or in full or partial payment of dividends in respect of a share that he or she owns in the capital stock of a corporation that is not resident in Canada.
However, if the income was earned in a country with which Canada has signed a tax treaty—in this case, Barbados—one avoids double taxation. That income can be non-taxable.
From the moment that a business, an international business corporation, says that it has paid US$250 in addition to 1% of its profits—a little more because, as I mentioned, it starts at 2.5%—it can take advantage of the tax treaty and not pay income tax in Canada.
If the foreign subsidiary is considered to be not resident in Canada and the tax treaty prohibits double taxation, we are stretching the general rule that all income received by a Canadian is taxable. It is the tax treaty that applies, as I have already said.
In the case of Barbados, of course, the treaty does not apply to subsidiaries that have a tax rate of virtually zero. The Canada-Barbados tax treaty specifically excludes international business corporations or any other similar kinds of companies that enjoy favourable tax treatment in Barbados.
One might think, therefore, that corporations pay a normal tax rate, but since the normal tax rate in Barbados is around 40%, virtually all the Canadian corporations that have a subsidiary in Barbados established it specifically to enjoy favourable tax treatment. It is the rule, therefore, but obviously not the reality. What possible interest might a Canadian corporation have in opening a subsidiary in Barbados if it had a higher tax rate than in Canada while not engaging in any activity?
They are therefore established mostly under the aforementioned legislation that makes it possible to set up international business corporations that are not covered by the treaty. The corporations covered by this provision of the tax treaty are therefore considered under the Income Tax Act to be residing in Canada and subject to Canadian taxes. That is the way it is supposed to be according to the Canadian legislation.
However, based solely on the Income Tax Act and the tax treaty between Canada and Barbados, dividends received by the Canadian parent corporation of a subsidiary in Barbados should be taxed in Canada when they are transferred home.
What actually happens, though, is this: the regulations under the Income Tax Act are specifically designed to enable corporations to circumvent this difficulty and transfer profits from Barbados tax-free in Canada.
We find, therefore, in paragraph 5907(11.2)(c) regulations under the Income Tax Act that render moot article 30 of the tax treaty, the one that excludes international business corporations. This section of the regulations sets forth a series of criteria for a corporation to be considered non-resident in Canada and therefore not subject to tax, in particular:
5907(11.2)(c) where the agreement or convention entered into force before 1995, the affiliate would, at that time, be a resident of that country for the purpose of the agreement or convention but for a provision in the agreement or convention that has not been amended after 1994 and that provides that the agreement or convention does not apply to the affiliate.
Barbadian subsidiaries of Canadian companies fall into this category because the treaty entered into force before 1995—in 1980, to be precise—and has not been modified since. Annexes have been added, but the body of the treaty has not changed, and only one section of the treaty, section 30, excludes the majority of Canadian owned subsidiaries.
Thus, by invalidating article 30 of the tax treaty, subparagraph 5907(11.2)c) of the regulations allows the dividends of Barbadian subsidiaries of Canadian companies to be covered under subsection 250(5) of the Income Tax Act and to be tax exempt in Canada.
We can therefore see how Canadian taxation, through these corporations created under Barbadian laws, allows Canadian businesses to avoid paying taxes in Canada.
Through access to information, the Bloc Québécois obtained a copy of correspondence between the Minister of Finance and an accounting firm, confirming that this section of the regulations was drafted specifically to allow Canadian businesses to use Barbados as a tax haven. Wallace Conway, of the taxation policy branch of the finance department, confirmed to Craig Cowan that subparagraph 5907(11.2)c) assures international businesses that they will not have to pay their taxes in Canada. Perhaps Mr. Conway is no longer in that position because he wrote this in July 1994.
Their draft regulation did not come into force until 1997, but it was specified that it would be retroactive to 1994. With this amendment to the regulations, Canadian businesses with a subsidiary in Barbados win on two fronts. First of all, since their business is not covered by the tax treaty, Barbados is under no obligation to share information with Canadian tax authorities and, second, since the Income Tax Regulations disregard that exclusion, profits sent back to Canada are tax exempt. It is crucial that the government and the Minister of Finance act quickly in order to correct this loophole, just as the minister did in the case of income trusts.