Mr. Speaker, I appreciate the opportunity to present Bill S-5, the tax conventions implementation act, 2006 for second reading today.
This bill is part of Canada's ongoing network of tax treaties with other countries, which happens to be one of the most extensive of any country in the world. At present Canada has tax treaties in place with over 80 countries.
Bill S-5 would enact updated tax treaties that Canada has signed with three countries: Finland, Korea and Mexico. These treaties will provide taxpayers and businesses both in Canada and in those countries with more predictable and equitable tax results in their cross-border dealings.
The conventions in Bill S-5 would replace existing treaties that have been in force for some time and need to be updated. The Canada-Korea treaty, for example, was originally signed in 1978. In the case of Finland and Mexico, the original treaties were signed in 1990 and 1991 respectively.
Through this bill our bilateral arrangements with these three countries would be updated to make them consistent with current Canadian tax treaty policies. For these treaties to have effect depends on the countries involved completing the legislative requirements. All indications are that all three countries, Finland, Korea and Mexico, are anxious to ratify these conventions as soon as possible.
Before discussing these treaties I want to take a few minutes to provide the House with a brief overview of the importance of tax treaties and why it is necessary for this bill to be passed.
Canada's new government is committed to enhancing fairness in the tax system. Tax treaties or income tax conventions, as they are sometimes called, are an integral part of our tax system.
Basically, they are agreements signed between countries that are primarily concerned with setting out the degree to which one country can tax the income of a resident of another country. In this regard, 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.
The benefits to Canada of having tax treaties in place with other countries are significant. The fact that Canada has over 80 tax treaties already in place attests to this. 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.
Tax treaties also impact on the Canadian economy, particularly because they are directly related to international trade and investment. Their direct impact on Canada's domestic economic performance is quite substantial. For example, Canadian exports account for more than 40% of our annual GDP.
In addition, Canada's economic wealth each year depends on direct foreign investment, as well as inflows of information, capital and technology. As a result, eliminating tax impediments in these areas has become even more important and contributes toward the creation of a competitive tax advantage for Canada.
In fact, there are definite economic disadvantages for countries that do not enter into tax agreements with other countries. Not having a tax treaty in place can have a negative impact on the expansion of trade and on 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 a country. For example, when considering doing business in Canada, investors and traders are anxious to know the tax implications associated with their activities both in Canada and abroad. They also want assurances that they will be treated fairly.
Tax treaties establish a mutual understanding of how the tax regime of one country will interface with that of another, thus removing any uncertainty about the tax implications associated with doing business, working or visiting abroad. Such an understanding can be achieved by allocating the right to tax between the two countries together with incorporating measures that resolve disputes and eliminate double taxation. All these measures promote certainty and stability, and help produce a better business climate.
Tax treaties, including the ones enacted in this bill, are specifically designed to facilitate trade, investment and other activities between Canada and its treaty partners. They are developed with two main objectives in mind: the avoidance of double taxation and the prevention of tax evasion.
The first and perhaps most important objective of tax treaties is the avoidance of double taxation. This 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, this income can be taxed in both countries. In other words, income can be taxed twice.
The absence of a tax treaty leaves open the threat of double taxation, which is, of course, of great concern to taxpayers.
To alleviate the potential for double taxation, a tax treaty between two countries allocates the exclusive right to tax with respect to a number of items. The other country is thereby prevented from taxing those items and double taxation is avoided.
As a rule, the exclusive right to tax is conferred on the state of residence.
For example, if a Canadian resident employed by a Canadian company is sent on a short term assignment, let us say for three months, to any one of the three treaty countries 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 amount of tax that may be imposed in the state of source is limited.
Put another way, the tax treaties in this bill reduce the frequency with which taxpayers of one country are burdened by the requirement to file returns and pay tax in another country when they are not meaningful participants in the economic life of that other country.
The second objective, the prevention of tax evasion or tax avoidance, comes about as a result of cooperation between tax authorities in Canada and our tax treaty partners.
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 other countries with which we have tax treaties. This helps ensure that taxes owed are paid.
Another aspect of tax treaties that I want to discuss is the importance of withholding taxes. Bill S-5 provides for several withholding tax rate reductions.
Withholding taxes are a common feature of international taxation. 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 levied on the gross amounts paid to non-residents and represent their final obligation with respect to Canadian income tax. Without tax treaties, Canada usually taxes this income at a rate of 25%, which is the rate set out under our domestic law or, more precisely, under the Income Tax Act.
Our tax treaties specify the maximum amount of withholding tax that can be levied by Canada and its treaty partners on certain income, and these rates are always lower than the 25% rate provided for in the Income Tax Act.
The tax treaties in this bill all provide for certain reductions in withholding tax rates.
For example, each treaty provides for a maximum rate of withholding tax of 15% on portfolio dividends paid to non-residents. The maximum withholding tax rate for dividends paid by subsidiaries to their parent companies is reduced to as low as 5%.
Withholding rate reductions also apply to royalty, interest and pension payments. Each treaty in this bill caps the maximum withholding tax rate on interest and royalty payments at 10%. In addition, with respect to periodic pension payments, the maximum rate of withholding tax is set at 15% or 20%.
Time does not permit me to go into detail about all the measures in these treaties, which I am sure the House will be disappointed to hear. However, I do want to emphasize that the proposals in Bill S-5 ensure that the tax consequences of certain transactions are in line with current Canadian tax policy.
In closing, I want to point out that Bill S-5 is standard and routine legislation. These treaties, like their predecessors, are all patterned on the OECD model tax convention, which is accepted by most countries around the world. The provisions in the treaties in the bill before us comply fully with the international norms that apply to such treaties.
In other words, Bill S-5 addresses fair taxation and good international and trade relations.
Bill S-5 meets these issues head on. The bill eliminates double taxation. It provides taxpayers living in treaty countries with a more simplified tax treaty system in which to operate. It provides investors and traders with a more stable environment in which to do business.
In short, Bill S-5 represents an integral part of our government's priority to ensure fairness in our tax system. I encourage the House to support this bill and to pass it today.