Mr. Speaker, I am pleased to rise this afternoon to speak on the second reading of Bill S-2. Just in case there is any suspense in the House, I can say that given that perhaps 90% of the content of this bill was initiated under the previous government, the Liberal Party will be pleased to support this bill.
Canada has signed close to 90 such bilateral conventions with various countries. While each is important in its own right, there is no doubt that a convention with our largest trading partner by a long shot has a particularly important place.
This Canada-U.S. tax convention was last updated in 1997. Negotiations on this round began soon thereafter. They were officially announced in October of 1998.
As one can imagine, these are often extremely complicated and complex negotiations, requiring the utmost attention to detail. When Bill S-2 receives royal assent in the near future, I am sure there will be public servants on both sides of the border preparing to immediately begin negotiation of the next round of talks.
Before I get to the substance of this bill, I thought I might mention in passing a related area of international taxation and that is the Canada-South Korea free trade negotiations that are currently under way. As the leader of my party has pointed out, we are all in favour of free trade, but this deal is not really free trade at all because of the unacceptably high non-tariff barriers that remain in place.
A few days ago, the CEO of Ford Canada, Mr. Bill Osborne, took the unusual step of very publicly chastising the government for this failure. According to Mr. Osborne, the deal “contains no effective measures to ensure the immediate and sustained opening of the Korean market to significant numbers of imported vehicles”.
So while the government has some pieces of legislation, like Bill S-2, which seek to improve the investment climate here in Canada and make us more competitive in the global marketplace, it also has the Korean free trade deal, which is doing just the opposite.
At a time when the high dollar and numerous other pressures are casting doubt on the future of the auto sector in this country, the Canadian government is pursuing policies that have the CEO of one our largest auto manufacturers taking strong offence and making the following comment. He stated:
The question is where's the most efficient jurisdiction for us to invest [our dollars], and where can we be most competitive? We would like to see policies and support from the Canadian government that allows Canada to be one of the most efficient places to invest.
On the one hand, Bill S-2, which was largely inherited from the Liberal government, promotes competitiveness, and we support it. On the other hand, this Canada-South Korea free trade agreement goes in precisely the opposite direction, destroying the competitiveness of Canada, or diminishing it, and causing one of our biggest employers to question whether his company will even continue to invest in this country.
Let me turn now to the more technical elements of Bill S-2. The biggest change in this bill is the elimination of source country withholding tax on cross-border interest payments from arm's-length lenders. That is to say, a borrower on one side of the border will no longer have to remit withholding tax on the interest payments for that loan.
In the last few years, both Australia and Japan have come to similar arrangements with the United States by reducing the withholding tax on interest payments from 10% to zero. When Bill S-2 receives royal assent, Canada will be on a par with these two countries.
What exactly does this mean for Canadian companies? It will mean better access to the United States debt market and an increased ability to finance expansion here and abroad.
Many of our small and medium sized businesses here in Canada struggle to find the capital to take their work from the very early stages of research and development to the point where they are ready to bring the product to market. Often they will find lenders in the United States who are interested in funding their products, but only if the remainder of the research and development takes place in the U.S.
By eliminating the withholding tax on cross-border interest payments, we would be eliminating one of the tax disincentives that prevent these companies from pursuing that work here in Canada. This measure also has implications for individual Canadians who would now have greater access to international lenders.
Another aspect of this bill, which will be of interest to many Canadians, is that it would allow for the mutual tax recognition of pension plan contributions for workers whose employers move to the United States for temporary postings. Currently, there is a problem with the double taxation of these pension plan contributions.
What Bill S-2 aims to do is ensure that if a Canadian is posted to a branch of his company located in the U.S. he would be able to contribute to the U.S. employer's pension plan and make those payments deductible for Canadian income tax purposes.
The bill would go a little way toward offsetting the disastrous impact of another really uncompetitive proposal brought in by the Conservative Party, which is the proposal that would have disallowed interest deductions for loans used to finance foreign acquisitions. This measure would have destroyed competitiveness even more than the South Korean deal would destroy competitiveness. It was described as one of the worst tax measures to come out of Ottawa in 35 years. It would have forced Canadian companies to compete with foreign companies with one hand tied behind their back. It would have weakened our companies relative to foreign companies. Happily, under pressure from the official opposition and from industry, the government withdrew that budget measure, replacing it with something less harmful, but even more foolish, something called double-dipping.
I do not think I will get into that more. It is another example, along with the South Korean free trade deal, of anti-competitive measures that the government has taken. At least here we have one bill that would a positive difference.
The bill would also deal with the stock option benefits that an employee might accrue when he is employed in both countries. Currently, when an employee's stock options are granted while working in one country and he exercises or disposes of the options while working in the other country, both Canada and the U.S. often tax the same benefit.
Under Bill S-2, both countries would continue to be able to tax the benefit of the stock option. The difference, however, would be that each country would be limited to taxing the benefit based on a time spent in country formula.
For instance, if a Canadian spends three months working from his company's office in the U.S. and nine months working on this side of the border, the U.S. would be able to tax one-quarter of the benefit realized between the date of the grant and the date of the realization of his stock option. Canada would be limited to taxing the other three-quarters of that benefit.
This bill could easily be viewed by some as a housecleaning bill that simply updates out tax treaty with the United States. It does, however, deal with our largest trading partner and, therefore, has a place of special significance. While I do not think it will be a matter of great controversy, I do think that the great majority of the members of this House, if not all members, will agree that this is a positive move for Canada.