Mr. Speaker, it is a pleasure today to speak to Bill S-2, An Act to amend the Canada-United States Tax Convention Act, 1984. We are now on third reading, which happened quite rapidly earlier today. I think the cooperation in this House seems to be quite rampant at this time of year.
The Canada-United States Tax Convention Act was last updated in 1997 and, prior to that, in 1995 by the former Liberal government. It is important that these conventions get reviewed and updated regularly. In fact, the former Liberal government had already started negotiating this new tax convention with the U.S. even after the adoption of the last convention.
Like any tax convention or tax treaty, these agreements are important to the economic success of a country and, in particular, under current conditions where countries and all stakeholders need to compete on the international scene.
This particular convention is important since it is with our largest trading partner, a country with over $50 billion of trade on an annual basis.
While international tax law, especially in this place, does not always make for the most exciting of debates, its importance is indisputable, especially as we move toward greater globalization and greater free movement of labour and capital across international borders.
We have had tax treaties in place with many countries for many years and, as with most laws, there comes a time when they need to be amended in order to reflect the changing times. This is one of those situations where we see a more rapid change in the actual conditions than the actual conventions themselves. Consequently, this bill presents some routine amendments that I believe will help to ensure Canada remains a leading participant in the global economy.
International arrangements, such as these, allow for relatively free movement of people and capital across borders, contributing greatly to the rich, multicultural nature of the country.
Some members in this House think that tax treaties are signed as a way of avoiding taxes. In fact, if these treaties are well written and properly understood, they make the taxation system more effective and promote trade—the exchange of goods and services—and do not add an administrative burden. Everyone benefits from treaties that are well written and signed in due form. They encourage foreign investment and increase trade, as I was saying.
Bill S-2, in turn, would also be a valuable tool to help certain industries improve Canadian productivity. Even though the latest Conservative measures, such as reducing the GST, do not improve productivity, nothing is even close to being fair about some of the Conservative latest tax planning or tax initiatives that they have come up with.
The worst example in the last couple of weeks is their tax policy or tax system where in the 2006 budget they raised the lowest personal income rate to 15.5% and now have announced that they will bring the rate back down to the original Liberal rate of 15%. People can all try and figure that one out.
Another advantage of Bill S-2 is that it would eliminate source country withholding tax on cross-border interest payments. Canadians who borrow money, and I would say mainly large corporations that borrow money from American lenders, would no longer need to withhold and remit Canadian tax on the interest payments.
Bill S-2 would also provide an advantage for Canadians to better access the U.S. debt market. Sometimes we see larger corporations having difficulty in accessing capital here in Canada. The Americans have a larger capital base and I think that will help the opening up to the debt market. We will see what happens in the short term with some of the crisis that we are seeing in the U.S. right now. However, this convention should definitely provide an easier flow of obtaining some debt for some of the Canadian companies. It also will be easier for companies to finance their expansion and, hopefully, their expansion into other markets other than here in Canada.
The bill would also allow taxpayers to require otherwise unsolvable double tax issues to be settled through arbitration. This arbitration rule is an important element of the bill because it would increase taxpayers' confidence that the tax treaty will resolve potential double taxation situations. These convention tax treaties, the basic purpose, in normal circumstances, is to avoid double taxation, should solve the fact that no double taxation of gains or even deemed gains of immigrants to Canada will arise.
The bill would also extend treaty benefits to limited liability companies by removing a potential impediment to cross-border investment which arises from private equity funds and their comings and goings. I will probably address this point later on in my speech because this point was brought up at the finance committee during the prebudget consultations in the past. This would make it easier for companies to bring their products from the research stage to the actual market commercialization phase. Hopefully, this will result in more research and development work to be completed in Canada and potentially for exporting to other markets, in this case the U.S. market.
More and more workers are temporarily being reassigned outside the borders and apparently more into the U.S.
Bill S-2 would give mutual tax recognition to pension contributors. In other words, provided certain conditions are met, cross-border commuters may deduct, for residence country tax purposes, the pension contributions they make to a plan or arrangement in the country where they work. People who move temporarily from one country to the other for work reasons can, subject to certain conditions, get tax recognition in their temporary new home country for pension contributions they continue to make to their original employer's pension plan. This proposal would facilitate the movement of personnel between Canada and the U.S. by removing a possible disincentive for commuters in temporary work assignments.
That is definitive a positive step. There is also an advantage for clarifying how stock options are taxed or, in other words, the harmonization of the rules in both countries. There are a whole bunch of other technical amendments in this bill that if we have some additional time I will get into.
I want to address the importance of these conventions. These conventions are great, fine and dandy. We can improve them, ratify them and pass them into law in this country, but the fact that they are international tax agreements, we require an entity on the other side to also sign these conventions. These conventions and tax treaties are not worth the paper they are written on if we cannot get the other countries to ratify them.
I wish that this particular legislation had been brought forward to the finance committee. Instead, the present government decided to bring it before the international trade committee. I am not sure why it went through without too many witnesses. We would have probably looked at ensuring that there was a willingness on the other wide to have this treaty ratified and signed quite rapidly.
There are some tax treaties that we signed in the past that have yet to be signed by other countries. I know of many in particular that have been negotiated with Italy. I think there are some agreements that are at least five years old that have not been signed by the other country to the agreement, so there are pending issues in terms of double taxation where there are people who are being taxed in Canada and other countries. Again I would caution the present government to make sure that even though we ratify these conventions or enact the legislation, the government make it a priority to have the other country ratify the agreement or convention as well.
Since I have some time, I will explain how some of the amendments got into this bill. I would like to take credit for some of them. I chaired the finance committee in 2004, and we did a very thorough job. There were a lot of presentations made before the committee in terms of what Canadians and Canadian businesses were looking for when doing business in the United States.
We devoted practically a whole chapter of our report to business growth and prosperity. We included in it some of the testimony given by witnesses. There is one paragraph I would like to read into the record where witnesses urged that changes be made to the non-resident withholding tax regime to ensure that Canada remained competitive. This was in 2004 and three years later we are still at this.
It was suggested, for example, that the Department of Finance negotiate a new provision with the U.S. to eliminate withholding tax on all dividends and interest to both related and unrelated parties. They mentioned a recent study which claimed that the elimination of withholding taxes on all dividends and interest would result in increased capital investment in Canada of $28 billion. Even a fraction of that would help certain sectors of this country, especially the manufacturing sector. It would also result in increased income of $7.5 billion annually. It was pointed out that while there would be a federal fiscal cost associated with eliminating withholding tax, the economy would benefit in the long run. Again this was in 2004. The committee also heard that Canada's dividend tax rate is now much higher than that in the U.S., with a 15% federal tax rate.
As a result of that, I am proud to say that in 2004 we made over 30 recommendations. Of those, there were at least five that pertained to items that needed to be addressed when it came to the Canada-U.S. tax treaty. I will read into the record one of the recommendations that I thought was important:
The federal government ensure that the effective tax rate for Canadian corporations is competitive with that in the United States and elsewhere. Within that context, the government should: review the timetable for elimination of the federal large corporations tax; review the timetable for the tax changes for the resource sector; consider immediate elimination of the corporate surtax; and review the corporate income tax rates and other taxes paid by corporations.
Recommendation 13 reads:
The federal government, bearing in mind Recommendation 16 regarding a review of capital gains, review the current federal tax treatment of dividend income and non-resident withholding taxes with a view to ensuring that the tax treatment in Canada remains competitive with the rest of the world, particularly the United States, and that the tax treatment does not distort investment decisions.
Another recommendation that was applied in the U.S.-Canada convention is that the federal government revise Canada's cost allowance rates such that the Canadian rates are similar to rates for comparable asset classes in the United States and other countries. In fact, this one has not been addressed yet by the current government.
Recommendation 24 was that the federal government undertake a comprehensive review of the personal taxation system in Canada, including the value of the basic personal amount and other particular aspects of the Income Tax Act, but always taking into account that the review should be undertaken with a view to ensuring that Canada's personal taxation system is both fair and as competitive as possible with other countries, particularly the United States.
We have seen the importance of this convention in the past. Other recommendations were made that also referred to making sure that we are competitive with the United States.
In the finance committee's 2006 prebudget report, everything is recapped in one little passage which states, “The federal government expedite the review of the tax treaty between Canada and the United States. This review should specifically address Canadian recognition of the United States limited liability corporations” . This is one of the items that is in the bill right now.