Mr. Speaker, I am pleased to rise today to speak to this fascinating bill, Bill C-33, An Act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that Act.
The bill represents a necessary update to the Income Tax Act, particularly as it relates to foreign amendments and other domestic measures. The majority of the bill's provisions are taken from the Liberal government's budget of 1999. The government put the proposed changes up for public comment in July 2005. The changes we are debating today also contain revisions made to that July 2005 release.
Although the amendments to the income tax will be mainly administrative, it is important to highlight them to have a better understanding ahead of an eventual vote.
The bill can be broken down into three parts.
Part one deals with amendments to provisions of the Income Tax Act governing the taxation of non-resident trusts and their beneficiaries and of Canadian taxpayers who have interests in foreign investment entities.
Part two deals with technical amendments that were included in part one of a discussion draft entitled “Legislative Draft Proposals and Draft Regulations Relating to Income Tax”, released by the minister of finance in February 2004.
Part three deals with provisions of the act not opened up in parts one and two.
The proposed measures in part one deal with non-resident trusts and foreign investment entities designed to ensure Canada is properly taxing those Canadians who are earning income through foreign intermediaries in the same manner that income would have been taxed had it been earned directly.
It is essential that Canada close tax avoiding loopholes, not only to protect our own tax base but also to demonstrate our commitment to the international community. We must show our international partners that Canada takes its international responsibilities seriously and that Canada is not a destination for taxation loopholes.
If I look at the bill, it is over 500 pages long. It is not likely that anybody in the chamber has read it. Even if people have, I am not too convinced they can understand this type of bill. However, as vice-chairman of the finance committee, I look forward to sending the bill to the finance committee after second reading so we can further study to determine if any amendments will be needed to make it an even better bill than what it is today.
We need bills like this. They may be complex, but in debating the bill in the past, members have decided to concentrate their points on other areas. As an accountant, I know the foundation of these bills are important. They are just as important as any other bill we debate in the House. That is why, if read some of the debate that went on in previous sessions by members of the opposition, especially government members, they had trouble determining what was a tax haven, what was a tax treaty and what were international tax agreements.
Tax havens are jurisdictions where people park their money, or investments, and they pay no income tax on the income generated on these moneys. Tax havens are countries like Bermuda, Cayman Islands, Turks and Caicos, Gibralter, just to name a few, where people or companies put their money, leave it there and it accumulates tax free. The purpose of the bill is not to address tax havens.
The second point is government members feel these are tax treaties. This is not a tax treaty. A tax treaty is like one of the bills we discussed a few months ago, Bill S-5. Tax treaties are conventions between two countries. Normally the purpose of the tax treaty is to avoid double taxation so Canadians or residents of the other countries do not have to pay double tax. Bill S-5 was our agreement with countries like Mexico, South Korea and Finland.
Some of the other problems we get into when we speak about tax treaties, tax havens and international conventions is our tax base does not get protected. Canada's tax base needs to be protected. If people start taking their hard-earned money and parking it elsewhere, Canada will be unable to maintain the revenue stream that we need so we can rely on the social programs.
The other item that makes Bill C-33 important is there are advantages to using a non-resident trust. If we do not put limits on it, the foreign investment entities will be eliminated.
There are a lot of points on which I would like to speak, but one of the items is the international tax agreements. We can sign these international tax agreements because this affects foreign entities. From what I understand, in the 1990s, although I was not in the House then but perhaps the Speaker was, a tax treaty with Italy was passed by the House. Italy has yet to ratify that treaty.
Italy now has two members of Parliament from other countries who sit in the House of Commons. It has an elected member of Parliament representing the riding of North America. One member of Parliament was born in the United States. The other one was born in Canada. It even has a senator. These elected members of Parliament and senator live outside of Italy but they have full right of vote. One MP seems to be lobbying. He has asked what has happened with the treaty. It was signed with Canada but it has not been ratified.
This is a typical example of a treaty we signed with a developed country and there has been no advancement. Some residents of both countries have had to pay double tax. Then they have to file their tax returns to get some of the money back, all because one country has ratified the treaty and the other country has not.
We can talk about the tax treaties and what these types of bills do on the international scene. When we look at what the government has done in the last little while on its international tax position, we think about regulation. I read in the today's paper that we have a regulation as to foreign ownership in the telecom sector, but we still see foreign entities trying to take over one of our biggest corporations in Canada, BCE, formerly Bell Canada.
Some of the articles say that they are looking for Canadian partners. If we do not protect ourselves with agreements like this, foreign corporations can come here, set up non-resident trusts, with Canadian owners but not really beneficial owners, and take over our corporations. We have seen that in the last few years. We just saw it last year when Inco was taken over by another foreign company.
If things continue as they are, all our historic corporations, which have added to the country's past, will slowly slip away. CN has its head office in Montreal, but it is just a skeleton. Most of the decisions are made in Chicago. We have lost part of that.
These agreements are important. The government has to realize that when it makes a decision, it has to be an overall decision to protect Canadian interests. Canada's financial markets represent 1% or 2% of worldwide markets. We need to protect Canada's corporations or they will be swallowed up in this international global economy that we live in today.
In the budget just tabled one of the items concerns me when it comes to the international tax system and fairness. Canada and the U.S. apparently have agreed in principle to update the Canada-U.S. tax treaty. They want to eliminate the non-resident withholding tax on interest payments and Canada also plans to unilaterally remove the withholding tax from arm's length interest payments to other countries.
What does that mean? Does that mean we will not collect any money on interest payments that are made to foreign companies? How about having an agreement with the U.S. in this case to ensure that the money will be taxed on the other side? When companies from the U.S. pay Canadians, we can collect our taxes from those Canadians.
The government then says that we need to promote more business investment. We turn around and look at the budget. Budget 2007 proposes to eliminate the deductability of interest incurred to invest in businesses and business operations abroad.
How does that make any sense? The government wants Canadian businesses to buy foreign entities. Does it want foreign entities to buy Canadian businesses? This will eliminate the deductability of interest incurred to invest in business operations abroad.
How will that help Canadians to expand, to go abroad and increase productivity? It will not. I am not sure what the government is trying to avoid here. There is no basis for saying it is going to affect revenues in Canada. Most Canadian companies that borrow to purchase foreign affiliates borrow from Canadian financial institutions. The Canadian financial institutions from what I understand pay taxes here.
Perhaps the government should have put a disclaimer that said if a Canadian business was to purchase an operation abroad, as long as it borrowed the money from a Canadian financial institution, that interest could be deducted.
When other members spoke on the bill, they spoke about income trusts. Income trusts have a non-resident aspect to it. We see now that the rules were changed. Some REITs are still allowed, but the government has put a limit as to how much foreign ownership or foreign property they are allowed to invest in.
In the news it said that Canadian REITs were not allowed to invest in foreign entities or foreign real estate up to a certain level. How will that help Canadian companies if they cannot go abroad? As we say in French, “Les bâtons dans les roues”.
Getting back to income trusts, the government has imposed a 31.5% tax on income trusts, which is fine if it chooses to do that. Now it has totally eliminated that sector because it says it did not pay tax or claimed too much tax. The government keeps flip-flopping in terms of its position.
Now we have income trusts that are now going to have to pay 31.5%. People were interested in investing in income trusts, especially the energy sector, because these allowed corporations to go out and get capital at a cheaper price because they were selling units instead of shares. Then the government decided to implement this 31.5% tax. It said that trusts were no longer allowed to operate as of 2011. Existing corporations cannot be converted to trusts.
What has happened is there are no restrictions for foreign entities to buy these companies and turn them into private entities or private trusts to be controlled by foreign entities? There are no restrictions on the actual way in which incomes trusts can now function.
The Liberal way would have been to tax earnings only, to keep the income trusts and tax the non-residents who benefit from the tax free distribution from these income trusts.
Before I get to my next point on private members' bills, I want to go over the tax treaties. The government has also decided to unilaterally provide U.S. companies to borrow in Canada on these limited partnership payments.
What has happened again, if we look at what is in the news, is these limited partnership entities that are allowed to operate in Canada and are allowed to deduct interest payments in the United States are now going to be able to buy up Canadian companies and get a deduction in the United States as well as here in Canada. The only problem is that Canada is not getting cooperation from the U.S. They will probably be able to deduct the interest here in Canada, buy up Canadian companies and use Canadian capital. There is no consistency in how these fee agreements are treated.
There is a whole page on the interest deductibility on the foreign affiliates. There are going to be a lot of problems when we go through this in the finance committee. We are already hearing that Canadian corporations with foreign affiliates are not happy that they are not able to deduct these payments. These items will have to be dealt with when the budget implementation bill is sent to the finance committee.
There was just one more aspect that I want to talk about. If the government is serious about getting a handle on money offshore or making sure that people are not hiding income from Revenue Canada, there are certain procedures that could be used. Some of the departments here in Canada could monitor these moneys or shifts in large sums of money that seem to go offshore and are not accounted for.
FINTRAC, the Financial Transactions and Reports Analysis Centre of Canada was established a couple of years ago. We just did the five year review so it has been around for five or six years. There are financial institutions that have to report to FINTRAC whenever they receive payments of more than $10,000, so FINTRAC could easily monitor any payments that are going offshore.
The problem is that FINTRAC's basic responsibility is to look at whether sums of money are used for terrorist financing or money laundering. It is for crime proceeds. Tax avoidance does not seem to be within its mandate. This is one of the amendments that I had asked for when we were doing the five year review of its mandate, to see if FINTRAC could look at the way tax avoidance is handled in this country.
Another idea that I had was similar to an initiative which has been done in Europe and a couple of countries. It was to provide Canadians with a once in a lifetime opportunity to declare all their worldwide income, and if they repatriated back here, to charge them something like 10% or 20%, and split that amount with the provinces. It would be a good way to generate some revenue even for the provinces. If somebody had forgotten to declare some money or they happened to have some money in another country, they could bring it back. We could assess a tax of 10% or 20% tax. They would not have to pay any interest or penalties on those sums of money.
This initiative seems to have worked in a few other countries. I do not have the stats but apparently there was a good take on it and it increased government revenues by a good 10% or 15%.
There are other ways in which we can look at how tax havens and tax treaties are handled. A 500 page bill is definitely an interesting way to look at all these complex items. The bill tries to amend the Income Tax Act. The Income Tax Act is one of the more complex pieces of legislation, although apparently, the Employment Insurance Act is much more complex.
These are all issues the government should be looking at. I am looking forward to seeing Bill C-33 come to committee so we can analyze it and get a better understanding of what this 500 page document is all about.