George Baker

[Canada-United States Tax Convention Act, 1984, October 18th, 1995]

Mr. Speaker, I was not actually speaking from notes, I was speaking from my head on those subjects. Let me tell the hon. member this. In the United States of America a term called formulary apportionment is used rather than the arm's length procedures of transfer pricing.

The present system is this. The Canadian government discovered in the auditing branch one case where a company was selling paper clips for $200 to a Canadian subsidiary to bring down the Canadian subsidiary's profits and then from the Canadian subsidiary was buying tires back for 6 cents each that were made in Canada to bring down the Canadian profits.

The Canadian government looked at that and at all the different systems in effect throughout the world. In the United States there is a system called formulary apportionment promoted by the state of California. Most states in the United States have this. They did it with foreign multinationals but they even did it with domestic tax. They made a judgment on the portion of the company's operations in each state.

In other words California said, we are going to make a judgment here. We are going to decide after looking at the entire operations-the company would have to open its books-how much the operations are paying in each one of the states. That led to double taxation.

The international multinational companies will not go to California because of that. California had to drop it but it is still a principle that is being promoted.

We should have more investigators in Canada. The hon. member and I agree on that. A lot of money is tied up here. There is $10, $20 billion at stake. However, what has been done in Canada, which is probably the best system, is sign an agreement.

The investigators go after each one of the multinationals and sign a pre-agreement, an agreement in advance. It is a secret agreement, because one cannot go around telling everybody what one's operations are.

An agreement is made in advance. That has cut down on a lot of the violations in Canada. That is the reason why the office is so small. It is a very effective and well run office.

[Canada-United States Tax Convention Act, 1984, October 18th, 1995]

He says that it is a reciprocal agreement. Reciprocal? This is a one-way agreement. Did he not listen to what I just read? Does he not know what the estate tax is compared with the capital gains in Canada? You cannot have a reciprocal agreement if it is not equal on both sides. You can have it, but why would you want to do it?

[Canada-United States Tax Convention Act, 1984, October 18th, 1995]

Yes, in this agreement, down to zero. That is only one of the tax cuts in this agreement.

Let me get to the whole purpose. What is behind this? What is behind this kind of rush? The International Business and Finance Daily is printing news stories. I will read a portion. I can table it for hon. members to see. It is marked: ``Washington, September 12, 1995''.

They are interested in getting the bill passed before the end of the month. Why? This is why. "The protocol to the tax treaty between the United States and Canada is expected to be ratified by the Canadian Parliament before the end of October". It then goes on to talk about the other protocols that were signed and quoted a Canadian official: "We will try as quickly as we can for the second reading, and the third reading will take place in the Canadian House of Commons". That is nice to know.

He then goes on to say: "Although the leading party, the Bloc, has the power to hold up the vote", he does not expect that it will. Then he goes on to say that one of the key features of the protocol is this: "The proposed treaty will be effective with respect to amounts paid or credited on or after the first day of the second month after the protocol enters into force". Just imagine. Let me repeat that: "the first day of the second month that the protocol" is finished in this Chamber. This is October.

The next sentence is key. "Companies in the United States are looking to apply the rate to their 1995 income tax. However, if the third reading vote is delayed in the House of Commons they may have to pay the higher rate on dividends".

The largest multinationals in the world will be getting an enormous tax decrease. However, if this bill does not pass third reading before the end of October, they will not be able to claim their reduction of 3 per cent because the protocol lowers the existing treaty's 10 per cent tax rate to 7 per cent in 1995, 6 per cent in 1996 and 5 per cent in 1997. Does anyone want to save the Government of Canada a few hundred million dollars? Pass this bill the first week in November.

Those are just a few of the reasons why I am opposed to the bill. The big one is this. Every single business organization in the United States that appeared before the Congress of the United States made one point clear. Of the seven treaties that were being passed in the U.S. Senate, only the Canadian treaty was truly a one-sided affair with the majority of the benefits going to the United States.

Let me quote from probably the biggest business organization, the National Foreign Trade Council, Inc., 1914 representing 500 U.S. multinationals, Mr. Robert H. Green, vice-president, tax policy. "Turning to the treaties before you"-this is the testimony-"the one that clearly is of the greatest interest to the largest number of companies in my membership is the U.S.-Canada protocol. The investment that flows between the two countries is substantial and favours the United States. We have substantially more investment there than they do here. The dividend withholding rates which are phased into 5 per cent over three years are of

tremendous benefit to the United States because of the reduced"-this, that and the other thing. He goes on to say: "Here are all the cuts".

This is from the administration of the United States. Mr. Samuels, who appeared before the committee, stated at page 42: "If you look at the treaties that are before the committee, with the exception of Canada, we think that it is probably about a zero, that it is probably a wash as far as benefits are concerned. With respect to Canada, when you look at the relative flows, there is a greater flow of income into the United States from Canada than there is going from the United States to Canada and we will benefit".

Then comes an interesting quote. This is from the assistant secretary for tax policy of the United States. He says that in one of these cuts it is only a one-way street because according to him and the U.S. treasury: "It will have a lesser effect on U.S. outgoing flows of interest to Canada because much of the flow is already exempt from U.S. tax under the portfolio interest provisions of the code".

What do we have here? We have an agreement that was negotiated in 1988 by the Mulroney administration. The Reform Party is absolutely correct. Agreements are signed between governments sometimes and they must be honoured. However, that is no reason to stand up in this Chamber and support them when you are taking money out of the pockets of ordinary Canadians who are being laid off by the government. We are cutting back programs and here we are giving what is in effect a tax break to the very rich in this country.

Much more could be said about this agreement. It is very complex but it all boils down to three enormous tax cuts. It boils down to giving a tax credit to somebody who has property worth over $600,000 in the United States. Those poor people, my heart goes out to them. If you have property in the United States worth more than $600,000 you are subjected to the estate tax. If you are under that you are not subjected to it. These political parties in the opposition, the Bloc that is supposed to be doing its job, are saying: "Atta boy, this is the best thing that ever happened".

We all respect the function of the House of Commons. In order for it to function properly that accountability must be there in the opposition parties. That is why I take such strong exception to the procedure and the content of the legislation.

This is the House of Commons. This is the house of commoners. That is where that phrase comes from. This is not the house of millionaires or the house of multimillionaires. This is the House of Commons. In these difficult times we should not be increasing tax cuts, tax expenditures for wealthy people and big American corporations. If we keep doing this, Canadian corporations will not be able to compete. Where is the cut for the Canadian corporations here? Where is it? It is absent.

[Canada-United States Tax Convention Act, 1984, October 18th, 1995]

Mr. Speaker, in response to the questions raised by the Reform Party and by the Bloc yesterday, the accountability of the Government of Canada to the people of Canada is made here in the House of Commons by the official opposition.

There are only two functions which Parliament serves: One is a legislative function and the other is an accountability function. The actions of the executive of government are held accountable to the people through Parliament. If the official opposition party does not do its job, then Parliament is not doing its job.

We have before us today a bill which came in through the back door. It was not the servant's entrance because the back door was the Senate. It came in through the Senate, but it involves an incredibly large expenditure of money in the final analysis. It is a large expenditure not in direct allocation, but in what the auditors general call tax expenditures.

The bill also includes provisions which Bloc members keep repeating as being wonderful. It cuts dividends by 50 per cent to American corporations which have subsidiaries in Canada. It cuts by one-third the taxation on interest on the money that flows back across to the United States. It eliminates every single royalty tax in this country which is held by Americans, except for trademarks. Trademarks are being bifurcated. It is a very difficult accounting procedure, but that is what is happening under the bill. There are those three big tax cuts.

I just cannot understand it. I do not believe there is one constituent of the official opposition-I keep referring to it as the official opposition because it is supposed to be the group that controls question period and debate in this Chamber. That is why we have a group of MPs like myself and others on the government side who are wondering where the accountability and debate is here.

What I am referring to is this philosophy of the official opposition that working Canadians should compensate people who have property worth over $600,000 in the United States of America. With the passage of the bill, the estate tax in the United States only applies to property worth over $600,000.

The Bloc is saying it is going to end double taxation. It is demanding this on behalf of Quebec. How? It says that the Canadian government taxes in a different way. Yes, it does tax differently on property over $600,000 because there is no double taxation below $600,000. The estate tax in the United States will not kick in until there is property over $600,000 in the United States. The Bloc tells us it wants to end double taxation for people who pay a tax on things that are valued at over $600,000 in the United States of America.

The estate tax in the United States of America has been in existence since the turn of the century. It was brought in at the same time it was brought into Canada when income tax came in. Income tax was demanded by the people of western Canada in 1916 when they marched with their signs. They demanded that income tax be brought in. Their cry was the same cry as that of the people in the United States of America when they wanted income tax brought in at the turn of the century, about 1897, because they said the rich were not paying their fair share of taxes.

The governments of the day responded by bringing in taxes on wealth of varying amounts. Estate taxes came in. All of a sudden, here we are in 1995 and we are going to try to end double taxation which has been there since 1904. Worse than that, we are going to try to end double taxation for people who have property in the United States worth over $600,000. I just do not understand the Bloc's position on this as the official opposition in the Canadian Parliament because that is where the objection should come from.

Let me repeat this again. There is no double taxation after the passage of this bill unless one has property of over $600,000 in the United States. The double taxation is not really double taxation because we do not have an estate tax. Our death tax is on income. The estate tax is on property. Everybody in this Chamber knows that.

In the United States they take the value of one's automobile, house and everything else, the paintings on the wall and the dishes, the stocks and bonds, everything. In Canada we exempt the primary residence and the things one uses. Canada does not tax the car in the driveway; we only tax what the estate of the dead person says was actually an increase in value of the property that is not exempt. It is two completely different things, so how can we have reciprocity when we do not have the same thing in effect in both the nations?

When the bill was introduced into the United States Senate the Government of the United States said: "Each country agrees to allow an appropriate credit for the death taxes imposed in the other country". It is convenient for the United States because it takes about three years to settle an estate owned by a Canadian in the United States. A long time. You normally do not want to pay estate taxes in the United States. This will sort of hurry it up, will it not?

If we are now going to give a tax credit, where does that tax credit come from? It comes from the pockets of working Canadians. It comes from the person working on a construction job. It

comes from the person who works in a store. It comes from the person making the beds in the hotels. It comes from every working Canadian. Until the official opposition in Parliament understands that the government must be held accountable on tax expenditures we will never get the finances of this country under control.

Apart from that, the other major thing in this bill is that it reduces by 50 per cent the taxes paid by American multinationals operating in Canada on their profits. Every single member of this House knows that we have a special division in Revenue Canada called the transfer pricing division. Every member in this Chamber knows there are nine or 10 people there and there are another 17 or 18 in the field looking at all these multinationals. Everyone knows that over 70 per cent of them do not pay any tax at all. Transfer pricing is the major problem but there are other problems as well.

You charge $50 for a clothespin when you pass it from your parent company to your subsidiary. The trick is that if you have a company working in Canada at rates which are higher than in the United States, you want to make sure there is no profit showing on the books, so you bring down the profits by transfer pricing.

The only place we know they can pay taxes on their profits and operations in Canada is at the border. What is the Senate doing in this bill? The Senate is reducing that to half. How much money is that? Let me quote the chief of corporate and international tax of the finance department before the Senate standing committee April 25, 1995. He was asked the question: Why not reduce it to zero? Instead of 10 per cent why not bring it down to zero? His answer is on page 19 of the transcript: "The principal reason is money". Do not forget we are reducing it by half down to five. He said: "I have not looked recently but I believe that our annual withholding tax take is approximately $1.5 billion. Currently it would be difficult to sustain completely walking away from that". I repeat, 1.5 billion bucks.

Do you know, Mr. Speaker, that the agreement we are passing here today not only reduces the withholding tax by 50 per cent but it also commits us in writing that in three years time we will go back to Washington and negotiate it down?

[Canada-United States Tax Convention Act, 1984, October 17th, 1995]

Mr. Speaker, I rise on a point of order. I presume you will have me down as voting in favour of the motion. That is exactly what I want, and in case any other members want to do the same thing they are free to do so.

[Canada-United States Tax Convention Act, 1984, October 17th, 1995]

Mr. Speaker, I moved the motion so obviously I would support Motion No. 1.

On Motion No. 2 perhaps there are other members who may feel the same way as I do about the amendments I have put forward so I would suggest that the vote proceed.

[Canada-United States Tax Convention Act, 1984, October 17th, 1995]

Mr. Speaker, I certainly would not give unanimous consent to vote the same way as other Liberal members on the bill, in fact not the same way as the Reform or the Bloc will vote on the bill.

[Excise Tax Act, October 17th, 1995]

Mr. Speaker, I enjoyed listening to the hon. member. However, I am not too certain that the solution is as simple as he purports.

The corporate tax rate in Canada is 38 per cent. When provincial corporate taxes are added the average is 43.4 per cent. In the United States the tax rate is 35 per cent nationally. When state taxes are added the average is 40.3 per cent. In Japan the corporate tax rate has never been below 50 per cent. In fact, the corporate tax rate today in Japan is 52.5 per cent. The corporate tax rates in France and Germany, which are major trading partners of the largest nations in the world, in Germany range from 56 to 44 per cent, with France at 33 per cent.

The hon. member is suggesting a substantial decrease in corporate taxes, with a single rate of tax. In fact he has expanded that to personal income taxes. He suggests that there should be a simple direct rate which would be the same for everybody regardless of income. I would ask him what deductions, if any, he would allow for corporations if that were the case.

[Canada-United States Tax Convention Act, 1984, October 17th, 1995]

Mr. Speaker, this is what I was building up to. Under our laws in the Chamber we are not allowed to amend a tax treaty. It states that clearly in our standing orders. We can amend the legislation that brings in the tax treaty. However in introducing an amendment to that legislation we cannot negate the principle of a clause in the tax treaty.

Just imagine the power of the U.S. committees. They actual change treaties. The Minister of Finance had to go back to Washington twice. He signed one, they changed it and he had to go back again.

According to our standing orders our House of Commons is not allowed to change anything in a treaty. The amendments I put forward are amendments that do not negate a clause. The first amendment is that all of these huge tax decreases to American multinationals operating in Canada come to an end in the year 2000. That is amendment number one. We cannot afford giveaways any more.

We are cutting public servants. We have got to. We are cutting back on UI. We are cutting back on this and cutting back on that and at the same time we are introducing this whole new set of tax expenditures, gifts.

That leads me to the second amendment, the gift part. Motion No. 2 relates to the dating back of the tax credit on the estate tax to people who had died since November 10, 1988. Do you get the significance of the date, Mr. Speaker? Perhaps somebody of great wealth did die on November 11, 1988, I do not know. The very date is the date the protocol came into effect in the United States that decreased the maximum from $600,000 to $60,000.

Under this bill there are estates today in Canada verified by Revenue Canada to me and to the committee that are just waiting to put in their bill. Now the Canadian government has to pay for the amount of estate tax that they pay in the United States that was taxed as U.S. source revenue.

The Canadian people have to cough up the money now out of the treasury. I am told that one chap who died had $20 million in the United States. He really got hit with the estate tax, almost $8 million of it had to be paid to the U.S. treasury. He has a nice rebate coming to him from the U.S. government but he has a much bigger rebate coming to him from the Government of Canada. Only $12 million went to the family. Now the people concerned who received the benefits from the estate will be able to bill the Canadian government for an additional $5 million or $6 million in that one year.

The second amendment, seconded by the hon. member for Broadview-Greenwood, is that since the Canadian delegation and the U.S. delegation said this is reciprocity, this is to eliminate double taxation, that if there is not double taxation then there will be no money granted. That does not negate the clause at all. It just says if no taxes were paid no rebate will be given as far as the Canadian government is concerned.

The auditor general in 1985 said the Canadian Parliament reminded him of a group of automobile engineers trying to build an automobile that was more efficient, that burned less gas but had the same energy. He said that Parliament is like that because we are trying to find ways of cutting while still maintaining our services to the Canadian people. He said the problem is this.

When the engineers changed the engine of the automobile from eight cylinders to six cylinders to four cylinders and brought in all those modifications to save energy, at the end of the day they discovered they were burning just as much gas as they were before. They did not know what the problem was until they looked under the car and saw all these little holes in the gas tank. Those, the auditor general said, are the tax expenditures of the Government of Canada.

The government cuts and slices and chucks. It lays people off who have children going to school and to university who do not know where their next dollar is going to come from. It changes the system of unemployment insurance. When a primary producer working in this country has as a part of his income unemployment insurance, it says: "Oh no, we are going to take that away because that was not intended for that". That person is worried to death today.

While we do all of that, we turn around and take a Senate bill that will give enormous returns to very wealthy people, very rich people, and we say to the multinationals we are going to cut your taxes by 50 per cent.

We are not going to do anything for the very poor. We are not going to do anything for Canadian corporations operating in Canada. That is why I think, after looking at the bills we are

discussing, what is really happening in real terms of tax expenditure is that we take from the poor and give to the rich.

It is Robin Hood in reverse. He is now working for the great companies that represent those very multinationals in the United States that are working so well in this country, a country that according to the World Bank is the second wealthiest country in the world because we have resources.

The House of Commons today, with the Bloc and the Reform Party supporting this legislation wholeheartedly, is not working. The Canadian people are saying that we need a change in the rules of procedure or we need to get rid of the two opposition parties.

[Canada-United States Tax Convention Act, 1984, October 17th, 1995]

The hon. member from the Reform Party says it is supported by the government.

The Bloc as well stood up in the chamber on second reading and in the committee of the House when this bill was being dealt with and said "We love this bill. Give us more bills like this that give huge tax breaks to American companies operating in Canada".

However, that is not all the bill does. The bill gives a tax credit to anybody who has property is the United States valued at over $600,000 and who happens to die and is subjected to the estate tax in the United States. Now the Canadian public will have to make the payment on behalf of that person to the U.S. government.

Mr. Speaker, as you know, if you die in the United States, in come the people from the Internal Revenue Service and they assess the value of the paintings on the wall, the value of your car, your garage, your backyard, your orange trees and your grapefruit trees-they look at everything. If it comes to over $600,000, they sock it to you with what is called the estate tax. We had it in Canada prior to 1971, but not on the scale it is in the United States. The normal grab is about 54 per cent of everything you have over $600,000, which includes stocks and bonds, even if they have been obtained through a Canadian broker, if you have that property in the United States.

In Canada we have unrealized gains upon death, capital gains, but that is a different story from the estate tax. Nobody comes in and looks at your home. If it is valued at $20 million it is not taken into account because that is your residence. Nobody looks to see if you have a $100,000 Rolls Royce in the driveway. That is not counted in Canada because that is your personal property for personal use. It is a different form of taxation. This Senate bill

gives you a tax credit, which is paid for not just by the Canadian treasury; this is out of the pockets of Canadian citizens. That is a tax expenditure. That is what is wrong today.

People wonder where the money has gone over the years. Why could we afford health care and education transfers to the provinces and a big public service 20 years ago and we cannot today? Auditors general since 1985 have identified the main culprit as being tax expenditures. This tax expenditure will mean the Canadian people will pay for your estate tax in the United States of America. The Canadian people will pay for a 50 per cent reduction on the tax on profits to American multinationals operating in this country, on dividends. The Canadian people will pay for the 33.33 per cent tax decrease on interest that travels over the border into the United States. The Canadian people will pay for the elimination of royalties on practically everything, down to trademarks, which have been bifurcated. It will be divided. They will be examined each part separately.

Let me give the House some idea of how much this will cost the federal treasury.

The person in charge, the chief of corporate and international tax in the Department of Finance, testified before the Senate committee. He was asked: "Why do you need to have a 5 per cent tax? Under this bill we are reducing it by 50 per cent. Why not reduce it by 100 per cent on the withholding tax? Why not give the American corporations their entire profit tax free?" The person in charge of corporate taxes in Canada stated: "The principal reason is money. I have not looked recently, but I believe that our annual withholding tax take is approximately $1.5 billion. Certainly it would be difficult to sustain completely walking away from that".

What are we doing? We are cutting by 50 per cent the withholding tax on dividends from American corporations operating in Canada and sending their profits back across the border to the United States. What does that do to a Canadian business that is trying to compete? It is fine to give Wal-Mart a 50 per cent tax break, but what about the Canadian company that is competing against the American company?

It is interesting to look at the flow. I have the evidence given before the committee on foreign relations in the United States Senate. It is the Jesse Helms committee. It talked about the treaty with Canada. It did not like it last year. After the Minister of Finance signed it in Washington the American Senate changed it. The Minister of Finance had to return in March of this year to re-sign the amended protocol.

I will read a couple of things into the record. Here is the Secretary of the Treasury for tax policy for the Government of the United States: "The protocol reduces the rate of withholding on cross-border flows of interest from 15 per cent to 10 per cent. This reduction will provide a substantial benefit to many U.S. recipients of Canadian source interest payments. It will have a lesser effect on U.S. outflows of interest to Canada because much of this flow is already exempt from U.S. tax under the portfolio interest provisions of the code". In other words, we are giving the Americans a 33.3 per cent tax cut when Canadians will not benefit from that interest provision because the Secretary of the Treasury in the United States says that it is already exempt under the code.

The other provision is on royalties. Here is the assistant treasurer for tax policy, the Hon. Cynthia Beerbower: "Being freed of tax on royalties is cash in hand. Now we pay royalties to Canada. With a zero rate in effect in this protocol, I cannot imagine that anyone would sit on this".

Then we go to the big one, the $1.5 billion the treasury is getting today in this Senate bill, which is supported by the Reform Party and by the Bloc.

The vice-president of tax policy, Robert Green, for the National Foreign Trade Council Inc., 1914, which represents 500 American multinationals doing business in Canada, said in his evidence: "The investment flow between the two countries is substantial and favours the United States. We have substantially more investment there than they do here. The dividend withholding rate reductions, which are phased into five per cent over three years, are a tremendous benefit to the United States, to U.S. multinational companies doing business there. And because of the reduced withholding rates the amount of net repatriated earnings to the United States for investment will be substantially increased".

Then he goes on to talk about the reductions in the withholding rates on royalties: "The additional amount of repatriated earnings will substantially benefit the United States".

Let there be no guessing about this. The United States business community says it will take that from Canada and repatriate it right back to the United States of America.

It is funny, Mr. Speaker, you stand here in the House and hear some Liberal backbenchers objecting to this, and you have the Reform Party and the Bloc in total agreement. How did it start? In 1988 the U.S. made a tax change. It was a change to the estate tax rules for foreigners. It stated that any foreigner with property in the United States would have to pay estate tax on everything above $60,000, not $600,000. That was in 1988.

The record shows that the Canadian government in 1988 took a week to respond. It sent people down to Washington. It said: "We

want to relieve Canadians of this tax that is being imposed on them in the United States". That is where it started.

The United States said: "In order for us to give you a break for wealthy Canadians, you will have to give us something in return". It went back and forth. The negotiations started in 1988. It has gone on since then. It has gone on to include huge tax expenditures that nobody has an estimate on. Revenue Canada and the Department of Finance say they do not know-