Mr. Speaker, we are dealing here today with a very important bill. It implements certain corrections to the current tax convention between Canada and the United States. This is a very technical subject that requires a lot of detailed analysis.
As in the past, Canada and the United States held repeated negotiations to try to find the most operational tax convention possible. As I said earlier in my question for the parliamentary secretary, these revisions have previously had some rather negative consequences.
For example, a change was made to the way in which so-called American pensions were taxed, that is to say, the pensions that Canadians earned while going to work and paying contributions in the United States and then returning to Canada. It was not necessarily in bad faith, but the result the government produced a few years ago was that people whose incomes were 50% taxable in Canada suddenly found them 85% taxable. The amendment intended to correct the tax convention ultimately had the effect of increasing the tax rate. This result was not necessarily very positive. We fought it, though, and succeeded in winning a certain number of points.
This shows that even though a bill is very technical, we need to take the time to examine it. That is what we have started doing in the Bloc Québécois. In general, this is clearly a positive bill that the Bloc will support. However, we would like certain aspects to be studied more closely in committee.
The bill gives cross-border workers the same tax benefits as resident workers. In other words, it tries to standardize the tax treatment so that Canadians who work in the United States will be treated virtually the same as American workers, and the same for Americans who come and work in Canada. It tries to simplify things and treat people as equitably as possible.
The bill also institutes a bipartite tribunal to settle tax disputes. This is a sensible improvement. In the past we found that when a situation was inappropriate and needed to be corrected, the citizen paying the tax did not really have the tools needed to appeal the decision. Even when the citizen was right about something, he could not easily obtain satisfaction because there was no decision-making tribunal. This bill corrects that situation.
As well, the bill contains rules regarding certain kinds of companies, and will make it more difficult to use various tax loopholes. We have to work harder on this issue. We need only consider the Barbados situation. We know that there has been a tax treaty in force with Barbados for several years, which is very much to the advantage of businesses who use that loophole so effectively that some experts are now talking about billions of dollars being taken out of reach of Canada’s tax system. Ultimately, the people who pay their taxes are paying for the ones who are using that tax evasion mechanism.
In fact, at the Standing Committee on Finance in May, we realized that we had no idea of the real extent of this phenomenon, in terms of what it is costing. I put some questions to the representatives of the Canada Revenue Agency and the Department of Finance, and no one was able to tell us how much this tax evasion amounted to. At our request, some research was done, and the Canada Revenue Agency was able to confirm that unless there are changes to the tax return that would make it possible to distinguish between interest income from businesses in Canada and interest income from outside Canada, it is impossible to place a value on it.
In my opinion, this is a major flaw. This is a question of fairness. My colleagues and I, and all individuals and businesses in Canada, pay income tax. If there is a tax loophole that allows businesses or individuals not to pay their share of taxes, then ultimately we lose as a society, and this situation must be fixed. And so when we examine an issue like the tax convention between Canada and the United States, we have to be concerned about this.
We support the bill. However, we want to have a little more explanation of certain points, and in particular the proposals for eliminating the withholding tax on foreign interest and the tax treatment of cross-border corporations.
These are complex questions. Negotiations are conducted in good faith and we want to simplify how things are done, but we must be sure we are not creating something that would put Quebec and Canadian corporations at a disadvantage. In the past, with the Free Trade Agreement, for example, we have seen that Quebec and Canada have been winners overall, but that there are aspects that were not dealt with in sufficient detail in the negotiations and we did not come out in the final agreement in the position of strength we wanted. Given that we have a tax convention concerning these points, the elimination of withholding tax on foreign interest and the tax treatment of cross-border corporations, it will be important that we obtain additional information in committee to ensure that the agreement truly reflects what is wanted.
Let us come back briefly to the main aspects. One of them, in this draft tax convention, is advantageous for cross-border workers. It will make their lives easier. Prior to the new convention, Canadian residents who work in the United States could not deduct contributions to their American pension plans from their taxable income. We know that here in Canada, when we make contributions to our pension plan, we receive a corresponding deduction. People who work in the United States have not had the equivalent of that, and the new tax convention will fix that situation.
From now on, those workers would be able to deduct pension contributions from income, in the same way as an American worker living in the United States. Conversely, an American resident working in Canada could also deduct contributions to his or her pension plan for income tax purposes. Thus, we see a significant and desirable improvement that makes good sense and that moves us to support the bill. Numerous workers in border areas in the United States as well as in Canada would enjoy all the tax benefits related to their pension plan, just like resident workers.
It is a bit paradoxical. At the same time as we make progress by trying to simplify the situation related to border areas, we run into a tightening of border-crossing regulations that creates a great deal of complications. A lot of negotiation is necessary. We have seen the effort made by nearly every member of this House to put limits on the American requirement that anyone entering the United States have a passport so that we can find other solutions. Initiatives are underway to promote the use of a driver’s licence. There appears to be some interesting work in that regard. However, on the other hand, there is a joint effort at the level of the tax convention to really simplify the situation. In terms of attitude, logic and the economy, that is the direction we should be taking in our relations with the Americans. In fact, we could make real progress that way.
The agreement on the tax convention also provides for a binding arbitration procedure for tax disputes between the two countries. In case of double taxation, a taxpayer who was adversely affected could appeal to the arbitration board for relief. If someone recognizes that his or her income is being taxed by both governments and should not be, there will be an automatic right to recourse through arbitration. There will no longer be the very complicated tax procedure involving submissions to both governments. In future, there will be a tribunal, an arbitration board, made up of an American representative, a Canadian representative and a third representative jointly appointed, which will be able to make determinations on tax matters and which will facilitate the settlement of tax disputes between individuals and the two administrations.
We can see that as an improvement. In refining the manner in which decisions will be made in a dispute, we are improving the settlement of issues. We have seen how that can lead to complications for major issues or when the decision mechanism is not clear; for example, in the softwood lumber agreement. Let us hope that the mechanism introduced to enable taxpayers to obtain satisfaction will improve the situation in the future and simplify the steps involved.
This will also create a body of cases, which could result in future amendments to the tax convention to fix the problems as they are identified. If a citizen complains about double taxation and ends up winning his case, we could then make changes and actually do something about it.
Decisions by this board will be legally binding and will perhaps lead to quicker adjustments to the tax treaty. In any case, we hope that it will truly simplify matters.
Third, the bill clarifies some provisions of the tax treaty in order to eliminate flaws that could be used as tax loopholes. For example, since the income tax laws are different in Canada and the United States, some companies could benefit from both tax laws. There are probably tax experts who earn a living studying these questions to help companies get the maximum deductions. When this is done legally, it is fine. However, when we realize that there are some flaws in the act and they can be fixed, we must correct the situation. This is the aim of the bill to amend the Canada-U.S. Tax Convention, and it is for the best.
Some companies could benefit from both tax laws by being recognized in different forms in both administrations, without having to assume the costs. In real life, we can see that this part is not easy to administer. Earlier, I gave the example of the treaty with Barbados. When we look at the organization charts of companies, it is very clear that some fictitious corporations were developed with this in mind.
Canada was also even a bit complicit in some situations of this kind. For example, a group of 13 OECD countries, including Canada, asked in 2001 that the “no substantial activities” criterion be eliminated from the determination of tax evasion. This reduced the number of countries on the list of non-cooperative tax havens from 35 to seven. Canada turned a blind eye here to a something that costs us plenty. There is a loss of tax revenues for the Canadian government, which adds to the pressures on Canadian citizens, whether natural persons or corporations, that pay taxes on their activities in Canada. There is tax avoidance here as a result of something that the Government of Canada did deliberately.
I want to say again, therefore, that in treaties of this kind, everything is there for a purpose. We have to get to the bottom of everything to ensure that something that was thought to be positive does not end up having some perverse effect. Sometimes as well, the government may well try to put one over on us and we need to correct the situation.
In the current case, therefore, we will see an improvement because companies that were taking advantage of the two tax laws will find it much more difficult to do so. Some of the tax loopholes will be closed and companies will have to pay their fair share. We will have to watch whether it actually works. In addition to eliminating some of the obstacles to cross-border investment, the bill reduces the number of cases of double exemption through greater harmonization of the tax rules of the two countries.
It is going to be a huge job for both countries to ensure that they have finally corrected not only double taxation but also the actual company practice. We need to simplify the way things are done and the costs that this issue can engender.
Finally, in an attempt to stimulate cross-border investment, the bill clarifies the rules to avoid double taxation of cross-border capital gains. This issue needs to be explored in greater depth and the type of transactions checked. Will the Canadian and American governments not end up losing revenues to which they would otherwise be entitled? Will it favour one country or the other? The purpose is to make it as easy as possible to do business, but both countries need to be respected and need to benefit.
From now on, Canadian investors operating in American markets will be required to pay tax in just one jurisdiction. That is a major advantage. We just have to ensure that this positive new way of doing things, this advantage, does not lead to negative effects with respect to legal issues that might arise. We have to make sure that companies pay their taxes.
This bill raises a lot of interesting issues. The Bloc Québécois is in favour of referring this bill to the committee. We intend to study it there. Once things have been clarified and, if necessary, adjusted, we will see what can be done and how we can improve the Canada-U.S. Tax Convention. We hope that the federal government will put just as much energy into closing the Barbados tax loopholes. The Standing Committee on Finance held hearings on the subject, but the government has not yet done anything to fix the situation.
In the meantime, billions of dollars have been flowing unchecked and untaxed out of Canada, at great cost to our society.
I hope that we can count on the cooperation of all parties. Adopting this tax treaty would be a good thing, and the Bloc Québécois will work hard in committee so that we can bring the bill back here quickly and complete the process to amend the Canada-U.S. Tax Convention.
