Roy Cullen

[Income Tax Act, September 24th, 2003]

Mr. Speaker, I am pleased to participate in this debate on some important tax policies the government is introducing.

I would like to go back to budget 2000, when the government introduced a phased reduction of the corporate tax rate from 28% to 21%, phased over a number of years. That to me was a very positive development. It brought our corporate income taxes more in line with those of our U.S. neighbours. Perhaps we can still do more, but once this is fully implemented many of the corporate taxes we are paying here in Canada will be very competitive and, in some cases, below the combined corporate tax rates in some of the largest U.S. states that border this country.

In the reduction of the rate from 28% to 21%, resource sectors were left out of the equation. There was a certain logic to that, because the oil and gas industry and the mining sector have some special provisions. For example, they have the resource allowance, special accelerated capital cost allowances or accelerated depreciation for tax purposes, and they also have other tax credits that apply, such as depletion allowances et cetera.

So there was a certain logic in the government not reducing the tax rates for those particular sectors at that time because those sectors had some other unique tax advantages. Although it is interesting to note there are other sectors of the economy that do have some tax incentives which are not available to industry as a whole, such as the film industry and others. Nonetheless, there was a certain logic to that.

What the government did undertake, though, was to review that with the oil and gas and the mining sectors to see if there was a way to bring the 28% rate in line with the 21% that applied to the rest of the sectors of the economy. The reason was that the oil and gas and the mining industries wanted to bring down the statutory rate, in line with other parts of the economy, for a very simple reason. If we are trying to attract investment from overseas, it is much easier to quote a statutory tax rate of 21%. If we quote the statutory tax rate of 28% but indicate that resource rents are deductible and investment tax credits, accelerated capital cost allowances and depletion allowances are available, it gets muddy and complicated.

The oil and gas and mining sectors said they would like to move down to the 21% tax rate. They understood that there might have to be some give and take in moving to that rate. The government agreed to look at that and the discussions started. Basically, it was a search for solutions. How could the government move from 28% to 21% recognizing that there are special tax incentives available to those sectors?

The government has come out with a paper and now legislation describing what it saw in its wisdom as some of the trade-offs. It is proposing to eliminate the 25% resource allowance and there are a few other measures. I would like to speak to this very briefly.

Some years ago, the government replaced the deductibility of royalties against tax otherwise payable with the resource allowance. For example, a mining company would pay royalties provincially. Those would have been under the old regime and will be under this new regime that is proposed deductible for tax purposes, but the government was concerned that the provinces could actually capture much of the resource rents through their own royalties and diminish the tax base available to the federal treasury. It decided to say that royalties were not deductible for income tax purposes but there would be a 25% resource allowance.

The government looked at getting rid of the resource allowance, which it wanted to do very much because it has become very complicated and administratively somewhat of a nightmare. In looking at that, it was appreciated and understood by the government that replacing it would cause some winners and some losers to be created.

As members can imagine, if the 25% resource allowance were greater than the amount that one was paying in royalties to a provincial government, then one would be happy with the resource allowance. Conversely, if the resource allowance were less than what one was paying to a province for royalties, then one would not be very happy to lose the resource allowance. The government went through a number of iterations, discussions and models with the mining and oil and gas industries. In fairness, one can never arrive at a perfect solution. Given this scenario, there were probably going to be some winners and losers.

In addition to the elimination of the resource allowance and the deductibility of royalties, the government also said that if the resource allowance were removed and there was an allowance for the deductibility of royalties, that would actually increase the tax burden of the oil and gas and mining sectors. It then asked how it could replace that with something that is somewhat comparable.

It looked around and basically came up with this exploration credit for qualifying mineral exploration expenditures. It said it would eliminate the resource allowance, allow the deductibility of royalties and, because there was still a little left over leaving the industry at a disadvantage, it would throw in this tax credit for qualified exploration.

On balance, that sort of nets out. The analogy I would use would be that if people have their feet in a freezer and their heads in an oven, on average everything is fine, but it does not always work out that way. We know, for example, there are more mature mining companies that have developed mines and are not engaged so much in exploration and development. This exploration credit would not be of much value to them. There are also many companies in loss carry forward positions.

In any case, if we look at the whole balance of the measures, we do know, for example, that the potash industry has benefited or will benefit from these measures significantly. Some of that is actually quite justified because, as I understand it, for many years the royalties that it was paying was in excess of the resource allowance that was available. There are other parts of the mining sector in particular that are disadvantaged by this proposal, especially the more mature, developed companies that are not engaged so much in exploration and where the saw-off with the resource allowance and the royalty deduction does not really compensate for that.

We must also add into the mix that the government recently introduced the measure to eliminate the capital tax over a certain number of years. For mining companies and oil and gas companies this is a positive development because they are capital intensive, as one could expect. That is a very positive development.

They and others in the corporate world are saying we should accelerate the elimination of the capital tax and that is one point of view, of course. Some of these things come down to what is fiscally possible, but what the mining industry has come forward with I think is an eminently fair proposition.

What it is asking is, given that we have some losers in this scenario that is proposed with this legislation could we not accelerate the measures? Could we not accelerate, for example, the move from a 28% statutory rate to a 21% statutory rate? Could we not accelerate the elimination of the capital tax? Could we not bring these measures forward so that on balance, even though there are some winners and losers, the mining sector as a whole could probably end up in a position that would be easier for it to accommodate?

Presumably the bill will pass the House at some point. I believe it will be referred to committee. I know the government wants to deal with it expeditiously, but I will be arguing for the mining industry to have its chance to come before the House of Commons finance committee to present its case and perhaps departmental officials as well so there could be a good debate and discussion around some very important issues.

We sometimes undervalue or underestimate the contribution the mining industry and the oil and gas industry make in terms of jobs and economic activity. We hear a lot about the new economy. That is very important. We need to develop that by focusing on more research and development and by being more innovative, but there is actually a new economy embedded in the so-called old economy.

We have some of the most high tech industries in Canada with oil and gas, forestry and mining. Some of the leading edge technologies are being employed in those industries and there are many spinoffs from those industries in terms of the outsourcing of services and in terms of the contracting of a whole variety of services from trucking to logging and drilling, etc. They provide a huge amount of jobs and economic activity in this country. We should be ever mindful of that.

We want to ensure that we have a competitive mining industry in Canada that can attract investment. Going from the 28% statutory rate to 21% is a good move. That will help. However, we need, in my judgment, a little more tweaking of this formula to make it more fair to certain sectors, in particular, the mining industry.

Left out of the mix is the forestry industry, but it has a slightly different situation in that the royalties and the stumpage that it pays are deductible from income tax. It gets the manufacturing and processing rates, the lower rate of tax. My understanding of the forestry industry is that it is reasonably comfortable with this type of legislation.

We do have an issue. The oil and gas industry is generally on side, but presumably it would like to see the measures accelerated. I am sure my colleague from Medicine Hat will speak to that point, coming from an oil rich province like Alberta. I will listen with interest to his speech. Certainly the mining industry would like to see the measures accelerated. It would like to see the capital tax reduction and the statutory rate reduction accelerated to create more of a level playing field within the mining industry. That way we will attract more jobs and we will be more internationally competitive.

We have a very environmentally responsible mining industry and oil and gas industry. Some would have us believe otherwise, but it is not the case. Both these industries have made enormous strides in becoming environmentally responsible in the way they conduct their operations and in the way they deal with the resources that they extract.

In conclusion, I will certainly argue at the finance committee that the mining industry and perhaps other sectors that will be impacted significantly by these measures have the opportunity to come and present their cases. Perhaps departmental officials could be there as well so that we could have a good solid debate around some very important tax issues that will affect jobs and economic activity in Canada.

[User Fees Act, September 18th, 2003]

moved that the bill be read the third time and passed.

[User Fees Act, September 18th, 2003]

moved that the bill be concurred in.

(Motion agreed to)

[Supply, September 18th, 2003]

Madam Speaker, the member for Peace River raises a good point. Some recent studies that I have read basically showed that taxpayers, rightly or wrongly, reach a level of taxation where they intuitively say that they will not pay more.

However I think there is a certain fallacy to that logic. It is akin to the idea that the laws are too tough in Canada. People have to abide by the rules and the laws of the land.

However the member raises an interesting point. We should be mindful of the tax burden that we have on Canadians. At the corporate level we have moved quite aggressively to the right level. I would be surprised if were promoting a lot of tax evasion on the corporate end, although, with creative corporate accountants and tax advisers, I am sure some of that will go on.

However, on a personal level, we still have some work to do. My own sort of anecdotal evidence would suggest that there are more individuals than there should be moving income offshore and we need to deal with that in a couple of different ways.

[Supply, September 18th, 2003]

Madam Speaker, the member for South Shore wants to be very partisan and drag someone through something because he is not here to defend himself.

I know from my personal experience that the former minister of finance was absolutely pristine when it had to do with recusing himself from any decision that had anything even remotely to do with shipping.

It is interesting that the member raised Liberia. Liberia is one of the countries listed on the OECD list as a jurisdiction that has an unco-operative tax haven. These are jurisdictions, as I outlined before, that are currently unwilling to provide a commitment to exchange taxpayer information and to eliminate any non-transparent features of their tax system. It was quite appropriate that we dealt a blow to the tax treaty with Liberia.

I have not followed the former minister's business operations but the department was much involved in these discussions. In fact, I think the business operations initially were in Liberia. I am not sure about that but these are questions I know the former minister of finance was absolutely pristine about in terms of recusing himself from anything that was even remotely related to shipping. Even though the department might have concluded or not concluded various tax treaties, I am sure the minister had nothing to do with them, or he did not express his opinion one way or the other.

[Supply, September 18th, 2003]

Madam Speaker, I was born in Montreal, which is something I am very proud of.

I am very happy to see that the economy in Quebec is picking up. That is a good thing. The more the better. The economy in Quebec has gone through a lot of difficulty and that is because of the policies of separatism. We know that to be very true. I am glad to see that Quebec is coming back. It is coincidental with the demise of the separatist feelings in Quebec, and I am sure that is no coincidence.

With respect to the other question, I noticed earlier that the same question was posed by the deputy to his colleague asking if he could explain how the $2 billion in the banking system was lost. His colleague did not really answer it. I think he was implying that if the operations were offshore that was lost revenue to the Government of Canada. If it is a legitimate offshore operation, be it in Barbados, the Caymans, Luxemburg, or Switzerland, it is not subject to the direction and control of Canadians. Companies operate internationally and we lose some tax revenues because companies are formed around the globe. That is just the reality of life. I did not really understand what the connection was with tax evasion and tax havens on this supposed loss of $2 billion.

[Supply, September 18th, 2003]

Madam Speaker, it is a pleasure for me to take part in the debate on the motion by the Bloc Quebecois.

It is unfortunate because we could have had a very good debate about tax havens and tax evasion. These are important issues and are of concern to members of the OECD, the developed economies. There may be income that is finding its way into tax havens in these low tax or no tax jurisdictions. In some cases it constitutes tax evasion. In other cases it constitutes tax avoidance. In any case, it takes away revenues from the federal Government of Canada and other governments and that is a serious matter.

First, unfortunately the debate today has been personalized. The former finance minister has been spoken about in his absence with no opportunity to rebut.

Second, if we look at the revenue losses that the Bloc Quebecois is concerned about, all we have to do is look at the province of Quebec and the separatist policies. These policies have driven investment and economic activity out of the province of Quebec, thereby diminishing the revenue sources of the government.

Until recently we also had a government in the province of Quebec that spent beyond its means. Of course government revenues in the province of Quebec are an issue. That is why the Bloc in its usual fashion would like to lay this problem at the feet of the federal government.

While it is a serious issue and while the government I am sure is seized with tax evasion, I would hope that we could have a more constructive debate and discussion on this important topic.

Tax treaties are signed with countries. Canada has a number of tax treaties. They are designed to facilitate trade and investment. They are designed to facilitate the exchange of information. They are designed to avoid double taxation. Therefore, if we have companies and individuals of Canadian citizenship doing business in these other countries, they will not be double taxed. This is the reason for these tax treaties.

As my hon. colleague already said, Canada and the other members of the Organization for Economic Cooperation and Development, the OECD, have long been aware of the importance of eliminating instances of double taxation and protecting against tax evasion.

The model of double taxation, the convention, is designed by the OECD. Essentially all the tax treaties that Canada has negotiated, while they are designed to meet our particular needs, are in conformity with the model that was developed by the OECD.

International taxation is a highly complex matter. There are some countries, like Canada, that tax income based largely on residency. There are other countries, like the United States, that tax largely on citizenship. There are yet other countries that tax largely on source of income. That makes for quite a complex quilt. For imaginative minds, tax lawyers, tax accountants and others, it is somewhat of a smorgasbord, especially given our global economy, the amount of interrelatedness of companies around the world, and the way that they operate globally.

Tax evasion and tax avoidance are challenges. I want to clarify at least my understanding of the difference. Tax avoidance means that companies or individuals take advantage of the provisions of, let us say, the Income Tax Act of Canada, within the rules. In other words, they take advantage of rules, or perhaps loopholes, in the income tax system that Canada has evolved.

It is then incumbent upon the Government of Canada, if those activities are contrary to the spirit of the Income Tax Act, to fix those loopholes. That is an ongoing exercise. As we close loopholes, creative people think of other schemes. This will never end in any type of developed society. There will be creative tax accountants and tax lawyers who will look at how to avoid taxes and governments will look for ways to close loopholes if they are outside the spirit of the legislation.

Tax evasion is a totally different thing. This involves evading taxes that clearly are otherwise payable. Essentially there are a number of ways to do this: not to report income that should be subject to Canadian income tax, or to claim expenses against income that clearly are outside the scope of what was intended. Tax evasion is a serious problem, as is tax avoidance, but they are problems that require different types of solutions.

Canada has been at the absolute forefront of the initiative by the OECD to deal with what is referred to as harmful tax competition. It was our former finance minister in particular who was leading the charge on that. In doing so, the exercise started out initially looking at tax havens and offshore operations, where there are essentially low-tax or no-tax regimes, and looking at how the OECD countries could examine those particular jurisdictions and try to deal with them.

The second part had to do with transparency and the wish of the developed economies to entertain those situations in those tax havens or offshore banking centres where, if there was a suspicion of tax evasion, there would be cooperation and a transfer of information and a willingness to share. The Canadian tax authorities could get the information and if they felt that there was a Canadian evading tax, they could take the appropriate action. It had to do with sharing of information.

This is a very complex and difficult task when one looks at tax havens and offshore centres like Switzerland, Luxembourg, the Bahamas and others where the very raison d'être is secrecy and confidentiality. This is not an easy problem to deal with but the developed economies are trying to deal with it because they realize that they are losing a lot of tax revenues because of this tax evasion.

The challenge occurs of course when looking at low-tax or no-tax regimes. There are some obvious examples like the Bahamas, like Bermuda, like Switzerland, like Luxembourg and many others where there are low-tax or no-tax regimes, especially for what is called offshore operations. Many of these countries tax income of companies that have operating income, or real income in a sense, in their own countries, but they provide exemptions for offshore companies that operate within their domain.

These operations are quite numerous and they can be very legitimate. There are a number of Canadian companies that have set up offshore operations. Those operations are managing businesses outside of Canada. They are not directed and controlled within Canada and therefore they are not subject to Canadian income tax. It is quite legitimate to do that.

In many cases we have offshore operations which I would not say they are against the rules or they are evading tax, but they certainly stretch the application of the rules in the Income Tax Act. One example is the transfer of goods or services between affiliates. The Canadian Income Tax Act says that if we are selling a product or service to what is called a non arm's length organization, such as a wholly owned subsidiary or something akin to that, we have to sell that product or service at a fair market value. However, there is a range within which it is very difficult to challenge whether or not it is fair market value.

There are some schemes, if we want to call them that, which would put most of the profit margin in those jurisdictions where there is low tax or no tax to keep the profits in the low tax or no tax regimes. Again, the Canada Customs and Revenue Agency is charged through its mandate to make sure that transactions are priced at fair market value within a range and it does a very good job of that.

There are a number of what we call captive insurance companies that are set up offshore which are insuring the assets of multinationals and are really not attached directly to any particular country. They are directed and controlled from an offshore geographical location and they have real direction and control from that particular area.

The OECD found, in my recollection, that when it is looking at low tax or no tax regimes, it is very difficult to know exactly where to stop and where to start. As I said earlier, there are some obvious examples where there are no income taxes, but then there are examples like Ireland, which has gone to a very low tax regime.

I believe the OECD countries decided that it would be a bit of a mug's game to actually try to establish what was a harmful tax regime and what was not. In fact it was really outside the scope of the OECD's interest or what it could realistically deal with. It changed the focus from looking at harmful tax regimes in the sense of the actual amount or rate of tax and it focused more on transparency and the sharing of information. That exercise is ongoing.

Barbados is the example which was brought before the House today, and we know the reasons, but in terms of looking at it substantively, it actually has a very progressive and refined tax system. It taxes local companies at reasonably high rates. It does have provisions for the offshore banking and offshore operations, but it also has a very transparent system. It cooperates with countries like Canada. If there are concerns about tax evasion, there is a lot of information sharing.

The government of Barbados has committed not only in words but in deeds to actively fight money laundering. This was a very important initiative. In fact the financial action task force of the G-7 was set up to deal with fighting money laundering. Canada again, I am very proud to say, is right at the forefront of that. In fact a senior bureaucrat at the Department of Finance is chairing the working level group of the G-7 financial action task force that is looking at how to deal with fighting money laundering. As I said earlier, Barbados has made an absolute commitment to fight money laundering. Barbados does not want dirty money and I applaud it for that.

If Canada simply cancelled the tax treaty with Barbados, first of all it would jeopardize the 1,700-odd companies that are currently in Barbados and operating very legally and very appropriately. It might subject them to double taxation.

The other reality is that there are many tax havens around the world. Companies could easily move from one jurisdiction to another. In my judgment it is better to stick with an offshore operation in Barbados where the government is committed to clean money and the government is committed to transparency. I think that is how we are going to make progress on many of these issues.

The other interesting fact is the European Union has decided also to attack what it calls harmful tax competition and also tax evasion within the European Union. There are countries, as I said earlier, like Switzerland, Luxembourg and others that are a concern to some of the other economies in Europe. Those discussions are ongoing.

It is interesting that the European Union decided also to include manufacturing subsidies. It wants to avoid the kind of tax competition between European countries where they end up with a rush to the bottom. Unfortunately we are seeing some of this in North America. We are seeing some of this in some of the enormous subsidies that are available in the United States at the state level and the municipal level for manufacturing operations.

I can speak from personal experience. If we go to a U.S. state, Tennessee, Kentucky or wherever it might be, the state governor and local officials will absolutely line up to give out the sales tax abatements, property tax relief, cheap industrial land, cogeneration agreements and so on. Unfortunately this is causing some difficulty for us here in Canada because at the provincial and municipal levels we do not seem to have that same flexibility. Besides, our government has taken the position, I think with some wisdom, that we are not going to rush to the bottom. We are going to work on our natural competitive strengths and we are not going to be writing out cheques.

I have been a bit vocal in saying that we need to look at that seriously because we are in danger of losing a lot of investments. If we look at the automobile industry, I saw a report that was done not too long ago that there were 13 additions or new automotive plants in the United States within the last four to five years where the subsidies at the state and municipal levels were absolutely staggering. We have lost out on a few of those.

The one that piqued my interest was one in Georgia not too long ago. There was a $1.3 billion automotive plant investment. The subsidies that were attached to that were close to 58%. That is very difficult for us to compete with.

The reason I raise this is if we are going to look at harmful tax competition, we need to look at it holistically. It is not just harmful tax competition if it relates to offshore financial services. We have harmful tax competition right here in North America.

I think that medium to long term we need to sit down with our major trading partner and say that this is a rush to the bottom and we are all losing out. I know that the U.S. position at the federal level is that it does not have any control over what the states or local governments do. I think that is a bit of a cop-out. I think it is a little too easy to say that. We need to address this issue.

We also need to be mindful, if we are looking at countries like Barbados, Bahamas, Bermuda, the Seychelles and so on, of how these countries compete for manufacturing jobs and manufacturing investments. First of all in some cases they are constrained by their land mass. Bermuda is 22 square miles. I worked there as a young chartered accountant for two years and I would bump into the same people three or four times a day. Other countries have more space. Barbados in terms of geographic resources is more plentiful.

However these countries have gone into offshore banking and offshore financial services. It is a way for them to get some economic activity going into those jurisdictions because they do not have the land mass and perhaps the technical or workhorse experience or capabilities, at this point in any case, to attract the kind of manufacturing facilities that are always up for bid and for grab.

Is it appropriate to shelter income that evades taxes in other developed economies? No. I think that is wrong. I think we would find that most of these countries are prepared to deal with tax evasion. Some are not and they are on the OECD list of non-co-operating countries, which is quite a short list, but Barbados is not on that list because it is prepared to co-operate.

This is when we get into the fine point about tax avoidance versus tax evasion. They are two different things. Some creative people and companies have set up some tax avoidance schemes but that requires a different solution than tax evasion.

We have heard the example of shipowners and we know why that has been chosen as a target. I have had some experience with this in my business life. International shipping companies are all organized offshore. Whether we like it or not, whether we think that the better solution would be for these companies to be onshore and subject to the labour codes of countries like Canada, that is not the way it is. If companies want to be competitive internationally they simply have to organize offshore, and that is the way it is. Without that, those jobs, or even the ancillary jobs back at head office, would not be there because the company would not be able to compete at all.

I talked earlier about the international banking centres in Montreal and Vancouver. A number of us in the GTA tried to resuscitate the international banking centre concept for Toronto. We were rebuffed again because of the Montreal banking centre, which, unfortunately, Montreal has not done much with, and the one in Vancouver which was provided to give it a bit of a leg up in the very competitive world of international banking and finance.

We need to be better able to deal with countries that are committed to fighting money laundering and committed to transparency. Let us deal with tax evasion and banking centres that are illegitimate in a very aggressive way.

[Supply, September 18th, 2003]

Mr. Speaker, the hon. member for Rosemont—Petite-Patrie is talking about special tax systems for banks.

I find that especially difficult to understand because when the OECD did its review of all the OECD countries in terms of any harmful tax policies, it singled out the international banking centres and the tax treatment of those here in Canada. Those apply to the international banking centres in Montreal and Vancouver.

I will tell everyone the history of those centres. Those centres were set up because of lobbying pressure from the province of Quebec, and probably the deputies opposite and the Parti Québécois, to set up an international banking centre regime in Montreal and, likewise, some pressure to set up an international banking centre in Vancouver because they could not effectively compete with the strength of the banking centre in the city of Toronto. The government, perhaps in its wisdom, decided to give Montreal and Vancouver a chance. Does anyone know what Montreal did? It did not use it very effectively. It hardly used it at all, so it was a wasted effort.

On the one hand they talk about the special tax treatment for banks and, on the other hand, this is the very treatment to which the OECD objects. I wonder if the member for Rosemont—Petite-Patrie is aware of that provision, and if he would come clean to the House.

[Supply, September 18th, 2003]

Mr. Speaker, I recently saw the excellent movie by filmmaker Denys Arcand, Les Invasions barbares . It may well have been about the Bloc's barbarian invasions.

I listened to the hypocrisy of the member opposite, especially the part where he talked about the special tax treatment for banks. I find it ironic that the OECD, in its review of all the OECD countries--

[Supply, September 18th, 2003]

Mr. Speaker, I think it is scandalous that the member for Jonquière and previously the member for Saint-Hyacinthe—Bagot would attack the member for LaSalle—Émard when he is not here to defend himself. It is one thing to attack the policy of the government but it is another thing to attack someone personally and they should be ashamed of themselves. However we know why they are attacking him.

The member for LaSalle—Émard is one of the most scrupulous members of the House. What the members opposite do not seem to understand at all is that there is a difference between tax avoidance and tax evasion. They do not seem to understand at all that the former minister of finance was the lead on the OECD initiative on harmful tax competition, which is designed to deal with those tax havens to make them more transparent and to ensure that they share information. If there are companies or individuals in Canada trying to evade taxes, those jurisdictions will share information and allow a thorough examination so the Canadian authorities can take the necessary action.

I thought it was quite ironic that the member for Drummond earlier talked about a case of a capital gain that ended up in a certain situation perhaps not taxable. The Canadian Customs and Revenue Agency launched an investigation and it reversed the tax treatment of that company or individual. It seems to me that this is an example of a success story where the revenue agency has taken the right action.

Could the member discuss what the views are of the various tax havens around the world? Barbados is just one.