Mr. Speaker, I appreciate the opportunity to speak today at second reading of Bill S-3, the 1999 conventions implementations bill.
This legislation puts into force seven new tax treaties that Canada has signed recently with Kyrgyzstan, Lebanon, Algeria, Bulgaria, Portugal, Uzbekistan and Jordan. It also replaces the existing convention with Luxembourg and amends Canada's treaty with Japan.
These nine tax treaties have been designed with two objectives in mind—the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income
Before discussing the specifics of this bill, there are a couple of points I want to make for the benefit of my hon. colleagues.
First, I want to make it clear to hon. members that Bill S-3 is standard, routine legislation.
Proof of this is the fact that all of these treaties, like their predecessors, are patterned, to a large extent, on the OECD Model Tax Convention, which is accepted by most countries around the world. The provisions in these particular treaties comply fully with the international norms that apply to such treaties.
Another point I want to make at the outset is that, should any conflicting matters arise, tax treaty rules take precedence over the Income Tax Act. This ensures that the objectives I just mentioned can be reached.
Let me take a moment to put this legislation into context. One of the goals of the 1971 review and overhaul of Canada's income tax system was the expansion of our network of tax treaties with other countries, a goal that the government has worked hard to achieve, and with great success I might add. At present Canada has tax treaties in place with 68 countries, a number that will increase to 75 when the treaties in this bill come into force.
It is interesting to note that Bill S-3 is the 24th tax treaty bill to be introduced in parliament since 1976. In the past two years alone Canada has signed treaties or protocols with 14 countries.
Tax treaties are particularly important to two ongoing government priorities: tax fairness and the promotion of trade and investments. I will deal first with tax fairness.
Since coming to office in 1993, the government has been guided by the following principles of tax policy—principles that the finance minister recently reaffirmed in the 2000 budget.
First, our approach to tax relief must be fair. While tax reduction must ultimately benefit all Canadians, it must be directed first to those who need it the most—middle- and low-income earners and especially families with children.
Second, broad-based tax relief should focus initially on personal income taxes where the burden is greatest and where Canadian taxes are most out of line with our history and with other countries.
Third, the business tax system must be internationally competitive. Fourth, broad based tax relief should not be financed with borrowed money.
As hon. members know, the government's fiscal improvements have enabled it to begin providing general tax relief, an integral element of our strategy for sustained economic growth and an improved standard of living and quality of life for all Canadians.
While tax reduction has begun, the government realizes that more needs to be done to lower the overall tax burden and to reform the structure of the tax system. Tax treaties are a part of this overall structure and tax fairness demands that no Canadian should ever find himself or herself caught in the midst of double taxation. As their full title implies, this is exactly what tax treaties work to eliminate.
Let me explain what I mean by double taxation. International double taxation arises as the result of the imposition of comparable taxes in two or more jurisdictions on the same taxable income in the hands of the same person and for the same period of time.
This overlap between source based taxation and residency based taxation can result in adverse and unfair consequences for taxpayers. These tax treaties like the ones included in the bill avoid double taxation by establishing rules for dividing taxing jurisdictions between the country of the taxpayer's residence and the country where the income arises.
Allocating taxing rights not only helps safeguard against double taxation but also reduces the burden of compliance to taxpayers resident in one country who have only limited contact in the other country. An example of this is the reduction of withholding taxes.
Withholding taxes are the taxes countries generally impose on income paid to non-residents. This is a subject I will discuss in more detail a bit later.
The other government priority that tax treaties address is the promotion of trade and investment. Tax treaties are directly related to international trade in goods and services and therefore directly impact on Canada's domestic economic performance.
Their impact is very significant. Over 40% of Canada's annual gross domestic product is tied to exports. Moreover Canada's economic wealth also depends on foreign direct investment as well as inflows of information, capital, technology, royalties, dividends and interest. It is obvious then that the tax treaties contained in Bill S-3 will benefit Canadian businesses and individuals with operations and investments in these nine countries.
Let me outline the additional benefits in addition to the avoidance of double taxation that I have already mentioned. Taxpayers will know that a treaty rate of tax cannot be increased without significant advance notice. The mere existence of these tax treaties will foster an atmosphere of certainty and stability for investors and traders that will only enhance Canada's economic relationship with each country.
Annoyance and complexity in the operation of the tax system will be reduced as the need to pay tax on certain business profits where there is no substantial contact with the other country will be eliminated and a mechanism to settle problems encountered by taxpayers will be provided. Reducing the burden of compliance will encourage more international activity which will have a favourable effect on the Canadian economy.
I referred to withholding taxes as being one of the solutions to the problem of double taxation. I also mentioned that countries usually impose such taxes on income paid to non-residents.
Canada's network of tax treaties provides for several reciprocal withholding tax rate reductions. Without a tax treaty or other legislated exemption, Canada taxes income paid to non-residents at the rate of 25%.
Reduced withholding taxes simplify the tax system and make it fairer. The country where the income is generated can withhold tax usually at a rate of 5%, 10% or 15% on dividends and 10% in the case of interest and royalties. In some instances royalties on copyrights, computer software, patents and know-how are exempt at source.
I will not go into the detailed changes in the tax treaties. They are fully outlined in the bill. They talk about the withholding taxes that will apply to these treaties with respect to dividends and other types of income. It is well laid out in the act. In the interest of time I will move to other provisions.
The treaties covered in Bill S-3 address other tax treaty issues such as capital gains, non-discrimination based on a taxpayer's nationality and pensions and annuities paid to non-residents. Time does not permit me to discuss all of these provisions in detail.
However, there is one issue in particular I must bring to the attention of the House, and that is the proposed rules relating to the taxation of emigrants' pre-departure gains. These rules were proposed by the finance minister and will be included in the 1999 technical amendments bill when it comes before parliament. The proposed rules are recognized in the conventions with Luxembourg, Portugal, Lebanon and Jordan as they address the potential for double taxation in such situations.
However, since the treaties with Uzbekistan, Bulgaria, Algeria and Kyrgyzstan were negotiated prior to these rules being announced, the proposed migration rules allow Canada to give a unilateral foreign tax credit to emigrants until the year 2007. This timeframe guarantees that there will be no double taxation of pre-departure gains before these treaties have been negotiated to take the new rules into account. Japan has asked to review taxpayer migration in future negotiations.
Before closing, I would be remiss if I failed to mention another benefit to double taxation treaties. The second objective in designing these treaties is the prevention of fiscal evasion.
Double taxation treaties encourage the exchange of information between revenue authorities to prevent tax evasion or avoidance. Sharing information helps revenue authorities identify cases of tax evasion or avoidance and act on them.
In summary, I urge my hon. colleagues to support the legislation. The benefits of Bill S-3 are clear.
The thrust of the treaties covered in Bill S-3 is to provide equitable solutions to the various taxation problems existing between Canada and these nine countries.
These treaties will help to secure Canada's position in the increasingly competitive world of international trade and investment while ensuring that Canadian tax policy remains consistent and Canadians are not subject to double taxation. Let us pass the bill in haste and put it into effect.
