Bryon Wilfert

[Financial Institutions, November 8th, 2002]

Mr. Speaker, the banking payment system in Canada is one of the most sound in the world. The government does not generally regulate the pricing of financial institutions' charges for their services.

[The Economy, November 8th, 2002]

Mr. Speaker, I would be more than happy to provide the member with some good economic news and put the opposition in the light.

First, because of the sound economic policies and fiscal management of the government, coupled with a strong, vibrant private sector, the unemployment rate is now down to 7.6%. In practical terms, 33,000 new jobs were created in the month of October and 459,000 new jobs this year alone.

The government has found the right formula and we are on the right track.

[Question No. 3, November 6th, 2002]

The 2001 budget extended the existing tax-deferred rollover of farm property to a child to transfers of commercial woodlots after December 10, 2001, where the woodlot is operated in accordance with a “prescribed forest management plan”.

The budget indicated that specific criteria for prescribed forest management plans would be developed in consultation with interested parties. The department’s consultations with interested stakeholders have now been completed and draft regulations defining “prescribed forest management plans” will be developed taking into consideration the views expressed during our consultations.

As indicated in the 2001 budget, intergenerational transfers that occur before the regulations are promulgated will qualify for the tax-deferred rollover if a plan providing for the necessary attention to the woodlot’s growth, health, quality and composition is followed.

[Question No. 19, November 1st, 2002]

Madam Speaker, I ask that the remaining questions be allowed to stand.

[Questions on the Order Paper, November 1st, 2002]

Madam Speaker, the following questions will be answered today: Nos. 18 and 19.

[Government Response to Petitions, November 1st, 2002]

Madam Speaker, pursuant to Standing Order 36(8) I have the honour to table, in both official languages, the government's response to 10 petitions.

[Sports, November 1st, 2002]

Mr. Speaker, it is with great pleasure that I rise in the House to recognize the leadership that has been shown by Athletes CAN in developing its six point manifesto for sport in Canada.

Athletes CAN is a 10 year old organization representing national team athletes whose mission is to work with partners in leadership, advocacy and education to ensure a fair, responsive and supportive sport system for high performance athletes in Canada.

At its annual forum in Quebec City last month, it further refined its declaration, which was recently announced to the public. The manifesto calls for the federal government to invest in a comprehensive sports development program from playground to podium and beyond, for the provincial and territorial governments to increase sport and physical activity in schools, and for the creation of a national infrastructure program to assist in developing sport and recreational facilities.

The Government of Canada appreciates the dedication of our high performance athletes in their athletic achievements and congratulates them for the leadership that they continue to demonstrate in trying to improve the sport system in Canada.

[Tax Conventions Implementation Act, 2002, November 1st, 2002]

Mr. Speaker, I appreciate the opportunity to present Bill S-2, the Tax Conventions Implementation Act, 2002, for second reading today.

The bill relates to Canada's ongoing effort to update and modernize its network of income tax treaties with other countries, a network that happens to be one of the most extensive in any country of the world.

At present, Canada has tax treaties in place with over 75 countries. Passage of the bill will, of course, see the number increase. The bill would enact tax treaties that Canada has signed with seven countries. Of these seven treaties, three represent updates to existing tax treaty arrangements and four of the treaties establish bilateral tax arrangements with countries for the first time.

More specifically, the treaties with Kuwait, Moldova, Mongolia and the United Arab Emirates are all new treaties that have recently been signed. They are historic in the sense that they are the first comprehensive tax treaties ever concluded with these countries.

The new treaties will provide individuals and businesses, both in Canada and in the other countries concerned, with more predictable and equitable tax results in their cross-border dealings. What is more, our arrangements with Belgium, Italy and Norway are updated to ensure that our bilateral arrangements are consistent with current Canadian tax policy.

Before discussing these treaties any further, I want to take a few minutes to provide the House with a brief overview of the importance of tax treaties and why it is necessary for the bill to be passed.

Canada taxes both the worldwide income of Canadian residents and the Canadian source income of non-residents. Put another way, all income of Canadian residents, whether earned here or abroad, is subject to a tax in Canada, whereas as non-residents are generally only taxed here to the extent that they participate in the economic life of Canada or receive income from sources in Canada.

Bilateral tax treaties or, if one prefers, income tax conventions, are an integral part of our tax system. Basically, they are arrangements signed between countries that are primarily aimed to protect taxpayers from double taxation and to assist tax authorities in their efforts to prevent fiscal evasion.

Canada benefits significantly from having tax treaties in force with other countries. Our tax treaties, for example, assure us of how Canadians will be taxed abroad. At the same time they assure our treaty partners of how their residents will be treated here in Canada.

Tax treaties also impact on the Canadian economy, particularly because they help facilitate international trade and investment by removing tax impediments to cross-border dealings. This is significant because, as hon. members know, Canada's economy relies significantly on international trade. In fact, Canadian exports account for more than 40% of our annual GDP.

What is more, Canada's economic wealth depends on direct foreign investment to Canada as well as inflows of information, capital and technology. In other words, by eliminating tax impediments and by creating more predictable tax results for traders, investors and other taxpayers with international dealings, our tax treaties promote opportunities at home and in international trade and investment abroad.

Since Canada's economy is likely to become more intertwined in the world economy, eliminating administrative difficulties and unnecessary tax impediments with respect to cross-border dealings will remain important.

I would like to point out that there can be economic disadvantages for countries and taxpayers in the absence of cooperative tax arrangements with other countries.

Let me explain. The absence of a tax treaty makes the threat of double taxation a concern to taxpayers. Double taxation occurs when a taxpayer lives in one country and earns income in another. Without a tax treaty in place to set out the tax rules, income is at risk of being taxed in both countries. This situation produces unfair results and can have adverse economic impacts.

It is only natural that investors, traders and others with international dealings want to know how they will be taxed before they commit to doing business in a given country. For example, when considering doing business in Canada, investors and traders are anxious to know the tax implications associated with their activities both in Canada and abroad. They also want assurances that they will be treated fairly.

Tax treaties establish a mutual understanding of how the tax regime of one country will interface with that of another, thus helping to remove uncertainty about the tax implications associated with doing business, working or visiting abroad.

Such an understanding can be achieved by allocating the right to tax between the two countries together with incorporating measures that resolve disputes, eliminate double taxation and require notice to be given before the arrangement can be terminated. All these measures promote certainty and stability and help produce a better business climate.

Although tax treaties, including the ones enacted in this bill, help to facilitate trade, investment and other activities between Canada and its treaty partners, they are principally aimed at achieving two main objectives. First, they aim to encourage cooperation between tax authorities in Canada and in treaty countries. One form in which cooperation takes place is through the exchange of information related to taxes. There are good grounds for including provisions in tax treaties concerning cooperation between tax administrations.

In the first place, it is desirable to give administrative assistance for the purpose of ascertaining facts as to how the rules of a particular treaty are to be applied. Moreover, in view of the increasing internationalization of economic relations, countries have a growing interest in the reciprocal supply of information.

Cooperation is also promoted through the establishment of a so-called mutual agreement procedure for resolving difficulties arising out of the application of a particular tax treaty. The mutual agreement procedure acts as a mechanism through which Canadian tax authorities and their counterparts in the other country can resolve disputes and address unintended outcomes, such as double taxation of income.

This brings me to the other fundamental objective of tax treaties, namely to prevent double taxation. Relief from double taxation is so very necessary and deserves to be discussed in some detail. Having income taxed twice when the taxpayer lives in one country and earns income in another can be troubling unless relief from double taxation is offered. As I mentioned earlier, without a tax treaty both countries could claim tax on the income without providing the taxpayer with any measures of relief for the tax paid in the other country. To alleviate the potential of this happening, a tax treaty between two countries allocates taxing authority with respect to a given item of income in one of three ways: first, the income may be taxable exclusively in the country in which it arises; second, it may be taxable only in the country in which the taxpayer is resident; or, third, it may be taxable by both the source country and the residence country, with relief from double taxation provided in some form.

The treaties contained in the bill will confer an exclusive right to tax with respect to a number of items. The other country is thereby prevented from taxing those items and double taxation is avoided. As a rule, this exclusive right to tax is conferred on the state of residence. Put another way, where a certain country is granted an exclusive right to tax, the frequency with which taxpayers of one country are burdened by the requirement to file returns and pay tax in the other country when they are not meaningful participants in the economic life of that country, or where it would be a nuisance for them to do so, is reduced.

For example, if a Canadian resident employed by a Canadian company is sent on a short term assignment, say for three months, to any one of seven treaty countries in the bill, Canada has the exclusive right to tax that person's employment income. However in the case of most items of income and capital, the right to tax is shared, although for certain types of income, such as dividends and interest, the amount of tax that may be imposed in the state of source is limited.

Under any of the seven tax treaties contained in this bill, where a shared right exists to tax an item of income of a taxpayer, there also exists an obligation on the part of the country in which the taxpayer is a resident to eliminate any double taxation.

There is another aspect of tax treaties that I want to discuss, and that is the importance of withholding taxes. The bill provides for several withholding tax rate reductions. Withholding taxes are a common feature in international taxation. In Canada's case they are levied on certain payments that Canadian residents make to non-residents. These payments include interest, dividends and royalties for example. Withholding taxes are levied on the gross amounts paid to non-residents and represent their final obligations with respect to Canadian income tax.

Without tax treaties, Canada usually taxes this income at a rate of 25% which is the rate set out under our domestic law or more precisely under the Income Tax Act. Canada's tax treaties establish limits on the amount of withholding tax that can be levied in respect of certain payments. In all cases where the maximum rates of withholding tax are set out in Canadian tax treaties they are always established at a rate lower than the 25% provided under our domestic law.

The tax treaties in the bill would all provide for certain reductions in the withholding tax rates. For example, each treaty provides for a maximum rate of withholding tax of 15% on portfolio dividends paid to non-residents. The maximum withholding tax rate for dividends paid by subsidiaries to their parent companies is reduced to a rate of 5% in all cases.

Withholding rate reductions also apply to royalty, interest and pension payments. Each treaty in the bill caps the maximum withholding tax rate on interest and royalty payments to 10%.

What is more, the treaties with Norway, the United Arab Emirates and Belgium specifically provide that no withholding tax can be levied in respect of royalty payments for the use of computer software, patents and know how.

In addition, with respect to periodic pension payments, the maximum rate of withholding tax is set at 15% for all countries except Belgium and the United Arab Emirates where no cap has been established.

These treaties also implement other measures which ensure that the tax consequences for certain transactions are in line with Canadian tax policy. Unfortunately, time does not permit me to go into detail about all these measures today.

In closing I want to point out that the bill is important, but albeit routine legislation. As I stated at the beginning of my remarks, the bill relates to Canada's ongoing efforts to modernize and to expand its network of tax treaties with other countries. The key word here is ongoing, for Canada is already in the midst of negotiations with other countries to implement more tax treaties. I encourage all hon. members to support the bill and to pass it without delay.

[Supply, October 31st, 2002]

Mr. Speaker, I hear my colleague. I would say to him that the supreme court decision already provides the government with a basis to challenge a business deduction for a penalty that results from a repulsive act or certainly beyond the scope.

I would suggest to my colleague that the government will therefore continue to monitor on an ongoing basis various cases. We will consider the matter further in consideration of input from interested parties. We will take further comments both, I am sure, from this colleague and from others, and from those in the business community, and we will take further action if deemed warranted.

[Supply, October 31st, 2002]

Mr. Speaker, the government takes very seriously the issue of whether fines and penalties should be deductible for income tax purposes. However it is first important to clarify what penalties are and are not deductible under the law today.

First, not all fines and penalties are deductible for tax purposes. Only fines and penalties that are business expenses are deductible, and they must have been incurred in order to earn business income. Illegal payments to government officials are specifically denied a deduction, as are fines and penalties levied under the Income Tax Act.

Finally, and most important, the Supreme Court of Canada has ruled:

It is conceivable that a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income.

What types of fines or penalties are deductible as a business expense? The supreme court reviewed the case of an egg producer who was assessed an over quota surcharge by a marketing board. The court found that the levy imposed was a legitimate business expense.

The supreme court suggested that certain fines and penalties would not be deductible. If, for example, a business owner were to commit a criminal offence or deliberately and illegally dump toxic waste, would the resulting fine be deductible? The supreme court has left open the door to challenge the suggestion that penalties for such offences and repulsive acts would deducted. In this regard, the government will monitor the effects of the supreme court decision to ensure that the fines for serious infractions are not deductible.

Would the hon. member have the government dictate to the business community which infractions are worthy of deductibility in a business context and which are not? This goes beyond the concern for fairly and accurately calculating the net profit of a taxpayer that should be subject of tax. The object of such a rule would be to address public policy concerns.

What types of fine or penalties would be contrary to public policy? If a trucking company can buy a permit to carry freight overweight, is it contrary to public policy to allow a business deduction for overweight charges? What about the case of the egg producer? Should the farmer have destroyed the eggs in order to avoid a non-deductible levy? There are other examples.

These examples suggest that many fines and penalties levied against Canadian business owners can be regarded as a normal risk of doing business. Sometimes they are simply a means of encouraging acceptable behaviour, regulating the marketplace or are in the nature of user fees. It is not necessarily contrary to public policy to incur these charges. Likewise, it would be unfair to deny a deduction as an expense if such levies are incurred in the ordinary day to day operation of business.

In creating a specific rule to delineate the deductibility of fines and penalties, the government would be attempting to draw a line between levies that are acceptable versus those that are not, even though the acceptability of the underlying actions of the business owner would depend on the facts and the circumstances in each case.