Mr. Speaker, I am pleased to have the opportunity to speak today at second reading of Bill S-2, a bill that proposes to implement a fifth protocol to the tax treaty that we recently signed with the United States. That was an exceptionally exciting day for Canada to see our Minister of Finance and his colleague from the United States come together and sign this treaty that we have been working on for a long time.
With the signing of this treaty last September, we have concluded nearly a decade of negotiations. At the same time we have strengthened the bonds of economic cooperation between our two countries. In doing so, we are modernizing a long-standing instrument for the betterment of individuals, families and businesses on both sides of the border, including manufacturers.
This fifth update or protocol of the Canada-U.S. tax treaty will stimulate further trade and investment between our two countries. As we all know, that is very critical because the U.S. is our largest trading partner on the other side of the 49th parallel and any way we can smooth that path is a tremendous benefit.
In today's highly competitive global economy we need to continually explore ways to grow, to expand and to compete. To that end, further improving and refining our relationship with our neighbours to the south is essential.
Canada is a trading nation. The United States is by far our largest trading partner. Through NAFTA we have come together to create a competitive, open and connected marketplace, the largest marketplace in the world.
This government recognizes the importance of our economic and trading relationship with the United States, so after almost 10 years of negotiations, we have signed an agreement that will provide tremendous value today and for future generations.
The bill we are looking at today represents the final step in this country in implementing that agreement. It also needs to be ratified by the United States before it comes into force.
This protocol will make our tax systems more efficient through initiatives such as eliminating withholding taxes on cross-border interest payments; extending treaty benefits to limited liability companies; allowing taxpayers to require that otherwise insoluble double tax issues be settled through arbitration; ensuring that there is no double taxation on immigrants' gains; giving mutual tax recognition of pension contributions; and clarifying how stock options are taxed.
I will speak in more detail shortly about these proposals, but first let me say a few words about the absolute necessity of tax treaties.
Tax treaties, like the one we are debating today, are key to Canada's competitiveness. One of the most important functions of a tax treaty is to prevent double taxation. Whenever a resident of one country earns income in another country, there is potential for double taxation. This is because both the person's country of residence as well as the country where the income is earned can legitimately assert rights to tax the same income.
Certainly no one wants to pay tax twice on the same income; that is hardly fair, nor is it logical. To prevent double taxation from happening, countries sign bilateral tax treaties, also known as tax conventions. These agreements set out which country gets to tax particular forms of income in a variety of specific situations. These agreements become legally binding once ratified, that is to say, once the proposals are passed into law by Parliament and by the government of the other country.
Tax treaties also help in the enforcement of tax law by providing for exchanges of information between tax authorities. One of the advantages of having tax treaties such as this one is that they include mechanisms for resolving differences of view between countries on such questions as characterizations of a particular item of income or where it was earned.
Within today's increasingly global economy and a more mobile population, tax treaties are increasingly important for Canada.
Those who benefit from tax treaties could be businesses that operate or invest abroad, or perhaps new ventures that are seeking foreign investment. They could even be individuals who may want to work temporarily in another country or own property there. A tax treaty gives all of these parties clear answers as to where they have to pay tax.
Canada's extensive tax treaty network consisting of over 85 countries includes our NAFTA partners, virtually all of the European Union and OECD countries, many members of the Commonwealth and the Francophonie, as well as other rapidly growing economies such as Brazil, Russia and China.
However, Canada's tax treaty with the United States is unique, given our close relationship. While it is similar to our other double taxation agreements in that it is based on an OECD model, the Canada-U.S. treaty has always included some special features that reflect the Canada-U.S. relationship.
As cross-border business and investment practices evolve, the tax treaty has to evolve at the same time to remain current. Canada and the U.S. have a long tradition of tax agreements dating back as far as 1928. However, the current Canada-U.S. income tax convention was first signed in 1980 and has been updated four times, in 1983, 1984, 1995 and again in 1997.
Those four changes to the treaty, or protocols as they are known, covered a wide spectrum of points, but they all have two things in common. First, they all helped to ensure the treaty adopted the latest developments in the two countries' tax policies. Second, they responded to the changing needs of Canadian and U.S. individuals and businesses. That is why it is so important for a government to be open to and aware of those changing needs. As a result, an agreement in principle was reached with the U.S. on a fifth protocol to update the tax treaty.
As I mentioned earlier, this agreement, signed last September by the Minister of Finance and U.S. treasury secretary Paulson will enter into force once it has been given effect by both the Canadian and United States governments.
The proposed legislation contained in Bill S-2 will stimulate further trade and encourage investment between Canada and the United States. This bill delivers significant benefits to Canadian individuals and businesses in a number of ways.
Bill S-2 proposes to eliminate source country withholding tax on cross-border interest payments. With that goal in mind, I would like to mention that originally the government had planned to wait for this protocol to be ratified before this initiative would come into effect. However, that would have left Canadian borrowers in an uncertain position because of the uncertainty of the timing of the ratification.
To provide that certainty, rather than waiting for this treaty protocol to be ratified, the government has decided to specify in advance the date on which the measures will start to apply. Assuming that Parliament agrees, that date will be January 1, 2008. This means that after 2007 any person in Canada who pays interest to an arm's length non-resident will not have to withhold tax regardless of which country is involved.
For example, starting next year a resident of Canada who borrows money from a U.S. lender will no longer have to withhold and remit Canadian tax on the interest payments. This will reduce borrowing costs and will make cross-border investment more efficient.
Bill S-2 also proposes to provide protection against double taxation, for example, in cases where individuals cease to be resident in one country and become resident in the other.
Furthermore, the bill also allows residents of Canada or the United States who face the possibility of double taxation to require the two countries' revenue authorities to resolve the issue through arbitration if they cannot resolve it through negotiation. This proposal is important because it increases taxpayers' confidence that the tax treaty will resolve potential double taxation.
Bill S-2 contains other proposals that will improve the efficiency of the tax system in both countries. One such example is the proposal to extend treaty benefits to what are known as limited liability companies by removing a potential impediment to cross-border investment. Once passed, this legislation will give mutual tax recognition of pension contributions.
In other words, provided certain conditions are met, cross-border commuters, such as those in Windsor and Detroit who work in the automobile industry, may deduct for resident country tax purposes the contributions they make to a plan or arrangement in the country where they work.
As well, someone who moves temporarily from one country to the other for work reasons can get tax recognition in his or her temporary new home country for pension contributions he or she continues to make to the original employer's pension plan, again subject to some conditions. This proposal would facilitate the movement of workers between Canada and the United States by removing a possible disincentive for commuters and temporary work assignments.
Finally, Bill S-2 also clarifies how stock options are taxed and implements a number of technical improvements and updates.
To sum up, as we know, the United States is our closest neighbour and by far our largest trading partner. This tax treaty strengthens our very important economic relations. It promotes growth and investment. It enables Canada to move swiftly in the dynamic global economy. However, more than all of this, this protocol improves and refines our relationship with our friends and neighbours to the south.
For all of that to happen, this agreement must now be ratified by Parliament. I therefore encourage all hon. members to lend their support and pass this bill without delay.
I might add that this bill, as members can see, was tabled in the Senate. The senators, many of whom have business backgrounds, recognized the value of this bill. They understand the amount of trade back and forth and the amount of fluidity, so to speak, of our constituents who travel back and forth and who deal with pension contributions on both sides of the border and all sorts of financial matters.
We encourage our Canadian constituents to invest abroad. We encourage investment to come into this country. The senators looked at this very closely. In very short order, I might add, through one quick presentation, although I will not suggest it had anything to do with the presentation that I provided to them, they passed it entirely in one sitting. I think that is an indication of how important it is to expedite this.
As I said earlier in my speech, we want this done so that its effects can take place as of January 1, 2008. Once again, it is to help facilitate the movement of finance back and forth across this border without having double taxes, so to speak, paid on the two sides of the border.
I do not think any government would object to investments in or out of its country as long as it knows that taxes are being paid either in one jurisdiction or in the other. It is very important to get this legislation in place as quickly as we can. It is an encouragement to the movement and flow of money back and forth.
We see this in many places along this border. Windsor-Detroit is just one example. Another one is the lower mainland in British Columbia, just outside Roberts Bank. Many American citizens travel across that border every day to work in Canada. They work in the lower mainland.
This legislation is very important. There have been four protocols before this one. As the need for the flow of money and finance increases, we have a need for this fifth protocol to come into play.
I would certainly encourage all hon. members to look very seriously at this and to consult with their constituents, but very quickly. I think we have a lot of support in industry. In the financial sector, we have good support for this legislation. Its beginnings go back several years.
This is a very simple and straightforward piece of legislation and a very positive one. It would be a great Christmas present for Canadians if we could get the bill passed through the House as expeditiously as possible.
