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[Recorded by Electronic Apparatus]

Tuesday, May 30, 2000

• 1850


The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order.

Is there unanimous consent to have Mr. Cullen's statement read into the record?

Some hon. members: Agreed.

Statement by Mr. Roy Cullen (Parliamentary Secretary to the Minister of Finance): Thank you, Mr. Chairman.

I will keep my remarks brief so that we have enough time for questions.

Bill S-3 is standard, routine—almost housekeeping—legislation. It puts into law nine tax treaties or protocols that Canada has recently signed with Kyrgyzstan, Lebanon, Algeria, Bulgaria, Portugal, Uzbekistan, Jordan, Luxembourg, and Japan.

Like their predecessors, these tax treaties are patterned primarily on the OECD Model Tax Convention, which is accepted by most countries around the world. They are in full compliance with the international norms that apply to such treaties.

The treaties with Kyrgyzstan, Lebanon, Algeria, Bulgaria, Portugal, Uzbekistan, and Jordan are all new treaties. In addition, through Bill S-3, the existing convention with Luxembourg is replaced and Canada's treaty with Japan is amended.

At present, Canada has tax treaties in place with 68 countries. When the treaties in this bill come into force, there will be 75.

Tax treaties are important to the Canadian economy, Mr. Chairman. Exports now account for over 40% of Canada's gross domestic product. In addition, Canada's annual economic wealth also depends on foreign direct investment, as well as inflows of information, capital, technology, royalties, dividends, and interest.

Tax treaties are designed with two primary objectives in mind: the prevention of fiscal evasion with respect to taxes on income and the avoidance of double taxation. Both objectives are met in the treaties legislated in this bill.

With respect to fiscal evasion, tax treaties encourage the exchange of information between revenue authorities to prevent tax evasion or avoidance. Sharing information helps revenue authorities in identifying cases of tax evasion or avoidance and acting on them.

On the subject of double taxation, tax treaties help ensure that income is not taxed twice when a taxpayer lives in one country and earns income in another. Without a tax treaty, both countries could claim tax on the income.

To alleviate the potential for double taxation, the government has several options available. One is for the country of residence to either exempt the income from tax or to give credit for the tax paid to the source country under a tax treaty. Another method is for both countries to agree to a reduction in withholding taxes. These are the taxes that countries usually impose on income paid to non-residents.

The treaties covered in Bill S-3 provide for reduced withholding tax rates on dividends, interest, and royalties. In some cases, copyright, computer software, patent and know-how royalties, and interest paid on certain government indebtedness are exempt from tax. In addition, under the protocol with Japan, Canadian companies operating ships or aircraft in international traffic are exempt from local Japanese enterprise taxes—a courtesy that Canadian provinces already extend to Japanese companies carrying on similar activities.

The treaties in Bill S-3 also 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.

Before closing, there is one issue in particular that I want to raise, and that is the government's proposed taxpayer migration rules with respect to the taxation of emigrants' pre-departure gains.

Through Bill S-3, the treaties with Luxembourg, Portugal, Lebanon, and Jordan give recognition to these proposed new rules. Each treaty addresses the potential for double taxation that could result if Canada enforced its right to tax emigrants on their pre-departure gains.

The proposed taxpayer migration rules are not recognized yet in the treaties with Uzbekistan, Bulgaria, Algeria, and Kyrgyzstan as they were negotiated prior to the announcement of the new rules. However, this does not present a problem for emigrants to these countries as the proposed rules allow Canada to give them a unilateral foreign tax credit until 2007. This provision will ensure that there will be no double taxation of pre-departure gains before Canada has been able to renegotiate its tax treaties to take the effects of the new rules into account.

Japan will review the issue of taxpayer migration in future negotiations.

In conclusion, Mr. Chairman, I want to emphasize the importance of tax treaties in the promotion of trade and investment for Canada. Tax treaties are directly related to international trade in goods and services and therefore directly impact on Canada's domestic economic performance. As I mentioned earlier in my remarks, Canadian exports account for over 40% of our annual GDP.

The tax treaties contained in Bill S-3 will only benefit Canadian businesses and individuals with operations and investments in these nine countries. There is no downside to this bill, Mr. Chairman.

I, along with the officials here today, will be pleased to answer any questions honourable members may have.

Thank you for your time.

The Chair: Are there any questions?

Do you want to proceed to clause-by-clause?

Some hon. members: Agreed.

The Chair: May I deal with these clauses in blocks?

Some hon. members: Agreed.

(Clauses 2 to 53 inclusive agreed to on division)

(Schedules I to IX inclusive agreed to on division)

(Clause 1 agreed to on division)

The Chair: Shall the title pass?

Some hon. members: Agreed.

Some hon. members: On division.

The Chair: Shall I report the bill to the House?

Some hon. members: Agreed.

Some hon. members: On division.

The Chair: Thank you.

The meeting is adjourned to the call of the chair.