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View James Rajotte Profile
CPC (AB)
I call to order meeting number 129 of the Standing Committee on Finance.
Our orders of the day, pursuant to the order of reference of Monday, June 10, 2013, are for the study of Bill S-17, An Act to implement conventions, protocols, agreements and a supplementary convention, concluded between Canada and Namibia, Serbia, Poland, Hong Kong, Luxembourg and Switzerland, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes.
Colleagues, I want to thank all of you for being here on very short notice. I sincerely appreciate it.
I also want to thank our guests, both here in Ottawa and by video conference, for appearing on very short notice. It is very much appreciated by our committee.
We have a three-hour meeting scheduled, from 11 till 2, and we are going to hear from officials from the Department of Finance first. Then we will have questions from committee members. I expect this will take 30 minutes minimum, or maybe a little longer. Then we will ask our witnesses to come forward and present their opening statements, and then we'll have questions from members.
At the time when members want to go to clause-by-clause consideration of the bill, they will indicate that to me, and we will do that.
For the other witnesses who are here with us and by video conference, you'll be able to hear the officials from the Department of Finance present their rationale for this bill as well.
First of all, from the Department of Finance, we have Mr. Ted Cook, who has been before our committee many times recently.
Welcome back to the committee, Mr. Cook.
We also have Monsieur Alain Castonguay.
Welcome to the committee.
Mr. Castonguay, I believe you have the opening statement for the officials. Then we'll have questions from members.
Please begin.
Alain Castonguay
View Alain Castonguay Profile
Alain Castonguay
2013-06-17 11:02
Thank you, Mr. Chair.
I would like to thank the committee for inviting us to appear this morning to talk about Bill S-17, Tax Conventions Implementation Act, 2013.
Canada has one of the most extensive networks of income tax treaties in the world, with 90 tax treaties currently in force. Bill S-17, once into force, will increase this number to 93, by implementing new treaties with Hong Kong, Namibia and Serbia. Bill S-17 will also implement a revised treaty with Poland, which will replace the existing treaty which dates back to 1987.
Further, Bill S-17 contains a protocol with Luxembourg and an agreement with Switzerland. In both cases, the agreements modify the provisions of the existing treaties with these countries relating to the exchange of tax information to ensure that they are consistent with the Organization for Economic Cooperation and Development standard for tax information.
Canada's tax treaties are generally patterned on the OECD model tax convention, modified to reflect the particularities of the Canadian tax system. Internationally, most tax treaties are generally patterned on the OECD model as well. Tax treaties are used for two main purposes: first, to eliminate tax barriers between two jurisdictions in order to promote bilateral trade and investment; and second, to prevent tax avoidance and evasion by encouraging the exchange of information for tax purposes between taxation authorities.
Allow me to expand slightly on each of these objectives and explain how the agreements in Bill S-17 support these objectives.
International double taxation can impose a barrier to cross-border trade and investment. Tax treaties prevent double taxation by providing greater certainty to taxpayers regarding their potential liability to tax in a foreign jurisdiction, by allocating taxing rights between two jurisdictions so that the taxpayers are not subjected to double taxation; by reducing the risk of "burdensome" taxation, which l will explain in a moment and which may arise because of high withholding taxes paid on certain payments; and, finally, by ensuring that taxpayers will not be subject to discriminatory taxation in the foreign jurisdiction.
Under our own domestic laws, payments of dividends, interest, and royalties made to non-residents are subject to rates of withholding equal to 25 per cent of the gross amount paid. Many of Canada's trading partners also have similar rates of withholding. Because the withholding tax does not take into account expenses incurred in generating the income, a taxpayer frequently will be subject to an effective rate of tax that is significantly higher than the rate that would be applicable if the income were taxed on a net basis. That's what I referred to earlier as “burdensome” taxation, which is clearly an impediment to cross-border trade and investment.
Tax treaties alleviate this burden by setting maximum levels of withholding tax that a treaty partner may impose on these types of payments or by providing, in some cases, for taxation exclusively in the state of residence. For example, the tax treaty with Hong Kong would impose limitations on the rates of withholding to 5% on direct dividends, 15% on other dividends, and 10% on non-arm's-length interest and on royalties.
Hong Kong is one of the largest financial markets in Asia in terms of trade and an important destination of Canadian foreign direct investment. Once the treaty is in force, it is expected that it will further encourage trade and investment and solidify our bilateral links.
The second objective that I mentioned at the outset was the prevention of tax avoidance and evasion. A key element our tax treaties is the provision authorizing the exchange of information between the respective tax authorities. Better transparency and access to information are important tools for tax authorities to enforce their own domestic tax law and to prevent international tax evasion.
In order to enhance Canada's network of information sharing, budget 2007 required that all of Canada's new tax treaties and revisions to its existing treaties would include the standard developed by the OECD for the exchange of information. The six agreements in Bill S-17 contain exchange-of-information provisions that are consistent with the OECD standard. In fact, two of the agreements in the bill with Luxembourg and Switzerland deal exclusively with the exchange of information. These provisions mandate the tax authorities of the treaty partners to exchange information relevant to the administration of each country's respective tax laws in conformity with the standard. The provisions also ensure that the effective exchange of information is not impeded by bank secrecy laws that may exist in the other country.
I mentioned at the beginning of my remarks that Bill S-17 would contribute to increasing the extent of our tax treaties network, but it is as important to revise our tax treaties and to update them, where necessary.
The treaty with Poland is a good example. The need to negotiate and sign a new treaty with Poland was the fact that the existing treaty between Canada and Poland was signed in 1987, in a much different economic context than today. The new treaty with Poland reflects Canada's new policies regarding maximum withholding tax rates on payments of dividends, interest, and pensions. Of course, the agreement includes the most recent standards when it comes to the exchange of information.
Mr. Chair, this concludes my remarks. I am available to the committee to answer any questions.
Thank you.
View James Rajotte Profile
CPC (AB)
Thank you for your presentation.
We will begin members' questions with five-minute rounds.
Mr. Rankin, please.
View Murray Rankin Profile
NDP (BC)
View Murray Rankin Profile
2013-06-17 11:08
Thank you to the officials for being here. It's much appreciated.
Mr. Castonguay, you said that generally the treaties that are before us are patterned after the OECD model tax convention.
On May 29 in the Guardian, the current Secretary-General of the OECD, Mr. Ángel Gurría, said that rewriting these international tax rules has become one of the greatest challenges for finance ministers of our time. He was specifically quoted as having said the following, which I'd like your comments on:
The [international tax] rules which we have built since the 1920s were meant to avoid double taxation...the problem is we've moved from double taxation to double non-taxation.
Now we don't tax anybody because we've built a set of codes and regulations and law…and culture…where we facilitate the fact that co-operations, through transfer pricing practises, put their profits in low-tax jurisdictions and therefore do not pay what would be considered to be their fair share.
So countries are moving from double taxation treaties like this to double non-taxation treaties, according to the secretary-general.
What would your reaction be to that comment?
Alain Castonguay
View Alain Castonguay Profile
Alain Castonguay
2013-06-17 11:10
While it is the case that double taxation agreements are about eliminating double taxation and that the problem you are referring to is obviously of a different kind, I think the secretary-general is referring to the project that was launched by the OECD earlier this year on base erosion and profit shifting.
First of all, the problem he's referring to is not simply a matter of defective double taxation agreements. I think he's also referring to the fact that the international coordination of domestic laws can create situations where income is taxed nowhere—and that's true.
The OECD launched a project on that, and Canada, being part of the OECD, is extremely interested in participating in this project. We share the concerns expressed by the secretary-general about income that may end up not being taxed, in contravention of the spirit, at least, of our tax rules.
We are participating in this project. It just got started. I believe the OECD intends to make a report to G-20 finance ministers in July, which will provide more details on the direction of this project.
View Murray Rankin Profile
NDP (BC)
View Murray Rankin Profile
2013-06-17 11:11
Thank you.
You mentioned in your remarks just now that one of the ways in which tax evasion and the use of tax havens perhaps can be addressed is through the exchange of information provisions. Article 25 and the conventions before us deal with the exchange of information.
I was reading commentary on the OECD model tax convention to the effect that the language in this type of provision cannot just cover on-demand tax information exchange agreements, TIEAs and the like, but can also deal with automatic tax exchange information.
Is that your view as well, that this could accommodate automatic information exchange, if that's where Canada were to go?
Alain Castonguay
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Alain Castonguay
2013-06-17 11:12
That's correct. The article on exchange of information in our treaties accommodates on-demand, automatic, and spontaneous exchanges of information. Then it's up to the bilateral relationship to decide whether we're going to go to automatic. In our case, we have about 30 conventions where we have in place automatic exchanges of information.
There are two treaties in this bill where it's not the case, because the treaty itself explicitly limits it to on-demand. Treaty partners can decide to limit it if one treaty partner is not prepared to go beyond on-demand.
View Murray Rankin Profile
NDP (BC)
View Murray Rankin Profile
2013-06-17 11:12
For the countries we're talking about today, Luxembourg and Hong Kong, for example, could our exchange agreements be automatic with those countries under the current rules?
View Murray Rankin Profile
NDP (BC)
View Murray Rankin Profile
2013-06-17 11:13
And you don't consider that a deficiency, based on what we're hearing at the G-8, and other countries saying that Canada is showing no leadership on going to automatic exchange? You don't think that's a deficiency in this treaty?
Alain Castonguay
View Alain Castonguay Profile
Alain Castonguay
2013-06-17 11:13
I think you have to put it in context. Up until 2009, Hong Kong was not prepared to exchange information in a way that would override its bank secrecy laws. As of 2009 they announced that they were prepared to do exchanges of information, but on request only. All of the treaties that Hong Kong has today are on request only. Hong Kong is not prepared to go beyond that.
View James Rajotte Profile
CPC (AB)
Thank you, Mr. Rankin.
Mr. Jean, please, for your round.
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