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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 Brian Jean Profile
CPC (AB)
Would you consider $2.5 billion in extra revenues in 2013-14 a good start in data collection? That's what I understand: that the 75 new measures we've brought in over the last five or six years have brought in extra moneys to that degree.
View Guy Caron Profile
NDP (QC)
Okay.
I ask the question because I assume it takes a lot of energy to get to the point of signing these bilateral agreements. And, we may wonder about the outcome.
As we said when we did our study on tax havens, there is a lot of doubt about whether bilateral treaties are really the best way of handling this issue. It's better to have them than not, but the progress made is still minimal.
You are probably aware of the article that appeared recently in The Economist. I would like to quote something from it. Unfortunately, it's only in English.
Now accountants can shuffle intangible assets such as intellectual property, and the profits they generate, from one jurisdiction to another with ease. A confusing thicket of bilateral tax treaties lets them play off national rules against each other.
They give an example of the “double Irish with a Dutch sandwich”, which you might be aware of.
Some hon. members: Oh, oh!
In terms of treaties, we are spending a lot of time signing bilateral agreements but, in the end, don't you think the time should be spent on something else? Shouldn't we be taking on bigger problems, like the lack of transparency and double taxation or, as my colleague said, double non-taxation?
Alain Castonguay
View Alain Castonguay Profile
Alain Castonguay
2013-06-17 11:28
The problem you are referring to has to do with tax avoidance, meaning planning to ensure that some income is sent to places with low or no taxation. That refers to what I was talking about earlier. In English we call it base erosion and profit shifting.
Is a multilateral agreement the only response to that? I don't think so. I think this problem has many facets and must have many solutions. We can think about national laws and tax treaties. One thing can certainly be done when it comes to tax treaties, which is to protect the integrity to ensure that third country residents do not have access to the treaty benefits. For example, the treaty with Hong Kong reflects this reality because it includes provisions that ensure that the benefits are available only to residents of the territories that signed the agreement.
That is part of the solution. The solution is not limited to tax treaties, be they multilateral or bilateral. There are also issues relating to national legislation that come into play here.
View Guy Caron Profile
NDP (QC)
Thank you.
My next question is for Mr. Rosenbloom.
You mentioned that the purpose of the information agreement was to prevent double taxation. My concern is that the government could say that it did its part in fighting against tax evasion and tax avoidance. But that is not the case at all. That is a whole separate issue. In addition, the current bill and the ratification of tax conventions do nothing to address the issue of tax havens.
Could you confirm that?
H. David Rosenbloom
View H. David Rosenbloom Profile
H. David Rosenbloom
2013-06-17 12:42
I don't think I would endorse nothing at all. The exchange-of-information provision is useful. It has a limited utility. It's basically designed to produce information in specific cases. If a tax administration has a particular taxpayer and the information is in the treaty partner's jurisdiction, a request can be made and you can get the information. It's useful. It's not useless. But it is neither an answer to mass evasion at the individual level nor in any way an answer to the use of tax havens. They're just different subjects, as far as I'm concerned.
View Peggy Nash Profile
NDP (ON)
It's my understanding that there are only about seven tax case convictions a year involving offshore assets. Don't you think we could boost that, given the whistle-blower leaks that have been very public over the last few years?
Mark Perlman
View Mark Perlman Profile
Mark Perlman
2013-05-07 9:00
If it's the will of the committee, we can do that.
One thing I will add is that there are no reductions in the international audit program or the aggressive tax planning program in any of these reductions, and I think that's come out quite clearly.
View Murray Rankin Profile
NDP (BC)
View Murray Rankin Profile
2013-05-07 9:20
What about the international auditing program? Ms. Nash talked about tax havens, and the ministers told us in the House that they have not cut—in fact, they've increased—the auditors in the audit programs. But looking at figures released in an order paper question to my colleague Mr. Casey by the minister on February 14, it shows that the number of auditors doing international audit programs have declined significantly from 2008-09, and likewise the auditors in the aggressive tax planning program have declined. Yet the claim is that there's more. Isn't it just shuffling people around? The number of people doing this in the international auditing section has in fact decreased. Is that not right?
Mark Perlman
View Mark Perlman Profile
Mark Perlman
2013-05-07 9:20
The question 1174 that you're referring to goes back to 2005-06 and shows a significant increase overall from, let's say—
Ed Broadbent
View Ed Broadbent Profile
Hon. Ed Broadbent
2013-04-30 9:03
Mr. Chair, members of the committee, I am really pleased to be joining you today.
This is especially so on a subject of such great importance to a large majority of Canadians, and especially, I note, today, when tax returns of all Canadians are due.
I want to make two points at the outset. The first is that extreme inequality undermines democracy and the common good. The evidence is in. Very unequal societies do much worse, including in such fundamental terms as health and the real equality of opportunity for children.
Second, I want to underscore that the level of inequality in a nation is ultimately a matter of political choice. Despite common exposure to globalization and other forces of economic change, which are real, a good number of advanced industrial countries have clearly been able to remain much more equal than others. They're all facing the global circumstances, but politically, they've made adjustments to that. So I repeat, a number are much more equal than others.
Canada used to do quite well at achieving broadly shared prosperity, but changes in the job market, changes in our tax system, and cuts to social programs from the mid-1990s have pushed us strongly, I believe, in the wrong direction. As a result, Canada today has a major inequality problem.
Part of the solution lies in achieving a fairer distribution of market income by creating more good, middle-class and unionized jobs. Another important part of the solution is to make major changes in our tax transfer system. Experts have shown us that its redistributive impact has shrunk significantly, to the point that it is now one of the least fair in the OECD.
Our institute says that the goal should be to reform our income security system so as to eliminate poverty and significantly narrow the growing gap between low- and higher-income Canadians. This goal should be met by building incrementally on existing income support programs targeted to different age groups and by promoting greater tax fairness. The maximum level of income-tested child benefit should be raised to cover the full cost of raising children.
We should significantly increase the federal working income tax benefit to support the working poor and deal with the growing reality of low pay and precarious work.
I want to give credit to the government for creating the working income tax benefit, a new form of benefit here in Canada that can promote employment as the best path out of poverty. However, the current benefit is extremely modest, as members will know, and is lost completely at low levels of employment income. I believe it should be increased significantly and phased out more slowly as income rises.
In addition, we should eliminate poverty in old age by raising the guaranteed income supplement. Canadian seniors, on a global basis, technically and statistically, are the best off in the world right now. But we still have a number of Canadian senior citizens who need assistance and we should be providing that.
Finally, a long-term goal—this would clearly involve complex negotiations with the provinces—would be to abolish welfare as it currently exists and replace it with an income support program for working-age adults, delivered as a negative income tax. This approach, as again I'm sure members will know, has been broadly championed across the political spectrum, including by my once friend and colleague from a different life, Senator Hugh Segal, and by the late Tom Kent.
To pay for change, these improvements to our income support programs can be financed by making our income tax system much fairer. We have proposed a number of approaches in our discussion paper, which the institute produced on inequality.
We should scale back special tax breaks that deliver huge benefits to the very well off, such as the exclusion of 50% of capital gains income from taxes and low tax rates on gains from stock options. For a functional market-based economy, I believe these existing benefits are not necessary.
We should be looking to more progressive income tax rates, and we should be cracking down on tax avoidance.
Revenues can also be gained by more broadly applying the principle of polluter pay.
In summary, Mr. Chairman, concrete steps can be taken to make our tax and transfer system a much more effective vehicle for closing the growing gap in Canada between the very rich, on the one hand, and the middle class and the poor on the other. Priority, as I've suggested, should be given to fundamental reform of our income security system.
Thank you very much.
View Murray Rankin Profile
NDP (BC)
View Murray Rankin Profile
2013-03-07 9:54
Thank you, Chair.
Thank you, witnesses.
I'd like to start my questioning with Mr. Vineberg.
Sir, you're a well-known expert on non-resident trusts, family trusts, and the like, and it would be very helpful if you might tell us a little bit—and I realize the difficulty with having only a couple of minutes is that the question may be too vast.
You did talk about non-resident beneficiaries and the reforms to clause 274 and section 94. I want to know to what extent you think Canadian taxpayers are using non-resident trusts for tax avoidance purposes. There are also the foreign investment entities, of course.
I'm asking you a couple of questions. Given the amazingly complex amendments to section 94 that are proposed in this bill, are you surprised that they are contained in a technical tax bill rather than in a stand-alone bill? Did they make it more confusing or less confusing?
There are a couple of questions embedded in there: on tax avoidance and on the complexity of the way in which these changes were made in this particular technical bill.
Michael Vineberg
View Michael Vineberg Profile
Michael Vineberg
2013-03-07 9:55
Let me try to answer your second question first. The changes made to section 94 and subsection 94(1) are perhaps not technical measures or remedial measures per se; however, they have been brought before the House of Commons and the Senate on a number of occasions in the past.
With respect to tax avoidance—perhaps this is because I'm on this side of the table—I would suggest that subsection 94(1) goes very far, and, as you see in my submission, it perhaps goes too far in taxing some trusts that have a very ephemeral relationship to Canada. If a wealthy Canadian leaves $1 million—$100,000 to each of his 10 grandchildren, nine of whom live in the United Kingdom and one who lives in Canada—then Canada gets tax on the Canadian's portion. If, however, he leaves it in a single trust for them, the full $1 million is taxable in Canada.
View Raymond Côté Profile
NDP (QC)
Thank you, Mr. Chair.
I would like to thank the Minister of State for being with us.
Minister, my first question is on part 3 of Bill C-48 which is on amendments in respect of foreign affiliates. You could say that this is a philosophical question because, in this part of the bill, the rules on loans between different components of a same multinational company are tightened and a framework is provided for the provisions on non-competition.
As part of the committee's study on tax havens, on which we are cooperating very well, we are looking at elements that are in part related to Bill C-48, such as transfer pricing and other similar issues. When you have some knowledge of economics, you really understand—whether you are an entrepreneur or a multinational company—that it is difficult to deal with the uncertainty and insecurity related to free markets. That is why everyone tends to want to reduce the level of insecurity.
However, multinationals that are oligopolies or even monopolies may start behaving in ways that are morally questionable. This is where my question becomes philosophical. You get the impression that the objective of part 3 is simply to limit the damage instead of dealing with the real problems, particularly the fact that these businesses have perfectly legal loopholes.
Do you believe Bill C-48 goes far enough to fight this kind of practice?
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