Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 7 - Evidence
OTTAWA, Tuesday, December 9, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-10, to implement a convention between Canada and Sweden, a convention between Canada and the Republic of Lithuania, a convention between Canada and the Republic of Kazakhstan, a convention between Canada and the Republic of Iceland and a convention between Canada and the Kingdom of Denmark for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and to amend the Canada-Netherlands Income Tax Convention Act, 1986 and the Canada-United States Tax Convention Act, 1984, met this day at 9:30 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: We are here to consider Bill C-10, to implement a convention between Canada and Sweden and several other countries.
We have two witnesses this morning. From the Department of Finance, we have Mr. Dan MacIntosh, Legislative Coordinator, Tax Policy Branch. In a moment, I will ask you to introduce your colleague.
Following the presentation from the department, we will have a presentation by Mr. William Thrasher, Spokesperson for Canadians Asking for Social Security Equality.
I think, Mr. MacIntosh, you will begin with a brief explanation of the bill. Members of this committee have two strong concerns about it. I assume that you will answer those concerns in your opening comments. We will proceed to ask you questions and then hear Mr. Thrasher's comments. Please proceed.
Mr. Dan MacIntosh, Legislation Coordinator, Tax Policy Branch, Department of Finance: With me today is Mr. Jean-Marc Déry, Chief, Tax Treaties, Tax Legislation Division, Department of Finance.
The Chairman: He has appeared before us on several occasions respecting similar types of tax treaties.
Mr. MacIntosh: That is correct.
I will give you a brief overview of the bill and then move on to those matters which are of particular interest to the members of the committee.
Bill C-10 is needed in order to implement tax treaties with Sweden, Lithuania, Kazakhstan, Iceland and Denmark and to implement protocols amending the tax treaties that Canada has with the Netherlands and the United States.
Tax relationships between Canada and Sweden and Canada and Denmark are presently governed by the 1983 tax treaty between Canada and Sweden and the 1955 tax treaty between Canada and Denmark. Tax relationships with Canada and Kazakhstan are governed by the 1986 tax treaty between Canada and the USSR until the end of 1995. Thus, it is necessary to have a treaty with Kazakhstan with retroactive effect to the beginning of 1996. The tax treaties with Iceland and Lithuania are completely new.
The reason for tax treaties at all is to ensure that there is certainty in international tax relations for the sake of taxpayers and to avoid double taxation. Also, tax treaties govern the rate of withholding taxes applied on payments between the two countries, such as the withholding taxes on dividends, interest and royalties.
Tax treaties enable international investment and international business to be carried on more efficiently through the mutual reduction of withholding taxes. In the case of these treaties, the standard rate of withholding tax under the Income Tax Act and under foreign legislation has been reduced to 5 per cent in the case of direct dividends and branch profits, and 10 per cent in the case of interest and royalties. However, copyright royalties and royalties in respect of computer software and patents and know-how are fully exempted in the case of our tax treaties with Sweden, Iceland, Denmark and the Netherlands.
These treaties will be helpful to Canadian corporations carrying on business and investing in these countries and to individuals as well. It is unlikely that there will be any objections to any of the measures that I have just described.
I will move on to those matters which I understand are of more interest to the committee at this time. First, the protocol to the Netherlands treaty. That protocol, contained in Bill C-10, would amend our tax treaty with the Netherlands, which was entered into between Canada and the Netherlands in 1986.
There are two important provisions in the protocol. The first provision mutually eliminates withholding tax on patent and know-how royalties. That will be good for trade and investment between the two countries.
The second article of particular interest to the committee is the article which provides that the tax administration of each country will be entitled to provide assistance to the administration of the other country in the collection of taxes. The protocol provides that this would apply not only to tax claims arising in the future but also to tax claims going back 10 years from the coming into force of the treaty.
There have been some claims that this represents retroactive taxation. The government does not share this view. The government's view is that retroactive taxation occurs when the tax laws governing past events are changed. For example, if the article proposed to legalize attempts at tax collection which were unauthorized in the past, that would be retroactive taxation. However, that is not the case here.
The article I speak of deals with the collection of taxes in the future. It is true that the article applies to tax claims which exist now and have been in existence for the last 10 years, but I think that is true of all laws. They all come into force and they all come into a context of circumstances that arise from events in the past. Thus, for example, if the government were to introduce tax rate increases which affected my salary, I do not think I would be able to claim that that was retroactive taxation on the basis that I had entered into my employment many years ago.
We do not feel that this constitutes retroactive taxation. I should like to emphasize that the protocol does not change the determination of taxes in either country with respect to past events; it merely effects the collection in the future. In any event, tax collection assistance can be provided, under the protocol or under any law of Canada, only where the taxpayers' rights to objection and appeal, and any other administrative and judicial rights that they have in the other jurisdiction, have either lapsed or have been completely exhausted.
Moving on to the protocol for the United States treaty, as I understand it the most important change of interest to members of the committee is the change in the protocol governing the taxation of social security benefits paid from one country to the residents of the other, specifically the payment of U.S. social security benefits to residents of Canada.
I remind you that the protocol is really an amendment to the existing tax treaty. It provided that social security benefits paid from the United States will no longer be subject to the flat-rate withholding tax of 25.5 per cent levied in the United States. Rather, the social security benefits will be included in the taxable income of the residents of Canada and taxed under Canada's tax laws at our progressive rates of taxation. The exception, of course, is that only 85 per cent of the social security benefits received will be included in income. The other 15 per cent will be tax exempt, in the same manner as it would be for social security recipients of U.S. benefits who are actually living in the United States.
According to the protocol, this new system would be applied retroactively, to the beginning of 1996, but it is retroactive only where it is to a taxpayer's benefit. In other words, if bringing the treaty into effect back to the beginning of 1996 will actually produce a refund for a certain taxpayer, then that taxpayer will be entitled to that refund for 1996 and for 1997. Any person whose taxes increased by reason of this rule will not be affected for 1996 or 1997, but it will take effect only in the future.
Senator Kelleher: Thank you for your presentation.
I wish to make it clear at the outset that I am not an expert on very many things, and I am certainly not a tax expert. Consequently, I will be proceeding slowly because I am not sure of all the ins and outs of the Netherlands provision.
As I understand it, the amendment is set out in Schedule 6 to Bill C-10. By virtue of Article VII in the protocol, Article 26A sets out assistance in collection procedures. Proposed Article 26A will allow Revenue Canada to collect Netherlands' taxes as though they were Canada's own revenue claim, and Revenue Canada will use all of its collection powers to collect the amount owing to the Netherlands. Is this correct so far?
Mr. MacIntosh: That is correct.
Senator Kelleher: Canada bears the cost of collecting such taxes, but remits the amounts to the Netherlands. I think up to that point we are okay.
Mr. MacIntosh: Yes.
Senator Kelleher: The clause that I find offensive is the provision of the collection assistance set out in paragraph 2 of Article IX of the amending protocol. I think that is the right clause.
Mr. MacIntosh: Yes, it is.
Senator Kelleher: That clause allows the Netherlands to request Canada to collect revenue claims that were finally determined in the Netherlands for a period of 10 years before the protocol enters into force. We are advised -- and I have no personal knowledge of any of th -- isthat this would affect, and could affect, a great number of farmers in the dairy business in particular who left the Netherlands and came to Canada. They may have had outstanding claims with the Netherlands at the time they left or claims that were determined after they left and were here in Canada. This gives the Netherlands the right to request Revenue Canada to come after people who are now in Canada carrying on business.
I cannot determine from this what rights of appeal they have or had or the nature of the punitive aspect of this taxation, if any. I am told by these people that in many cases it was punitive; that some of it arose as a result of the disposition of their farming properties and then coming over here. In some cases, I presume the assessments and levies arose subsequent to their departure. The foregoing is something that I have been told; I have no personal knowledge.
The process appears at least to be retroactive. I have always subscribed to the old adage that if it looks like a duck, walks like a duck and quacks like a duck, it is probably a duck.
I do not want to hold this up. I understand the relevant provisions of the Canada-U.S. tax treaty. I understand why it is important to get this legislation through. I do not have a quarrel with that; I think that is valid.
I know that if I were to request -- or this committee were to request, for that matter -- that we delete the Netherlands Convention Treaty from Bill C-10 at this time, it would probably affect the Canada-U.S. Tax Treaty, hold it up, and delay cheques to many Canadian citizens. I do not have any interest in doing that, nor do other any members of the committee. However, I am concerned about the provision I spoke of. It appears to set a precedent, although I am told that a similar provision exists in the Canada-U.S. Tax Treaty. I think the situation between Canada and the United States is a little different.
I do not know how accurate my feeling is of retroactivity. I am not a tax lawyer or a tax accountant. We have tax lawyers here. I have documents to the effect that they consider this to be retroactivity. If it is, I am against that principle.
What troubles me and what I would like to see is an opportunity for the committee to take a look at this. There is no time right now. I would like to call witnesses from the accounting field and the legal taxation field to discuss this with us.
Rather than hold up this very useful situation regarding Canada-U.S., I suggest that your department consider giving us a written undertaking, allow Bill C-10 to pass now, but withhold the further implementation of the Netherlands portion of Bill C-10 until such time as the committee has a chance to examine this further. We would, of course, have you people back again to make representations in that regard.
Mr. MacIntosh: The senator's suggestion is very agreeable to the government. Finance Minister Martin agrees that it would be appropriate for the committee to study this matter further. The government agrees that the treaty will not be implemented until the committee is satisfied with respect to the provision that you were discussing.
In order for the treaty to come into effect, it is necessary for Canada and the Netherlands to exchange instruments of ratification, which are really notices that the parliamentary procedure or the legislative procedure in each country has been completed.
We will not do that until the committee is satisfied with respect to that provision, so the treaty will not begin until the committee is satisfied with respect to that treaty.
The other treaties in the bill, though, would be able to continue to go forward.
The mere enactment of Bill C-10 will not by itself cause the Netherlands treaty to come into effect. We are quite willing to following your suggestion, senator.
The Chairman: Just for the record, and to emphasize Mr. MacIntosh's point, yesterday I received a draft letter from the Minister of Finance, Paul Martin, which I reviewed with Senators Kelleher and Stewart. The last sentence is all I really need to read into the record because it summarizes exactly what Mr. MacIntosh said. It reads:
...I am prepared to assure you that the government will not proceed with ratification of the protocol to the Netherlands tax treaty until the committee...
Which means this committee --
...is satisfied with respect to the article on mutual assistance in collection of taxes.
I do not have a signed copy of the letter because it was left that I would review it with Senators Kelleher and Stewart, which I did late yesterday. I will have a signed copy, however, before tabling a committee report in the chamber.
I understood yesterday, from talking to Senators Stewart and Kelleher, that that provision as amplified by Mr. MacIntosh's comments dealt adequately with concerns which members of both sides of this committee had with respect to the perceived retroactivity on the Netherlands treaty.
Is that a reasonable solution?
Senator Kelleher: Yes.
The Chairman: Are there any other questions on that point?
Senator Stewart: I was going to inquire about the department's understanding of the facts in the Dutch farmer situation, but since we are going to go into this matter later, I will not ask those questions at this time.
Senator Grafstein: My question would take the same form as Senator Stewart's. I just give this to the minister before he comes back to this committee and ultimately to the Senate. Two questions perhaps should be addressed. First is the question of retroactivity. I always thought that there was a five-year rule as opposed to a 10-year rule. Maybe I am missing something. Perhaps you could give us more precision about how far back one goes and why. I think that that is a question of public policy, as opposed to one that relates just to this bill. It has been raised before in other places. Perhaps the minister can give us an aide-mémoire as to the rationale for that.
Second, I think the thing that troubles me the most about the Netherlands issue is a statement made in a letter we received from aggrieved taxpayers, Peter Wellen and Hans Van denBosch, which I think the minister probably has, in which they say that many of the people owed tax because they sold their farms in Holland. The important part reads as follows:
They would have been able to defer the tax on the sale of their Dutch holdings if they had reinvested anywhere in the European Union.
Since we deal with the global economy and we are trying to entice farmers and others to come to Canada, surely our tax treatment with respect to farmers in the union should be the same if they decide to come to Canada.
I am not asking for an answer today. I just hope that when you come back, you will address the question of equity and fairness as it applies to farmers reinvesting in the union and farmers who decide to move their holdings to Canada. I think they should be treated the same way.
Mr. MacIntosh: Yes, senator. We will be sure to deal with those points.
The Chairman: If that deals with the Netherlands issue, I will move on to the U.S. social security issue.
Senator St. Germain: Thank you, gentlemen, for appearing before us this morning. Mr. Chairman, as you know, we will be hearing a witness, Mr. Thrasher, who will be appearing immediately after the gentlemen from the Department of Finance. I do not know whether we can ask the officials from the department to stay around; we may have questions following Mr. Thrasher's presentation that they could answer for us.
The Chairman: I am sure the officials are happy to stay.
Senator St. Germain: With the change, so that social security income will be taxed in Canada now, can you gentlemen tell the committee what negative effect this will have on people on fixed income? It is my understanding that they will have to pay more tax on this money now because I believe it says here that benefits are taxable only at a higher income in the U.S. A threshold of $46,000 (Canadian) exists. Are we attacking a group of people on fixed income with a higher tax levy as a result of this change?
Mr. MacIntosh: No. In fact, I would say that the change is generally in the opposite direction. The reason for the change, from the point of view of the government, has nothing to do with revenue implications because as far as the fiscal side is concerned, they are not very great. It was done for equity reasons. The problem with the existing situation is that all Canadians receiving these social security benefits, including those at the very lowest levels of income, are subject to a 25.5 per cent withholding tax from the United States without any sort of exemption or provision for deduction or graduated rates, and this hits very hard at lower-income Canadians. We have done some rough estimates, and we feel that of the 80,000 Canadians receiving U.S. social security benefits, about half will actually benefit from the new rule that we are proposing, about a quarter will be treated roughly the same, and about a quarter will actually have to pay more tax. However, virtually all of the benefits will go to those Canadians at lower-income levels. This was done to provide relief for Canadian taxpayers from fixed, relatively high-rate U.S. taxes.
Senator St. Germain: I would like to hear the witness who has asked to appear before us on this issue.
Senator Stewart: Am I correct in assuming that recipients of U.S. pension money will be taxed in Canada in terms of Canadian dollars, that is, the converted currency, rather than in U.S. dollars?
Mr. MacIntosh: That is correct. The amounts they receive in U.S. dollars will be converted to Canadian dollars for purposes of Canadian tax calculations.
Senator Whelan: I have a follow-up on the Dutch issue. It has been very capably covered by Senators Kelleher and Grafstein, but I have a slight concern. The legislation that we are amending was put through by the previous government, and the present Minister of Finance signed it, it would seem, without knowing what he was signing. I do not want the government to get in this position again where we put legislation on the books, it becomes law, but we do not enforce it until we have further hearings, and so on.
The Chairman: What we have agreed to do with respect to the Dutch treaty is that it will not be signed by Canada, not go into effect, until this committee has had an opportunity to examine it in some detail.
While it is included in the bill <#0107> and, that is unfortunate, because if there were five separate bills we would not have this problem; however, there are not -- and there is a desire to have certain other aspects of the bill pass, we will pass the whole bill, but the government will not proceed with signing the Dutch treaty until this committee is satisfied with the tax-collection provisions.
Senator Whelan: How do we guarantee that no one will sign it as they did last time?
The Chairman: We have a letter signed by the Minister of Finance, which is a very clear and public undertaking. That letter will be read into the record in the Senate by me. Mr. MacIntosh has also made that point very clear today.
Senator Stewart: I want to make sure that our record is clear, because I suspect that it will be read with great interest by those affected.
The term "signed" has been used. I believe that the agreement with the Netherlands has already been signed but that it has not yet been ratified. Is that correct? It is the ratification that will be withheld until such time as the committee has been satisfied that the provision is proper; correct?
Mr. MacIntosh: That is correct. The protocol follows the same typical course as do our tax treaties. The first step is negotiation; the next is signature by representatives of each government to indicate that they now agree on a common draft. In order to become law, two more steps are needed. It must be included in a bill and enacted by Parliament. The final step is exchange of instruments of ratification. Each of these steps is required.
Senator Stewart: Thank you.
Senator Grafstein: On that point, it is not "ratified" that we are talking about. The minister has undertaken not to implement prior to the ratification step. The implementation is contained in the bill.
The Chairman: "Ratify" is first, followed by "implementation".
Senator Grafstein: Bear with me for a moment. As I understood the witness, he said that one of the steps is enabling legislation. We are dealing with the enabling legislation. There is an undertaking by the minister not to proclaim or put into effect the enabling legislation under the bill.
The Chairman: May I ask Senator Stewart, who is probably the resident expert on this subject in the room, to summarize the procedure. I will then ask Mr. Déry to comment.
Senator Stewart: My understanding is that the arrangement with the Netherlands has already been signed. This bill will become law when it receives Royal Assent. However, in order to bring into effect any agreements or protocols, ratification will be necessary. That is to say, that although the law will exist, it will not be activated until there has been ratification; and the minister has said that there will not be ratification by the government until such time as this committee has been satisfied that the arrangement is proper.
The Chairman: Does that coincide with your understanding, Mr. Déry?
Mr. Jean-Marc Déry, Chief, Tax Treaties, Tax Legislation Division, Department of Finance: That is exactly the procedure. After the law has been enacted, the government still must formally notify the Dutch government that everything has been completed in Canada. It is that part that the Minister of Finance has indicated will not be acted upon at Foreign Affairs until this committee is satisfied that the arrangement is acceptable.
Senator Austin: That means that if this committee is not satisfied that this legislation is equitable, the agreement with the Netherlands will be abrogated; correct?
Mr. Déry: It will not be abrogated because it will never be in force. The agreement has been signed but it has no effect. If Canada never notifies the Dutch authorities, the agreement will be on the books but will have no effect.
Senator Austin: So it will never be implemented?
Mr. Déry: That is right.
Senator Callbeck: Apparently, up until 1984, immigrants coming from Holland had to sign a tax release ensuring that all Dutch taxes were paid prior to their departure. In 1984, we dropped that requirement. Why did we drop it?
Mr. MacIntosh: We do not have a good answer to your question right now. That is something that has been handled by the Department of Citizenship and Immigration in the past. We do not know why that policy was dropped but we will get an answer for you so that when the committee reconsiders the matter, we will be able to provide you with that information.
Senator Callbeck: Thank you.
The Chairman: I want to ensure that I understand the U.S. social security issue correctly.
Historically, Canadians living in Canada and receiving U.S. social security payments had 50 per cent of their income taxed as income in Canada and 50 per cent was tax free. Is that correct?
Mr. MacIntosh: That is correct.
The Chairman: At the time that that rule was put into effect, if you were a U.S. citizen living in the U.S., collecting U.S. social security, the same rule existed there; namely, that in the U.S., 50 per cent was taxed as income and 50 per cent was not. So far, am I correct?
Mr. MacIntosh: Yes.
The Chairman: Forget for the moment that the U.S. introduced a flat withholding tax. Under the current new provisions, 85 per cent of the income will be taxable in Canada as income and 15 per cent will not be taxed if you are a Canadian resident living in Canada and collecting U.S. social security.
Mr. MacIntosh: Yes.
The Chairman: Am I also correct that if you were a U.S. resident living in the U.S. collecting U.S. social security, 85 per cent would be taxed in the U.S. as income and 15 per cent would not be taxed?
Mr. MacIntosh: Yes.
The Chairman: Therefore, while it is true to say that the provision increases Canadian taxes on recipients of U.S. social security, it treats Canadian recipients of U.S. social security exactly the same way U.S. recipients of U.S. social security are being treated because they, too, have had to suffer the same tax increase. Is that correct?
Mr. MacIntosh: Yes, that is correct.
The Chairman: Thank you.
Senator Meighen: Is there any dynamic to the negotiation and signing of these tax treaties? In the list here of some 86 countries, the dates are all over the map. Is there a regular review? Does it depend on which country approaches us or which country we choose to approach to bring matters up to date? How does the system work, if at all in an organized fashion?
Mr. Déry: Originally, it started with a negotiation with the countries where Canada's economic interests were the highest. That was in the early 1970s and involved European countries, Japan, Australia, the U.S., some Latin American countries, and so on. After that first list, we went out to other countries where there was potential Canadian investment. We negotiated with countries that were interested in negotiating with Canada. Over this 20- or 25-year period, we have reached 61 treaties that are now in force.
Over the past five to seven years, we began to renegotiate the treaties that were negotiated in the 1970s, mostly because of changes in Canadian tax policies. For example, the minister indicated in 1992 that Canada was not willing to go down to 15 per cent of the withholding tax on inter-company dividends. In our treaty with most European countries, we had a 15 per cent rate. That necessitated a renegotiation. It is the same for the royalties exemption announced in 1993. It is sort of a continuous process.
There is also the fact that there are more countries than there were 25 years ago. With the split of the U.S.S.R. and the independence of the Baltic countries, we had to enter into separate negotiation with most of those countries. There is also the fact that Latin American countries are now starting to join the tax treaty world, if I may say. Thus, there will be more negotiation with Latin American countries. Those negotiations are usually based on the interest as represented by Canadian investors and sometimes for political reasons. Some countries do not like to be excluded if Canada has a treaty with the surrounding countries. I think all the reasons are on the table.
Senator Meighen: I notice that there are no Eastern European countries in here; I take no particular significance from that. But then really it comes down to the fact that if Canadian investors are active in an area where there is out-of-date tax treaty or no tax treaty, it is up to them, directly or indirectly, to convince the department, presumably, that negotiations should be begun.
Mr. Déry: That is correct.
Senator Angus: Mr. Déry, is it fair to describe Bill C-10 as a compendium of all the current treaties that are ready to go?
Mr. Déry: That is exactly what it is. It includes all the treaties signed between August 1996 and September 1997.
Senator Angus: It is your practice that when you have a few more ready to go, they will be initiated in similar legislation?
Mr. Déry: That is what I certainly intend to do. A treaty was signed with Vietnam in November, so Vietnam will likely be the first in the next tax treaty bill.
Senator Angus: You are still the Chief of the Tax Treaty section?
Mr. Déry: Yes, sir.
Senator Angus: Is that the correct title?
Mr. Déry: Yes.
Senator Angus: You may recall that I asked you a question at an earlier hearing about Colombia; I indicated that we had had some representations that Canadians dealing with Colombia are suffering a big withholding tax, and there is no double-taxation-treaty type of relief. You indicated in reply to my question that that July -- and I forget whether it was 1994 or 1995 -- you were expecting to get into that. Where do we stand with Colombia? I see that it is not on the list anywhere in this big briefing note you gave us.
Mr. Déry: With Colombia, nothing has moved in the past four years. We regularly -- by regularly, I mean every six months or so -- try to find out if they are now ready to continue the negotiation. Because the last round was so many years ago, we will probably have to start from scratch. Unfortunately, I have not been successful; every time I am in South America, I make the suggestion, but, again, so far we have not agreed on a date to meet.
Senator Angus: You are saying that Canada is willing to negotiate this type of a treaty or convention with Colombia but they do not seem to want to dance?
Mr. Déry: We have started the negotiations. The draft, which was done a number of years ago, is becoming more and more obsolete. We will have to start almost from scratch. One of the problems in Central America and Latin America is the lack of experience; another is the very high turnover of officials. We sit down and discuss this with a group of people, and I think they understand quite well. Unfortunately, people tend to be moved around very quickly, and we have to start the process over again with whoever comes after and try to convince them that it is a good idea. That is part of the problem. Some of them do not have any practical experience in such negotiations.
Senator Angus: What would be necessary to step up the activity to get a treaty with Colombia?
Mr. Déry: If the Colombian government wants to negotiate, it is only a matter of finding a date and location.
Senator Angus: A venue for the discussions?
Mr. Déry: That is right, and a date.
Senator Angus: And Canada has no aversion to it? Would it be our policy that we would like to have such a convention with Colombia?
Mr. Déry: We know there are specific problems regarding Canadian investment in Colombia, and we would try address all those in the a tax treaty. Whether we will have one or not, I cannot say at this time but we are certainly willing to negotiate.
The Chairman: Thank you for attending here, Mr. Thrasher. Would you like to make some opening comments?
Mr. William Thrasher, Spokesperson, Canadians Asking for Social Security Equality: Thank you, Mr. Chairman. This is a very important matter to many Canadians. I think there are 85,000 people in Canada who receive social security benefits; 55,000 of those are Canadian citizens. Most of the ones that I know actually lived in Canada and worked across the border. They were commuters. They paid taxes in both countries. They retired under a certain set of rules. Those rules were changed in 1995.
By the way, just to correct Senator Whelan, changes to the Canada-U.S. Income Tax Convention, described as the third protocol, were signed on March 17, 1995, and came into force with an exchange of instruments and ratification at Ottawa on November 9, 1995. That is some two years after the present government was elected.
In 1995, people received letters from the social security administration in the United States telling them that their social security benefits were going to be reduced by 25.5 per cent. This was devastating news to most seniors. People could no longer stay in nursing homes. People were being told that they could not stay in their apartments any longer if they could not pay their rent. I had calls from 85-year-old widows who told me that they could not stay in their apartments unless they paid their full rent. They could not afford it, and they were forced to leave.
A group called CASSE was formed. That group was made up of a few of us, instigated by a letter I wrote to The Windsor Star. A number of other people wrote a letter. A woman by the name of Olive Smith, who herself had several operations, for cancer and so forth, a lady of much dignity and a lot of power, talked us into forming a group. We held a meeting in a little town called Essex, expecting 25 people to show up, and 200 people showed up. We realized the meeting place was not big enough. We held another meeting in August of 1996, and 2,000 people showed up. This is a very important matter to the people of Windsor and Essex County.
When Herb Gray was asked by The Windsor Star what he thought this U.S. withholding tax meant, he said that as he understood it, no one will pay more taxes and some may even pay less. That was reported in The Windsor Star on December 27, 1995.
The withholding tax went into effect on January 1, 1996. People had two-weeks' notice, just a couple of weeks before Christmas. They were devastated.
Our organization put a lot of pressure on the government. Paul Martin visited with our board and listened to our concerns. He said that it would be difficult because the United States would have to be involved. He said that this would take time.
Well, it took two years. We are in that process now. Bill C-10 is a result of the government going back to the United States.
In 1995, people were taxed on 50 per cent of their social security benefits here in Canada. When this was changed in 1996, the United States had the right to tax and withhold tax on Canadian benefits at a rate of 25.5 per cent. Anyone who earned less than $70,000 a year was worse off than they were in 1995, and anyone who made more than $70,000 a year paid about the same as they did before.
As a result of Bill C-10, they are now proposing to include, not 50 per cent, but 85 per cent of social security benefits for Canadian income tax purposes. That is a 70 per cent increase over what it was in 1995.
People keep referring to 1996, but 1996 was so bad that that is what brought about Bill C-10. Bill S-9 did not last two years. Bill C-10 is what they are working on now.
Some of the things I have heard here this morning are wrong. You can earn $41,000 Canadian dollars in the United States without paying one nickel of tax on U.S. social security. After you reach about $41,000, they include 50 per cent of your social security, and it works its way up to 85 per cent by the time you get to $60,000. In Canada, some poor widow with a gross income of $12,000 will now have to include 85 per cent of the U.S. social security benefits for income tax purposes.
Why could those people not have been grandfathered just like they proposed to do in the Canada Pension Plan?
I received a flyer from one of the local members of Parliament. It says that all CPP retirement pensions, disabilities benefits, survivor benefits and combined benefits as of December 31, 1997 are not affected.
Why are people who have been living on social security, people from the ages of 65 up to 90, being hit with a tremendous tax increase? Anyone earning over $12,000 will pay more taxes. Under Bill C-10, no one will pay less than they did in 1995.
There is a five-year lead time on the proposed seniors' benefit. There was no lead time in 1995 when two-weeks' before Christmas people were told that their pensions would be reduced by a whopping 25.5 per cent.
CASSE takes the position that we do not want to hold up the signing of this treaty. To do so would allow the U.S. to continue withholding the tax, which will cause more pain for a longer period of time. By signing this bill now, we will get the refunds back. We understand that.
We are asking this committee to ask for a letter of intent from our government that they will go back to the United States and insert seven words. Those seven words are: "a minimum of or not less than" 15 per cent?
The Chairman: Where the 85 per cent appears?
Mr. Thrasher: That is correct.
Under Article 2, paragraph 5(a) of Article XVIII states that:
(a) a benefit under the social security legislation in the United States paid to a resident of Canada shall be taxable in Canada as though it were a benefit under the Canada Pension Plan, except that 15 per cent of the amount of the benefit shall be exempt from Canadian taxation;
We believe that if you added those seven words, "a minimum of or not less than" 15 per cent, it would allow the Canadian government to take the handcuffs off because we are now tied to the U.S.-Canada Tax Treaty when it comes to Canadians receiving U.S. social security benefits.
There may already be an understanding that the 15 per cent is a minimum, but I would rather see in writing that 15 per cent is "a minimum or will not be less than".
Senator St. Germain: Are you saying that if these words are inserted, it would give more flexibility and would not tie tax laws to the treaty?
Mr. Thrasher: Right now, we would have to go back to the United States and revise or amend the tax treaty to get any change from the 15 per cent rate. If we amend the treaty to say "a minimum of or not less than 15 per cent", it has the effect of opening the door and taking our handcuffs off. We would not have to go back to the United States. This government or any future government would have the ability to change the tax laws regarding beneficiaries of social security from the United States without going back to the United States.
In fact, Paul Martin said to CARP that the U.S. withholding tax is of course a matter of U.S. tax policy. He said that any solution to the problems caused by the U.S. tax rate will have to involve the United States. For that reason, he said, CARP may wish to make its concern and those of its members known to the U.S. government.
Here again, he is saying that we cannot do anything because it is tied to the United States. Well, let us take the ropes away. Let us be free to tax people as we see fit as Canadians and as the Canadian government.
Senator St. Germain: My next question would be to the officials as to whether this could be done and whether this would create the effect that Mr. Thrasher is expecting it to create.
The Chairman: Mr. MacIntosh, perhaps you or Mr. Déry could respond to Senator St. Germain's question. You heard the proposed change. I would not call it an amendment. Mr. Thrasher has indicated that he understands the merits in proceeding with the bill and treaty at this point. What he called a statement of intent was not a bad description with respect to effectively trying to move the 85 per cent down in a manner consistent with the gradation of the percentage that is taxed in the United States.
Mr. MacIntosh: Leaving aside the question of whether this would be appropriate in policy terms, in technical terms to do that it would not be necessary to change the treaty. The treaty in effect provides that Canada must exempt 15 per cent of these U.S. social security benefits from taxation.
How we treat the other 85 per cent is subject to domestic law. It would be possible to provide further exemptions under our domestic law if that were thought to be appropriate. It would not be necessary to seek agreement with the United States on that.
The Chairman: To follow up on Mr. Thrasher's point that it ought to be subject to whatever decisions Canada makes, that is possible under the existing treaty?
Mr. MacIntosh: Yes.
Senator St. Germain: I do not want to get a debate started among the witnesses, but are you satisfied, from what you are hearing, Mr. Thrasher, that there are no longer handcuffs on that 85 per cent?
Mr. Thrasher: Yes. And I would like to remind those here that Mr. Martin has always said that we cannot stop this bill, that we cannot change anything now; otherwise, it would have negative effects. Even if we cannot stop the bill, we can change the rate of taxation of social security benefits.
There is one thing I did not mention. When we worked in the United States, we paid social security premiums up front. In other words, we were taxed on social security premiums. It is not like Canada Pension Plan which is tax-deferred.
Senator St. Germain: Are you saying that it was after-tax dollars?
Mr. Thrasher: Yes, and you are taxed up to $60,000 U.S., which is $84,000 Canadian. Actually, the ratio of the benefits from the Canada Pension Plan are substantially greater than those from U.S. social security. Some people say that it is not fair that Canadians are taxed on 100 per cent of Canada Pension Plan benefits and we are taxed on only 50 per cent of our U.S. social security. However, that is not fair to say because what we get in return from what we put into social security is in a ratio of three.
The Chairman: Are there any further questions for the witnesses?
Thank you all for attending here today.
Mr. Thrasher, the committee appreciates that you took the time to bring this issue to our attention. Until the committee heard from you late last week, I was unaware of this issue. You have been very helpful.
Senators, may I have a motion to dispense with clause-by-clause consideration of the bill?
Senator Angus: So moved.
The Chairman: Given the evidence we have heard this morning, I suggest that we proceed to report the bill without amendment, subject to two conditions, the first being that I get the signed letter from the Minister of Finance before I table the committee report.
Mr. MacIntosh, before you leave, I want to ensure that I have the letter in my hand before 2 o'clock.
Mr. MacIntosh: You will have it.
The Chairman: Second, in light of the last exchange, I should like to write a letter on behalf of the committee to the Minister of Finance picking up on the comments of both Mr. Thrasher and Mr. MacIntosh. That letter would essentially say that we would like to see gradation introduced into the taxation of U.S. social security benefits in Canada; and that they should be subject to the same variable rate tax as they are in the United States, which goes from a 50 per cent to an 85 per cent level depending on income. I would like to say that it is our understanding from officials that that change could be made without any change to the treaty and to urge the Minister of Finance to take that into account when considering the next changes to the Income Tax Act.
Do I have the agreement of the committee to write such a letter?
Senator Stewart: I must confess, Mr. Chairman, that I find this situation very complex. I just do not understand it at all. Consequently, I am reluctant to agree to the kind of solution to which you make reference. I just do not fully understand the complaint that has been lodged.
The Chairman: I think I can explain the complaint.
Senator Stewart: Perhaps we could do it this way: As I understand your comment, the government and the Parliament of Canada could, to a very great extent, cope with the problem without going to the United States. I believe Mr. MacIntosh indicated that. However, before we start urging the Minister of Finance to undertake to satisfy the witness we heard this morning, I would like to have a careful analysis made of the impact of Canadian taxation on these taxpayers, taking into account the benefits which we get for our tax dollars in Canada as compared with the benefits that U.S. taxpayers resident in the United States get.
The Chairman: Then I will suggest a slight modification of my proposal, that being that we get that analysis, which will take a few days, obviously. I will circulate that analysis to the committee, along with a suggested potential draft of a letter to the minister, which we would discuss before I send it. The firm decision this morning would be the letter from the minister which Mr. MacIntosh will ensure I have before 2 o'clock.
Is that solution acceptable to everyone?
Hon. Senators: Yes.
The Chairman: Can I have a motion to report the bill unamended?
Senator Meighen: I so move.
The Chairman: I have one last question for the Conservatives member of the committee. I will be asked today in the chamber when to place the bill on the Order Paper for third reading.
Mr. MacIntosh, is it correct that once this bill receives Royal Assent, you then need a Ways and Means motion through the House of Commons in order to issue the tax refunds?
Mr. MacIntosh: We had hoped to do that, although given the closeness of the Christmas break, that might be difficult. After Royal Assent to Bill C-10, the next step is exchange of instruments of ratification with the United States. That can be done fairly quickly; nonetheless, it does take a few days.
The Chairman: You can issue the refunds once that happens, right?
Mr. MacIntosh: Once that happens, I think the government is contemplating an announcement and, on the strength of that, I think Revenue Canada would go ahead and issue the refunds. They are gearing up now in the Sudbury taxation centre to get these cheques out.
The Chairman: You have answered my key question. The purpose of the question was to determine whether I needed to ask for leave to move to third reading today. I do not; I can set it down for third reading tomorrow, and that is fine.
Mr. MacIntosh: Certainly Royal Assent is very key to this.
The Chairman: We will set it down for third reading tomorrow.
Senator Grafstein: One of the concerns I have been made aware of is the question of refunds. I hear about notification and so on, but when will people get their cheques? When will they see their money? Part of the urgency, and part of the request of the department, is to speed this up so that those refunds can be sent out as quickly as possible. People need and want that money.
I hear you saying that you are gearing it up, but will they get it before Christmas? We have done our duty by proceeding expeditiously. We are only proceeding expeditiously because we went to ensure that taxpayers receive their refunds, hopefully before Christmas.
The Chairman: It is my understanding that if we set the bill down for third reading tomorrow, we will get Royal Assent tomorrow, and that will enable the cheques to go out before Christmas. That is what I have been told.
Am I correct? I just want to ensure that my information is correct.
Mr. MacIntosh: I cannot guarantee with absolute certainty that the cheques will go out before Christmas. We are certainly aiming at that. As soon as Royal Assent is received, we will move as quickly as possible to get ratification with the United States. At the bureaucratic level, all the machinery is in place to get the cheques sent out. It will certainly be within a matter of a small number of weeks, but that is about as far as I can go.
The Chairman: Thank you very much.
Senators, that dispenses with the bill. We will now continue in camera for a discussion of the issue of joint and several liability.
The committee continued in camera.