Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 2 - Evidence, December 1, 1999
OTTAWA, Wednesday, December 1, 1999
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-3, to implement an agreement, conventions and protocols between Canada and Kyrgyzstan, Lebanon, Algeria, Bulgaria, Portugal, Uzbekistan, Jordan, Japan and Luxembourg for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, met this day at 3:30 p.m. to give consideration to the bill.
Senator E. Leo Kolber (Chairman) in the Chair.
[English]
The Chairman: Our first witness this afternoon is Mr. Roy Cullen, Parliamentary Secretary to the Minister of Finance.
Welcome, Mr. Cullen. Would you please proceed, and perhaps you could introduce your colleagues.
Mr. Roy Cullen, M.P., Parliamentary Secretary to the Minister of Finance: With me from the Tax Policy Branch of the Department of Finance are Brian Ernewein, Director of the Tax Legislation Division, and Mr. David Sénécal, Acting Chief, Tax Treaties, also from the Tax legislation Division. Also in our midst are Ms Ann Collins, from the Department of Foreign Affairs and International Trade, and Gary Zed, from Revenue Canada.
The Chairman: Do you have an opening statement?
Mr. Cullen: Yes, I do. Honourable senators, I appreciate the opportunity to appear before you today to discuss Bill S-3. I will keep my remarks brief in order to have time for some questions.
[Translation]
This bill is about the new tax treaties between Canada and Kyrgyzstan, Lebanon, Algeria, Bulgaria, Portugal, Uzbekistan and Jordan. In addition, it replaces the existing tax convention between Canada and Luxembourg and modifies sections of the current tax convention with Japan.
[English]
This legislation contains nothing new or controversial -- hopefully. The bill is simply part of Canada's ongoing efforts to expand its network of tax treaties with other countries. At present, Canada has 67 income tax treaties in place, Mr. Chairman, with other countries. Once the treaties in this bill come into force, that number will increase to 74.
Tax treaties are particularly important for Canadian businesses operating internationally and for individuals with foreign source income. These treaties provide an assurance that withholding tax rates can neither exceed certain limits nor be increased without significant notice.
[Translation]
They also engender an atmosphere of certainty and stability for investors and traders, which enhances Canada's economic relationship with other countries.
[English]
The treaties also simplify the tax system by eliminating tax on certain business profits, and they provide a mechanism to settle problems that arise. Finally, and most important, tax treaties eliminate or alleviate double taxation. Double taxation occurs when a taxpayer resides in one country and earns income in another. If there is no tax treaty in force, both countries could claim tax on that income, with the result that some Canadians could end up paying tax twice.
Essentially, tax treaties eliminate double taxation in two ways. The first way is by allocating taxing rights between the taxpayer's country of residence and the source country of that income.
[Translation]
If that income remains subject to tax in both countries, the taxpayer's country of residence shall either waive that income tax or credit the taxpayer an amount equal to the tax paid in the source country.
[English]
A key to any tax treaty bill is withholding-tax-rate reductions. Countries generally impose withholding taxes on various types of income paid to non-residents. Without a tax treaty or a specific exemption in our domestic law, Canada's withholding tax rate on non-resident income is 25 per cent.
Bill S-3 spells out the reduced rates of withholding taxes on dividends, branch profits, interest and royalties for each treaty covered in this legislation. In some cases, copyright, computer software, patent and know-how royalties and interest paid in respect of certain government indebtedness are exempt from tax.
The protocol with Japan also exempts Canadian companies operating ships or aircraft in international traffic from local Japanese enterprise taxes. Our provinces have already extended this courtesy to Japanese companies carrying on similar activities.
[Translation]
Before closing, I must point out that the tax treaties which were signed with Luxembourg, Portugal, Lebanon and Jordan also gave recognition to the proposed taxpayer migration rules by eliminating the risk of double taxation resulting from the exercise, by Canada, of its right to tax emigrants on gains accrued before their departure from our country.
[English]
The treaties with Uzbekistan, Bulgaria, Algeria and Kyrgyzstan do not yet recognize taxpayer migration, as they were negotiated prior to the rules being announced. Japan will review the issue in future negotiations. Honourable senators can be assured, however, that not giving recognition to the proposed taxpayer migration rules in these five treaties will not be a problem, because the proposed rules allow for a unilateral foreign tax credit to be given by Canada to immigrants until the year 2007.
This provision will guarantee that there will be no double taxation of pre-departure gains before Canada has had an opportunity to renegotiate its tax treaties to take into account the effects of the new rules.
[Translation]
In conclusion, I want to stress the importance of such tax treaties for the international trade of goods and services and their impact on Canada's economic performance.
[English]
Canadian exports, Mr. Chairman, now account for over 40 per cent of our annual GPD. In addition, our annual economic wealth also depends on foreign direct investment along with inflows of information, capital, technology, royalties, dividends and interest. The importance of tax treaties to Canadian businesses and individuals operating internationally and to the Canadian economy is therefore significant.
Honourable senators, this bill is deserving of your support.
I will be pleased now to answer any questions you may have; if necessary, I will refer the more technical questions to the officials.
Senator Lynch-Staunton: Thank you, Mr. Cullen, for your presentation. If some of us are taking a special interest in this bill, which is but one in a series of bills that have been passed pretty well without debate, it is because the government legislative agenda in the Senate is rather thin these days. So we chew on what we have.
I want to congratulate those who are responsible for the briefing book, with the background on each country. It is an excellent presentation. I must say that I wish others could use it as a model for purposes of background, because a briefing book like this helps us appreciate what we are asked to study.
You have answered a question I had in mind concerning the agreement with Japan regarding Canadian enterprises operating ships or aircraft in international traffic. The condition is that Canadian provinces do not subject similar Japanese enterprises to similar taxes.
Did I understand you to say that the provinces had agreed to that, or there is agreement with the provinces not to impose such a tax?
Mr. Cullen: Yes, that is the case.
Mr. Brian J. Ernewein, Director, Tax Treaties, Tax Legislation Division, Tax Policy Branch, Department of Finance: It is more a matter that the provinces do not in fact apply such a tax. We have not, according to our own domestic legislation, imposed a federal tax on international airline or shipping profits, based on the view that most other countries do the same. There are difficulties in attempting to identify and allocate the amount of income that is attributable to a non-resident shipping company or airline company. So the tacit or explicit understanding amongst most countries is that it will just be taxable by the country of residence.
Simply put, the provinces follow the federal rules in that respect and have not imposed a tax on non-resident airline companies or shipping companies in respect of international profits. Therefore, the condition in the protocol with Japan is that the Japanese will see to the exemption from their local enterprise tax, conditional upon our not imposing at the federal, provincial or municipal levels any of our own tax that was already satisfied from the Canadian side.
Senator Lynch-Staunton: In a case like that, where the province might come and disturb the agreement, are provinces consulted ahead of time before the treaty is finalized and the wording of it is completed, or is this just wishful thinking or hoping that the provinces will not, once a treaty goes into effect, skewer this particular clause by imposing a tax? Are they aware of this treaty, in other words, to make sure that they do not gum it up?
Mr. Ernewein: We are not in a position to bind the provinces with our tax treaties. They can impose their own taxes and, if you wish, undermine the terms of any of our 60 or 70 tax treaties now in existence. The fact of the matter is, however, that the provinces have respected the terms of our tax treaties. They do not, for instance, impose withholding taxes. So that issue does not arise. They respect, virtually without exception, the standards we agree to in our tax treaties with respect to the threshold for taxing non-residents.
I am not talking about shipping or airline companies now, but, generally, non-resident companies are only taxable in Canada if they have a permanent establishment in Canada. The provinces adhere to those same rules. Functionally, many of them do so by virtue of being part of the Tax Collection Agreement, whereby Revenue Canada or the CCRA collect their taxes on their behalf. But even the provinces that collect their own taxes generally -- and I mean almost without exception -- apply the same standards.
Senator Lynch-Staunton: In your briefing book there is a table showing the history of all the tax treaties. The one with Nigeria was given Royal Assent over five years ago. The one with Croatia was given Royal Assent and went into force just this week, according to a press release from the Minister of Finance.
Why would it take so long, in one case, five years, for a treaty to go into force?
Mr. David Sénécal, Acting Chief, Tax Treaties, Tax Legislation Division, Tax Policy Branch, Department of Finance: Are you referring to Nigeria?
Senator Lynch-Staunton: That is the most glaring one, I suppose, but there is also Chile, according to my notes.
Mr. Sénécal: Since the briefing book was prepared, our treaty with Chile has now come into force and so has our treaty with Croatia.
Senator Oliver: And Nigeria?
Mr. Sénécal: The treaty with Nigeria could come into force at any moment. It is my understanding that this matter was discussed during the Prime Minister's visit to Nigeria recently and that Foreign Affairs is about to present the Nigerian government with a diplomatic note that would be the missing piece in order for the treaty to come into force.
Senator Lynch-Staunton: So we are waiting for them to make the final decision?
Mr. Sénécal: They have already notified Canada.
Senator Lynch-Staunton: Once these treaties are approved by Parliament, can Parliament intervene in them, amend them or adjust them, or is it out of their hands and then in the hands of the executives?
Mr. Ernewein: No, it has not fallen outside the hands of Parliament. It is necessary to come to Parliament to get approval of the treaties in question.
They do represent an agreement between at least representatives of the Government of Canada and representatives of another government, which is to say that if Parliament were to reject all or part of a proposed treaty, then that would not bind the other country, obviously.
As a practical matter, that would mean that it would be necessary for the representatives -- that would be us -- to return to that other country and present to them the information on what had transpired in Parliament and the directions that had been sent by Parliament.
Senator Lynch-Staunton: My main question has to do with having a treaty with Uzbekistan. Judging from the briefing notes of the government, Canadian involvement in Uzbekistan is practically non-existent. Trade was about $18 million in 1998. Canadians have hesitated to invest there because the regime is not exactly instilling confidence.
If I recall, some companies that have sold high-tech equipment there have had trouble getting paid in hard currency. It does not sound like an area in which Canadians want to be particularly involved, if at all, or are rushing to get into. It is a country with a very repressive regime. Your summary in the briefing book says it all. One can have that confirmed by Human Rights Watch and other organizations. It is just a very sad situation over there.
Why would we want to have any kind of association, other than a minimum one, with a country like that, where Canada's interests and Canadians are really not involved? To my mind having a tax treaty sort of sanctions the regime. I know that the answer to that will be that we have treaties with other countries whose regimes we have reason to be critical of, but in most of those cases, if not all of them, there is a significant Canadian content, where Canadian citizens have a right to be protected, both in body and in terms of taxation.
But in the case of Uzbekistan, from what I have read so far, that situation does not exist. So why do we pursue a treaty with that kind of country?
Mr. Cullen: Senator, I will answer in a general sense, and then perhaps Ms Collins from Foreign Affairs can address your question.
From the government's point of view, there is an interest in that area of the Caucasus. There are some developments there that are worth watching and noting and having an interest in. There is a large oil and gas industry. The House of Commons Standing Committee on Foreign Affairs will be conducting a review of that whole area of the former Soviet Union and will submit a report in the next while. Among other things, they will be looking into the matter of human rights there and Uzbekistan's record in that area.
At this time, we have a number of treaties with a whole range of countries where perhaps the human rights records are not optimal, but in terms of keeping engaged and keeping a dialogue open, there is a rationale at that level from the government's point of view.
The Chairman: Senator Lynch-Staunton, I believe it was partly as a result of your advocacy that this bill is also going to the Foreign Affairs Committee.
Senator Lynch-Staunton: It was the government's decision, but you are correct in that we urged the government to send the bill to Foreign Affairs rather than here, and the government agreed to send it to both committees.
The Chairman: You are free to ask any questions you want, but these questions will be further studied by the Senate Committee on Foreign Affairs.
Senator Lynch-Staunton: I want to tell Mr. Cullen and his officials that that is one major preoccupation we have, and I want to hear from the technical point of view how he saw the arguments in favour of pursuing this treaty.
Mr. Cullen: I would suggest, Mr. Chairman, that if this bill is also going to your Foreign Affairs Committee, perhaps those officials, who would be there obviously, could deal with the political or diplomatic climate, and today the Finance officials could talk about the rationale from the point of view of the tax treaty initiative.
Mr. Ernewein: Mr. Chairman, in our role as tax treaty negotiators, we do not assume the role of government in determining whether or not there should be diplomatic relations with a particular country. From a bureaucratic perspective, we are limited to analyzing the tax policy principles associated with having a treaty or not. That is to say, if there are not full diplomatic relations with another country, then the threshold has not been crossed and we will not even enter into a consideration of having a tax treaty with that country.
Given the existence of full diplomatic relations with a country, then the question for us as we have seen it -- I am using the past tense and this is subject to change -- is that we will analyze it on the basis of its sense from an investment and tax policy perspective. That will take into account the level of actual or anticipated investment by Canadians in that other country, and possibly the investment in Canada by the residents of that other country.
We look into the existence and nature of the tax system in the other jurisdiction and the tax administration in the other jurisdiction. We are concerned about the administration being reliable enough to honour the terms and to enforce and apply the terms of the tax treaty. That is particularly important in respect of the exchange of information provisions we have in most of our treaties, because we want to know that there is value in that. If we need to or want to seek information from the other tax authorities for our purposes, we need to know that there is some realistic expectation that we can use it for that purpose. On the other hand, if information is sought from us, we need to be assured that it will be used only for the purposes of tax administration and not for other purposes.
Those preceding comments apply generally, but with respect to Uzbekistan in particular I would draw the committee's attention to the fact that Uzbekistan, as a member of the former USSR, was actually covered by a treaty between Canada and the USSR since 1985. In fact, that USSR treaty has continued to apply to several former Soviet republics; on that basis, we made an offer, along with many other OECD countries, to continue to apply the USSR treaty to Uzbekistan. They, in fact, had sought to renegotiate and have a specific treaty applying between Canada and Uzbekistan. But we are by no means alone in proposing a treaty with them.
There are 11 treaties in force currently between other countries and Uzbekistan. There are five direct treaties, with Belgium, Finland, India, Greece and the United Kingdom, and, through the USSR treaty that is continuing to apply it to Uzbekistan, there are another six treaties, with Austria, Denmark, Japan, Netherlands, Spain and the USA.
There are four other treaties that have been signed but are not yet in force, making a total of 15.
It is not simply the case that, because someone else does it, it makes sense that we do it as well, but we are not alone in this respect.
Senator Lynch-Staunton: I will pursue my main concern before the Foreign Affairs Committee, because I do not want to draw you into an area that is not within your expertise.
Has Canada ever refused to sign a tax treaty with another country for other than its taxation regime? Every year the State Department in the United States comes out with a human rights assessment of each country, and maybe or maybe not their policy is based on that assessment. We do not do that in this country.
Is there any non-taxation element in a decision to decide whether we pursue a treaty with a country or not, or is it strictly based on an appreciation of the tax regime of that particular entity, and the rest is not really within your bailiwick.
Mr. Ernewein: I am not aware that we have declined to sign or proceed with a treaty because of non-tax policy considerations or non-commercial considerations. There was one instance where an existing treaty was terminated because of the termination of diplomatic relations with the country, and that was in the eighties with South Africa.
Senator Tkachuk: My first question was asked, so this is a follow-up question to what Senator Lynch-Staunton had asked. What drives a tax agreement?
I notice that Cuba is not on this list. I understand that the Prime Minister and the Minister of Foreign Affairs a while back were talking about the great relationship we were having with Cuba and how there were a lot of people interested in investing in that country. I am wondering why we do not have a tax treaty with them.
Mr. Ernewein: I am not sure I wish to prompt it. We have not received any representations from the Cuban government expressing an interest in having a tax treaty. Even if such representations were received, there would still be the questions that I have outlined about the existence of a tax system, et cetera, that, even in our blinkered approach, would have a bearing on deciding whether or not to have a treaty with them.
Senator Tkachuk: Did Uzbekistan ask us for a tax treaty? How does this work? Do countries ask us or do we ask them?
Mr. Ernewein: The initiation of a tax treaty can occur through different routes. Another country may express an interest in holding negotiations with us. We may express an interest in holding negotiations with them. Investors of either country may push one or the other country to hold negotiations. There may be a common interest between the two countries in strengthening ties, and a tax treaty is one way to do that.
Senator Tkachuk: In the case of Uzbekistan, for example, would that have come from our government or their government or from private investors?
Mr. Ernewein: As I mentioned before, Uzbekistan is one of the former Soviet republics. They have had in place functionally a tax treaty with Canada since 1985. The dissolution of the USSR led to the question of what to do with the former Soviet republics. We determined as a general matter that we would be prepared to extend, or maintain, the application of the then current USSR treaty to all parts of the former USSR. Uzbekistan was part of that. That was motivated in part by an interest to continue to engage the former Soviet Union and continue to have relations with them -- not just tax treaties, but other economic relations. From our perspective, though, it seemed worthwhile to maintain tax treaty relations with all of those countries.
Senator Tkachuk: Senator Lynch-Staunton covered some of the ground as to why an agreement would be signed. From what I understand, after this bill comes into force, there will be 74 countries with which we have treaties.
Apart from trade sanctions, nothing drives this policy except the tax agreement itself. In other words, we did not have one with South Africa, because there were trade sanctions with a country that had an abysmal human rights record. However, other than saying we have sanctions and therefore we will not sign these agreements, nothing else drives it.
To put it another way, if there was a local butcher out there that a corporation was doing business with, that would be fine with us. In such a case, is there anything that would stop us from having a tax agreement? How bad does a country have to be? That is what I am trying to get at.
Mr. Cullen: The example cited was South Africa, where the diplomatic relations were withdrawn. In a general sense, the tax treaties are driven by the need to have a level playing field. The parameters are more commercial.
Those companies or individuals who want to invest or wish to participate commercially with these countries need to be on a level playing field so they are not taxed doubly; but it seems to be driven more by the commercial interests of Canadians rather than looking at individual countries and saying that we are not very happy with their human rights records, therefore we will not have a treaty with them. Perhaps the officials from the department would like to expand on that.
Mr. Ernewein: We do not second-guess the determination of the government with respect to its judgment as to the conduct of another government. If I personally believe that there are human rights abuses or that there is some poor environmental track record in the other country, I am entitled to hold that view. However, I do not think that should inform the decision as to whether or not to have a tax treaty with that country.
I take my lead on that score from the government generally, which informs itself through Foreign Affairs.
The Chairman: These kinds of questions will be addressed at the Foreign Affairs Committee. I would appreciate it if we kept our questions on the tax end of matters.
Senator Tkachuk: Mr. Chairman, I agree with you.
The Chairman: You are free to ask whatever you want. I am just trying to make life easier.
Senator Tkachuk: I am enjoying this human rights stuff. I would like to continue on. Maybe my real interest is in the Foreign Affairs Committee.
Let me get back to Cuba. The Prime Minister has been talking about building strong relations with Cuba; our Minister of Foreign Affairs actually visited there. I find it strange that we do not have a treaty with them, and yet we have treaties with countries like Uzbekistan, which I come back to because of their abysmal record. I am sure that no one wants to even go there.
I did not find your answer on Cuba satisfactory. Maybe they do not have a tax system. Maybe Canadian businesses get a tax-free road and that is why they are not asking for a tax system, but, if that is the case, I would I like to know that. I would like to know why we do not have a treaty specifically with Cuba.
The Chairman: May I suggest that you contact the senator with a written answer, Mr. Cullen, because this has nothing to do with what we are dealing with.
Mr. Cullen: Certainly, we will be glad to do that.
Senator Oliver: I have two questions. The first is a rather generic, general question. The second relates to capital gains, as touched on in your briefing book.
First, time and time again, this committee is asked to study a treaty after you people have negotiated agreements. At the same time, when we ask questions about what you actually talked about and negotiated during these discussions, you are very reluctant to give that kind of information.
It has been suggested in this committee previously that you could prepare a form of checklist, which we could have before us when you appear, and we could then go through that checklist with you. Are you prepared to prepare such a checklist so that we could have a benchmark against which to judge these various tax treaties?
My second question relates to capital gains. This committee is now studying capital gains. In your briefing book you say that the source country, the country where the property is situated, retains the right to tax capital gains derived from the disposition of real property, business assets and shares in real estate companies, or interest in real estate partnerships or trusts.
Say I had a company in one of the countries we are talking about now; say I bought a piece of land, built a plant on it and had it for five years and the real estate appreciated by 50 per cent. Could the capital gains treatment under your negotiated agreement be any worse than the capital gains treatment we would get in Canada, or would it be the same?
Mr. Cullen: With the first question, I am sure the department could pull together such a checklist. I am wondering if, in doing that, they would be developing a sort of report card on themselves. If you have research staff, it might be more beneficial if they developed the checklist, perhaps in cooperation with the department. That is the only thing I would offer there.
Mr. Ernewein, would you like to expand on that and also on the capital gains issue?
Mr. Ernewein: I have one point to add on the checklist. We would be happy to do what we can to improve --
Senator Oliver: To help us know the principles that go into the negotiating of one of these agreements.
Mr. Ernewein: When you refer to a checklist, if you have the briefing book before you, at the second tab titled annex 2, about the fourth page in, is a chart of withholding tax rates for each of the nine countries whose treaties are implicated in this bill, talking about the items of income, dividends, branch income, interest, royalties, pension payments, annuities and trust income. I just mention that, because that may be what you are referring to.
Senator Oliver: No, it is not.
Mr. Cullen: This is more like an inventory. Senator, if I understood your question correctly, you are looking for some kind of checklist that would help you understand whether or not we have negotiated a good treaty.
Senator Oliver: Exactly.
Mr. Cullen: What are the key elements or the benchmarks?
Senator Oliver: That is exactly what I was asking.
Mr. Ernewein: On the capital gains question, we are not novel in this respect. Most countries and most tax treaties reserve to each country the right to tax gains on real estate situated in that country and on business property.
Senator Oliver: At what rates?
Mr. Ernewein: At domestic rates. There is no limitation. So it is whatever rates apply in the particular jurisdiction. In Canada, assuming it represents a capital gain and is not real estate inventory, the return on which would be ordinary income, as a captain gain it is 35 to 37 per cent combined federal-provincial.
The answer to the second question about a real estate company is that, because of the obvious avoidance issue that would arise if you reserved only to yourself the right to tax real estate, no non-resident, or at least no even reasonably advised non-resident, would ever buy local real estate directly. They would always buy it through a holding company and trade, that is sell, the real estate by way of or by means of selling the shares of the company.
To counteract that, many OECD countries, including Canada, have, for a number of years, included a provision reserving to themselves not only the right to tax the real estate in specie, or in itself, but also the right to tax interest in shares, or partnership interests of holding companies, or partnerships whose principal value is attributable to real estate.
Senator Angus: I notice, Mr. Sénécal, that you are the Acting Chief, Tax Treaties, Tax Policy Branch.
Mr. Sénécal: Yes.
Senator Angus: Was there a Mr. Déry there? Are you his successor, more or less?
Mr. Sénécal: Unfortunately, Mr. Déry is off for health reasons. We are not able to say at this point if he is coming back.
Senator Angus: I am trying to get the sequence. He was here two or three times in the last three years on previous tax treaty-tax convention legislation. On each occasion, I asked a series of questions about a potential treaty with Colombia and Mr. Déry gave the answers. I asked the questions because I have had representations from Canadian businessmen involved in Colombia, who find that not having a treaty makes their business dealings very onerous. At one time there was some indication that Canada would like to have a treaty, but nothing was happening, and we were going to be given an update on that.
Could you tell us where we are at the moment, vis-à-vis Colombia. You have nine new tax treaties and still no treaty with Colombia. What is the story?
Mr. Sénécal: Colombia is almost a daily event in my life. We actually are having difficulty getting the Colombians back to the table. They keep withdrawing. There is a certain hesitancy on their part to have double taxation agreements. They are quite nervous. The officials they have in place now have very little experience with tax treaties. That is another problem.
We have attempted in the last 12 months to set up a number of visits there. Last spring we were scheduled to go. I was already on the plane and was told to come back. It is not through any lack of effort on our part.
Currently, we are looking at the possibility of going early in the new year, but we have been told that they are undergoing some type of tax reform and are not certain whether they can receive us.
Senator Angus: It is fair to say, I believe, that it is our government's policy that we would negotiate and enter into a tax convention with Colombia if we could get them to agree. Is that not so?
Mr. Sénécal: And whether we could come to an agreement on the terms in the negotiations.
Senator Angus: Is there anything we can do to help?
Mr. Sénécal: Foreign Affairs officials are working on this constantly. I am receiving e-mails and phone calls from our embassy in Bogot<#00E1> almost on a daily basis. It is not through lack of trying.
Mr. Cullen: I would suggest that Canadian business interests make representations in Colombia to try to expedite the process.
Senator Angus: Are you up to speed on this issue?
Mr. Cullen: On the tax treaty with Colombia, I have not had any constituents or any companies that I am aware of pushing for a Colombian treaty, but if we do, perhaps it is something they could represent.
Senator Angus: The gentlemen from the department have confirmed that it is a problem for Canada because we do business with that country. There is shipping business, along with various other business interests, and I am aware, through some of these people, that representations have been made in Colombia as well.
The reason I have asked these questions now, and pursued them on previous occasions, is that there is so much folklore about Colombia in the bigger picture of things that I thought the government might be reticent in pursuing relations, but you have reassured me today that it is our policy to deal with them. There is no boycott of Colombia; there is no embargo. It is just a case of getting them to the table.
Mr. Cullen: Under tab 3 in our briefing book, Senator Angus, we indicate that the question of a treaty with Colombia is under negotiation. However, I will undertake to take that message back to the ministers responsible to see if there is anything that they might entertain to try to expedite it from our end.
Senator Angus: I appreciate that.
Senator Kelleher: As I understand the basis for wanting to have a tax treaty with a country, it is because of investment and trade with that other country. We want to be able to ensure that Canada is getting its share and that the Canadian company or person involved is not being unfairly treated. Given the concerns that we have about Uzbekistan, why have we gone in there at this time, when, according to your own documents on Uzbekistan --
Senator Oliver: Oil and gas.
Senator Kelleher: It says in your book that Canada has some minor commercial interests there. Total trade was $18 million in 1998. That is not much trade. It says there is no major Canadian investment in the country. Given their human rights record, why are we rushing into a tax treaty at this time?
Mr. Cullen: This matter will be coming up again at the Foreign Affairs Committee, Mr. Chairman, but the officials have indicated --
Senator Kelleher: I am not trying to deal with the human rights part of it. I am saying that, on the underlying basis, we do not seem to have any commercial interests there. So what is driving this?
Mr. Cullen: As indicated earlier, Uzbekistan was part of the former Soviet Union, and because the Soviet Union was breaking up we tried to formulate treaties with the elements of the former Soviet Union. Frankly, there is not a big huge push on for a treaty with Uzbekistan. It is in the hopper and it is being negotiated. As you say, there does not seem to be a lot of commercial interest at this point in time.
However, from the government's point of view, there is an interest in keeping a watching brief on this area of the former Soviet Union. Right now the area is being served by various of our embassies -- for example, those in Moscow and Ankara -- and there is a feeling, as I understand it, that this area could start to move commercially, because other countries are already making investments there. If, then, a Canadian company wanted to start dealing with that country and suddenly realized it was up against a tax treatment that would prejudice its investment or trade, it would be in a difficult spot, because you do not negotiate these treaties in a matter of days or weeks. They take a considerable time.
Perhaps the officials would like to expand further.
Senator Oliver: I believe you said earlier that there are oil and gas reserves there. Are there and are they substantial?
Mr. Cullen: That is my understanding.
Mr. Ernewein: We understand that the reserves exist. We are not in a position to establish their substantiality. To echo again the point raised by Mr. Cullen, it is not just actual investment that is relevant to a treaty; anticipated investment or potential investment can also be relevant to having tax treaties. In the circumstances, as the point has been made, it is important for potential investors to know that a treaty is in place that will give them fair treatment vis-à-vis competitors from other countries; in other words, there is an important trade value to having the treaty in place.
In terms of negotiating treaties, I would make the point that this treaty was negotiated in 1994 or 1995, approximately, but was only signed recently; that does serve to make the point that these things are not done overnight. If, for example, someone were to come to us tomorrow and ask us to negotiate a treaty with country X, it would take -- for reasons on our end and their end and because of logistical difficulties -- a matter of years to get that treaty in place.
Mr. Sénécal: As we mentioned, countries like the United States, the United Kingdom, Germany and Belgium already have these treaties in place. With the time lag, our companies would be disadvantaged, because, if a project did come up and they wanted to bid on it, we could not get the treaty in place overnight and there is no way they could compete.
Senator Lynch-Staunton: When you negotiate these treaties or take the initiative to negotiate them, or are approached by a country for negotiation, do you consult with Foreign Affairs, or with any other department that has an interest there, in order to assess the status of that country and Canada's diplomatic approach to it, or do you go there -- I will not say in isolation, but pretty well under the mandate that you have -- believing that it is your responsibility to negotiate the treaties and then we will see what happens after?
Mr. Ernewein: There are generally three departments involved in the process around the negotiation and implementation of a tax treaty. Foreign Affairs is certainly involved. Revenue Canada is also involved. The actual negotiations are led by the Department of Finance with the direct assistance of officials from the CCRA. Foreign Affairs is consulted and is aware of the negotiations, and sometimes participates in the negotiations directly at the outset as well as during the course of them.
In terms of seeking approval, we seek the express approval of all three of those ministries before taking a treaty forward for signature.
Senator Lynch-Staunton: Foreign Affairs signs the treaty, I believe. I see Mr. Axworthy's signature on three of them.
Mr. Ernewein: I believe it is almost always a representative of the Foreign Affairs department that signs it, yes.
Senator Lynch-Staunton: The role of Foreign Affairs is to facilitate, with the government involved, the process of treaty preparation. Mr. Sénécal mentioned Colombia. He is hoping that Foreign Affairs at its end will help things come to the solution that Senator Angus would like to see.
Mr. Ernewein: Generally, Foreign Affairs' involvement is essential logistically and often substantively in advancing treaty negotiations.
We have a treaty of longstanding with the United States, given the level of investment and the proximity of the countries. We at Finance deal directly, routinely, with people at Treasury Board and, as a result of that, generally we do not need emissaries to work between us; but that is often not true in respect of other countries. In respect of those other countries, it is imperative that Foreign Affairs be involved.
Senator Fitzpatrick: I understand that capital gains are exempted from this, or that capital gains are paid in the source country and at that country's capital gains rate. Then Canada would apply a capital gains tax as well. In the case of capital gains, we are dealing with double taxation. Is that correct?
Mr. Ernewein: I perhaps should ask a question myself to make sure that I do understand your question. Is this a situation in which, for instance, a Canadian investor is generating a capital gain in another country and the other country does tax that?
Senator Fitzpatrick: Yes.
Mr. Ernewein: If you are talking about real estate situated in the other country, under the terms of all, or virtually all, of our tax treaties, the other country would have the right to apply such a tax. We would relieve double taxation by providing a foreign tax credit. That is, their tax would be credited against our own tax so that you would end up paying only the greater of the two, effectively.
If it is not real estate or shares of real estate companies -- again I am speaking generally, because there are variations in our treaties -- then the other country does not have the right to tax it at all and it is only subject to tax by Canada at whatever rates apply in Canada.
[Translation]
Senator Hervieux-Payette: From the outset, we have been talking about double taxation. We seem to forget the second purpose of this bill, which is to prevent fiscal evasion with respect to taxes on income and on fortune. From the moment a treaty comes into force, there are exchanges of information between two Departments of Revenue. Does that mean that such information makes it possible, both for Canada and the other country, to prevent their citizens from finding a shelter in the foreign country?
Mr. Sénécal: Yes, you are right.
Senator Hervieux-Payette: Technically speaking, is it the case that more of these exchanges of information occur with than without such treaty?
Mr. Sénécal: Yes, since otherwise, we would not have that right.
[English]
Senator Tkachuk: You mentioned that you are dealing with Colombia. Do you have a list of the countries you are dealing with now?
Mr. Cullen: It is in the book at tab 3.
The Chairman: Honourable senators, if there are no more questions of our witnesses, I would like to thank the witnesses for appearing today.
Honourable senators, can I dispense with clause by clause?
Hon. Senators: Agreed.
The Chairman: Shall I report Bill S-3 without amendment?
Senator Tkachuk: To whom do we report?
The Chairman: The way I understand it, this bill will go to the Foreign Affairs Committee. As to when, I do not know precisely.
Senator Lynch-Staunton, you must know.
Senator Lynch-Staunton: No. The instruction from the Senate, urged on by the government, was that the bill would go to the Banking Committee first and then on to the Foreign Affairs Committee. We cannot send the bill from one committee to another. It must go back to the Senate.
The Senate entertains the report and then decides to follow on to the next step.
The Chairman: Mr. Gary Levy, our clerk, will explain the procedure.
Mr. Gary Levy, Clerk of the Committee: My understanding is that we proceed as usual with this bill in that we adopt it here and report it back to the Senate. That is the extent of the committee's involvement. What happens next will occur in the chamber.
The Chairman: When do I report the bill to the Senate? I said I would do it Wednesday.
An Hon. Senator: No.
Senator Hervieux-Payette: Why not tomorrow?
The Chairman: I need some input. Does anyone know when the Foreign Affairs Committee will meet on this matter?
Senator Lynch-Staunton: I do not think that committee can have a meeting until the bill is sent to that committee.
Senator Fitzpatrick: I move that we report the bill without amendment. The bill will then be in the hands of the Senate.
Senator Lynch-Staunton: After the Senate moved to send the bill to two committees, the Deputy Leader of the Government was very clear in stating that it would go first to this committee and then on to the Foreign Affairs Committee.
Senator Kenny: I concur with what the Leader of the Opposition says. That was the agreement.
The Chairman: On what have you based your comments, Mr. Clerk?
Mr. Levy: I based my comments on the motion in the Journals of the Senate. However, I believe the motion was corrected by Senator Hays the next day in the chamber.
Senator Lynch-Staunton: We will have to rely on Hansard and Senator Hays' explanation of the events.
Senator Kenny: In any event, the question is whether the chairman is reporting the bill back to the Senate.
The Chairman: That is correct. I must report the bill, and then the Senate can proceed however it wishes.
Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
The Chairman: I shall report the bill to the Senate, without amendment.
The committee adjourned.