Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 2 - Evidence - Meeting of November 25, 2004
OTTAWA, Thursday, November 25, 2004
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-17, to implement an agreement, conventions and protocols concluded between Canada and Gabon, Ireland, Armenia, Oman and Azerbaijan for the avoidance of double taxation and the prevention of fiscal evasion, met this day at 11:06 a.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Honourable senators, at the outset, I would welcome our witnesses and our audience.
Today, we are here to deal with Bill S-17, to implement an agreement, conventions and protocols concluded between Canada and Gabon, Ireland, Armenia, Oman and Azerbaijan. I have been to a number of these places. This bill is important to all of us. Its purpose is to eliminate tax barriers to trade, investment, productivity and competition in the Canadian marketplace, all of which is of interest to this committee.
We welcome Mr. McKay, our colleague from the other place. Perhaps you would introduce your colleagues, Mr. McKay.
Hon. John McKay, P.C., M.P., Parliamentary Secretary to the Minister of Finance: Honourable senators, I am joined today by my colleagues Mr. David Sénécal and Mr. Brian Ernewein from the Department of Finance, as well as by Ms. Deborah Chatsis from the Department of Foreign Affairs.
I do not intend to make a long opening statement because I do not think it is necessary. This is a simple bill. Its outline is fairly straightforward. As you rightly point out, Mr. Chairman, it concerns the countries of Gabon, Armenia, Oman, Azerbaijan, and a new treaty with Ireland replacing the one that is in effect. It is modeled on the OECD tax convention, although there are themes and variations thereon.
Canada is trading nation and, as such, we require these treaties — probably as much as any country in the world — to stabilize relationships among companies and people in various countries.
In entering into a treaty, the goal is to accomplish three major objectives. They are, first, to avoid double taxation. Most of our citizens take a dim view of double taxation. The second is to prevent tax evasion, and the third to prevent tax avoidance.
Since this is the Senate Banking Committee, I need not go into the palaver about what constitutes double taxation. I will work on the assumption that all honourable senators know what that means.
The second and third objectives are tax evasion and tax avoidance. The ultimate concern here is that those who take advantage of situations are, in effect, passing an unfair burden on to other Canadian taxpayers. That is one of the major reasons for entering into such treaties. Since these matters cannot be put into legislation, we hope that the mere existence of these treaties creates an atmosphere of stability and certainty for investors and traders.
My next point has to do with the treaty. The rate of taxation cannot be increased without substantial advance notice. We all have examples of countries that ratchet up the rates of taxation without notice and effectively expropriate foreign assets. Hopefully, a treaty will at least have some mitigating effect against that.
We hope that the complexity of the administration of the tax system will be reduced by the entering into of these treaties.
Mr. Chairman, that is the shortened version of my remarks.
We have tax treaties with 83 countries. With the four countries dealt with in this bill, that number will increase to 87. In the past thee years, we have signed treaties and amended protocols with 14 other countries.
I hope you will see this as a reasonable bill and that you will be able to support the government in this matter.
Senator Angus: Let me get right to the issue of human rights, which I think you know is of concern to the leadership of my party. I notice that you have with you your experts on the human rights element.
In at least one or two of these countries there are such issues. First, how do you choose the type of countries with which Canada would have a tax treaty? Over and above the fact that we might have regular and ongoing trading relations with them, what kind of an analysis do you do? What are the key criteria that might drive the government not to agree to a treaty?
Mr. McKay: One of the critical questions with which we all wrestle is whether it is appropriate to engage these countries with less than sterling human rights records or do we maintain our distance. In some respects, as we speak, we have just such an issue unfolding before us in Kiev.
In 1991, under the previous administration, Canada underwent a robust engagement process with Ukraine. As a result, I believe we now have some credibility with the authorities there. That allows us to question the outcome of this particular election. You ask a profound philosophical question. I will pass the practical analysis part of the question over to my colleague Ms. Chatsis who can respond more directly.
Ms. Deborah Chatsis, Human Rights, Humanitarian Affairs and International Women's Equality Division, Foreign Affairs Canada: Honourable senators, this is my first appearance before a Senate committee. I am pleased to be here.
Senator Angus: You are most welcome.
Mr. McKay: They are all outstanding minds.
The Chairman: We should say that Ms. Chatsis is not only in charge of human rights and humanitarian affairs but also the international women's equality division. She will speak with a great deal of experience exactly on your point, Senator Angus.
Ms. Chatsis: The issue of engagement raised by Mr. McKay is a long-standing one. It is a multi-faceted issue as well that we consider at length in Foreign Affairs Canada. We look at the human rights records of most of the countries in the world. As part of our foreign policy, we ask our missions abroad to report on the human rights situation in their countries of accreditation on an annual basis, and we use this for our own purposes and for information that is provided to other departments, Crown agencies, et cetera.
This information about the human rights situation is taken into account when we consider the extent to which we have bilateral relations with a country, but it is only one of the factors taken into consideration. We also look at the links with that other country, including economic links, links with Canadians or expatriate communities in Canada, cultural and geographic links, et cetera.
It is not just a yes-no question on human rights and our engagement with a country. We may take a particular approach. For example, if a country has serious human rights issues, that may affect our engagement with that country, but it may not. It may mean that we decide that we must raise the issue to an international level. For example, on the state of human rights in Iran, we recently ran a resolution successfully at the UN General Assembly to highlight our continuing concerns about the human rights situation in that country. The same week or the following week we also sent a new ambassador to Iran, so it is clearly not just one or the other.
We also look at how we can work with that country to improve its capacity and willingness to improve its human rights situation. We do that through bilateral dialogues at an official level, but we also do that through the CIDA Development Assistance Program. CIDA has strong capabilities in building capacity. For example, it has been working for decades in China to help improve the capacity in the judicial and legal sectors. This is part of our multi- faceted approach.
With respect to the specific question on double taxation treaties, I must say that I would have to throw the ball back into the other court. That is not a decision that we take. That is something, from what I understand, that is decided between the geographic divisions in Foreign Affairs alongside Finance, based on a number of other criteria. We feed into that discussion, but we do not have the final say on whether we enter into double taxation treaties with countries that may have human rights concerns.
Senator Angus: In the specific case here, we all know the countries involved: Gabon, Ireland, Armenia, Oman, and Azerbaijan. Does Canada have a concern about human right violations in any of those countries?
Ms. Chatsis: With respect to Ireland, we probably do not.
Senator Angus: It may be worse than the others.
Ms. Chatsis: With respect to the other countries, there are issues of concern. There are common themes regarding the protection of the rights of minorities, and of the rights of women and children. As part of our annual human rights reporting and as part of our discussion with the geographics divisions and the Department of Finance on this issue, we have highlighted the fact that there are areas of concern.
As I say, we are not in a position to object to entering into a double taxation treaty. In fact, there are arguments that a greater engagement at all levels will help to improve the human rights situation in a particular country.
Senator Angus: I know how you prepare for these presentations. Mr. Ernewein would likely have read the speech of Senator Lynch-Staunton in the Senate at second reading.
Mr. Brian Ernewein, Director, Tax Legislation Division, Tax Policy Branch, Department of Finance: Yes, I read it.
Senator Angus: He drew to the attention of his colleagues in the Senate that there was no human rights report with this particular bill, and he expressed concern. Do you share those concerns or do you have any comments that you might wish to offer us in respect of his concern?
Mr. Ernewein: I would at least offer a few additional observations to round out the picture of how we arrive at providing our advice as to whether to pursue a tax treaty with another jurisdiction.
Following the presentation that my colleague from Foreign Affairs has made, we treat as a threshold question whether there exist diplomatic relations with another country that would allow or support the existence of a tax treaty in the first place. If there is not — and I do not mean to diminish its importance — it is just a trade agreement that is subordinate to the general question of whether to have diplomatic relations.
As far as our analysis is concerned, I have recounted to the committee before, and I will not do it at great length here, the considerations that inform us in providing our advice to our minister as to whether to pursue a treaty, which is the level of actual or potential investment in the other country or that other country in Canada, and the prospect for double taxation, real or prospective, current or prospective, between ourselves and the other country that implicitly raises the question of the existence and extent of the tax regime in the other country. If no taxes are imposed by that other country, I would not rule out necessarily having a treaty, but it certainly diminishes the likelihood that there will be double taxation problems in that context.
It is really that economic analysis — that base sort of consideration that you would expect the Department of Finance to do — that we in fact do. That, informed by the Foreign Affairs Department on the questions that have been addressed and the larger geopolitical questions, leads us to our decision.
With regard to your specific question about the inclusion of human rights materials, it is true that the material we prepare for the Department of Finance is about the topics for which we are responsible and to which we can speak.
[Translation]
Senator Plamondon: My question relates to article 26 on the exchange of information. In Canada we have the Privacy Act. Is there an equivalent act in the countries mentioned in the bill? If not, what legislation will apply to the exchange of personal information?
Mr. David Sénécal, Tax Policy Officer, Tax Treaties, Tax Legislation Division, Tax Policy Branch: Whenever we negotiate a tax treaty, we make sure that the other country does have a law similar to ours relating to the exchange of information and that such information is properly protected. In each case our first concern is to examine the appropriate provisions to ensure that they are similar to the ones contained in our Income Tax Act.
Senator Plamondon: Have you any comparison between our act and the legislation in these countries? Could we obtain this information?
Mr. Sénécal: This was done during the negotiations. We asked them to explain their legislation to us. We also read the texts. I do not know what I have in our files.
Senator Plamondon: I would like to have it because in Canada it took us quite a while before we had good legislation. I am interested in knowing whether these countries have the same protection. Article 25 talks about a mutual agreement procedure. Does this procedure, agreed upon by the signatory countries, take place with the cooperation or the involvement of the person concerned or is it carried out between the two countries without the involvement of this person?
Mr. Sénécal: It takes place between the two tax authorities. But I can assure you that the Revenue Agency is very much interested in this question. In a number of cases, they will refuse to exchange the information if they have the slightest doubt about this information being used solely for tax purposes.
Senator Plamondon: Can we have a comparative analysis of legislation as it compares to ours with respect to this article?
[English]
Mr. Ernewein: I would add an observation and emphasize a point that my colleague Mr. Sénécal has just made: This is not a static analysis. This is not a question that occurs only once when you are negotiating a treaty to determine the state of legislation or the rules in the other jurisdiction. It is something that Revenue Canada, in considering whether to exchange information with another jurisdiction, would consider each time. The exchanges of information provisions in our treaties authorize the exchange of information; they do not dictate it. It is authorized only where the revenue authorities can satisfy themselves that the information will be used for tax purposes and only for tax purposes.
If, next year or 10 years from now, the privacy legislation in another jurisdiction were to change unfavourably, so that the information could not be guaranteed to be used only for tax purposes, Revenue Canada would not at that stage authorize the disclosure. If, on the other hand, today, Revenue Canada is not comfortable with the guarantee of limited use but, 10 years from now, the rules in that other country change favourably, then the rules of our treaty would authorize the exchange of information in those circumstances.
While the question asks about a current analysis — and it is possible to put that together — it is a question that Revenue Canada considers on an ongoing basis with respect to each jurisdiction with which we have a tax treaty containing an information exchange article.
Senator Meighen: To satisfy my own curiosity more than anything else, I want to understand what the process is, leaving aside the human rights question for the moment, in countries with which we enter into tax treaties. Do we generally take the initiative, does the initiative come from the other country, or can it be both?
Mr. Ernewein: It is probably mixed.
Mr. McKay: It is fair to say that it is a mix.
Senator Meighen: Approximately how many additional treaties would we be working on now with other countries with whom we do not have a treaty?
Mr. McKay: We did 14 in the last year. What is in the hopper?
Mr. Ernewein: We publish a list of our current tax treaties on the Finance website.
Senator Meighen: It was not asking about the list of current treaties, I was asking about the number with whom we are in negotiation to sign a tax treaty.
Mr. Ernewein: I am sorry. The list contains both existing, current tax treaties in force as well as current negotiations. Almost always, when we begin a negotiation, an announcement is made that negotiations are being launched and that comments are being sought from people to inform us. That is compiled and put on our list.
The Chairman: The question is: How many have you completed? We understand that there are 87, include these, but is there another 14?
Mr. Ernewein: I would draw your attention to tab 10 of the briefing materials. This is, largely, a replication of the material on our website.
Senator Meighen: It is material we received and I apologize because I did not have time to read it. There is the answer. Thank you.
What is the process for reviewing, on a regular or irregular basis, the existing treaties?
Mr. Ernewein: Again, the process is somewhat demand-driven. It may arise because of our own concerns or because of the concerns of the other country. An issue may be raised by taxpayers which suggests that more attention should be paid to one treaty rather than another. Not surprisingly, the treaties that are of greatest importance to us economically and otherwise receive the most attention. With the U.S., since 1980, we have had the 1980 convention signed with the U.S. — obviously, there was one before that — but as an example, the 1980 convention is up to five protocols and we are negotiating the sixth.
Other countries are updated less frequently. I think Ireland is probably exceptional in that respect. The treaty we have in this bill updates the 1966 treaty which is probably longer than the average for countries of that significance to us economically and otherwise.
It really does depend on the occurrence of a particular issue and the state of the pace of the evolution of the treaty policy in each country. I cannot give you a specific example of this but, abstractly, if we had a treaty with another country that negotiated withholding rates of 20 per cent or a high percentage several years ago, when we are now considering 5, 10 or 15 per cent, and that country were to suddenly change its policy, we would observe that by saying that they should consider another treaty with rates closer to our own, and we would obviously upgrade that in terms of priority and try to renegotiate ours as well.
Senator Meighen: Going back to the subject that my colleague Senator Angus raised, human rights, would the human rights situation in a country with which we are negotiating a tax treaty generally be assessed in the light of international rather than our own national laws or practices? In other words, the United Nations conventions?
Ms. Chatsis: We usually use international standards when we assess the human rights situation in a particular country. Most notably, there are six main human rights conventions and there are a number of declarations that are of some relevance to human rights standards.
Senator Moore: My main question was the one asked by Senator Meighen. I want to know how we happen to enter into discussions with these various countries, whether Canada initiated it or if they did. You indicated that it is a mixture.
At tab 10 it states that treaties have been signed but are not yet in force with Armenia, Azerbaijan, Gabon, Ireland and Oman, the five countries that are the subject of Bill S-17. Three other countries are listed there: Italy, Lebanon and Romania. Will they be the subject of a new bill? How will that process work? If those are at the same status in the negotiations, they are not in this bill. Can you tell me about that?
Mr. Sénécal: Those treaties in the case of Lebanon and Italy have been ratified in Canada. Unfortunately, in the case of Italy, the treaty is still sitting in the Italian Parliament and has not yet been approved. Therefore, we are unable to exchange notes which would allow the treaty to come into force. Our Department of Foreign Affairs has been pushing the Italian authorities for several years to try to speed up the process on the Italian side and have not been successful, but we are constantly monitoring the situation and attempting to get the approval from the Italians which would allow the new treaty to come into force.
Senator Moore: How long has that been under review in Italy? You said ``years.''
Mr. Sénécal: It is probably close to four years.
Senator Moore: Is that a normal process?
Mr. Sénécal: I would say, in the case of Italy, it is somewhat normal.
Senator Moore: Can you review Lebanon and Romania for us?
The Chairman: Senator Harb has read the appendix and brings to my attention that it has been two years, which is not abnormal. It is fair to say that we have had treaties that have been outstanding for over a decade and we have not moved on them. It is important to say that two years is not an abnormal time frame. Frankly, if the department wants help, many of us have colleagues in the Italian Parliament who could write to us and we could write to them.
Senator Moore: The witness said four years.
Mr. Sénécal: I may have made a mistake.
The Chairman: Can you tell us exactly what we are talking about here? It is not a big issue, but you mentioned two years, Senator Harb.
Senator Harb: The treaty was signed June 3, 2002. I presume by the time it went to them and they considered it, considering the period that their Parliament sits, I think it is fair.
Mr. Sénécal: That is true. It was a mistake on my part. I thought it was in the previous treaty bill.
The Chairman: Thank you for that.
Senator Moore: I would like the witness to give us similar information with regard to Lebanon and Romania.
Mr. Sénécal: With respect to Lebanon, once again, it has been approved in Canada. It has stalled on the Lebanese side. From my understanding, there was some lobbying by Canadian residents of Lebanese origin who have some concerns with the treaty and expressed those concerns to the Government of Lebanon, and that has held up the approval process there. Once again, our Department of Foreign Affairs is trying to encourage the Lebanese government to approve the treaty.
Senator Moore: It indicates at tab 11 that Royal Assent was June 29, 2000. They have had it for four years.
Mr. Sénécal: Yes, that is why I was confused.
Senator Moore: What about Romania?
Mr. Sénécal: With Romania, I expect the treaty to enter into force next week.
Senator Christensen: My question has been partially answered. Do we have any treaties with any of the countries in this bill? We have an existing treaty with Ireland but none of the others. Is that the case?
Mr. Ernewein: Yes.
Senator Christensen: What is the purpose for updating the treaty in Ireland? What problems were identified that required the treaty to be upgraded?
Mr. Ernewein: There is some discussion of this in the briefing materials relating to Ireland. There have been a number of changes relating to withholding tax rates. Across the board in the 1966 treaty, the maximum withholding tax rate that applied to dividends, interest or royalties was 15 per cent. That has been reduced in each case under this proposed agreement. The direct dividend rate, the rate between corporations holding a significant interest in the dividend paying company, was reduced from 15 to 5 per cent as a maximum. That is consistent with the treaties put in place during the last 10 years or more.
The maximum rate of withholding tax on interest would fall from 15 to 10 per cent, and on royalties it would fall from 15 to 10 per cent. In addition, with respect to royalties, a number of exemptions have been introduced, again consistent with our Canadian tax treaty policy that has been in place for the last decade or more.
Senator Christensen: What is the policy on reviewing these treaties when changes are required? Are they implemented through requests from the countries or on our own initiative?
Mr. Ernewein: Again, it is largely demand driven. In this instance, I believe there was interest expressed on both sides to update what had become a fairly dated treaty. If we were to identify that Ireland, for instance, had negotiated lower rates of tax with a number of other countries, that would be a catalyst for us to approach them to try to get the same arrangement in place for ourselves.
Senator Christensen: Do we have in place a process within the department to do a review so there is constant reviewing and updating so that when it is necessary it happens?
Mr. Ernewein: I do not want to suggest it is more formal than it is. It is an ongoing process of awareness of what new treaties are being signed and the terms of those treaties. David Sénécal is a member of the working party on tax treaties at the OECD. Others are also involved with the OECD or otherwise engaged with our colleagues in other countries. We try to maintain an awareness of what is going on in those other jurisdictions. When we fail to do that, taxpayers will identify the problems that arise or inform us of better deals that other countries are getting and suggest that we should pursue them as well.
Senator Tkachuk: I would like to follow up the questions of Senator Angus on human rights issues because I was not satisfied by the answers you gave Senator Angus. According to the Amnesty International report of 2004, Azerbaijan had a number of human rights violations to do with election campaigns, ballot stuffing, multiple voting, intimidation of voters and electors, and flawed election protocols. International observers are barred from monitoring the activities of the commission. Many opposition supporters and relatives were intimidated, and state run printing houses refused to print opposition newspapers.
In Gabon, the human rights record, according to the U.S. Department of State, remains poor. They continue to limit citizens' ability to change their government's security forces, repeatedly beat and torture prisoners and detainees, there are arbitrary arrests and detentions, authorities routinely infringe on privacy rights, the government continues to restrict freedom of the press to report violence and forced labour, child labour and trafficking.
When we decide to negotiate these treaties, do we ask for a report on the human rights record to go to the department in our government that is responsible for monitoring human rights? Do we have any discussions about these issues before we initiate the treaty?
Mr. McKay: Your question is a good one and strikes to the philosophy of how Canada engages with the rest of the world. It is a philosophical dilemma. Your analysis is perfectly correct. What you have described is not an outstanding human rights record, by any means, but does Canada remain aloof from a country such as that based upon human rights records? I might argue that, in fact, a happy by-product of entering into economic treaties is that you are building democratic and economic capacity in these countries. That is obviously not the principal objective of a treaty that is essentially economic, but it effectively forces a government to recognize contractual obligations and effectively forces a country to recognize treaty obligations.
When you do have recognition of contractual rights, then there may be — and I emphasize ``may'' — some possibility that recognition of human rights might well follow. I appreciate that that is not a perfect symmetry, by any means, but nevertheless, the analysis is done. It is not as if the department or the government is not aware of the difficulties in some of these countries. However, having said that, you make a judgment call as to whether you engage or not, and in this case the judgment call was to engage.
Ms. Chatsis: Mr. McKay has covered most of what I wanted to say in response to that question. It is a question that goes to the basis of the relationship between Canada and these other countries and whether or not you engage with a country where there are challenges in the human rights situation, as one might say. Certainly, in the case of Gabon and Azerbaijan, we recognize that there are problems in the way they treat their citizens and in the way their citizens are treated by certain segments of the population, but we have made the decision, as a government, to have established diplomatic relations with those countries.
As part of our ongoing processes, we do monitor the human rights situation in those countries, and that does influence how we manage those relationships. We have decided to have diplomatic relations, and we use the information about the human rights situation in managing those relations and approaching them bilaterally about our concerns, and in assisting them with their capacity building in key areas of their government.
Senator Tkachuk: In the Human Rights, Humanitarian Affairs and International Women's Equality Division, do you keep track of what happens after the treaty is signed? Judging by what Mr. McKay said, that the treaty itself, hopefully, would have a positive effect, do we then keep track of past treaties we have signed where there were concerns? We have signed many treaties with bad abusers of human rights. Do we then have a report card at the end of each year or every two years saying, ``Here is how we are doing. Human rights are getting better in that country because of our economic relationship?'' Do we publish that report? Do we forward it to the Department of Finance? What process do we follow to justify what we are saying at these meetings every year?
Ms. Chatsis: We do not have any formal process in place to analyze the results or outcome of an agreement that Canada has established with these countries on double taxation, but this would form part of the larger analysis of our relationship with that country. Our representatives in those countries constantly report on various aspects of the relationship, including human rights, and the existence or lack of a double taxation treaty is one of the issues that is taken into consideration. Yes, it is an ongoing evaluation of our relationship, but not one that is specifically tied to those double taxation treaties.
Mr. McKay: To add to that, it is fair to say that, if you enter into a tax treaty, you form an economic relationship of some kind. If, subsequently, the human rights record deteriorates substantially, and you and I can both point to places where the human rights record has deteriorated, it does give one another a basis for engaging that country in questioning their abuse of their citizens. Again, if they are abusing their human rights, then certainly abuse of contractual rights is nothing. Those would be interactive trigger points, I would say.
Senator Tkachuk: How bad does the record have to be?
Mr. McKay: I do not think there is an objective test on that.
The Chairman: There is another monitoring mechanism to which Canada belongs, and that is the OSCE.
Senator Tkachuk: I am asking the witnesses. If you wish to make a point, you can ask questions and make your point known.
The Chairman: It is a fact that other monitoring mechanisms are available.
Senator Tkachuk: I am sure there are, so why do the witnesses not answer that. What other mechanisms are available? How else do we keep track?
Mr. McKay: I will leave Ms. Chatsis to respond to the specifics of other mechanisms. I can say that Canada belongs to Amnesty International and we receive those regular reports. Those go into reviews. Our own citizens are very good at bringing to our attention abuses of human rights records. None of this happens in a vacuum, including commercial relations.
I appreciate the expression of your concern. The real question is, are there objective tests? I do not think there are objective tests on anything. Ms. Chatsis might be more specific on any other monitoring devices we might use.
Ms. Chatsis: As the chair mentioned, there is the Organization for Security and Cooperation in Europe. That includes all of the countries except for Gabon and Oman. Azerbaijan, Armenia and Ireland are all members of the OSCE where a lot of work is done on human rights at both the political and technical level. There are various reporting mechanisms within the OSCE that cover issues that are relevant to those countries.
There is also the Council of Europe for those countries as well. They may be members of it and have requirements to report on human rights to that body.
There is, of course, the UN General Assembly, the Commission on Human Rights, and most of these countries are parties to the major human rights treaties. As a state party to those treaties, they would have an obligation to report periodically to the treaty bodies on areas under the jurisdiction of the treaty body.
Senator Tkachuk: If you are keeping track of these things and you have records, perhaps you might want to forward them to the committee. We would be interested to see the human rights record comparisons before and after the treaties over the last number of years. We would appreciate it, if there are reporting mechanisms, if they could be forwarded to us with those comparisons.
[Translation]
Senator Hervieux-Payette: I have two or three small questions for you. The first is whether the trend at the present time is to have an increasing number of reductions and treaties or whether the protectionist approach tends to dominate? Secondly, who began this process of review? Were we the initiators or did these countries make a request to us? And generally speaking, in view of the legal context in each country, are the obligations more or less the same in each country?
[English]
Mr. Ernewein: Working backwards, in every case, the treaties are bilateral — that is to say, there are equivalent rates of tax or maximum rates of tax imposed on the other obligations, with possibly one or two exceptions. I do not recall any offhand, but either entirely or almost entirely they are reciprocal in obligating each side to provide the same measure of treaty relief or treaty benefit. As to who is demandeur in each case, I mentioned before that my recollection is that, in the case of Ireland, there is a mutual interest in doing this.
In the case of Gabon, Armenia and Oman, it may be the case that there were expressions of interest on the other side to enter into treaty negotiations. Whether or not that was the case, I also believe there were Canadian taxpayers who had investments or prospective investments there. They were interested in getting in place the regularization of tax rules that treaties bring through the pursuit of a tax treaty.
That may also be the case with Azerbaijan.
Mr. Sénécal: In the case of Azerbaijan, it was at their initiative. They heard that we were negotiating with Armenia, which is a neighbouring country. That caused them to contact Foreign Affairs. They said that, since we are in the neighbourhood, so to speak, would we consider having negotiations with them as well.
Mr. Ernewein: As to whether we have observed a trend toward protectionism or not, although I earlier called these agreements economic or trade agreements, they also have the aspect of promoting trade and investment. However, they are not in and of themselves trade agreements.
The only thing one might infer from them is whether, by virtue of higher rates or lower rates, one is observing a tariff wall going up or coming down. As a very general observation, if I were forced to classify in that way, I would say that the walls are coming down. I say that because we are reducing rates, as are other countries. Of course, we, along with other countries, are expanding our treaty network, with the net effect being that there is lower source country taxes in most cases, and thus lower tariffs to the extent you regard these as tariffs.
Senator Angus: We have been furnished with a list of all the countries we have had dealings with in these treaties. Some of you may recall that, for about 10 years, I have been asking, in light of these issues, about Colombia. I have a file in my office which contains your answers. I am told that you are working on it. It is now the end of November 2004 and there is still no treaty with Colombia. Yet, on the bottom of the list with respect to about eight countries, including the U.S., it states either ``In negotiation with...'' and/or ``We do not have a treaty.'' What is the status with regard to Colombia? Why do we not have a treaty with Colombia?
Mr. Sénécal: We do not have a treaty with Colombia because it has not made the decision as yet to have tax treaties with anyone. They have not negotiated any tax treaties.
On several occasions, we have discussed the merits of tax treaties with them. They are still of the view that, being the source country, or the country which would receive the investment, lowering their withholding tax would significantly decrease revenues. They are unsure as to whether they would make that up through increased investment. Thus, they are reluctant to enter into agreements.
I can assure you that, if they do make the decision to begin a tax treaty program, we are probably number one on their list because we have been in negotiations and discussions with them for years now.
Senator Angus: Are we still in discussions with them?
Mr. Sénécal: I am in contact almost on a weekly basis with our embassy in Bogota to learn about any developments. They keep informing me that everything is taking place and there is new Canadian investment, et cetera.
The Chairman: Obviously, senator, it is a slow tango, but the partner does not want to tango at this moment.
Senator Angus: That is fine.
For your information, I had a number of representations made to my office from people in the shipping industry. There is trade between Canada and Colombia. The shipping industry, which is international like the airline industry, is very susceptible to double taxation. It is one of the key areas for originally getting into international treaties, along with the avoidance of double taxation.
I take it your answer is that we are still talking to Colombia but that it takes two to tango.
That leads me into my next question. Is it not desirable that in these treaties the language be uniform? For example, shouldn't treaties between Canada and A, B, C or D country on the same subject be uniform? If not, you will get weird interpretations from the courts. Is that a fair question?
Mr. Sénécal: It is certainly desirable. It is one of the roles of the OECD model. To the extent possible, we try to encourage, at an international level, all countries to use that as a starting point. Thus, to the largest extent possible, we have provisions which are the same across the whole network of treaties.
However, we are in a situation of negotiation. If a country we are dealing with prefers different wording and they say, ``We have negotiated 15 treaties with other countries, including Germany and France, and they have accepted our wording,'' then we have to make a call as to whether that wording is acceptable to us. We have to ask if we can still get to the same point using that wording. If we cannot, then, reluctantly, we will accept it, as long as we have not given up something. That is, of course, based on the fact that that is their model wording and other OECD countries have accepted it.
If all treaties looked alike, I guess I would be out of a job, and we could just mail these agreements to each other.
Senator Angus: The bill before us has attached to it as appendices the treaties with each of these countries. Since I am interested and have some knowledge of the international transportation of goods and people by water and/or air, I immediately looked at its provisions. I found that in every one of the agreements, as far as the shipping and airline industries are concerned, the language is substantially different.
Profits derived from ``the operation of a ship'' are buzz words. Since I have some personal knowledge of the field, the question that always arises in tax law is: What does ``the operation of a ship mean?'' You go on to define in each of these treaties what the operation of a ship or air transportation means, and it is different in four of the cases. Seeing that blew me away.
Does your previous answer that we could not negotiate common language apply to this question as well?
Mr. Sénécal: Yes, to a large extent. For a number of reasons, including our geographic situation and, for example, the St. Lawrence Seaway, international shipping is important for us. Therefore, we like to use wording that is somewhat tighter than the OECD wording. We like to look at the concept on a voyage-by-voyage basis rather than referring just to overall transportation. It is our position that cabotage should be taxable in Canada, whether or not the shipping company has a permanent establishment in Canada.
Sometimes, to achieve those objectives, we have to play around with the wording. Sometimes the other country will say, ``We agree to allow you to achieve that result,'' but we have to find a way to use wording which is acceptable on our side. Sometimes we have to give up on the wording, as long as we get the result we want, through a convoluted way sometimes. However, I can assure you that we end up getting what Canada wants with respect to international traffic because we are very sensitive to that article.
Senator Angus: I put it to you that this is a tax lawyer's dream. It is an invitation to litigation on the different meanings of the words in question.
The Chairman: Perhaps we can address that with the minister. It is an important issue.
Mr. McKay: I take Mr. Sénécal's point that these are negotiations. My recollection of the geography of Armenia would not cause one to be concerned about shipping implications, and certainly not with Oman and others. That would lead to a different set of negotiations.
As to whether it is a tax lawyer's dream, I thought that tax lawyers have all kinds of dreams and it seems that, no matter what the phrasing, tax lawyers seem to find expansionary notions.
The Chairman: I think what the senator is getting at is that this committee will be looking at the issue of productivity and competitiveness. As much as possible, we are trying to reduce barriers to trade and competitiveness in this country. One of them, and this is the objective of these statutes and these agreements, is to increase productivity and competitiveness. The senator make as valid point. It is something to which we may give further consideration.
Mr. McKay: I agree with the validity of the point. Frankly, it is not something I would have immediately thought of it as a productivity barrier, but you are probably right.
Senator Meighen: There are 17 countries on the list of treaties being updated or negotiated for the first time and Colombia, as Senator Angus has pointed out, is one of them. There is another one that is far and away more important than any of the others and that is the United States. According to my information, the last round of meetings was held in Washington in July 2001, and the last documentation was a press release that came out in September 2000 dealing with double taxation and clarifying questions of residence, at least proposing to do so. I see nothing where any of that has been ratified or concluded in any fashion. Why not? Are we trying, perhaps on both sides, to negotiate too much in one fell swoop? Is the ratification process so complicated that we would be better to take little bites, agree on one or two issues, go back and ratify those, and agree on two more issues and ratify those? Are you trying to hit a home run with the result that, in four years, nothing has been ratified with the most important trading party we have ever had?
The Chairman: As a supplementary to that: Are they dragging their feet or are we dragging our feet?
Mr. Ernewein: Thank you for the question. The negotiations have been under way for a long time. As I mentioned already, this round of negotiations on the sixth protocol, was mandated by the fifth protocol. It mandated both country to sit down and talk about further rate reductions on withholding taxes within three years of the coming into force of that fifth protocol. That coming into force was the fall of 1995. In the fall of 1998, we stat down for the first time. We have done a lot of good work. Part of that, as Senator Meighen identified in the press release of September 2000, is providing advance notice of changes intended to be included in the protocol dealing with continued cooperation and about our departure tax and recognition of that tax in the other jurisdiction.
Our discussions are continuing. The last round of face-to-face negotiations was, I believe, in the summer of 2001. It is not that we have not talked with our colleagues in the time that has passed since then, but we have not had further rounds of negotiations. We are stuck on an issue.
In response to the supplementary, I would just say that it takes two to agree and we are not in agreement. I do not think it is productive to talk about who is hanging on and who is not.
Obviously, if it is the US clinging to an issue we would rather not pursue, then we support you entirely in your view that we should do less and leave that other issue alone. If it were us, they would probably respond in the same way. We are not done yet, but we hope we will be soon. The fact is that the press release communiqué was issued a couple of years ago.
Senator Meighen: Four years ago.
Mr. Ernewein: It remains out there and it reflects our intention that we will come to terms and get a protocol in place.
The Chairman: This committee has plans to visit Washington. I have a good personal relationship with the chairman of the Finance Committee, Senator Grassley of Iowa. He is a great friend of Canada's. If this is an item to put on the agenda, we will certainly try to push it from the congressional side.
Senator Meighen: If we agreed on the questions of double taxation of individuals and on clarifying residences of corporations, which is what I understand from the press release of four years ago, what was the reason for not ratifying those items?
Mr. Ernewein: I mistook the question. Is it legally possible to have a protocol on just those two items? Absolutely. Can we wrap those up with some other items we have on the table? We hope so. If it should prove that none of the other matters come to fruition, it may well be the case that we would proceed only with those, but we believe we there are other beneficial changes that we can make as well. That announcement stands. When the protocol comes forward, those items will be incorporated as of the dates proposed in the press release, but we believe we can do more. As long as it does not take us another four years to reach that conclusion we hope to do that.
Senator Meighen: I hear you, but I still have difficulty understanding why it is not possible to grab half a loaf. I do not assume that it is a negotiating ploy. Keep negotiating unless there is some element of doubt, or an item that you want to use as a negotiating point. I do not think you are saying that. Four years is a long time to wait hoping that the remaining matters will fall into place when you call it a day.
Mr. Ernewein: It is a fair comment. I hope you are wrong in the sense that we will not get other things done. I do believe we will.
Senator Meighen: I did not mean to say that.
Mr. Ernewein: If that should prove to be the case and are you right that we are unable to get other things done, then proceeding with this is something we should consider.
Senator Meighen: Four years is a somewhat long time.
The Chairman: The senator raised a valid point and we will explore that informally with the minister. Again it might be the subject we will raise when we meet with our American colleagues some time next year.
Are there any further questions or comments before we turn to Senator Harb?
I would thank the witnesses for their presentation. I also wish to thank you for your briefing notes which seem to be becoming better and thicker. We welcome thick briefing notes. Our questions were sparse but important because we read your material and it answered many of our questions. I thank you all, including those who prepared the briefing notes, which were most informative.
Senator Harb: Honourable senators, on behalf of the witnesses, I would thank you for this opportunity to discuss these important issues. I think it is important to put on the table some clarification with regard to certain points which were raised. The first point, the human rights element, is something that the government takes seriously. As the witnesses have indicated, there are a number of venues that the government is using to pursue those most important issues.
The second issue was whether or not we should use tax treaties as mechanisms to enforce a human right in those countries with which we have treaties. I should make the point that there is no difference in our treatment of those countries with whom we have an agreement, rather, in circumstances where we have a treaty, we can provide, in particular, Canadians who may be doing businesses in those countries — and vice versa — a level playing field.
Senator Angus: On a point of order, Mr. Chairman, senators on this side have asked me to determine through you what this is all about.
The Chairman: I want to wrap this up. I thought there might be some brief comments from Senator Harb because he is the sponsor of the bill. If he chose to say something that was fine. Although it is unusual, it is good practice to hear from the government sponsor to answer any questions. I am not asking Senator Harb to give evidence, but I am asking for comments. If there are no comments, we can proceed to clause-by-clause consideration.
Senator Tkachuk: In future when this happens, should the sponsor of the bill be in attendance to add to the questions and supplement the responses?
The Chairman: May I suggest that I take this up with the steering committee and come back to the committee on it? Thank you, Senator Harb.
Senator Harb: As a member of the committee, may I comment?
The Chairman: You may have 30 seconds. Are honourable senators agreed?
Hon. Senators: Agreed.
Senator Harb: Some of my colleagues on the other side wanted to let the public believe that we are not continuing to do business with the U.S., despite the fact that this kind of negotiation is taking place. I wanted to bring that to the attention of senators. A protocol is already in place.
The Chairman: I take the point of honourable senators. These are facts that speak for themselves — res ipsa loquitur. Could you please move your motion, senator?
Senator Harb: Honourable senators, I move that the committee move to clause-by-clause consideration of Bill S-17, to implement an agreement, conventions and protocols concluded between Canada and Gabon, Ireland, Armenia, Oman and Azerbaijan for the avoidance of double taxation and the prevention of fiscal evasion.
The Chairman: Are honourable senators agreed?
Hon. Senators: Agreed.
The Chairman: I suggest that, unless the committee decides otherwise, the normal procedure would be to postpone the consideration of the long and the short titles contained in clause 1. Shall we proceed in the normal way?
Hon. Senators: Agreed.
The Chairman: Shall clauses 2, 3, 4, 5 and 6 carry?
Hon. Senators: Agreed.
[Translation]
Senator Plamondon: For the exchange of information, in schedule 1, I would have like to have had further assurances that the exchange of information would be of the same quality when it comes to the country we are dealing with.
[English]
The Chairman: We agreed to proceed to clause-by-clause consideration, senator. This is simply a matter of clause- by-clause consideration with no variation.
Senator Plamondon: You said, ``schedule 1,'' and this is in schedule 1.
The Chairman: We agreed to deal with it clause by clause as opposed to evidence based on clause by clause or variations.
Senator Plamondon: Very well.
The Chairman: Shall schedules 1, 2, 3, 4 and 5 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 1, the short title, carry?
Hon. Senators: Agreed.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Is it agreed that this bill be adopted without amendment?
Hon. Senators: Agreed.
The Chairman: Does the committee wish to proceed in camera to discuss a draft report or can we take it that the draft report will be composed of the bill?
Hon. Senators: Agreed, the bill.
The Chairman: Is it agreed that this bill be reported without amendment and without observations at the next sitting of the Senate?
Hon. Senators: Agreed.
The Chairman: Carried. Thank you.
Senator Angus: Chairman, could you please clarify this for Senator Plamondon?
Senator Plamondon: I am in agreement with the bill but I would like to have a report on the quality of the exchange of information, because it was too vague.
The Chairman: Would you like us to make an observation?
Senator Plamondon: Yes, please.
The Chairman: There is a process that will satisfy the senator and others as well. We can follow this up with a letter to the minister suggesting that a number of important observations have been raised, particularly with respect to uniformity. The other would be the question of the status of the various negotiations and what, if any, is the monetary mechanism dealing with rights. In that way, we can have that on the record as a benchmark for us to consider.
Senator Angus: Perhaps we should prepare a short narrative to accompany the report.
The Chairman: My suggestion is that we deal with that in a letter by the steering committee. I think that will satisfy everyone.
Senator Tkachuk: That would be a letter from the steering committee.
Senator Meighen: I am not sure my point was made. On the status of negotiations, we should make a point that it would be better to take half a loaf and worry about the second half as negotiations continue.
Senator Moore: We could build on it.
The Chairman: I take your point.
We will continue in camera for two minutes, honourable senators.
The committee continued in camera.