Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 11 - Evidence - Meeting of November 9, 2006
OTTAWA, Thursday, November 9, 2006
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-5, respecting the Tax Conventions Implementation Act, 2006, met this day at 10:45 a.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: I want to welcome our distinguished witnesses, members of the Senate on the Standing Senate Committee on Banking, Trade and Commerce and the Canadian audience from coast to coast.
Today, the Standing Senate Committee on Banking, Trade and Commerce has been referred a bill called Bill S-5, which seeks to implement conventions and protocols concluded between Canada, Finland, Mexico and Korea for the avoidance of double taxation and fiscal evasion with respect to taxes on income.
I want to welcome our distinguished witnesses, the Honourable Diane Ablonczy, Member of Parliament, Parliamentary Secretary to the Minister of Finance.
With her are Mr. Gérard Lalonde, Acting Director, Tax Policy Branch, Department of Finance Canada; Mr. Alain Castonguay, Chief, Income Tax Treaties Group, Tax Policy Branch; and Mr. Parry Athenaios, Tax Policy Officer, Tax Policy Branch.
Diane Ablonczy, M.P., Parliamentary Secretary to the Minister of Finance: Thank you, honourable senators, for that very warm welcome. As it turns out, today is a very busy day. By coincidence, the House Finance Committee is looking at the Main Estimates of the Finance Department, so I will only be with you for about 20 minutes, and then I have to return to our own committee.
However, the good news is that these officials will be with you for as long as you need them, and I dare say they may actually know even more than I do about the matter at hand.
I would like to take the time I have to provide you with some background on Bill S-5, which is the Tax Conventions Implementation Act, 2006. What the bill does is put into force the updates that have been negotiated to three treaties that Canada has with Finland, Mexico and Korea.
The bill is standard and routine. I am sure this distinguished committee has seen a number of such bills, which are the result of Canada's ongoing efforts to update and modernize its network of income tax treaties with other countries.
When I say network, it really is a network because Canada has one of the most extensive networks of treaties in the world. In fact, right now there are over 80 countries with which we have tax treaties. This bill implements the most recent tax treaty arrangements that Canada has concluded with Finland, Korea and Mexico.
The tax treaties in this bill represent updates to existing tax treaties — these are not new treaties, but simply updates — and it will ensure that our bilateral arrangements are consistent with current Canadian tax policy. For some reason, tax policy seems to change from time to time and that does impact our treaty arrangements with our trading partners.
I can advise that the bill does not represent any new or significant change in policy. It is not controversial, I am advised by experts. Rather, our tax treaties are all modelled on the Organisation for Economic Co-operation and Development's, OECD, model tax convention, which is generally accepted by most countries around the world.
I mention this to emphasize, in case there are questions in your mind as to whether these treaties comply fully with the international norms that apply to such treaties, that the answer is, yes, they do.
As Canada's economy becomes increasingly intertwined with that of the global economy, the importance of eliminating tax impediments to international trade and investment has grown in importance. New treaty provisions — such as the ones we are discussing today — are designed to facilitate cross-border trade, investment and other cross- border activities between residents of Canada and residents of its treaty partners.
When we talk about tax treaties, we are primarily talking about international agreements that establish the degree to which a particular country can tax income — personal or corporate — particularly income of a resident of another country.
For Canada, our tax treaties give us assurances of how Canadians and Canadian businesses will be taxed abroad. Conversely, our treaty partners want to have assurances as to how their residents will be treated in Canada.
Our tax treaties are all designed with two general objectives in mind. The first is to remove barriers to cross-border trade and investment, most notably the double taxation of income. Of course, you are very much aware that this is increasingly becoming a global economy. If Canada is going to do well for its people and for its standard of living, we need to be able to be vigorous and effective participants in the global economy.
The second objective is to prevent tax evasion, which is always a concern of government. We want to do this by encouraging cooperation between Canada's tax authorities and those authorities in other countries.
I will expand briefly on each of these objectives. Removing barriers to trade and investment, as I mentioned, is paramount in today's global economy. Investors, traders and others with international dealings want to know with certainty the tax implications associated with their activities, both in Canada and abroad. They want to know they are operating within a stable tax regime.
The rules contained in treaties such as these make Canada an attractive destination for investments and expansion. One of the considerations that businesses take into account when deciding where to operate globally is the stability of the country and regime that they are considering. Equally important, of course, Canadians with business interests or investments abroad want to be sure they also will receive fair and consistent tax treatment. In other words, businesses want to know the rules of the game, and they want to know the rules will not change in the middle of the game.
One of the objectives of Bill S-5 is to remove any existing uncertainty — as tax conventions have shifted here in Canada — about tax implications associated with doing business, working or even visiting abroad, especially with respect to eliminating double taxation. Although this is an expert group, I will say a few words about double taxation. Obviously, no one is very happy if they earn money and then two different entities take a slice of it.
However, without clarifications in tax treaties, such as those contained in this bill, that is exactly what could happen. Indeed, both countries could claim tax on income without providing any relief. In order to alleviate this possibility of double taxation, treaties have two general methods of ensuring this does not happen.
In some cases, exclusive right to tax particular income is granted to the country where the taxpayer resides. In other instances, taxing power is shared. Usually, the country where the taxpayer resides has exclusive right to tax the resident where business activity is very short term. For example, for a three-month term in another country, the Canadian tax regime continues to apply.
If the person is employed abroad for a longer period of time — a year or more — then the country where the person works can tax employment income. In this case, the treaties generally provide that Canada must credit the tax paid in the other country against any Canadian tax that would otherwise be payable.
With respect to withholding taxes — I do not know if any of you have heard about withholding taxes, but I have heard quite a bit about it in the last week or so — one way to reduce the potential for double taxation is to reduce withholding taxes. These taxes are a common feature in international taxation.
Withholding taxes are levied by a country on certain items of income arising in that country and paid to residents of another country. The types of income normally subjected to withholding tax would include, for example, interest, dividends and royalties. Withholding taxes are levied on the gross amounts paid to non-residents, and generally represent their final obligations with respect to Canadian income tax.
The treaties in Bill S-9 provide for a maximum withholding tax rate of 15 per cent on portfolio dividends paid to non-residents. For dividends paid by subsidiaries to their parent companies, the maximum withholding rate is reduced to 5 per cent. Withholding rate reductions also apply to royalty interests and pension payments. Each treaty in this bill caps a maximum withholding tax rate on interest and royalty payments at 10 per cent.
I mentioned that tax treaties have two objectives. I have spoken about the first objective, removing barriers to cross- border trade and investment by eliminating double taxation. The second objective is perhaps a bit broader. It is to encourage cooperation between Canadian tax authorities and those in other countries — in the case of this bill, Finland, Mexico and Korea.
One of the most important benefits of increased cooperation between Canada and other countries is preventing tax evasion. Of course, this is not just for the good of governments, who always like to have revenue, but for fairness for everybody. Fairness and certainty in a regime that works is reassuring to business.
Tax treaties are an important tool in protecting Canada's tax base in that they allow consultations and information to be exchanged between our revenue authorities and their counterparts in countries with which we have tax treaties. If we do not have such a regime, then there could be much unfairness and inequity in the system, and taxpayers could pay more tax than they should. However, treaties like those contained in this bill, help to promote the international linkages on which we rely to promote opportunities at home and international trade and investment abroad.
In summing up, as honourable senators know, Canada is a trading and export nation. In fact, Canadian exports account for more than 40 per cent of our GDP. That is a very large chunk. Canada's economic wealth depends on direct foreign investment to Canada as well as inflows of information, capital and technology. Tax treaties, such as those in Bill S-5, that update existing treaties are important to keep our regime current. Although they do not represent any policy change and are not politically sensitive, it is important that we have current regimes totally up-to-date. These treaties will, once again, help to ensure certainty, stability and a better business climate for taxpayers and businesses both in Canada and in the treaty countries.
I have one other piece of information, honourable senators. The treaties in this bill would come into effect on a calendar-year basis, either January 1, 2007 or 2008. Both Canada and the other countries involved, and their respective business communities, want to be sure that the treaties are effective on January 1, 2007. Not to put any undue pressure on this committee, but I am just pointing out the time frame in which we are working.
That means the enactment of this bill and final ratification would need to be completed by the end of this year. We are assuming — and believe — that Finland, Korea and Mexico are also in a position to ratify before the end of the year. In fact, past discussions point to the fact that these countries are very anxious to ensure that these ratifications take place in a timely manner.
This concludes my opening remarks. I would be pleased to answer any questions. More to the point, people who have worked on these treaties for the last several months are here as well.
Senator Massicotte: Would it be appropriate for us to hear from the rest?
The Chairman: It is my understanding that that is the presentation and all the officials are here to answer questions. Am I correct?
Senator Massicotte: Is there is no presentation by the officials?
The Chairman: No. The presentation was from the parliamentary secretary. The officials are here to answer any detailed questions that we might have. If there are any policy questions that might be addressed to Ms. Ablonczy, we can do those quickly and then go back to the list for questions to the officials.
Senator Angus: Welcome, Ms. Ablonczy and gentlemen in the department. In respect of these treaties, you have stressed in your remarks that this bill is uncontroversial, contains no new policy issues and nothing sensitive. You have had no representations from groups that are unhappy with this. That is my understanding of your comments.
Ms. Ablonczy: Yes. I have been told these simply ensure the tax treaties we have with these countries are congruent with any recent changes that might have taken place with our income tax regime.
Senator Angus: We have had treaties in place with each of these three countries in the past — conventions for the avoidance of double taxation. The reason for doing away with the three conventions already in place was to basically replace them with conventions that reflect the OECD model. Am I correct in that regard? If there are other changes, or if there is anything concrete or substantive, I would like to know why we have had to develop new conventions and what the changes are before us.
Ms. Ablonczy: That is the essence of this. It would be helpful to the committee to allow the officials, who have been working in this area, to clarify that.
The Chairman: Are there any other policy questions to Ms. Ablonczy?
Senator Goldstein: There has been some talk about changing the dual citizenship availabilities for Canadians, arising in large measure from the concerns that some Canadians have expressed with respect to the cost of the Lebanese evacuation. All tax treaties are based essentially on residence for individuals. Would any possible changes in the dual citizenship regime have any effect on any of the tax treaties or individuals who are covered essentially by tax treaties? Are you maintaining the residence criterion entry level?
Ms. Ablonczy: That is a good question, senator. I would say that any discussion about the impact of dual citizenship is in preliminary stages at this time. Those kinds of decisions would not have been made.
I would point out that taxation is based not as much on citizenship as it is based on residency. I do not feel the citizenship issue will have substantial impact for that reason.
Senator Massicotte: My issues are also in respect of policy relative to the treaties. I have a couple of questions. I notice the retention rate or the applicable withholding tax varies. For instance, in Finland we are recommending 20 per cent withholding tax for periodic payments on pensions, while it is 15 per cent for Mexico and Korea. Why is the rate for one country different than it is for other countries? Is it Bermuda or another island that has a 5 per cent withholding tax for dividends? Why are some rates higher?
Ms. Ablonczy: Thank you for the question, Senator Massicotte. Mr. Chairman, I feel it would be better for the officials to answer those technical questions. The answer is not a matter of policy, but is simply linked to the regimes in those other countries. The officials will clarify that for the senator.
Senator Massicotte: This question arises out of question period in the other place. The Minister of Finance responded to a question about the 15 per cent withholding tax for dividends from international companies, probably related to the income trust issue, and why they will be treated differently. He responded that a 15 per cent withholding tax from international corporations is not adequate. They are paying much less than Canadian companies are paying on those same dividends, et cetera, which is a matter of fact. We are favouring, if you wish, and probably for good reasons. However, my question is: Why would we allow international companies to pay a lower level of taxation on dividends than Canadians will pay when they receive the same amount of money?
Ms. Ablonczy: The reasons for that should be based on fairly narrow criteria. In Canada, this regime was either expanding or anticipating expanding quite dramatically. The withholding tax is based on arrangements made within the framework of the whole regime. In other words, Canada gains and the international trading partner gains, so the 15 per cent withholding tax is deemed to be sufficient taxation for the level of economic benefit that takes place.
As far as the technical reasons for this, I will leave that to the officials who are taking notes and they will answer.
Senator Massicotte: We apply a 15 per cent withholding tax to international dividends, and yet it is my understanding that Canadians are paying much more than that. I would like to know why we favour international citizens over Canadian residents in respect of the level of taxation on dividends.
Ms. Ablonczy: We will get into that. I believe it would be most helpful if I did not provide a political answer. We do have the technical answer, however.
The Chairman: Are there any other policy questions that may be directed to this witness?
Senator Harb: Once this is signed between Canada and Korea, Canada and Mexico, part of it involves cooperation between the agencies. I would submit that that would be Canada Revenue Agency, Department of Finance Canada and other agencies from here, and equivalents from their side.
We have, here in Canada, a number of protections for our nationals that deal with privacy issues. I want to find out whether or not we have communicated with the other countries to ensure that there are similar mechanisms that also provide the same level of comfort for privacy on the other side.
As well, when we determine this person is a national of this country or the other country, our definition is six months and one day. I wonder whether they have a similar definition of residence. Does that appear somewhere in the bill? Should we raise it with the technocrat or the parliamentary secretary?
I feel she should have been a minister, Mr. Chairman, because she is a very capable person. Prime Minister Harper made a terrible error in not making her a minister. Nonetheless, that issue is for another day.
Ms. Ablonczy: Good wishes are always accepted.
Privacy for Canadians is a very important issue. This committee will shortly be dealing with that in the context of the terrorist financing bill, which will be coming to you shortly, we hope.
Again, I will let the officials talk to the technicalities of that. I believe all of us as parliamentarians want to satisfy ourselves that Canadian citizens and their privacy is protected to the greatest and most reasonable extent possible.
I encourage you to pursue that, both in this bill and even more so in Bill C-25.
Senator Eyton: I am a process guy, and some of the material I have been reading contains information about treaties with 80 some countries. There are treaties that are settled and in force, there are treaties that are settled but not in force for some reason, there are treaties in force that need to be renewed, and then there are new countries to add to the figure of 80, creating brand new treaties that must be settled and put in force.
It is tremendously important how we go about this. How do we establish the work plan for all that, in terms of getting it done and the priorities that are attached to it?
Ms. Ablonczy: That is a good question. Since I am not involved in that work, I have no ability to help you with that question. However, the good news is, there are people here who can. I will ask them to make sure they respond to you.
Senator Eyton: I have an add-on to that question, and perhaps we can deal with it later. For example, the U.S. tax treaty is clearly the most important tax treaty we have as a result of all of our trade and investment. We apparently have been working on the renegotiation of that since 1998. Therefore, we have been working on it for eight years.
I would have thought that viable and put it at the top of the list. I then looked at the three countries we are talking about today. Mexico is probably more important than the others in terms of trade, and they are part of NAFTA.
Is that a priority? To what extent is that reflected in the treaty we have with Mexico?
Ms. Ablonczy: In addition to what the officials will be telling you, I want to emphasize that Canada has a network of treaties with 80 separate countries around the world. Because it is a global economy, we do our trade more with some countries than others. We do about 85 per cent of our trade with the U.S. However, the whole network is important. We must keep the entire network strong and up-to-date, because any weaknesses impact on the rest of the network.
I would assume, and maybe we should never assume in politics, the whole network is of high concern with government to ensure that all of these treaties are capped, both current and in force, on an ongoing basis.
The Chairman: Are there any further questions on the policy side? Are you satisfied, Senator Eyton, or do you want to pursue this line of questioning?
Senator Eyton: I will leave it for the moment. I noticed that, for example, our tax treaty with Italy has not been proclaimed in force. It is a more detailed question. I will leave it.
The Chairman: Ms. Ablonczy, before you leave, I will emphasize what I believe is a major concern for me and some members of the committee. It has been well articulated by Senator Eyton.
This committee has studied productivity and has discovered that productivity in Canada is lagging behind the United States.
This government has decided — and we heard it as late as yesterday — that it will make productivity, as a question of competitiveness, a priority, as the previous government did.
Senator Eyton summed up our collective position exactly. That is, when these treaties are lagging, not completed efficiently and effectively, are negotiated for three or four years and implemented slowly, then that directly impacts our productivity and our competitiveness.
We hope that message goes back to the government. I am stating it on my own behalf as the chairman, not on behalf of us all. I believe Senator Eyton on the other side has, in effect, said the same.
If we want to send a message back to the government clearly, let us talk the talk and walk the walk. It is not satisfactory, quite frankly, for these tax treaties to lag. We will get into the question of detail about the harmonization of some of these tax treaties with our competitors. Even there you will find a difference.
We would like to pass that message on to the government. If any other senators want to make a brief comment about that, please do so before Ms. Ablonczy leaves.
Senator Angus: I have no comment.
The Chairman: Any other senator?
Ms. Ablonczy: I take that point. I feel it is very valid. I could see by Senator Eyton's response that he has some concerns and that maybe my comment that government would want to ensure this network is kept current and in force is very important. All I can tell you is that, obviously, that is true. If there is lagging, then we would want to find out why.
I point out that negotiation is a two-way street, and Canada cannot always bring their trading partners to the table and to consensus as quickly as we might like. I believe all of you know that very well. We would certainly want to ensure that best efforts are made, at the very least, to accomplish that.
I will certainly be raising this issue if there needs to be more done in that regard. That would certainly be the intention and the objective.
The Chairman: I appreciate that. Thank you very much. Are there any other comments before the parliamentary secretary departs?
Senator Harb: The issue is the fact that we recently, within the past few years, introduced a mechanism in order to tax worldwide. It became a problem because previously, people could have homes and investments around the world, and it was not an issue.
Senator Eyton raised the point that some countries are agreeing to it, but not implementing it. That is because it is controversial in those countries. For example, one Asiatic country was on the verge of signing a few years ago and almost had a revolution. It was so controversial that that specific country then approached the government and said they were not ready, and they did not sign.
Senator Angus: Gentlemen, you know what my question was; namely, in terms of replacing the three treaties that were previously present with these three nations, what drove us to change?
I know there is an effort to harmonize or have uniform model conventions like the OECD model. However, I believe in this case there may be other substantive changes introduced. Is that right?
Gérard Lalonde, Acting Director, Tax Policy Branch, Department of Finance Canada: As Ms. Ablonczy indicated, we have a number of treaties, some 86 or so, and some of those have been negotiated or renegotiated later rather than sooner. We do our best to keep them up to date.
In the case of these particular treaties, we are moving toward a policy of reducing the withholding tax rate on dividends between affiliated corporations; and, in this case, that withholding rate has been reduced to 5 per cent.
We are also moving to the new OECD standard for exchanges of information, and we are trying to bring our treaties up to date with the latest recommendation for the model tax treaty.
Finally, with respect to the changes to the Canadian tax law that were implemented recently, concerning departure gains. When someone leaves Canada, and we ensure we tax accrued capital gains on departure, we want to ensure that our treaty partners also provide a basis bump, that is, a basis increase for those people who are moving to the foreign jurisdiction, so that there is no double taxation on the accrued capital gains.
The Chairman: In terms of a change in substance from the antecedent three conventions, are these three changes common to all three?
Mr. Lalonde: Yes, they are.
Senator Angus: Was the first reducing the withholding tax on dividends to 5 per cent from 15 per cent?
Mr. Lalonde: Yes, it was.
Senator Angus: Why was that?
Mr. Lalonde: The question is the appropriate degree of taxation as between the countries and the encouragement of capital mobility. It is important, for example, for Canadian corporations that operate through subsidiaries in these foreign jurisdictions to have the reduced rate of withholding tax on the profits from those foreign jurisdictions that are repatriated to Canada. Keeping a lower withholding tax rate on those dividends from the foreign subsidiaries back into Canada encourages those companies to repatriate the money to Canada. That benefits us all and makes our Canadian corporations that much more competitive internationally.
Senator Angus: When Ms. Ablonczy was giving us an elementary lesson in withholding tax, she said in most cases this represents the final tax payable by the taxpayer in question.
Mr. Lalonde: Yes.
Senator Angus: That is not always the case.
Mr. Lalonde: In the case of a foreign subsidiary that is operating in Canada that has a permanent establishment and is carrying on business here, that subsidiary would pay corporate tax the same as any other corporation carrying on business in Canada. When they then repatriated their profits by way of making a dividend to their foreign parent, it is that dividend that is subject to the withholding tax.
Senator Angus: It is 5 per cent.
Mr. Lalonde: They are not paying only 5 per cent corporate tax in Canada. They pay the corporate tax, and then when they pay the dividends out, that dividend is subject to the withholding tax. In this case, the rate is being reduced from 15 per cent down to 5 per cent.
Senator Angus: Is that it for the foreign subsidiary? Would it only pay the 5 per cent?
Mr. Lalonde: It would pay the normal corporate Canadian income tax.
Senator Angus: What about the amount withheld in Canada?
Mr. Lalonde: Suppose they were to earn $100 million of income in Canada. That income would be subject to the Canadian federal and provincial corporate income tax rates, the same as any other corporation.
Senator Angus: That would be through the subsidiary.
Mr. Lalonde: In my example, the subsidiary is carrying on business in Canada, and the parent company is in some other country. The Canadian subsidiary carrying on business in Canada is a corporation that is carrying on business here and that pays tax here; the same as any other Canadian corporation paying tax. The withholding tax is about when that corporation, after having paid the corporate tax, declares a dividend and pays that money off to the foreign parent, there is a withholding tax on that dividend.
Senator Biron: What about with respect to income trusts?
Mr. Lalonde: Income trusts are a different story. There was an announcement recently dealing with income trusts. The difference between corporations and income trusts is that when a corporation pays a dividend, it cannot deduct that dividend in computing its income. It calculates its income, and pays its corporate tax.
Senator Eyton: I would like to pick up the discussion we had on the dividend. We had a Canadian subsidiary paying a dividend to, say, a Mexican parent, or affiliate company for that matter, and that dividend payment would be subject to a 5 per cent rate. If I transported that same subsidiary to the U.S. and was paying the dividend in the same manner, my understanding is there is no withholding tax that applies between the U.S. and Mexico. Why are we different?
Mr. Lalonde: I do not have the figures on hand as to what the withholding tax rate is as between the U.S. and Mexico.
My colleagues here tell me it is zero.
The Chairman: Just to put it on the record, our briefing note says that the United States has recently negotiated agreements modifying its existing treaties with some of its most important trading partners, including the U.K., Australia and Mexico. These new agreements reduce to zero the withholding rate of payment on cross-border dividends by a subsidiary of a parent company when, in general, the parent company holds 80 per cent of the voting power.
Again, the comment we have from our researcher says that the United States is adopting a more aggressive tax treaty policy with respect to its main trading partners regarding withholding taxes on certain corporate investment income from control affiliates. Essentially, the United States is taking a very aggressive stand when it comes to productivity and competitiveness.
Senator Eyton: It seems odd to me in the extreme that we would not replicate the U.S. treatment, particularly because we are part of NAFTA and because of the important trading and investment relationships between the three countries.
Mr. Lalonde: A number of years ago, Canada did indicate that it was its policy to move to a 5 per cent withholding tax regime for its new negotiations of treaties, and that is what we are implementing. Obviously, it works both ways; to the extent that we offer a zero per cent withholding tax rate, then we get zero and we pay zero. Our Canadian subsidiaries in the other countries would pay zero.
Where that leads us is that we do not have a zero withholding tax rate policy at this point in time, and so we have moved to try to negotiate our treaties coming down to 5 per cent. We have been successful in these three treaties in moving it down to 5 per cent, but it has to be recognized that Canada cannot impose on the other guy.
Senator Massicotte: I understand that for Canadian-controlled corporations that give the dividend to its subsidiary, which are both Canadian, there is no withholding whatsoever. It is tax free; is that correct?
Mr. Lalonde: Is that when both companies are in Canada?
Senator Massicotte: If a Canadian company gives a dividend to its parent, there is no withholding, no taxation whatsoever on the dividend.
Mr. Lalonde: Where both corporations are in Canada, the paying corporation pays no withholding tax. The receiving corporation includes it in income and gets an equivalent deduction in computing taxable income.
Senator Moore: Someone said Canada cannot decide to have zero taxation on its own. In the example you are discussing, why would Mexico, in that instance, want to have any tax at all on dividends flowing? I do not understand that. You said we have been able to reduce it from 15 per cent down to 5 per cent. Why did it not go to zero?
Mr. Lalonde: They wanted 5 per cent, and the Canadian government policy at the time was to move toward 5 per cent. The Canadian government has not expressed a negotiating policy of wanting to move to zero.
Senator Moore: As the U.S. did, is that right?
Mr. Lalonde: Yes.
Senator Angus: The first significant difference is the withholding tax. That is a big one, from 15 per cent to 5 per cent. What was the second one you mentioned?
Mr. Lalonde: The second one I mentioned was exchange of information.
Senator Angus: How does that work?
Mr. Lalonde: The previous treaties had exchange of information provisions in them, but generally required the exchange of information only where the information was required for the purposes of the other country's income tax administration. That bar is changed to information relevant for the purposes of the income tax administration. That means that it makes it easier, for example, for the Canada Revenue Agency to be able to approach our treaty partners and obtain information where it is relevant for our tax system, rather than having to prove that it is absolutely necessary and there are no other sources available.
Senator Angus: Could you give one example of the type of information about which we are talking?
Mr. Lalonde: First, the Department of Finance Canada does not administer the Income Tax Act; the Canada Revenue Agency does. Examples on my fingertips are few and far between, but I can probably create one. Take, for example, a Canadian taxpayer who is resident in Canada, taxable in Canada and, as Ms. Ablonczy pointed out, if he or she is only working in the foreign jurisdiction for a short period of time, the rules continue on as normal; they are still taxable in Canada. We might find out that the person has been working and earning income in the other country, but the person is not reporting it. We might be able to ask the other country to find out from their resources what has been paid to this individual for their services in that country.
Senator Angus: That is the second one, the exchange of information. The third one is the departure tax. This flows from the famous or infamous Bronfman-Seagram exit. What is the story there?
Mr. Lalonde: I would not want to comment on who was behind that particular trust. I would have no reason to have any knowledge of that. If I did, I certainly could not disclose taxpayer information before this committee or any other committee.
Senator Angus: I do not want specific information on the Bronfman case, but I want to know about the departure gains, how it works and what it was before.
Mr. Lalonde: I am pointing out that I would not know if it was that case or not, or if I did know, I could not tell you. However, the upshot of it is that the Canadian tax law was changed to ensure that when taxpayers depart Canada, there is a departure tax on any accrued gains on capital property.
Senator Angus: It is like death; it is a deemed disposition.
Mr. Lalonde: It is a deemed disposition, and the capital gain is taxable at that time. That is all well and good from our point of view. However, some other countries have tax systems that measure capital gains from the point in time when the property is acquired to the point in time of when it is disposed. They do not have any provisions to recognize the fact that some other country, Canada, for instance, has interposed itself in the middle, had a deemed disposition and assessed the gain at that time. Thus, it is important in these treaties to ensure when a departing Canadian becomes resident in a country that is one of our treaty partners, that the treaty partner recognizes that that gain has already been taken into account and adds it to their cost for the purposes of determining any capital gains that might accrue thereafter in the other jurisdiction.
Senator Angus: That makes sense to me. Those are the three main changes.
Senator Goldstein: The briefing book that we were given is a very useful document and well presented. Whoever is responsible for it in your department should be congratulated. It is an excellent piece of work. It was, in fact, very useful to us.
We also had the advantage of hearing an excellent speech by our deputy chairman on the floor of the Senate two weeks ago when the bill was first introduced.
The Chairman: The deputy chairman is responsible for this measure that he now criticizes. Do I have that straight?
Senator Goldstein: You can come to your own conclusions, Mr. Chairman.
That having been said, aside from the changes you have already indicated, that is, the reduction from 15 per cent to 5 per cent on withholding for dividends and certain other payments, and aside from the change of the bar from what it was to now information relevant, are there any other significant changes that you want to bring to our attention or that should be brought to our attention? We are not interested in respect to technical changes, merely linguistic changes or blocking certain inconsistencies. We will not become experts in tax treaties.
Alain Castonguay, Chief, Tax Treaties Group, Tax Policy Branch, Department of Finance Canada: No, I do not believe there are. The three that my colleague outlined are the major changes. My colleague talked about exchange of information. He touched upon one aspect of it. The other aspect that is quite important is the access to bank information. The treaty spells out clearly the fact that information is held by a bank is no reason for the treaty partner not to share the information. That was part of the changes at the OECD 2003; and it stands out, to me, as one of the most important changes in the ongoing treaty policy of Canada to insist on the inclusion of such language, and in future treaties as well.
Senator Goldstein: Have you had resistance to that language in some jurisdictions?
Mr. Castonguay: Yes. This is pretty much a new landscape out there. Obviously, OECD members in general are prepared to entertain that. This is not necessarily the case with non-OECD countries that are not part of discussions at OECD, so it can prove to be more difficult in that case.
Senator Goldstein: I take it that other treaties are being updated as well to take into account policy changes and information changes. Could you tell us in broad strokes what progress is being made? How many of the treaties that are now in force reflect the changes in principle that we have just been told about?
Mr. Castonguay: I believe, with respect to exchange of information, these are the first three; because in fact the changes probably occurred while we started negotiation with those three countries. We may have several more countries where we obtained the basis bump. I would not be able to tell you; I believe there are several more. Withholding has been a policy of the Government of Canada since 1992, to negotiate 5 per cent, so there are a number of treaties where we have secured that.
Senator Goldstein: How many of the treaties that are listed are not ratified to date and why, again in general terms?
Mr. Castonguay: At tab 3, you have the list of the six treaties that have been signed, but are not in force. Three of them are being discussed today. The three others would be Gabon, Italy and Lebanon. In the case of Gabon, I believe that the treaty was signed in 2005, and it is up to Gabon to do its ratification. I have no fresh information on why it has not happened.
In the case of Italy, it is dating back several years. I understand Canada is not the only country that has concluded a tax treaty where the Italian parliament has not yet ratified. This is something internal to Italy. We certainly press, whenever we have the chance, our Italian colleagues on that and we are getting assurances that they will proceed as fast as they can. It has not come to pass at this point. Lebanon is the oldest of them and, frankly, there has been no recent indication that there are any prospects of Lebanon ratifying.
Senator Angus: They negotiated and concluded the treaty and we implemented, but they will not play. Is that because of a regime change?
The Chairman: Let us not get into that.
Senator Angus: It is self-evident, these truths.
The Chairman: They are res ipsa loquitor. Read the newspapers.
Senator Goldstein: Once you put the proposition of res ipsa loquitor, I really have nothing more to say.
The Chairman: Quo usque tandem abutere, Catilina, patientia nostra?
Senator Goldstein: That is the extent of your Latin, I take it.
The Chairman: No, it is not. It is just one important part.
Senator Eyton: This is coming back to a question I raised earlier. There is a workload out there, and it seems to me it is a tremendous challenge. You probably do not have enough human resources. Who establishes the work plan and what are the priorities in doing that? Is there any declared priority or is it a random selection?
Mr. Lalonde: It is not a random selection. Two main sources of commencement of treaty negotiations are that the other country approaches us, has noted that Canada has a broad treaty net in the world and requests negotiations to start with us. Probably the more often, it is Foreign Affairs and International Trade Canada that approaches us and says, ``Here is another country with which Canada has significant economic ties and we would like you to commence negotiations with that country.''
Senator Eyton: That is fine. It seems to me in that context, you need priorities. Is no one setting priorities for the department?
Mr. Lalonde: We set priorities in terms of the resources that we have and the degree to which we feel we would be successful in negotiating a treaty. Clearly, the Canada-U.S. treaty is a priority to us. It was mentioned earlier that it has taken some time for that treaty to be renegotiated. There are a variety of reasons for that, which I cannot get into today. Suffice to say that the department is aware that the Canada-U.S. treaty is an important one, and I believe that the government does as well.
Senator Eyton: It seems odd that we have not been able to close it down with our American friends when they appear to be, if anything, more generous in the direction we are talking about in the three treaties we are dealing with today. That is an observation.
Concerning the three treaties before us today, how long have they been on the table? How long has it taken to get to this point?
Mr. Castonguay: I am not aware of that; I was not part of those negotiations. Perhaps my colleague can help me. I believe it was fairly fast, the three of them.
Mr. Lalonde: To give some background, Mr. Castonguay has, fortunately, recently come to us from another division in the department. He has a long history with the OECD and their play in determining treaty policy in the model treaty. We are happy to have him with us, but these treaties were obviously under negotiation before that time.
Mr. Athenaios, perhaps you could clarify this.
Parry Athenaios, Tax Policy Officer, Tax Policy Branch, Department of Finance: Typically negotiations would take about two rounds. Finland is an industrialized OECD country, therefore, it took one round. With respect to these three countries, we started in 2004 and wrapped up in 2005. That is the approximate timeline.
Senator Eyton: They went along in parallel. Are they at about the same stage of approval as we are now? It is going through their formal process.
Mr. Athenaios: All three countries are eager for these treaties to come into force as soon as possible. We are seeking to have them come into effect January 1, 2007.
Senator Eyton: Has that been declared between all three countries and ourselves?
Mr. Athenaios: Yes.
The Chairman: With regard to this question, based on our research, it is our information that the last tax treaties with Finland, Mexico and Korea replacing original treaties were signed, with respect to Finland in 1990; with respect to Mexico in 1991; and with respect to Korea in 1978. At present, Canada has tax treaties in force with 86 countries, including all major trading countries.
Senator Eyton might want to know why, having in mind everything that has gone on between 1991 and 2006, we have lagged on implementing or renegotiating a tax treaty with respect to Mexico. I do not understand that delay.
Senator Eyton: You expressed my question for me very well. Thank you for that, Mr. Chairman.
The Chairman: I thought I would give you the facts, because we have them here.
Senator Eyton: Perhaps the broader question is: It seems to me there should be consistent treatment as between Canada, the U.S. and Mexico, in all directions: U.S.-Mexico, U.S.-Canada. We are not there yet; there are differences. From an earlier comment, there does not seem to be any particular reason for the differences, they just are. As you understand it, it was Canadian tax policy with respect to Canadian withholding dividends.
Mr. Lalonde: We cannot abrogate our treaty negotiation policy for Canada to the U.S. Clearly, they cannot negotiate our treaties on our behalf, and it would be astonishing to have the treaties lockstep in every sense, to the extent that there is an open negotiation going on. Obviously, the quid pro quo, the give and take between the different countries, would be different between Canada and Mexico and Canada and the U.S.
It is not a tripartite negotiation as it was with the NAFTA, where we had all three countries agreeing to the provisions.
Senator Eyton: We have to be realistic. For example, if a Mexican company is deciding to do business through a subsidiary in the U.S. or Canada, one of the factors favouring the U.S. location, and perhaps the jobs that go with it, is the lower tax rate. It is not difficult to see that decision.
Mr. Lalonde: That is correct. It works as well for Canadian companies operating in Mexico and U.S. companies operating in Mexico. The extent to which Mexico, for example, would be willing to give up the revenue source to attract Canadians might be different than to attract American businesses. There might have been something else on the table that was involved in the negotiations. As I have indicated, the negotiation is a give-and-take process; so one item cannot always be picked out as the difference, because there might have been a take or a give somewhere else.
Last, as Mr. Castonguay has indicated, the Canadian government, since 1992, has been seeking a policy of renegotiating our treaties to bring the withholding rate down to 5 per cent. That policy has not changed at the government level. From the officials' level that is what we seek to negotiate, and in these three treaties, we have been successful in so doing. We may not have gone as far as you would prefer, going to zero, and I can understand that. I hope you would agree that the direction we have gone is the right direction.
Senator Harb: Ideally, if we are using the OECD model for those treaties, we would want to apply it across the board with every country we have a treaty with equally. We would not want a special arrangement with one country that is different from another one because we want to treat everyone the same. As an example, where we run into a problem is if we have a country with a flat tax rate of 10 per cent while another country has a tax rate of 25 per cent to 40 per cent. That is where businesses, as well as individuals, will start making strategic decisions whether or not they want to become a resident of this country or the other country. Is that not the case?
Mr. Lalonde: We refer to the negotiation of tax treaties because it is exactly that, a negotiation. We have an OECD model that is generally accepted amongst a large number of countries. However, every country has their peculiarities, so we try, for the most part, to deviate as little as possible from the OECD model; but it happens. As I say, it is a give- and-take type of process. We try to represent, as best we can, the interests of Canada in negotiating those treaties. There will be differences therefore.
If you were to pick up these three treaties and start reading through them, you would find that much of the language is consistent throughout. There will be changes amongst the different countries for reasons peculiar to the particular negotiations, but we try to adhere to the standard.
Senator Harb: Why is it then, in the Canada-Finland treaty, that you have provided them with special exemption on withholding tax on royalty payments for software, patent and know-how? What do you mean by know-how?
Mr. Lalonde: It is a two-part answer. Mr. Castonguay was not involved in those particular negotiations and neither was I. Perhaps Mr. Athens can answer that.
Mr. Athenaios: Korea and Mexico are more what is, in the tax world, called source countries: countries where foreign multinationals come in and extract payments coming out. They are more sensitive in taxing such items. Finland is a more developed country, more sophisticated, so they are a lot more willing to exempt these types of payments.
The Chairman: What is the policy behind that?
Mr. Athenaios: It is to facilitate trade and investment between countries.
The Chairman: It is more than that, is it not? I do not want to beg the question here, but I assume there is a rationale as to why Finland would exempt know-how.
Mr. Athenaios: A country like Mexico would have more payments, know-how payments, going to other countries than coming back in, so they would lose more in exempting know-how. With Finland and Canada, they are closer to being equals in terms of the flows of funds with respect to such intellectual property rights such as know-how. It is much easier to agree to exempt such payments from withholding tax to facilitate trade and investment.
Senator Harb: You did not really define ``know-how.''
Mr. Athenaios: Know-how is a difficult concept. It is not a legal term of art.
The Chairman: It is about patent and trade secrets, is it not?
Mr. Athenaios: Exactly; trade secrets, confidential information, and such.
[Translation]
Senator Massicotte: Following up on Senator Eyton's question, can you tell me what the withholding tax rate is on the dividends of a parent company in Japan? Is it 5 per cent? What about 10 per cent?
Mr. Castonguay: According to the current treaty, the rate is 5 per cent.
Senator Massicotte: A Japanese company that is trying to decide where it should locate an automobile manufacturing plant for the North American market will look more favourably on the United States, because unlike Canada, it does not charge a 5 per cent withholding tax.
Clearly, this form of taxation is a disincentive to investment in Canada. The only reason for levying this tax is to generate revenue. Any company thinking about investing in Canada will be put off by the tax. The tax is also a disincentive to Canadian companies operating abroad. If I understand correctly, the only advantage to this tax is that it generates needed revenue.
Mr. Castonguay: It is a trade off. Withholding taxes are indeed a means of extracting revenue in connection with income earned in Canada. We talk about global taxation. As far as setting the rate goes, it boils down to generating revenue while at the same time ensuring that businesses remain competitive. That is the reason why last time around, the government reviewed the rate. A decision was made to reduce the withholding tax rate from 10 per cent to 5 per cent. However, the question is whether is should be reduced even further.
Senator Massicotte: How much revenue does the withholding tax generate annually?
Mr. Castonguay: Potentially, it generates a very substantial sum.
Senator Massicotte: Can you give me a ball park figure?
Mr. Castonguay: In the range of several hundred million dollars.
Senator Massicotte: Getting back to the argument that was made earlier, the amount of tax payable in countries like Finland will equal the amount of tax taken in here. Rarely does a company benefit both ways. So then, the entrepreneur, or company, is at a disadvantage. He is not on the receiving end of the 5 per cent withholding tax. Tax experts often recommend that companies be set up in Bermuda or Barbados. These countries charge a very low withholding tax and this encourages companies to set up shop there. Correct? Why are they so different?
Mr. Castonguay: You are getting into tax planning questions. I cannot really speak to that, because you are talking about what motivates taxpayers to do what they do.
Senator Massicotte: Why would the withholding tax rate be much lower in certain countries with low trade volumes than it is in other countries?
Mr. Castonguay: Some countries set on attractive tax rate in order to attract foreign companies. It is part of their tax policy. In recent years in Canada, attempts have been made to bring in a relatively competitive corporate tax regime by gradually lowering, as you know, the taxation rate.
Senator Massicotte: When you look at the withholding tax rate on an interest rate of 10 per cent, for example, one could argue that these taxation rates are lower than the one Canadian corporations or individuals would pay in Canada on the same income. Why are foreign companies given an advantage over Canadian companies?
Mr. Castonguay: In this instance, the rate of withholding tax applies to the total interest earned. As a result of the withholding tax, taxing power is shared by both countries. The higher the withholding tax rate, the higher the tax share of the source country. Obviously, the country of residence will also tax the taxpayer who is paid interest in Canada. In that case, it is not necessarily true that the foreigner is at an advantage, considering the range of taxes that apply to him. In addition, he is taxed in his country of residence.
Senator Massicotte: If I understand correctly, they are often credited for the tax paid abroad. Correct?
Mr. Castonguay: To avoid double taxation.
[English]
Senator Moore: Does a resident who is a non-citizen — for example, an American, who lives in Nova Scotia and then moves back to the U.S. — have to pay withholding tax on the disposition of his or her home in Nova Scotia if it is a principal residence?
Mr. Lalonde: Is this a Canadian resident?
Senator Moore: A resident, but an American citizen.
Mr. Lalonde: Canada does not tax on a citizenship basis. We tax on a resident basis. An American citizen who is resident in Canada would be taxable in Canada the same as you or I or anyone else.
Senator Moore: Thus, if a principal residence, no tax; if it is a rental or a secondary property, then taxed the same as a Canadian.
Mr. Lalonde: The same rules as for everybody else.
Senator Moore: I believe Senator Eyton touched on the matter of treaties not being put in effect by the other party. You mentioned three, such as Lebanon, nil prospects. How long has that been in abeyance?
Mr. Castonguay: The Lebanese treaty was ratified by Canada in June, 2000.
Senator Moore: Italy?
Mr. Castonguay: December, 2002.
Senator Moore: Gabon?
Mr. Castonguay: March, 2005.
Senator Moore: Who monitors that? Is it the Department of Finance Canada or Foreign Affairs and International Trade Canada? How do we do it and how often?
Mr. Lalonde: The Department of Finance Canada negotiates the tax treaty. Mr. Castonguay is our chief treaty negotiator. We negotiate in good faith; and we hope our partners do as well.
In the case of Italy, I believe it is a procedural difficulty they are having with their own parliament. We are not the only treaty partner that is in that situation.
In the case of Lebanon, it is a different issue.
Senator Moore: Do you speak with a counterpart over there? Do you talk with the legislative clerk in their assembly? How do you know what the status is of a treaty in terms of moving through their system?
Mr. Lalonde: We keep in contact with our negotiating partners.
Senator Moore: How often do you do that?
Mr. Lalonde: I could defer to Mr. Castonguay. However, I would hazard a guess that if everything is going along well, there would be no point in calling them up and bothering them. If it appears there is a problem, then we would be contacting them to discuss that.
In some cases, there is a problem and we have discussed it with them; it has become apparent that matters will not proceed, at least for the time being. However, that is rare.
We have 86 treaties. There has been a problem issue with three in terms of delay of implementation. Frankly, we are in 2006, and Gabon was negotiated in 2005. That is not so bad.
With two other treaties out of the 86, there seems to be some delay. With one of them, there seems to be a rational explanation. The other seems to be that the treaty partner may have changed their mind.
Senator Moore: In tab 3, the treaties are listed. At the bottom of the page, it states that negotiations to conclude or update tax treaties have been underway with — and there are 13 countries listed there. Eight of them are not listed in the treaties in force in terms of the 86. These eight that are not listed above, are these new efforts? Have we not had treaties before with these countries?
Mr. Lalonde: That is correct.
Senator Moore: Those are eight new ones, then.
Mr. Lalonde: Yes.
Senator Moore: Are these negotiations that we will start or have we been underway for awhile with these countries?
Mr. Lalonde: Some of them have been longer than others. Again, it is probably unfair to ask Mr. Castonguay to reply on all these, having come only recently to our branch.
Some of the treaties are negotiated for a period of time. We run into a problem and pretty well we have to say to the other country, ``Look, you resolve that problem and come back and see us when you are ready.'' In some cases, we may have a difficulty in that we just cannot agree to something for which they are asking. In other cases, the process just takes longer than with other countries.
Senator Moore: We have treaties in force with the United States, but it is also listed here among these others as under way. Did the tax treaty we have with the United States expire?
Mr. Lalonde: No. It is still in place, but we would like to renegotiate.
Senator Moore: Are there aspects of it that we want to bring up to date?
Mr. Lalonde: That is correct.
Senator Moore: How long have those discussions been going on?
Mr. Lalonde: They have been ongoing for some time. I believe the last treaty negotiated there was an addendum or a provision that said we would be coming back to the table to renegotiate items. Those negotiations have taken probably longer than we would have expected and maybe even longer than the U.S. would have expected.
Senator Moore: When did they begin?
Mr. Castonguay: In 1998.
Mr. Lalonde: It has been a number of years.
Senator Moore: They are doing worse than Gabon.
Mr. Lalonde: It works both ways. It is an important treaty. We want to be careful with what we are doing.
Senator Moore: To go back to what Senator Eyton was saying: Will this always be this way with the U.S. document? Will it always be not totally agreed upon?
Mr. Lalonde: We certainly hope not.
Senator Moore: They keep chipping away. Will we see a date when it will be concluded, and we can put it to rest for awhile?
Mr. Lalonde: We are hoping that negotiations can be concluded soon, but it is a bilateral process. It requires the agreement of not only the U.S., but also of the Canadian government. There are important issues that we hope to resolve soon, but still remain outstanding.
As you can appreciate, treaty negotiations are closely guarded between Canada and our treaty partners. I cannot go deeper into the issues.
Senator Moore: Since 1998, we have gone through various federal administrations in Canada. Do you have to start all over when a new administration comes in?
Mr. Lalonde: We have to inform the new administration coming in what the state of play is and what the current issues are, yes.
Senator Moore: Does that throw us back, not necessarily to the start, but is it causing us problems in getting this concluded?
Mr. Lalonde: No, I would not say that that is causing problems. It is difficult for me to go into any more detail as to what the issues are.
Senator Moore: Are we getting close? Is it imminent?
Mr. Lalonde: We keep on saying so.
Senator Moore: Without giving away trade secrets, where are we?
Mr. Lalonde: The economic statement of 2005 indicated that we thought we were close, and I believe we still do feel we are close.
The Chairman: He is saying hope springs eternal.
Senator Goldstein: I recall from another life that the Income Tax Act makes a distinction between loans of a term of less than five years and loans of a term more than five years, with respect to withholding tax on interest on those loans. Does that distinction continue to be reflected in these treaties?
Mr. Lalonde: The treaties themselves do not reflect that distinction. As you pointed out, it is a provision in the Income Tax Act. I believe you are referring to subparagraph 212(1)(b)(vii).
Senator Goldstein: That is the only number I know in the Income Tax Act. I do not want anybody to be impressed.
Mr. Lalonde: I guess I have to admit to the same thing.
The Chairman: I would like to return to the Mexico question. As an aside, Senator Eyton is probably one of the outstanding experts on Canada-Mexico trade as he was instrumental in assisting in the negotiation of that treaty. Thus, we have here one of our resident founding fathers when it comes to this relationship, which has been positive. When we examine the statistics between Canada and the United States, our numbers and your numbers are the same. Canada's fifth most important export market is Mexico; its third most important source of imports in 2005 is Mexico. Our bilateral trade with Mexico is now $17 billion. Senator Eyton, that is a 218 per cent increase since NAFTA was entered into. Thank you very much for that.
Having said that, our direct investment relationships are not as good; Canadian direct foreign investment in Mexico was valued at $3.1 billion in 2005. I am not sure where that stands in terms of our sourcing for direct foreign investment.
On the Mexican side, even though we are, as I say, their fifth most important export market and our third most important import market, when it comes to Mexico's direct foreign investment as an investor in Canada, they are twenty-eighth.
There is a disconnect between the trade relationships and the merchandise relationships, not on the Canadian side, but on the Mexican side.
We have to do everything to make flows of capital between our countries more efficient and productive. Does the difference between the Canada and the U.S. on this particular issue place Canada at a relative disadvantage in attracting Mexican foreign direct investment?
Mr. Lalonde: Which provision are you wondering about?
The Chairman: We are talking about the withholding number. The United States is zero, while we still have that 5 per cent cap. We are just talking about Canada-Mexico.
Mr. Lalonde: In deciding to invest in any country, the withholding tax rate is important, as is the domestic rate. You will have noticed that in the last two budgets, we have been promoting, what we refer to as, the Canadian tax advantage; trying to bring our tax rate below that of the U.S. There are a number of other important features.
The Chairman: I understand that. I do not mean to interrupt, but would it be fair to say that this might be one factor that would slow down direct foreign investment with Mexicans in Canada?
Mr. Lalonde: I do not have the figures at my fingertips, but I would be interested as well to see what kind of figures there are for direct foreign investment from Mexico into the U.S. I would expect that Mexico would be a net receiver of foreign investment rather than a net provider of foreign investment, given the economics of that nation. I would not agree that that was forming an impediment in the absence of comparing all the variables.
The Chairman: Could it be a factor?
Mr. Lalonde: At the margin, if everything else were equal, it is possible that it could be a factor, but we have to look at other areas, such as the domestic tax rate, the economic conditions, the availability of skilled labour, education and health care in the country in which we are about to invest. Canada has many advantages. The withholding tax rate is one factor to take into account. I believe that we are moving in the right direction, although perhaps not as fast as some senators would prefer.
The Chairman: I appreciate that.
I wanted to get that on the record. As you know, we are consistently trying to analyze all legislation that comes to us through a productivity prism.
Senator Eyton: I believe we all support the thrust of these treaties and encourage you to do even more. That is the tenor of the comment today.
In the schedule, I see the rate of withholding on royalty payments between the three countries that we are talking about. The rate limitation that generally applies is 10 per cent across the board. However, a very important part of being more productive and of competing well is software patents and know-how. There is a special rate for software patents and know-how in relation to Finland, which is zero. I would have thought that was good. It encourages people to work with each other, to have a free marketplace where patents, royalties and know-how can be exchanged. It seems to me that that is a good policy reason for putting that in place.
At the same time, there is no special rate for software patents and know-how in both Mexico and Korea. I will leave Korea aside for the moment. In Mexico, because of NAFTA, and because of the trading relationships, it would make tremendous sense to have a special rate, just like Finland, of zero. It is not there, and that is not what the treaty says now. However, for the record, I personally believe that that is something we should try for in future negotiations, and perhaps the committee will come to that conclusion as well.
Mr. Lalonde: Our policy is to seek a withholding tax rate of zero for that. However, as indicated before, we cannot impose treaties on other countries; we have to negotiate them, and there is a give-and-take.
The Chairman: Out of curiosity, there seems to be an element of discrimination in these treaties that you might want to address. The maximum rate of withholding tax on periodic pension payments is 20 per cent in the proposed treaty with Finland, and it is 15 per cent in the proposed treaties with Mexico and Korea. Could you explain the difference in the government's policy approach to those differing numbers? I find curious that pension payments attract a higher withholding rate than other payments, but that is another issue. Perhaps you could give us an explanation of that as well.
Mr. Lalonde: As to why the rates are different, again, we negotiate treaties and, therefore, one cannot expect the rates to be consistent across all countries. As to why we would have a high withholding tax rate on pensions, consider, for example, Canadian resident taxpayers who generate a pension entitlement while in Canada and then move to Finland, Mexico or Korea for their retirement. When they were in Canada, they received tax recognition for their pension payments. If those payments are received by a Canadian resident, they are taxable in Canada at normal Canadian tax rates in recognition of the fact that they were at one point deductible in Canada to produce the capital required to generate the pension. As a result, we would look to have a higher withholding tax rate when those amounts leave the country.
It is a little different from when we have a withholding tax on dividends, where the income earned by the corporation has already been taxed. This is just a subsequent tax on the dividend leaving the country.
The Chairman: Thank you for putting that on the record. It was a question that some pensioners might want to have addressed.
I thank the witnesses very much.
There being no further questions, is it agreed that the committee move to clause-by-clause consideration of Bill S-5, to implement convention and protocols concluded between Canada and Finland, Mexico and Korea for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income?
Hon. Senators: Agreed.
The Chairman: Shall clause 1 stand?
Hon. Senators: Agreed.
The Chairman: Shall clause 2 in Part 1 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 3 in Part 2 carry?
Hon. Senators: Agreed.
The Chairman: Shall clauses 4 to 6 in Part 3 carry?
Hon. Senators: Agreed.
The Chairman: Shall Schedule 1 carry?
Hon. Senator: Agreed.
The Chairman: Shall Schedule 2 carry?
Hon. Senators: Agreed.
The Chairman: Shall Schedule 3 carry?
Hon. Senators: Agreed.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 1 carry?
Hon. Senators: Agreed.
The Chairman: Is it agreed that Bill S-5 be adopted without amendment?
Hon. Senators: Agreed.
The Chairman: Is it agreed that I report Bill S-5 at the next sitting of the Senate?
Hon. Senators: Agreed.
The Chairman: Thank you very much. This has been a very productive day at the Senate.
The committee adjourned.