Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 1 - Evidence - Meeting of November 15, 2007
OTTAWA, Thursday, November 15, 2007
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-2, An Act to amend the Canada-United States Tax Convention Act, 1984, met this day at 10:45 a.m. to give consideration to the bill.
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good morning. I call to order this first meeting of the Standing Senate Committee on Banking, Trade and Commerce in the Second Session of the Thirty-ninth Parliament under my stewardship as its new chair.
I would like to introduce committee members: from Montreal, Senator Goldstein, deputy chair of the committee; Senator Massicotte, from Winnipeg and Montreal; Senator Harb, from Ottawa; Senator Ringuette, from New Brunswick; and Senator Tkachuk, from Saskatchewan.
Today, we begin our study on Bill S-2, An Act to amend the Canada-United States Tax Convention Act, 1984. The bill is the result of some ten years of negotiations between officials of the two countries and follows an historic signing at Meech Lake in September between the Minister of Finance of Canada and his U.S. counterpart.
[Translation]
This bill was introduced by the leader of the government in the Senate on October 18, 2007. It was given first reading on October 18, 2007 and second reading on October 24 and 31, 2007. It was referred to the Standing Senate Committee on Banking and Trade on November 13, 2007, that is, this past Tuesday.
[English]
Bill S-2 proposes to implement the Fifth Protocol to the Canada-U.S. Income Tax Treaty. Its implementation would involve substantial changes to the existing Canada-U.S. Tax Treaty first signed in 1980. The Canada-U.S. Tax Treaty has been amended four times through agreements known as protocols in 1983, 1984, 1995, and 1997.
We are pleased to have as witnesses this morning Ted Menzies, Parliamentary Secretary to the Minister of Finance, as well as two senior officials from the Department of Finance, Brian Ernewein, General Director, Tax Policy Branch, and Lawrence Purdy, Senior Chief, Tax Legislation Division.
Senator Meighen, from Ontario and Québec, has arrived.
Mr. Menzies, please proceed.
Ted Menzies, M.P., Parliamentary Secretary to the Minister of Finance, Department of Finance: Thank you, Mr. Chair, and congratulations to you and Senator Goldstein on taking on this challenge. We all recognize the importance of the role this committee plays, despite what some media might insinuate in some of the discussions about the Senate's responsibilities and roles. Senators bring knowledge to the discussions on such legislation as this stemming from their vast experience in industry and business. The taxation rules are all about improving the economy of Canada, and that subject is all based on business. I respectfully submit this presentation to the committee knowing that senators here today likely have as much expertise as anyone in these fields.
The Chair: Mr. Menzies, now that I know your true colours, I will invite you back when the meeting is televised. It is nice to know how you feel about senators.
Senator Massicotte: We will be watching how you vote next election.
Mr. Menzies: Senator Massicotte, I thought that you always watched us vote.
I have the greatest respect for the institutional knowledge that senators bring to the discussions.
Thank you for the opportunity to appear before the committee to discuss Bill S-2, An Act to amend the Canada- United States Tax Convention Act, 1984. The bill proposes to put into force the fifth update to the tax treaty between Canada and the United States.
I will make brief opening remarks, after which I will be pleased to answer questions about the proposed legislation. Of course, I will defer to the experts when necessary because I do not understand all the tax implications, although I understand the overall reasons for the bill. That is why I have experts sitting on both my left and my right to explain those details.
The Senate, in general, and this committee, in particular, are familiar with tax treaties, so I do not need to tell you why they are important. As you know, Canada has tax treaties with over 85 countries, including one with United States, our closest neighbour. We have had a full-scale tax treaty, or convention, if you will, with the Americans since 1942.
The present convention was signed in 1980, and has been updated four times in the past through agreements known as protocols. Bill S-2 proposes a fifth update. As senators no doubt recognize, this bill is much like other tax treaties that the committee has seen previously. However, Bill S-2 is of particular importance given that it is with our largest trading partner.
Canada regularly updates and modernizes its network of income tax treaties with other countries, and this protocol is no exception. Like our other tax treaties, it is modeled on the model tax convention of the Organisation for Economic Co-operation and Development, which is generally accepted by most countries around the world. I mention this point to emphasize that the provisions in this bill comply fully with the international norms that apply to such treaties.
After nearly one decade of negotiations, the signing of this protocol in September and its implementation in the two countries will stimulate further trade and investment between Canada and the United States. It will also make our respective tax systems more efficient but, more than that, this protocol will strengthen economic cooperation between our two countries. Committee members will no doubt appreciate that, as Canada's economy becomes increasingly globalized, the necessity of eliminating tax impediments to international trade and investment has grown in importance.
Tax treaties, such as the one 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. The treaties accomplish this by avoiding the double taxation of income, and by giving taxpayers certainty as to which country will tax any particular item of income. The recent economic statement announced new tax reduction initiatives that will reduce taxes significantly for Canadians. Bill S-2 will also provide significant benefits to Canadian individuals and businesses. For example, one key element of the fifth protocol will eliminate source-country withholding tax on cross-border interest payments. This major step forward in Canada's international tax policy goes beyond the Canada-U.S. Tax Treaty.
As announced in Budget 2007, Canada's domestic law will remove the tax from arm's length interest payments to all non-residents. This change will give Canadians and Canadian businesses more choices by improving their access to the world's capital markets. It will help our firms become more productive by lowering their costs, and will simplify record keeping and tax filing for anyone who borrows money from a foreign lender.
The government wants to deliver these benefits as quickly as possible. Therefore, proposed Budget 2007 legislation in the form of a ways and means motion was tabled in the House of Commons earlier this week. To understand what I am about to describe, it might be helpful if I summarize the situation. The proposed legislation before the committee today will implement the Canada-U.S. Tax Treaty Protocol. The protocol will eliminate source-country withholding tax on interest paid between Canada and the U.S. For interest payments between related persons, for example, a subsidiary company in the U.S. and its Canadian parent company, the tax will be eliminated in a three-stage process: from 10 per cent to 7 per cent, then to 4 per cent and finally to zero. For interest payments between unrelated persons, for example, a Canadian bank and a customer in the U.S., the tax will be eliminated entirely when the protocol is ratified. In addition, as outlined in Budget 2007, not in the protocol, the government is committed to removing the tax on all arm's length interest payments to non-residents.
Obviously, the budget commitment overlaps the protocol measure as far as arm's length interest paid to U.S. residents is concerned. The question is: When should that general tax exemption, as referred to in Budget 2007, come into effect?
Instead of leaving Canadian borrowers in an unsure position because of the inherent uncertainty of the timing of ratification, we chose a more sensible course of action. However, while we, in Canada, with your help, are moving quickly to implement the protocol, we cannot be certain that the U.S. will keep up to us. Rather than providing the arm's length interest relief under the Income Tax Act only once this treaty protocol is ratified, the government has decided to specify in advance the date on which the measures will apply.
That date — following Parliament's consent, of course — will be January 1, 2008. The Notice of Ways and Means Motion that was tabled earlier this week includes this initiative, along with the other remaining measures from Budget 2007.
What exactly does that change mean? It means that after 2007, any person in Canada who pays interest to an arm's length non-resident will not be required to withhold tax, regardless of which country is involved. This more predictable timetable should make life a little easier for Canadian businesses. It may also mean that global lenders who want to offer their services in this country have an incentive to start a little sooner.
In the current credit market context, this proposal also takes on a greater significance. Although the two are not directly related, increasing the market's confidence in the withholding tax measure could help the debt market's recovery. While there has been some improvement in recent weeks, Canadian money markets continue to experience disruption. The ability for Canadian borrowers to access global debt markets more cost-effectively could lower their funding costs and help narrow borrowing spreads in Canada.
Again, this proposal is in respect of arm's length interest. For interest payments between non-arm's length parties, the tax remains unchanged for all countries, except the United States. For the U.S., the withholding tax rate reductions are still linked to ratification.
We are doing what we can to accelerate the benefits. Specifically, we and the U.S. have agreed to apply the rate deductions in respect of related-party interest as of January 1, 2008, assuming ratification takes place before the end of 2008.
The interest-withholding tax changes are among the most important elements of the protocol. The developments I have described amount to leveraging the changes even more to the advantage of Canada's economy and Canadians.
As well as the measures on interest, the protocol will also deliver several other important benefits to Canadians. For example, the protocol will allow taxpayers to require that otherwise insoluble double tax issues be settled through an arbitration procedure. It will extend treaty benefits to limited liability companies, giving mutual tax recognition of pension contributions, and will clarify how stock options are taxed.
The protocol ensures individuals who migrate from one country to another will not face double taxation on capital gains. It gives mutual tax recognition of pension contributions, which improves pension equity for cross-border workers, and makes it easier for people to move between our two countries.
The protocol removes uncertainties for employee stock options by giving clarity to the sourcing of benefits. Canadians who receive life insurance or annuity payments from the Canadian branch of a U.S. insurance company no longer will be subject to U.S. tax. Bill S-2 also proposes to implement many technical improvements and updates to bring other aspects of the treaty up to date.
Summing up, Mr. Chair, as you know, international trade is a significant part of Canada's economy. In fact, Canadian exports account for more than 40 per cent of our annual gross domestic product, GDP. What is more, Canada's economy benefits immensely from foreign investment, as well as from inflows of information, capital and technology. In an environment of intense international competition, Canada will continue to thrive if we keep our tax treaty network up to date, especially in relation to our closest neighbour, the United States, where so much Canadian business takes place. That is why ratifying this protocol is so important.
The proposals in Bill S-2 will help attract investment in Canada, and at the same time, will help Canadian businesses to compete in the North American market. The major initiatives to secure a stronger business tax advantage for Canada announced in the economic statement, combined with the government's commitment to delivering the benefits of withholding tax relief as soon as possible, will make a real difference to Canadian businesses.
Mr. Chair, that concludes my remarks, and I will be pleased to take some of the questions and defer the others.
The Chair: Thank you, Mr. Menzies. That was a clear statement about the bill. I want to clarify a couple of things before I ask the senators to proceed with their questions.
First, do I understand that neither of the officials intends to make a presentation of their own?
Mr. Menzies: That is correct.
The Chair: Second, at the present time, it is not our intention to call other witnesses on this bill, unless good reason for same comes forward this morning. In that regard, I will clarify a couple of points.
First, is it correct for this committee to understand that this bill has been subject to proper consultation with the so- called stakeholders, that it is what you would categorize as a noncontroversial bill, and you are not aware of groups in Canada or interested, serious-minded people that have any problems with the bill?
Mr. Menzies: Absolutely: I can provide positive comments at some time from the Canadian Bankers Association, the Chartered Accountants of Canada and others.
I am sure, Mr. Chair, you would have heard by now if there were negative comments from individuals. I suggest they know how to get in touch with this committee and probably would have placed those comments in that case.
Given the time that has elapsed since the initial signing of this treaty in September, people have had plenty of time to come forward. Frankly, we have heard nothing but positive comments. Businesses are supportive, as are business associations.
The Chair: Are the officials with you comfortable that there has been proper consultation? It has been a long, 10- year process, as I indicated at the outset, but we need that reassurance to proceed today, possibly even to clause by clause consideration.
Brian Ernewein, General Director, Tax Policy Branch, Department of Finance Canada: It is true that it has been a long process. It is also the case that the text of the treaty is not shared or circulated in draft form. The first time the text of the agreement would have been seen by the public is on the date it was signed, when both countries publish it and make it generally available.
Since that time, narrow questions have been asked on the interpretation and application of the rules, but nothing that would change our view, before signature, that this treaty represented a good deal for Canada — indeed, a good deal for both countries.
Even though the text of the agreement was not released until it was actually signed, the topics under discussion were known to the tax community. Indeed, the topics were sometimes brought up by the tax community. The bill before you reflects, to a large measure, input we have received from the tax community on changes they thought important to make to the treaty.
The Chair: Thank you. Mr. Purdy, do you have anything to add?
Lawrence Purdy, Senior Chief, Tax Legislation Division, Department of Finance Canada: I have nothing to add other than to reinforce the point that much of what is in this protocol reflects the direct requests from concerned sectors.
The Chair: Mr. Menzies, I have one final point of clarification. You used the word, ``ratification.'' If we understand it correctly, Bill S-2 would constitute Canada's ratification of the treaty, or implementation into its domestic legislation, whereas for the whole treaty to become enforceable between the two nations, the U.S. must go through a similar process.
You have indicated in your testimony that the U.S. process is not always as efficient, perhaps, as our process. Do we understand you correctly in that regard?
Mr. Menzies: We have no control over the speed with which the United States deals with the treaty, unfortunately.
The Chair: However, you have an understanding in terms of withholding tax on the interest — that it will come into effect as of January 1, 2008, regardless of implementation by our friends to the south, as long as they accomplish it within the calendar year 2008, is that right?
Mr. Menzies: What I understand is a great enthusiasm to accomplish this at the same date, and we understand the same thing from the officials.
Mr. Ernewein: That is right.
The Chair: We will proceed with senators' questions.
Senator Harb: I have a question with regard to the bill. Page 21 of the bill refers to limitation on benefits. On that page there is a letter from Terry Breese. I presume he is an official.
Mr. Menzies: We may have a different version. We may not have exactly the same version. Can you read what you refer to?
Senator Harb: It is point 14, ``Limitation on Benefits.''
Mr. Menzies: Yes, we have it here.
Senator Harb: This point is more or less the position of the Americans. They say, Thank you very much for the tax; thank you for your proposal; we agree with it, but here is our understanding of it. In addition to what you propose, we wanted to ensure that you attach to this agreement what we agreed on on September 26, 1980, 1983, 1984, 1995 and 1997.
Is that your understanding?
Mr. Menzies: I am not sure I am clear on your question.
Senator Harb: The letter was sent to the Government of Canada stating that they support what the Government of Canada proposes to the Americans in terms of the fifth protocol, or the proposal we are dealing with right now. However, they tell the Government of Canada that they agree to the proposal with the understanding that this proposal be in addition to what we have already agreed to before.
Mr. Menzies: I will refer to my colleague.
Mr. Ernewein: I will answer the question generally perhaps, and then you may wish to drill down a little further.
The reference to the exchange of notes on page 20 of our version signed by Terry Breese is, in most respects, a duplicate of what the Minister of Foreign Affairs, the Honourable Maxime Bernier, proposed, starting on page 11. Before that, in the bill another exchange of notes is put forward by our Minister of Foreign Affairs and signed by a U.S. representative as well. Both these notes represent exchanges reflecting understandings as to the application of the treaty, be it existing provisions of the treaty, amendments to the treaty or issues that have come up during the discussions to the treaty.
They are statements of understanding. By elevating them to the level of exchange of notes, they have interpretive effect and force for the purposes of the treaty.
It is not the U.S. proposing something to us. It is us having essentially negotiated these understandings as part of the negotiations of the protocol itself, expressing them in an exchange of notes. Call it a memorandum of understanding, if it is helpful, but the formal term is an exchange of notes. They are signed by both countries to give them effect.
Senator Harb: The bottom line, ultimately, is that we have the same understanding as they have. If we were to read what they are telling us, we agree; otherwise, the notes would not be part of the document. We would have commented that it was not our understanding, because what we have, for example, in 1980 is different from what we propose now, or in some cases it may be complementary.
My question is: Are all these points issues that were not dealt with before, for example, the six new reasons why we introduce this proposal today? Are we introducing them because the issues were not dealt with before and we feel that these issues are new items; and, therefore, we want to enter into a new amendment to the treaty and then introduce the fifth protocol between us and them?
Does anything in those six points perhaps contravene or contradict what we have already agreed to before?
Mr. Ernewein: I confess to not having thought of the question before in the way you framed it, but looking at it quickly, I can offer the view that most points, if not all, relate to new features or provisions. The first set of exchange of notes pertains to the rules and procedures around the arbitration procedure that has been installed or instituted in the protocol itself. That item is obviously new, because it is consequential or referable to a new arbitration procedure created.
Looking quickly at the second exchange of notes, the discussion is new of the term ``dividends'' applying to certain trusts that are taxed as corporations. The treatment of stock options and taxation by reason of death are new understandings. I will use one more example. Point 10 in the second exchange of notes relating to ``qualifying retirement plans'' bears upon an existing provision of the treaty, but it is a new understanding, confirmation perhaps, but it still represents a new articulation of an understanding that the two authorities, the two governments, have with respect to the application of the treaty. I hope that is helpful.
Senator Harb: I am sure my colleagues have the same questions. We want to ensure that whatever comes up now, and based on what we have received from the American side, there is no misunderstanding at some point in the future because we have already told them that we agree to what they propose, but with the understanding that we annex to the agreement all those different protocols.
You do not have to answer me now; you can answer later through a communication to the chair. Go over those points, and in the near future, hopefully before we report back to the Senate, give us the assurances that we do not have anything here that conflicts with what we have already agreed to. We want assurances about what they have told us that we both agreed to in the past, and annexing what we have agreed to in the past to ensure that agreement continues to be their position.
From reading their document, I think they say here, Go ahead, but with that understanding.
Mr. Ernewein: I return to my first point. I would not characterize this document as their document. It is a shared document. If you wanted to cast it in those terms, I might say formally it is our document because we proposed it to them and they responded by agreeing with it. There will not be a disagreement on whether these exchanges of notes are relevant or have traction. Exchanging the notes where both countries subscribe to the points made therein has the effect of being binding on both of us. I do not think there is an issue there.
Senator Harb: My second question deals with the limitation on benefits. On page 39, under ``Limitation of Benefits,'' it says:
2. For the purpose of this Article, a qualifying person is a resident of a Contracting State that is:
(a) a natural person;
I would like your clarification for paragraph 2(b):
(b) a Contracting State or a political subdivision or local authority thereof, or any agency or instrumentality of any such State, subdivision or authority.
Can you explain to me in plain English what we are talking about here: the ``political subdivision . . . or ``instrumentality of any such State, subdivision or authority''? What do you mean?
Mr. Ernewein: Let me step back. The limitation on benefits rule is intended to constrain treaty benefits to what some might term real residents of the other country so that, for instance, if income is paid by a Canadian company to a U.S. corporation and that U.S. corporation is a shell, set up by a company or person of a third country that has no treaty with Canada, this rule could potentially say, ``No, treaty benefits do not apply because the income is paid to a nominee corporation in the United States. It does not have a real presence. Since we do not have a treaty with the third country we will not provide treaty benefits in this case.''
We are actually adopting a rule that had applied in the other direction, that is, on payments from the U.S. to Canada for the past 10 years but, by virtue of this protocol, we propose to sign on to that same set of rules.
Your specific question about the qualification for treaty benefits for contracting states or political subdivisions or instrumentalities, ensures that when we or someone from Canada pays income to the United States government, or to a state of the United States, or to an instrumentality which might be, in our parlance, a Crown corporation or the like, that they represent a qualifying person and thus are entitled to treaty benefits. That might be zero rated or it might be limited taxation, but they qualify for whatever the treaty provides.
Senator Harb: Give me an example of political subdivision.
Mr. Ernewein: Let us use the Canadian example: A municipality of a province.
Senator Harb: They have the same document as we have here. We have changed documents so we have no misunderstanding in terms of Bill S-2. When the chair asked you whether stakeholders have been informed, as far as you are concerned, and you told the committee, the bill is not controversial and, in fact, it is much supported and you are not aware of anyone that might have a beef or bone to pick with the protocol or with the proposal as it is drafted.
Therefore, based on that information I am satisfied, chair. However, on the point of ``fair market value,'' under the fifth protocol, how do you determine what is the fair market value, in lay terms?
Mr. Ernewein: I am not sure. Are you speaking of fair market value in the context of the departure tax or taxpayer migration rules where people in Canada are required to dispose?
Senator Harb: I mean property fair market value.
Mr. Ernewein: Again, though, I am not certain of the context. I can imagine a question arising in that regard in the application of our domestic rules, where someone leaves Canada and moves to the United States; they are treated as having sold their property at its fair market value?
Senator Harb: Correct.
Mr. Ernewein: The treaty in that context confirms something that was announced between Canada and the United States in 2000, which is that we will ensure that relief from double taxation is provided. We will tax the person on their gains accruing until the point at which they leave Canada. To ensure that double taxation does not occur, that taxpayer will be entitled to elect, for U.S. tax purposes, as having arrived in the United States with their property at a cost for U.S. tax purposes equal to that fair market value. The U.S. will tax only the subsequent appreciation. We will tax the appreciation up to the point of departure; they will tax the rest. That is how double taxation is relieved.
Senator Harb: How do you determine that fair market value? It says a property. The market, thank God, is changing on a daily basis. In Ontario, for example, we have what we call the fair market value, where you look at your properties and compare everything in the neighbourhood; hence you have the value of your property.
The Chair: You are talking about real property; real estate as opposed to stocks and bonds.
Senator Harb: If you leave, you are deemed to have disposed of them.
Mr. Ernewein: I appreciate it is not a complete answer to your question, but that is sometimes easy, sometimes difficult. It is an issue that runs throughout the tax system. There are deemed dispositions on death where evaluation of property is required; there are transfers between non-arm's-length persons, between a husband and wife for example, where that is required.
Obviously, as the chairman has implied, it is much easier when you have publicly traded securities than when you have something like land, private corporation shares or the like. Valuation techniques are brought to bear and it can be a challenge, but methods are applied to arrive at an answer.
Senator Harb: Thank you.
The Chair: Thank you, Senator Harb. I want to make the observation that I was lenient with you because your question was technical. I know the other senators will observe the clock and try to keep their questions crisp.
Senator Ringuette: I will try to obey your command.
You mention on page 2 of your presentation that ``this protocol will strengthen the bonds of economic cooperation'' and so forth, and I realize this is the fifth amendment to the basic treaty. How do you exchange information between Canada and the U.S. with regard to the issues in the treaty?
Mr. Ernewein: May I seek a clarification? Are you talking about exchange of information between Finance Canada and U.S. Treasury on what issues we want and what sort of things we might be open to discussing, or are you speaking specifically about the exchange of taxpayer information between the revenue authorities?
Senator Ringuette: Taxpayer information.
Mr. Ernewein: We have the most sophisticated set of rules relating to exchange of taxpayer information with the U.S. than with other countries because of both the degree of integration and the close economic ties we have with the United States, as well as the relative development of their and our tax systems so that we are able to protect taxpayer information and we are assured of the other country's ability and propensity to protect taxpayer information. That protection means that there is a so-called spontaneous exchange of information in relation to some items. If certain types of income are paid to U.S. persons, information on those payments is exchanged with the U.S. Internal Revenue Service, IRS, and vice versa.
There is also the ability to request information relating to specific taxpayers. Both we and the U.S. IRS have systems in place to facilitate that, while again ensuring that taxpayer confidentiality is respected.
Senator Ringuette: Is this fifth protocol and the previous protocol subject to the Canadian Privacy Act?
Mr. Ernewein: I do not know that there is any conflict between this protocol and the Canadian Privacy Act. It facilitates what is already allowed under the Income Tax Act. I am not familiar with how the Privacy Act and the Income Tax Act rules apply mechanically. I think that the income tax rules are vetted by the Privacy Commissioner and I believe that, legally, they are expressed to have primacy. However, I am not aware of any inconsistency, in any event. Furthermore, we are not making a substantive change to the exchange of information rules in the fifth protocol. We are modifying the exchange of information rules on the fifth protocol on their face to adopt the new model exchange-of-information agreement that the OECD has developed. Effectively, however, the operation will not change in terms of exchanges of information between Canada and the U.S. because the procedures that the new model contemplates are already in place.
Senator Ringuette: Is it possible, on this issue — because there are no witnesses from the Canada Revenue Agency — to look into this issue with regard to compliance with the Canadian Privacy Act and see if there were any complaints on the part of Canadians with regard to the treaty and information that was exchanged?
Mr. Menzies: We would be happy to do that. One should never assume in cases like this — and we will be happy to confirm that — but this is virtually an amendment to the U.S. tax convention that is already in existence and is already under those requirements. I assume that and maybe I should not. However, we will confirm that for you.
Senator Ringuette: We assume that there is compliance to the Canadian Privacy Act and I would like some assurance of that.
Mr. Menzies: We will get that confirmation for you.
Senator Ringuette: With regard to the recognition of pensions, I have written in the past to the Canada Revenue Agency and Finance Canada because I represent a series of border communities with the state of Maine, and Canadian workers are teaching in Maine and nurses from Maine are working at regional hospitals.
The issue of the pension fund deductibility has been one of concern and of representation on my behalf to the department. I am pleased to see that representation has not fallen on deaf ears.
Mr. Menzies: Obviously we have another supporter here.
Senator Ringuette: This issue has been ongoing, and the negotiations happen at certain intervals. I am happy that it has been discussed and resolved at the last discussion. How many Canadians will this protocol affect in a positive way — that is, the deduction of pension plans that they are paying in the U.S. with an employer?
Mr. Menzies: I do not know that we would have numbers on that. Those numbers may need to be kept in confidence. More and more people are moving back and forth, as we become more fluid, if you will. We do not tend to stay in the same career or the same city for our entire lives like we used to. Obviously, there is more and more demand both from Canada and the United States, but I do not think we have a number of how many people would be impacted by that.
Mr. Ernewein: I think that is right that we do not. It is not something that would be tracked because, as matters stand now, it is question of obtaining a deduction in the other country — in your example, for pension contributions made to that other country. Since the current system does not allow it in every case, nothing would show up on the returns that CRA could track.
You have identified one of the cases that these rules would have application for, potentially. If I understood the example correctly, it was a Canadian cross-border commuter living in Canada and working in the United States and contributing to a pension plan there. This rule will provide, in some circumstances at least, the ability to deduct, in computing your Canadian taxes, the contribution to the U.S. employer pension scheme.
The other case where these rules will have application is if an individual is on a short-term transfer to the other country. For example, people have given up Canadian residence, for example, to move to the U.S. to work for the U.S. arm of the same company. They do not want to give up their Canadian pension plan contributions and join the U.S. plan for only a few years and then end up coming back to rejoin the Canadian plan.
These treaty rules will facilitate their ability to remain a member of the Canadian plan, work in the United States and receive a deduction in the United States for the contributions they make to the Canadian pension plan. We do not know the number of people this will affect but those cases are the ones to which it will apply.
Mr. Menzies: In speaking with some of my colleagues from Windsor, for example, regarding the flow of commuters across that border that have long-term jobs on both sides of the border, this measure will solve a lot of their concerns as far as pensions go. On the lower mainland in British Columbia, some people commute across the border for a cup of coffee, let alone to go to their jobs. It impacts a lot of Canadians, and this treaty is a positive move to encapsulate their concerns.
Senator Ringuette: If this bill goes through both Houses, the effective date will be January 1, 2008 for the people and the pensions that we have been talking about on this bill. Is that a guarantee?
Mr. Menzies: That is our understanding. However, as we say, there are two partners in this agreement. I will obtain a confirmation, but that is the expected date we are looking at.
The Chair: It is subject to U.S. ratification in the calendar year 2008.
Senator Ringuette: If the U.S. does not ratify the protocol within the year 2008, then January 1, 2008 will not be an effective date for Canadians. Is that correct?
Mr. Menzies: My suggestion is that it cannot be if the other partner is not willing to ratify it. It is an important year there, too, but I would hope it would happen before they are too politicized. It is important.
They, as well as we, have pushed hard for this treaty. As I said before, I think there is an appetite to complete this process.
Mr. Ernewein: May I provide one clarification regarding the question you asked in relation to the application of this protocol as of January 1, 2008? That application is entirely true in respect of the elimination or reduction of withholding tax on interest to which the parliamentary secretary referred in his opening remarks. However, a variety of application dates are set out for various rules in the protocol. If your question refers to the effective date for the pension changes, they would take effect, along with some others, the year following ratification. If we ratify in 2008, they would have application for the 2009 and subsequent taxation years.
Senator Ringuette: Why the difference?
Mr. Ernewein: The general approach by Canada, and probably by most other countries as well, is to have prospective application for treaties. If people are in the middle of the year not knowing whether the treaty applies, it is difficult for them to know how to structure transactions or how to guide themselves.
In the context of withholding tax, the fact that it is applicable in the year of ratification is one consideration that, as the parliamentary secretary mentioned, led to specifying in the budget bill currently in the other place that it will be fixed as of January 1, 2008 to avoid that sort of issue.
Senator Ringuette: I see now a kind of double standard if you look at a stock option, interest and so forth. You are creating retroactivity with regard to interest rates and so on, but you are not creating retroactivity with regard to Canadian citizens that earn a living and the amount of deductibility they are allowed. You are creating two different strata of citizens and how they are treated by this treaty bill.
Mr. Ernewein: I am not sure that characterization is fair. In the main, the provisions of the treaty have prospective effect. You are correct; we brought to your attention the point about the application date of the interest. Indeed, some rules go back some time. I mentioned the elimination of double taxation. That goes back to 2000. It applies to individuals and very much helps them. The only observation I wanted to reiterate was that, in general, with exceptions of course, the provisions of tax treaties are made prospective and the pension rule happens to be one of them.
The Chair: If the U.S. were as efficient as we might be and actually ratified before the end of 2007, Senator Ringuette's issue would be resolved. Am I correct?
Mr. Ernewein: Yes and that is an important point. It is one of the reasons that the government —
Senator Ringuette: You are looking at one month.
Mr. Ernewein: I know. It is the reason the Government of Canada chose to introduce this bill as soon as possible to create the possibility of having taken all the necessary steps on our side of the fence before the end of the year. We do not know that will be the case in the United States; but certainly, if it were, your point is well taken. We would have this treaty applicable as of January 1, 2008.
The Chair: To be fair, Senator Ringuette, you have raised an interesting point. However, many American citizens come north to work in New Brunswick, Nova Scotia, Ontario and Quebec. The point is that the pressure is equal. I am not holding my breath that the U.S. will ratify this treaty this year because we are receiving strong signals to that effect. It is a good point to watch for.
Senator Ringuette: The business community and large investors will have tax relief with this protocol as of January 1, 2008.
The Chair: That is right.
Senator Ringuette: However, Canadian middle income families will not receive this tax break most likely until January 2009. I want to flag this difference because I see two kinds of treatment — one for business and large investors and one for middle income families. That is my point.
The Chair: We appreciate your input. A careful reading of the letters of exchange will help you to have a better perspective on this.
Mr. Menzies: I have one comment. Senators might take on that role when in communication with U.S. counterparts on the issue. There might be an opportunity to express to American colleagues how important this bill is. Certainly, I do that when in discussion with my U.S. colleagues on occasion. Perhaps, senators could encourage their counterparts on the U.S. Senate Banking Committee to see how important it is for constituents on both sides of the border that we move this forward.
Senator Massicotte: We all understand but perhaps you can take 30 seconds to explain the efficiency of cost and there will be no withholding on interest payments. Can you repeat why it is important for both countries to do so?
Mr. Menzies: Can we do it numerically?
Senator Massicotte: From an economic efficiency sense would be fine.
Mr. Ernewein: We have a withholding tax that applies on interest payments to both arm's-length and non-arm's- length payments. An example of the latter is a payment from a Canadian company to its U.S. parent. I will leave it at that.
Our withholding tax under the current treaty is 10 per cent. We have a number of exceptions for withholding tax with respect to arm's length payments but, where withholding tax currently applies, it will not apply in the future. On a loan of 7 per cent, the potential savings represents 70 basis points between the borrower and the lender.
Senator Massicotte: That savings is good for Canada. Other than tax simplification, are there any economic benefits?
Mr. Ernewein: We think there are. The saving of 70 basis points of taxation is often passed back to the borrower, we have observed. If a Canadian borrower tries to raise money from U.S. lenders, a toll charge applies. Borrowing costs can be reduced if that tax is eliminated.
Senator Massicotte: We would lose to withholding that would now apply on the American side. Do we gain a net financial benefit from the fact that we are both withholding tax on interest payments?
Mr. Ernewein: On the arm's-length payments, the costing is modest, in the order of $20 million. Even though arm's- length payments are much larger than payments between related parties, there are so many exemptions in our system that it is estimated that we collect only $20 million in withholding tax in respect of payments made to the United States.
On related party interest, the costs are greater because we apply withholding tax more comprehensively in those cases. The estimates that were released with the 2007 budget showed the total cost of $70 million in 2007-08, and $180 million in 2008-09. The reason for the escalation is that the elimination of withholding tax on related party interest in the Canada-U.S. treaty is to be phased in over three years. The first year it will go from 10 per cent to 7 per cent, then to 4 per cent and then to zero.
Senator Massicotte: I understand. That is the sum of withholding we would have applied on the related parties. Is that correct?
Mr. Ernewein: Those figures are both but mostly they apply to related party.
Senator Massicotte: Our tax act provides that if a foreigner earned interest in Canada, that foreigner would deduct the withholding applied by the Americans. The foreigner must gain something. Would there be a higher level of taxation on the interest paid to Canadians?
Mr. Ernewein: You are describing a situation where interest comes from the U.S. to Canada.
Senator Massicotte: If the Americans had applied withholding tax to interest on income here, Canadians would be able to deduct that tax payable when paying Canadian taxes. Is that correct?
Mr. Ernewein: If the interest income is coming north, then the U.S. would apply withholding tax. They will be bound by this same treaty not to withhold tax in this circumstance.
Senator Massicotte: The government will benefit from the higher level of taxation because there will be no deductions for payments made to the American company.
Mr. Ernewein: We will have more room to tax in such circumstances because there will not be U.S tax payable on the income for which we would ordinarily give a credit.
Senator Massicotte: The numbers you generated do not represent that potential savings. Rather, money is going only to the U.S. and not vice versa.
Mr. Ernewein: These numbers are net of those savings.
Senator Massicotte: If the argument is so good for avoiding withholding tax on interest payments, and I accept your arguments, why could we not do that in the area of dividend income? I notice many other countries do that.
Mr. Ernewein: Cost is a factor in those circumstances and the amount of withholding tax that we collect. It was a factor in relation to non-arm's length withholding tax, and the numbers I cited previously reference that factor. Currently, a greater amount of withholding tax is collected on dividends paid out of Canada, and that is a consideration for the government.
I will connect that question back to the earlier question from the chair and from Senator Harb, ``Is everyone satisfied and happy with the agreement?'' Certainly, people would like other taxes to be reduced as well, and dividend withholding is one of those areas that was identified.
Senator Massicotte: It is my understanding that the Canadian government does not want to advance this proposed withholding to other areas. Is that accurate?
Mr. Ernewein: I am not sure that it is accurate. The United States has agreed with three or four other countries to reduce or to eliminate withholding taxes in certain controlled company situations, but it is not part of their model.
Senator Massicotte: It is not part of the American model despite the fact that it is in the U.K., New Zealand, Australia and other countries.
Mr. Ernewein: Add Japan to that list as well. I am not trying to extrapolate and say that Canada would not support it if it was offered but it is not currently part of their model.
Senator Massicotte: It was Canada that did not want to take it that far.
The Chair: He did not say that.
Senator Massicotte: He nearly said that.
The Chair: It was a matter of negotiations. They simply did not have a meeting of the minds on that subject.
Senator Massicotte: What about the OECD protocol? Mr. Menzies, you said that it satisfies the OECD protocol. Does the OECD protocol suggest that there be no withholding on dividends?
Mr. Ernewein: Frankly, I do not recall. I believe it also has a 5 per cent rate reflecting what we do but I confess to not being certain of that.
Senator Massicotte: If this represents our latest negotiations, will we follow the same path that other countries follow in respect of avoiding withholding interest payments and so on?
Mr. Menzies: That issue is probably a future consideration. The U.S. is our major trading partner so we are looking at ways to increase that investment in Canada. The withholding tax portion of Bill S-2 will stimulate increased investment in Canada.
If it works, that is great. Perhaps we would look at it.
Senator Massicotte: I congratulate you. At this committee, probably a year ago, we scolded some of your representatives for not concluding this treaty. The U.S. is a significant trading party. Negotiations have been taking place for ten years. Congratulations for finally finishing it. Meanwhile, we remain hopeful that similar applications and philosophies will apply to other countries soon.
Mr. Menzies: Your point is well taken.
Senator Meighen: Is it driven by economics, or is it driven by convention? Why would the deductibility of interest income between related parties be phased in rather than adopted in one year?
Mr. Ernewein: Again, the question was fundamentally of the revenue effects. In terms of what the government has recently announced in its economic statement, those effects do not seem as significant, perhaps, but the hundreds of millions of dollars that were associated with the change were a challenge at the time of developing the 2007 budget. Phasing it in over the three-year period made it easier to attain.
Senator Meighen: Significant trading partners in the United States have negotiated with the U.S. recently the elimination of withholding tax on dividend income. I do not know whether that negotiation, subject to certain restrictions, namely, ownership restrictions, will give them an advantage over us in any way, shape or form. Mr. Menzies, do you have any view on the urgency of trying to achieve the removal of withholding tax on dividend income?
Mr. Menzies: Any measure we can put in place to improve the competitive advantage of Canadian businesses, or competitiveness with all countries, would fit in well with our overall strategy. We are strongly supportive of negotiations by the World Trade Organization on trade, but having said that, we are also pursuing bilateral agreements because we need those in place. We need structured rules around trade with all these other countries, and that is why we are pursuing that agreement.
Therefore, that would appear to us to be a perfect fit, to allow Canadian companies to compete with many other countries, but also to provide an environment in Canada to encourage investment in Canada.
Senator Meighen: Following on one of the themes that Senator Ringuette explored, to whom does it fall to ensure to the best of their ability that this issue of ratification by the United States appears on their agenda? Is that a diplomatic responsibility? Is it a departmental responsibility? Where does that responsibility lie?
Mr. Menzies: I cannot defer this question to our department officials. The push is political, and I think the minister initiated it. I am sure that as he is speaking with his counterparts he is urging the completion of the treaty as much as he can.
I go back to my comments before. It is incumbent on all members of Parliament and senators to encourage our colleagues across the border to make sure it happens as quickly as possible. It is beneficial for all of us.
If you look at the year that this treaty was first put into place, we have dragged our feet for a long time putting these changes in place. I would encourage this change.
Senator Meighen: On a scale of one to ten, how optimistic are you?
Mr. Menzies: That question is hypothetical, and I do not like giving hypothetical answers.
I am encouraged that Minister Flaherty's counterpart came to Canada for the signing. That sign is a good one in my estimation. We did not need to go to them; they came to us to initial the agreement, if you will. I am sure our ambassador in Washington is discussing this treaty with whomever he can. We are pushing it hard, especially as it is time sensitive. You, madam, raise a good point. We need to complete this ratification as soon as we can. We have lost opportunity for so long.
Senator Meighen: Well, that sounds promising.
There is a voluntary arbitration procedure under the existing treaty, as I understand it, and it has never been used. Why do we think the obligatory arbitration or the mandatory arbitration procedure will be used?
Mr. Ernewein: It is a good question, and there is a bit of history to this process.
In fact, authority for a voluntary arbitration procedure in the treaty has never been brought into place. That was as much as we were able to achieve 12 years ago, when we negotiated the third and fourth protocols to the Canada-U.S. treaty. Then we thought there was value in having an arbitration procedure, and very much wanted to have the procedure, with the support of the business community. The Tax Executives Institute, particularly, was trying to push both countries in that direction. We thought it was a good idea, and we are trying to implement it.
The U.S., at that point, provided authority in the German treaty for arbitration. That treaty received a bit of a rough ride when it went to the U.S. Senate Committee on Foreign Relations. There was some concern over deferring application or interpreting treaties to third parties as opposed to the U.S. courts, perhaps, but I am not certain. In any event, I am confident in my recount that the U.S. Department of the Treasury was essentially under instruction, or felt themselves under instruction, not to agree to any further treaties having arbitration, and that is where matters were left. The best we were able to accomplish at that time was the inclusion of an authority for arbitration, if and when we were able to convince the U.S., or for other reasons the U.S. changed its mind.
The U.S. has now changed its mind, and favours arbitration. As we have not changed our mind and continue to favour it, that led to the adoption of an arbitration procedure.
With that meeting of minds, we could have simply invoked the voluntary arbitration procedure we had in the existing treaty, and relied upon the commitment of both countries to the idea. We have spelled out that there is no debate about it any longer. If a dispute on certain matters is not resolved between the competent authorities, then the taxpayer has the right to ask for arbitration with a setting of the full procedure for appointment of the panellists and a time frame to obtain a decision.
We do not hope that arbitration replaces the discussions between the two revenue authorities to come to agreement, but we believe it will impose discipline on the system, and that is to the good.
Senator Tkachuk: Mr. Menzies, I noticed that in the presentation on page 3, you mentioned tax treaties ``facilitate cross-border trade, investment and other cross-border activities between residents of Canada and residents of its treaty partners.'' Then on page 8, there is ``mutual tax recognition of pension contributions, which improves pension equity for cross-border workers and makes it easier for people to move between our two countries.''
It is a question of public policy, but also a question for your officials. It is something that I have long thought should be a part of our public policy discussion, and it was good to hear Mr. Burney yesterday at the parliamentarian dinner talk about the mobility of workers.
How we treat taxation by foreigners who come here or Canadians who go over to the United States is a good way to improve mobility.
It is not an easy process to make that happen. In Europe, a Polish worker can go to Ireland. It is a simple process to move people across the border, but here it seems to become more difficult all the time.
Is this particular treaty a good place to begin discussion on not only the tax treatment of these people but how to move them back and forth with greater ease across the border?
Mr. Menzies: Absolutely. You raise an interesting discussion that is a pet peeve of mine. The reason we trade north and south is because we cannot trade east and west. I think we all have dealt with that issue. I am sure that you, with the new government in Saskatchewan, are looking across the border into Alberta and British Columbia at this Trade, Investment and Labour Mobility Agreement, TILMA, that we have in place. I have heard some comments from senators of frustration with not being able to move labour, services, investments and all these things that impede improvements in our economy, open the flow of labour and all other aspects of our Canadian economy.
If this agreement can be used as a model to encourage that, move benefits and pensions back and forth across the U.S. border, maybe we can use the model in Canada to move across borders.
Senator Tkachuk: That would be a good start.
Mr. Menzies: I encourage you to talk to your new government in Saskatchewan to have a close look at the TILMA agreement in Alberta and British Columbia.
Senator Tkachuk: I think they have already said they would, and that was part of their platform.
To go back to the pension and deductibility question that was raised by Senator Ringuette, has the issue the portability of registered retirement savings plans, RRSPs, been addressed? People who move across the border may be self-employed or contracted employees who are not necessarily paying into a pension plan and have their own. How do we treat the taxation of RRSPs?
Say a person works here for ten years or five years, or an American working in the States comes here, and because the person pays tax here and contributes to an RSP, how does that work? Is there any indication that maybe in the next round, RRSPs will be included in our tax treaty? I think they are taxed unfairly now, but I am not positive.
Mr. Ernewein: You are testing my limits too as well as how all our tax rules work, particularly in cross-border situations. Pension rules work in cross-border situations.
The simplest case, I think, is somebody who lives and works in one country, the United States, and then moves to live and work in the other indefinitely. These individuals may have contributed to a self-contribution pension plan in the United States. After they move to Canada, that self-directed pension plan in the United States will continue to accrue further income hopefully. Then, there is a question of whether we would start taxing that, because it looks like a bank account or some return going to that taxpayer.
The tax treaty already contains rules to allow for the deferral of taxation on that pension income on a qualifying pension plan in the United States, so that resolves that question.
When they ultimately retire and take income out of that plan, there may be some taxation in Canada of the pension return, but that is generally parallel with our own rules.
Senator Tkachuk: They work here for 20 years and decide to retire here in Canada; they like it here, their kids have grown up here, and they have that pension plan over there. What happens to that 401(k) pension plan or the RSP, as the case may be?
Mr. Ernewein: I will continue, if I may, with the case of them coming to Canada. With your indulgence, afterwards I will also talk about them making contribution to an RRSP.
When they retire and take income out of their 401(k) plan, for example, we will not tax that which would not have been taxable by the U.S., but it is possible that the income over and above that will be taxable as ordinary Canadian income.
If they have moved to Canada and are working here, they may also contribute to an RRSP. We know the rules that apply to all of us in relation to RRSPs; there is a deferral of the tax. Contributions are deductible, and now that they are Canadian residents, they will receive a deduction for those contributions. Again, when they start withdrawing that income as a Canadian, they will include those withdrawals in their income.
To close the loop and talk about the person contributing to a Canadian RRSP and moving to the United States, there is no taxation on the move to the United States. As they withdraw income from that RRSP or take payments out of that RRSP living in the United States, they will be subject to a withholding tax. That withholding tax is generally 15 per cent, unless they withdraw it in a lump sum, in which case our rule may apply at 25 per cent.
Senator Tkachuk: Do they receive credit in the United States for that?
Mr. Ernewein: Yes, they would.
[Translation]
The Chairman: Senator Biron, from the beautiful province of Quebec, would like to ask a few questions.
Senator Biron: I have a few questions for Mr. Menzies. You say that the bill will encourage Americans to invest in Canada; will this agreement also encourage Americans to buy Canadian companies that have converted their capital structure into income trusts? That may facilitate the process.
[English]
Mr. Menzies: I think there was a comment in one of the papers yesterday that the hollowing out is, in fact, a myth because there is more outward investment by Canadian companies.
It is important to remember that we live in a global economy. Shareholders in any company can be resident in Canada, Jamaica, the United States or whatever country. We have seen many investments in Canada that have grown Canadian companies. We have more head offices in Canada than we had five years ago; it is because of the investments in Canada.
We do not have enough capital in this country to grow our economy like we want to. We have Canadian companies investing outside of Canada all the time, looking for opportunities. I do not see this situation as negative in any way, shape or form to entice the buy-out of Canadian companies. We are encouraging the flow of capital, both inward and outward.
I do not see anything negative about this tax treaty, other than it provides tax fairness for all those that are investing, both in Canada and the U.S.
[Translation]
The Chairman: Do you have any other questions, Senator Biron, about trusts?
Senator Biron: Thank you, no.
[English]
Senator Goldstein: One of the advantages of being the last one to speak is there are few questions left that require clarification. That situation results from an excellent presentation on your part. I want to add my voice to those of the others around the table in congratulating you for the material you have submitted to us and the excellent, clear testimony that you have given to us.
We also have the great advantage of having heard the chair, in a different capacity, speak to this bill on the floor of the Senate. Notwithstanding the nature of the subject, which does not usually capture the attention of all senators, it was a particularly well presented tour of not only the particular protocol — the fifth one — but also a more general indication and education in terms of how these protocols are negotiated and the excellent work that the department has done, not only now, but in many years past.
I congratulate the chair for that excellent tour.
I am left with two questions. Am I correct that with the termination of withholding on interest payments we no longer need to be concerned about the term of a loan? Loans whose term is in excess of five years are not subject to withholding. Loans less than five years are subject to withholding. Is that situation no longer relevant as everything will no longer be subject to withholding?
Mr. Ernewein: Yes, that is correct. The Canada-U.S. treaty change will eliminate withholding tax on arm's-length interest payments made to the U.S., and the complementary budget measure will, as of January 1, 2008, make that change applicable worldwide.
Senator Goldstein: Thank you for the clarification.
Tax treaty negotiation is a journey, not a destination; we never really arrive there. We continue to improve, but we have had five protocols. This is the fifth since 1942. Are you continuing to negotiate with your colleagues in the States on a technical level before governmental parliamentary intervention?
Are you negotiating with your colleagues during this period, and do those negotiations involve discussions of withholding on dividends? If you cannot answer the question because of secrecy provisions, we will accept that.
Mr. Ernewein: The answer is no, we are not negotiating with the U.S. right now. We like to take a couple of months between our ongoing rounds of discussions. We make no apologies for that. The U.S. is our most important trading partner and the country with which Canada is most closely integrated economically. It is not surprising that we have regular discussions to update the treaty but, no, we are not in discussions at the moment.
However, you do prompt me to mention an important point. The U.S. has a practice of preparing a technical explanation — a set of explanatory notes, in effect — for all its income tax treaties. That explanation is prepared and presented to the U.S. Senate Committee on Foreign Relations for their help. With the 1980 treaty and the subsequent protocols to that treaty, the Department of Finance has followed a practice of seeing, commenting on and subscribing to the technical explanation offered. The U.S. is in the course of preparing that technical explanation now for this treaty. They are planning to share it with us. We will look at that document and provide comments. Assuming we can repeat or continue the practice of expressing formal subscription to that interpretive document, it helps as an aide- mémoire. We will work with the U.S. on that in a month or so.
Senator Goldstein: That would take some time. Would ratification occur only when that study is complete and reduced to writing?
Mr. Ernewein: That point is a good one, and why we want it to take place as soon as possible. I mention a month, and we know where that takes us. If they have an opportunity to send it to the U.S. Senate Committee on Foreign Relations and were able to gear up and get that technical explanation ready in a short period of time, we would do everything to be able to subscribe to the contents.
Senator Goldstein: Reduction or preferably elimination of double taxation is a principle encouraging significant trade in commerce. I assume that everyone on this side of the table, and probably everyone on that side of the table, has a particular anxiety to complete this work as quickly as possible and to continue the effort to clarify other matters, such as dividend withholdings.
Mr. Menzies: Absolutely: I am sure most people are well aware of the old statement that there is no such thing as a good tax; there are lots of necessary taxes. Your comment is accurate. In this protocol, we are attempting to provide the fairest taxes we can provide. That is what we owe Canadians. As many of us have commented, we need to stimulate business. Business is what drives this economy. I go back to my opening comment in response to your statement, Senator Goldstein. I knew that you folks would understand exactly the reasons why we are doing this and the immediacy behind completing it as quickly as we can.
Senator Goldstein: Thank you.
The Chair: For what it is worth,I was contemplating sending the transcript of today's hearing to Ambassador Michael Wilson.
Mr. Menzies: I was kind and encouraging to him, was I not?
The Chair: Well, we might give him an extra stroke next time we play golf.
Mr. Menzies, you referred in your opening statement to the following:
Like our other tax treaties, it is modeled on the model tax convention of the Organisation for Economic Co- operation and Development, which is generally accepted by most countries around the world.
There are two weasel words there, the word ``generally'' and the words ``by most countries.'' For the record, I would like to know which ones do not follow that model convention.
Mr. Menzies: I am afraid I do not have that answer.
Senator Harb: They are listed.
The Chair: They are listed there?
Senator Harb: Yes.
The Chair: In the bill itself?
Senator Harb: No, it is in a separate document; Italy, for sure.
The Chair: In the same context, Mr. Ernewein, perhaps you can help us. We had some discussion about the arbitration clause. To what extent are the arbitration provisions in the OECD model convention, and are they compulsory or voluntary.
Mr. Ernewein: Thank you for both questions. As a point of clarification, what is in the briefing material is a list of Canada's tax treaties and not those countries that do or do not follow the model. The precise answer to your question as to which countries absolutely follow the model is zero. I am sure that every country has some deviation in some respect, Canada included. What Canada and other countries strive to do in their domestic treaty policy is to follow the language they use as closely as possible to the OECD model. They may accept or reject a particular proposition in the OECD model, such as the exemption for royalties that the model proposes. Canada does not, but we use the same language. We put a 10 per cent withholding tax rate on royalties. In some royalties, the model proposes zero. We use the same language so the interpretive issues are minimized.
Essentially, two models are used in negotiations or starting points for negotiations: the OECD model and a United Nations model. The OECD model I think has greater usage, but there are variations; there is no question.
In relation to your question about arbitration, the OECD has a model arbitration rule. I do not think this model follows it exactly. I have confessed to confusing on the spot the European Union model arbitration provision and the OECD model arbitration provision. If I have this wrong, I apologize. One of them has a different style or procedure for arbitration than we propose. In the Canada-U.S. treaty we have so-called baseball arbitration, where two numbers are put forward and the arbitrator or arbitration panel picks between the two. I believe that one or both of the OECD and EU models propose that the arbitrator come to a decision without having to pick only between two numbers.
The Chair: In the years I have been a member of this committee, we have dealt with international conventions for the avoidance of double taxation on a number of occasions. It has been discussed whether Canada will set one up with Colombia. As you know, Mr. Menzies, it was announced that we will move now in that direction. Is Colombia one of those countries that would accept the OECD model for a basis of negotiations?
Mr. Ernewein: First, we are engaged in discussions with Colombia. A meeting was held with them two or three weeks ago, a round of negotiations.
As far as Colombia's subscription to the OECD model, I cannot answer that question because, frankly, I think it is premature. Colombia does not have many treaties yet; I think they are still finding their way in terms of their treaty policy. They seem genuinely interested in pursuing discussions but they do not have a body of treaties out there. Even if I were able to reveal our discussions, I would not be able to detect, necessarily, from where things are at, exactly their position and how to characterize it yet.
The Chair: You might keep that in mind for future hearings. I will not ask you to give me the information on the delay.
One key element, as I understand it, in these international conventions is relief for international businesses and, in particular, the shipping business. In the earliest tax conventions, there was relief for profits derived from the business of operating ships — I think those are the words. We have a fair shipping trade with Colombia in newsprint, and so on. There was interest among Canadian exporters in newsprint and related products business that we would have such a convention. That is the only reason for my question, but it is important.
Mr. Menzies: The Department of Finance is deeply involved in that discussion if they are not the lead on those negotiations.
The Chair: We will have a discussion?
Mr. Menzies: Yes, absolutely.
The Chair: Senators, do you have any further questions or require any further clarification?
Senator Ringuette: I will await the clarification that they agreed to provide to you, Mr. Chair.
The Chair: Yes. In that regard, first, I would like to thank you, Mr. Menzies, and the two gentlemen from Department of Finance Canada who provided helpful interventions. As my fellow chair said, I think I can say that you are liberal. Thank you again for your participation this morning.
I would like to senators to remain, and anyone else is free to remain. I am in your hands, senators, whether to proceed to clause-by-clause consideration at this time. We have a few minutes; the bill is urgent, as we know, for many reasons. We can defer to that process next week or do it now. If we do, I will report the bill back this afternoon.
Senator Goldstein: It is an important message to send to our American colleagues that we have been efficient in our consideration and passage of this bill. I prefer that we proceed to clause-by-clause study immediately.
Senator Tkachuk: Very well, go ahead; proceed.
The Chair: Senator Ringuette, that would not prevent me from getting that information into your hands. I hope you note, Mr. Ernewein, that you will send that information to me.
Mr. Ernewein: We will.
The Chair: Is it agreed to proceed to clause-by-clause consideration of Bill S-2, An Act to amend the Canada-United States Tax Convention Act, 1984?
Hon. Senators: Agreed.
The Chair: Carried.
Shall the title stand postponed?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clause 1 carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clause 2 carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clause 3 carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clause 4 carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall clause 5 carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall Schedule 1 carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall Schedule 2 carry?
Hon. Senators: Agreed.
The Chair: Shall the title carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall the bill carry?
Hon. Senators: Agreed.
The Chair: Carried.
Shall I report Bill S-2 without amendment to the Senate?
Hon. Senators: Agreed.
The Chair: Carried.
Thank you very much. This committee as presently constituted has completed its first bill.
The committee adjourned.