Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 15 - Evidence
OTTAWA, Wednesday, December 9, 2009
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-8, An Act to implement conventions and protocols concluded between Canada and Columbia, Greece and Turkey for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, met this day at 5:25 p.m. to give consideration to the bill.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: This afternoon the Standing Senate Committee on Banking, Trade and Commerce is examining Bill S-8, An Act to implement conventions and protocols concluded between Canada and Colombia, Greece and Turkey for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The bill was introduced by the Leader of the Government in the Senate on November 18.
We are pleased to be joined by officials from the Department of Finance Canada. We welcome the department's views about the fiscal, commercial and foreign policy implications of the proposed legislation. I welcome Mr. Gérard Lalonde, Director, Tax Legislation Division; Mr. Alain Castonguay, Senior Chief, Tax Treaties; Mr. Tim Wach, Director, Legislative Development and Chief Legislative Counsel; and Mr. Parry Athenaios, Expert Adviser, Tax Treaties.
Mr. Lalonde, please proceed.
Gérard Lalonde, Director, Tax Legislation Division, Department of Finance Canada: We spoke briefly before the meeting started and, while we may not have met before, I have been an old hand with this particular committee. I think a number of you may recognize me from previous committee meetings.
We are here today to talk about Bill S-8. Canada has one of the most extensive networks of tax treaties of all countries in the world; we have 87 of them. We do not occupy the top space, but we are very close. With these proposed treaties, we will climb up to 90 international tax treaties. Two noteworthy ones in this bill, Greece and Turkey, are the last two countries of the Organisation for Economic Co-operation and Development, OECD, with which we have not had tax treaties to date. We are anxious to get these treaties passed. These treaties are modeled on the OECD model, which Canada generally follows, with small changes to reflect peculiarities in the Canadian tax system. With some 3,500 such treaties, the rest of the world tends to follow that model as well.
I understand that the committee would like to proceed as quickly as possible, so, if I may, I suggest that rather than proceed with extensive opening remarks, we open to questions and respond as best we can.
The Chair: Is there anything unusual about these particular treaties? I gather from your statement that there is not, but if so, could you outline it? Is there anything different about how these treaties will work compared to the other 87?
Mr. Lalonde: Mr. Castonguay is not only our senior chief of tax treaties but also our chief tax treaties negotiator, and he was in at the ground floor. I will turn to him to respond to those questions.
Alain Castonguay, Senior Chief, Tax Treaties, Department of Finance Canada: As Mr. Lalonde said, the treaties follow the OECD model. No two treaties are similar; they all have differences. However, by and large, they follow the OECD model. Where they deviate from that, they adopt features that are found in the UN model, which itself follows the OECD model, with a particular bias toward capital-importing countries. I would say there is nothing special about these treaties.
Senator Ringuette: What is the estimated tax evasion between Canada and the three countries we are looking at?
Mr. Castonguay: An important feature of tax treaties, other than relief of double taxation, is to prevent fiscal evasion. All of our treaties include an exchange of information article that allows the Canada Revenue Agency to go to the tax authority in the other country and obtain information relevant to the collection of taxes. When the CRA has grounds to believe that taxes due in Canada are not paid, it can ask the tax authority of the other country to seek and obtain information for the purpose of applying our tax laws.
In this respect, these treaties are similar to all our treaties. The government made it clear in Budget 2007 that all our new treaties will follow the state-of-the-art OECD article on that score, and these do.
Senator Ringuette: What is the estimated tax evasion between Canada and these three countries?
Mr. Lalonde: Tax evasion is a difficult subject. As Mr. Castonguay pointed out, these treaties are designed to counter tax evasion through the exchange of tax information. By definition, we are not able to discover the exact number or amount of tax evasion that exists in those countries. If we knew the number and knew who was evading taxes in those countries, they would not be successful at doing it because they would be reassessed, and then we would have the figures at hand.
We do not yet have a tax treaty with these countries. We do not yet have the exchange of tax information provisions. To the extent that there may have been attempts at tax evasion using accounts in these countries, these treaties will help us get at that.
Senator Ringuette: I will ask my question in the reverse, then. I can understand that the Canada Revenue Agency has not yet been able to access information from these countries. However, you stated that Canada has 87 treaties. Through these 87 treaties, what tax evasion was found and what measures have we have taken with regard to that in the last three years?
Mr. Lalonde: As you probably know, the responsibility of the Department of Finance is to develop tax policy and legislation. As you pointed out, it is the Canada Revenue Agency that administers the tax system. From time to time, CRA will publish reports of particular cases of tax evasion, but I do not have its numbers with me today on the other 87 treaties, as we are not talking about them today.
Senator Ringuette: I appreciate that, Mr. Lalonde, but could you ask your colleagues at the agency for that information? If parliamentarians are asked to agree to treaties that have a certain purpose, then certainly the Canada Revenue Agency should have a follow-up process to identify tax evasion in the 87 other countries with which we have those treaties.
Please provide this committee with your contact at the agency so that we know whether there is departmental follow-up on tax evasion that makes it worth signing these treaties. If there is, it will be worthwhile for governments and parliamentarians to seek further treaties.
Mr. Lalonde: My understanding is that there is follow-up. The Canada Revenue Agency is a member of an organization called the Joint International Tax Shelter Information Centre, JITSIC. Through that organization, countries specifically look at new and emerging tax avoidance and tax evasion transactions. The Canada Revenue Agency does that. It has been given funds to pursue international tax avoidance and tax evasion.
I can pass your question on to the agency. Given that I am from the Department of Finance and not from the Canada Revenue Agency, I cannot commit the Canada Revenue Agency to answer, but we will pass on the question.
Senator Harb: I had two questions, but the chair has asked one, and you gave a good and proper answer to it.
My second question deals with the investment protection agreement. When our ambassadors and trade commissioners go abroad, they always try to pedal two things: this, which is excellent; and the investment protection agreement that we signed with many countries around the world.
Is that managed by your department?
Mr. Lalonde: Are you speaking of a trade agreement or a foreign investment promotion and protection agreement, FIPA?
Senator Harb: Yes.
Mr. Castonguay: Negotiations for FIPAs is the responsibility of the Department of International Trade.
Senator Harb: Do you coordinate with them at all?
Mr. Castonguay: We are involved because there is one aspect that deals with taxation, but they use criteria for the merits of negotiation that are similar to ours — volume of trade, investment and so on. There are probably more tax treaties than FIPAs right now, but they tend to go hand in hand. In most cases, when we have a treaty with a country there is also a FIPA.
Senator Harb: Is there any merit in ensuring that when one is negotiated the other is also talked about, in order to sell two products at the same time and to manage human resources?
This is excellent, because it is important for business people who go to foreign countries to know that we have a tax treaty as well as an investment protection agreement with that country.
Mr. Castonguay: In the case of Colombia, as you may have noticed, the negotiations for the free trade agreement and the tax treaty were launched and signed at the same time. Obviously in this case they go hand in hand.
Senator Oliver: The purpose of these treaties is to avoid double taxation, so that if for example I had a business in Turkey and paid the tax there, I would not have to pay it again in Canada. That is a commendable reason to have it.
However, it also deals with withholding tax rates. I would have thought the rates would be the same, but in this bill the rate for Turkey is a lot higher. What is the reason for the differential in rates?
Mr. Castonguay: In order to conclude a tax treaty, it has to be acceptable to both sides. Obviously, Turkey has a different withholding tax policy than we do. With regard to Canada and most OECD countries, Turkey regards itself as the capital importer. Its interest is to maintain withholding tax higher than we would otherwise want. We like 5 per cent on direct dividend and 10 per cent on interest. We were not able to convince Turkey of that. Its withholding tax rates with other OECD countries are comparable to what we were able to achieve in our treaty.
Senator Oliver: How about Greece?
Mr. Castonguay: Greece is a standard at 5 per cent, 15 per cent for dividend — direct and portfolio — and 10 per cent for royalty and interest. It follows our own model.
Senator Oliver: Of all the tax treaties you have, is Turkey the lone standout?
Mr. Castonguay: There are a few other countries that are older. I would not be able to point out how many there are, but I am sure there are a few where the rates are comparable. They are probably older and ripe for renegotiation at some point.
Senator Oliver: You said these are the last two OECD countries that you are doing. Even within the OECD, withholding rates are not the same.
Mr. Castonguay: No, they are not the same. Different countries have different interests, but they tend to come down.
Mr. Lalonde: An important feature here is that notwithstanding the withholding tax rate is a bit higher, it is consistent with what other countries have negotiated.
Senator Oliver: It is not unique to Canada then.
Mr. Lalonde: That is right. The important part there is that it does not put Canadian interests at a disadvantage, because we are in the same ballpark as the rest of the countries.
Senator Gerstein: Are there any proposed provisions in Bill S-8 that are unique or different from the usual ones that you conclude with other nations? Is there anything you wish to draw to our attention?
Mr. Castonguay: As I said earlier, these treaties mostly follow our policy. In a few cases, they contain things that we would not necessarily ask for but the other country insists on. For example, there is a provision that provides for the taxation of income derived from services in the other country absent a permanent establishment. If a person is providing services in a country for more than six months, then taxation can occur at source. That is not something we usually seek in our treaties, but it is in the UN model and it is something that capital-importing countries tend to request, and we have them in a number of treaties.
Senator Gerstein: It is not unique to this treaty, then?
Mr. Castonguay: No.
Senator Frum: This requires Canada Revenue Agency to share information with the revenue agencies of other countries. What mechanisms are in place to ensure there is privacy and security of the trading of that information?
Mr. Castonguay: The treaty itself provides the condition under which information can be exchanged, and there are strict confidentiality provisions as to what can and cannot be done with the information. I would say they are broadly in line with our own domestic law. In other words, if you ask for information to enforce your tax laws, that is the extent to which it can be used. To enforce your tax law you can go to court and so on, but it has to be overall for the purpose of enforcing your own tax laws and nothing more than that.
Senator Frum: In the event something did happen and there was a breach of privacy or security in one of the jurisdictions abroad, would there be any way of dealing with that?
Mr. Castonguay: Obviously, we would express displeasure with that. I am not sure what else could be done. We would have to see the condition under which it occurred. When we enter into a treaty we expect the other country to abide by all the conditions of the treaty. I am not sure I can expand more than that. We would obviously express our displeasure, but there is no legal mechanism in the treaty in this case. It would be a case of making sure it does not happen again.
Senator Greene: We have 87 tax treaties right now, and a few of those countries are Third World. Why did it take as long as it has to develop treaties with Greece, Turkey and Colombia?
Mr. Castonguay: I can speak from my own experience. I joined the treaty group in 2006, and in both cases there were ongoing negotiations. I understand that in the case of Greece, negotiations started in the early 1980s; in the case of Turkey, it was in the late 1980s. It has been difficult for all kinds of reasons. I do not have the corporate memory on that, other than that it has been difficult to reach agreement on all aspects. At some point we did compromise and reach an agreement.
Mr. Lalonde: Assuming your question goes broadly beyond these three countries to generally why some countries have taken a long time, Colombia might be an example of a treaty that has taken on new interest recently. What I am going to say next does not apply particularly to Colombia. However, for our treaty network in general, there have been a number of countries that were not anxious to enter into the criterion for a treaty, which is the exchange of tax information.
Recently, with a strong push on the part of the G20 and the OECD, a number of countries that previously were adamant against the exchange of tax information are now joining the international standard to exchange information for tax purposes. Many countries that would not otherwise have been candidates for tax treaties or tax information exchange agreements with Canada are now coming forward and seeking negotiations with us.
The Chair: Article 29 deals with termination of a treaty, I believe. Mr. Lalonde, is there any automatic provision for review after a certain period of time in these treaties, or does one party simply have to say, ``We do not think this is working well; we would like to discuss the operation of this treaty''? Is that how it works if there is to be any amendment going forward?
Mr. Lalonde: It is pretty well on an ad hoc basis. We do review our treaties constantly. Beyond that, I will turn to our chief treaty negotiator to fill in the blanks.
Mr. Castonguay: There is no automatic procedure, but at some point, every 20 or 25 years, you look at a treaty, and obviously there is always development in your own tax policy, in the tax policy of the other treaty partner and in the treaty policy of the other treaty partner. Partners that used to be developing countries 25 years ago are now industrialized countries, and their paradigm has changed. Their treaty policy has changed. Sometimes they will approach us to say they want to renegotiate, and in other cases we approach other countries to say we are in line for negotiation. It is pretty much ad hoc, but one of our jobs is to monitor our treaties to make sure they are always up to date.
The Chair: Finally, along the line of Senator Ringuette's question, I realize it is difficult to be precise, but do you or does any other department do an analysis of a treaty that has been in existence with country X for Y years to monitor whether there has been increased economic activity, whether there has been increased investment, and whether it has in effect done its job? Is any of that carried out? If so, who would do it?
Mr. Castonguay: No, we do not do any of that. We enter into treaties because there are compelling reasons for doing so, with representation from business and from Foreign Affairs saying that much investment is being prevented because we do not have a treaty. We need a treaty.
The Chair: The compelling reasons as I understand them are to avoid double taxation and to favour investment.
Mr. Castonguay: That is right.
The Chair: Senator Ringuette asked, as I understood her question, whether these treaties succeeded in avoiding tax evasion. It may be impossible to judge. You did not know that I was about to evade tax. You put the treaty in effect so I did not do it, so you will never be able to know that. However, it might be possible to see what increased activity has been generated between our country and another country as a result of a treaty.
Mr. Lalonde: In large part, we enter into negotiations for tax treaties with countries in some cases because they approach us directly, but we always do so on the advice and with the cooperation of the Department of Foreign Affairs and International Trade. That department is consistent with the international trade part; it is the one that keeps its finger on, as you say, increases in investment or trade with any particular country.
Associated with increased trade and increased investment, you will also have Canadian companies with increased interests in those countries.
When a treaty is old and perhaps out of date, pressure on the treaty because of the increased trade generates a need for renegotiation, and that need will manifest itself in representations from the Canadian businesses operating in that country and from the Department of Foreign Affairs and International Trade. The department will come to us and say it is important to renegotiate a treaty with a particular country.
Mr. Castonguay was accurate in saying we do not do that here in our division. We are strictly on the legislative side looking at a treaty and in the treaty negotiation process and are involved in the narrow context of actually negotiating the treaty. Yes, treaties are re-examined from time to time. Treaty countries are re-examined from time to time to see whether they are ripe for renegotiation. It is not always — and in fact rarely — the Department of Finance that is the push for that, unless we see something in the tax treaty that is causing us a problem.
The Chair: I think I speak for my colleagues when I say that if any of your colleagues could provide some of the information that Senator Ringuette has asked for, and I have alluded to, it would be appreciated. If it is not possible or not done, we understand, I think.
Are there any other questions of our witnesses? If not, are you agreeable to proceeding to clause-by-clause consideration of the bill? May we excuse the witnesses?
Hon. Senators: Agreed.
The Chair: Thank you all very much, indeed. We appreciate your attendance.
While the witnesses are withdrawing, I will begin, colleagues, if you are agreeable.
Is it agreed that the committee proceed to clause-by-clause consideration of Bill S-8, An Act to implement conventions and protocols concluded between Canada and Colombia, Greece and Turkey for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income?
Hon. Senators: Agreed.
The Chair: I think you have already given your agreement, but I thought I would read it.
Shall the title stand postponed?
Hon. Senators: Agreed.
The Chair: Shall the short title, clause 1, stand postponed?
Hon. Senators: Agreed.
The Chair: Shall clause 2 carry?
Hon. Senators: Agreed.
The Chair: Shall clause 3 carry?
Hon. Senators: Agreed.
The Chair: Shall clause 4 carry?
Hon. Senators: Agreed.
The Chair: Shall Schedule 1 carry?
Hon. Senators: Agreed.
The Chair: Shall Schedule 2 carry?
Hon. Senators: Agreed.
The Chair: Shall Schedule 3 carry?
Hon. Senators: Agreed.
The Chair: Shall the title carry?
Hon. Senators: Agreed.
The Chair: Shall the short title carry?
Hon. Senators: Agreed.
The Chair: Shall the bill carry?
Hon. Senators: Agreed.
The Chair: Is it agreed that I report this bill to the Senate?
Hon. Senators: Agreed.
The Chair: Without amendment.
Hon. Senators: Agreed.
The Chair: Thank you, colleagues. I appreciate your attention to duty and the efficacy with which you have discharged it.
Senator Oliver: We look forward to your third-reading speech.
The Chair: Before we terminate the meeting, just for your information, you will have received a notice for our meeting tomorrow at our regular time slot. Tomorrow as well there is a possibility that we will be charged with the responsibility of dealing with Bill C-62, the HST bill, which is to be received this evening in the Senate. I do not know whether it will go to this committee or to the Standing Senate Committee on National Finance. Those who make these weighty decisions have not yet come to a decision, but we will be informed, no doubt, in due course.
If we have to attend to Bill C-62, we will have to do it in a special sitting of this committee, as permitted by the Senate, sometime during the day tomorrow. Is that correct?
Line Gravel, Clerk of the Committee: Yes, after it has been referred to the committee.
The Chair: After and if it has been referred to us, we will deal with that.
I would like the input of everyone, but I propose that tomorrow in our regular slot we discuss what we might tackle when we come back after the Christmas break in January. There are a few specific items, which I can mention tomorrow for your consideration. There is also a larger study that might deal with subjects such as pensions, where we will have more information based upon the finance ministers' meeting in Whitehorse and upon the Menzies report, which is expected this month, I believe, or early in January.
In addition, we might wish to consider a broader subject with respect to the international financial framework. As colleagues will recall, the G20 is to report on that at the end of January, following up on the Pittsburgh meeting. We will have some concrete information then and it might give us some idea of how best to attack it with respect to the proposed G20 international framework and how that impacts on Canada. Right now it is a bit vague as to what framework will be proposed, but we should have more details when we get back.
Senator Ringuette: What is happening with Bill S-232, which we started?
The Chair: That is one of the specifics I was going to mention tomorrow that we have to deal with.
Senator Ringuette: We have not been sitting. Hopefully, this will be the issue we deal with when we come back.
The Chair: We are not in camera.
Senator Harb: Do you want to go in camera?
The Chair: Perhaps it would be better. Let us terminate the meeting. We can discuss those details in camera.
(The committee continued in camera.)