Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 11 - Evidence - December 2, 2016
OTTAWA, Friday, December 2, 2016
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-4, An Act to implement a Convention and an Arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and to amend an Act in respect of a similar Agreement, met this day at 8:59 a.m. to give consideration to the bill.
Senator Joseph Day (Deputy Chair) in the chair.
[English]
The Deputy Chair: Good morning. My name is Joseph Day and I am the deputy chair of this committee, filling in for Senator David Tkachuk, from Saskatchewan, who regretfully is unable to be here today.
Today we are here to examine Bill S-4, An Act to implement a Convention and an Arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and to amend an Act in respect of a similar Agreement already in existence.
Although in practice most government bills are introduced in the House of Commons, government bills may be introduced in the Senate, and this is one of those exceptions. The bill was read a first time in the Senate by the Government Representative in the Senate on November 1, 2016.
Senators, we have received the clause-by-clause briefing binder supplied by the department, as well as a copy of the bill, the legislative summary and a briefing note from analysts at the Library of Parliament. If you are missing any of these materials today, we have some extra copies here for you. Please signal the clerk, which some of you have already done, and make sure that you have all the proper documents.
It gives me great pleasure to welcome the Honourable François-Philippe Champagne, Parliamentary Secretary to the Minister of Finance.
[Translation]
Mr. Champagne was elected Member of Parliament for Saint-Maurice-Champlain on October 19, 2015. He was appointed Parliamentary Secretary to the Minister of Finance on December 3, 2015. Thank you for joining us.
[English]
Mr. Champagne, you can introduce your colleagues who have accompanied you, and then please proceed with your presentation, and we'll follow that with a question-and-answer period.
Hon. François-Philippe Champagne, Parliamentary Secretary to the Minister of Finance: Thank you, chair, honourable senators.
[Translation]
I'm joined this morning by Brian Ernewein, General Director, Tax Policy Branch; and Stephanie Smith, Senior Chief, Tax Legislation Division, Tax Policy Branch. They will help me answer your questions. I will introduce the topic on the agenda in a short statement. I will then be happy to answer the senators' questions.
Thank you for giving me the opportunity this morning to address the Standing Senate Committee on Banking, Trade and Commerce and to discuss Bill S-4 with you. As you know, Canada relies on one of the most extensive tax convention networks in the world, with 92 treaties currently in force. The tax convention network that Canada has established with foreign governments must be constantly updated and modernized. By modernizing our tax conventions and expanding our network, we'll facilitate international trade and encourage our treaty partners to invest in Canada. This will help our economy and businesses and will obviously strengthen the country's middle class.
As you know, there has never been a better time to invest in Canada. Our country stands in a unique place in the world as a result of our capacity and willingness to invest in people and our openness to trade and investments that will grow our economy in a way that benefits all Canadians. We'll also support Canadian companies with operations located abroad.
[English]
Here is what Bill S-4 proposes to do: The first part of the bill is a convention between the Government of Canada and the State of Israel for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.
The second portion is an arrangement between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.
The bill would also amend the Canada-Hong Kong Tax Agreement Act of 2013 in order to add to it, for greater certainty, an interpretation provision.
As context, there is currently no double taxation arrangement between Canada and Taiwan. Taiwan is a significant trading partner for Canada, ranking as Canada's fifth-largest trading partner in the Asia-Pacific region and twelfth on a worldwide basis in 2015.
In 2015, Canadian exports to Taiwan were valued at $1.46 billion, while imports stood at $5.46 billion, for a total of more than $6.91 billion in trade between our two nations. I don't need to stress any more than that the importance of doing these types of agreements with trading partners such as Taiwan.
In keeping with Canada's one-China policy, the double taxation arrangement with Taiwan has been concluded as an arrangement between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada, as opposed to an agreement between sovereign countries.
Once implemented, this bill would constitute the functional equivalent of a tax treaty.
[Translation]
In addition, Bill S-4 supports the implementation of a revised double taxation convention with the State of Israel. The revised convention will replace the current tax treaty, which was established in 1975. The revised double taxation convention was updated according to Canada's current tax treaty policy. As Canada's economy is increasingly integrated with the global economy, the elimination of fiscal barriers to trade and international investment has become more important. As I mentioned earlier, the double taxation convention and agreement will facilitate cross-border trade, investment and other activities between Canada and each of the signatory jurisdictions. Our tax treaties are all based on two general objectives.
The first objective is to eliminate the tax barriers between the two governments to encourage trade and bilateral investment. The second objective is to prevent tax avoidance and evasion.
Let me take a few minutes to elaborate on each of the objectives. First, the elimination of barriers to trade and investment is paramount in today's global environment. Investors, traders and others with international dealings want clear information on the tax implications of their activities in Canada and abroad. In addition, Canadians who have business interests or investments abroad want to be sure they'll receive fair and consistent tax treatment. One of the objectives of Bill S-4 is to remove the uncertainty about the tax situation of business people, workers and foreign investors.
[English]
Second, nobody wants to have their income taxed twice, but without a double taxation convention or arrangement, such as those contained in Bill S-4, there is a risk that this could happen. Bill S-4 will also reduce double taxation and encourage investment by reducing withholding tax. It would provide for a maximum withholding tax rate of 15 per cent in the case of the State of Israel and the jurisdiction of Taiwan on portfolio dividends paid to non-residents. For dividends paid by subsidiaries to their parent companies, the maximum withholding tax rate is reduced to 5 per cent in the case of the State of Israel and 10 per cent in the case of the jurisdiction of Taiwan.
This bill would also cap the maximum withholding tax rate on interest and royalties at 10 per cent and on periodic pension payments at 15 per cent.
A key element of Canadian tax treaties is their provisions authorizing the exchange of information relevant to the administration of domestic tax laws, helping to combat tax evasion. Bill S-4 would allow Canadian tax authorities to do just that.
Under the terms provided in the double tax convention and arrangement, the bill would take effect the first day of January the year following the one when notices of ratification have been exchanged. Thus, it is important that this bill be enacted before the end of this year, Mr. Chair, so that Canada would be able to send its notices of ratification regarding the convention and the arrangement. This would mean that the double taxation convention and arrangement would take effect starting January 1, 2017. Otherwise, as you would understand, the next opportunity for the convention and the arrangement to go into effect would be January 1, 2018.
I invite you to support this bill so that we can facilitate more foreign investment in Canada, ease international trade, and strengthen middle-class families across the country.
Thank you, Mr. Chair and honourable senators. It would be a pleasure to take your questions.
The Deputy Chair: Thank you, Mr. Champagne. You indicated that the arrangement with Hong Kong is being amended and updated, but is it not also the case that we already have a double taxation agreement with Israel, so this is an update as well?
Mr. Champagne: In that sense. What's special between Canada and Hong Kong is with respect to interpretation, as the arrangement with Taiwan is referred to as an arrangement. There are some specific provisions. We wanted to make sure that on the basis of interpretation people do not infer anything different than what we mean. That's why we're clarifying that the Canada-Hong Kong arrangement would have the same effect as an agreement between sovereign states.
The Deputy Chair: It would be helpful for honourable senators to know that both Israel and Hong Kong are updates. Did something happen or has a practice developed that you're trying to avoid by bringing about these updates?
Mr. Champagne: I may turn to Mr. Ernewein, if he wants to provide additional background as to why exactly we did that, beyond the interpretation provisions.
Brian Ernewein, General Director, Tax Policy Branch, Department of Finance Canada: Certainly. The two agreements or arrangements before you are Israel and Taiwan. Israel is indeed a replacement of the 1975 treaty. It's a full new treaty, and so we presented as such.
We did not have any arrangement with Taiwan prior to this one, so it's brand new in that respect. Because of the special status of Taiwan and its characterization as an arrangement as opposed to an agreement or a convention between sovereign states, there's an interpretation rule that seeks to make sure that our rules and domestic law that apply to tax treaties apply equally to the arrangement with Taiwan.
Having done that, there is a question as to whether that created any sort of inference with respect to our agreement with Hong Kong, given its relationship to China as well. Having decided that it was important to have precision with respect to Taiwan, we've added similar precision with respect to Hong Kong and the existing agreement.
Otherwise, the Hong Kong agreement is not being changed at all by what's before you today.
The Deputy Chair: Thank you. There are questions arising from those questions.
[Translation]
Senator Massicotte: Thank you for being here this morning. Mr. Chair pointed out that bills rarely originate directly in the Senate. It's a personal observation, but I think that when bills are very technical or complicated, they're introduced in the Senate first. I don't understand why.
That said, with regard to the 5 per cent retention rate on dividends, how does the rate compare to the Canadian rate on the same type of revenue?
Mr. Champagne: Maybe Mr. Ernewein can make the comparison.
[English]
Mr. Ernewein: Was the question how we compare with other treaties?
Senator Massicotte: No. In other words, the retention you got on dividends to Israeli corporations is 5 per cent. How does that tax rate compare to the rate that a Canadian corporation would pay on that same revenue?
Mr. Ernewein: Sorry, let me ask one more question, if I may: Do you mean the rate of tax that would be paid in Canada on that same revenue?
Senator Massicotte: Yes.
Mr. Ernewein: In general terms, no additional Canadian tax would be paid on that revenue. Briefly, we essentially have a distinction in our law between dividends coming from foreign sources that are from passive investments and dividends coming from foreign sources that are from business income. The passive income is generally taxed either immediately, as it's earned — we don't wait for it to come home before we tax Canadians who own or control the foreign entity that earns it — or it may be taxed when it's remitted, if we don't have a controlling interest. But otherwise, if it's business income, there's no additional tax at all.
Senator Massicotte: Let's do apples and apples. A Canadian corporation gets dividends from an investment in Great-West Life or Power Corp, but the same income is taxed by an Israeli corporation that invests in shares of Power Corp. The Israeli company pays a 5 per cent retention and may get credit in their own country. That's secondary. How much does the Canadian corporation pay — what's the tax rate on the passive income dividends from Power Corp?
Mr. Ernewein: Within Canada, dividends paid between corporations are not taxed at all. If we tax that, we'd have cascading tax. There's actually an inter-corporate dividend exemption, so no tax at all. The cross-border tax is really kind of the shareholder-level tax, for which we have a 5 per cent.
Senator Massicotte: How about individuals? An individual got that dividend. How much tax would he pay?
Mr. Ernewein: An individual in Canada as a resident of Canada earning dividends from a Canadian company would pay something approximating a 30 per cent rate of tax.
Senator Massicotte: Including provincial tax.
Mr. Ernewein: Yes. The individual under the treaty would be subject to a maximum 15 per cent withholding tax rate by Canada.
Senator Massicotte: If it's a citizen of Israel, how much would he pay? One who is not a Canadian citizen.
Mr. Ernewein: An Israeli resident?
Senator Massicotte: A resident in his own country, not here.
Mr. Ernewein: Receiving dividends from Power Corp? It would be 15 per cent maximum rate of withholding tax under the treaty, and we apply a 15 per cent withholding tax under our domestic law.
Senator Massicotte: What's the rationale for the foreigner paying less tax than a Canadian on the same income?
Mr. Ernewein: The tax rates vary around the world. We try to come up with a model provision that allows us to have a common tax rate that applies everywhere. It's the source country's taxation only that's being applied in this case. That does not speak to what's being taxed in the other jurisdiction, so it potentially leaves room for the other country to tax over and above the 15 per cent, as you've already noted, giving credit for our tax. Similarly, when dividends are received by a Canadian individual from foreign sources from a Canadian treaty partner country, the other country could tax only to a maximum of 15 per cent. We would tax over and above that as well.
Senator Massicotte: That goes to my next question. What it does confirm, though, is that if I'm a Canadian and therefore I should be encouraged to move to the Bahamas, which has no income tax, my total tax for that dividend is 15 per cent, if I reside there. Meanwhile, if I live here, I pay a third.
[Translation]
You say there are two objectives. The first is the efficiency and competitiveness of the market. I agree, because it's important to avoid double taxation.
There are problems around the world with tax avoidance, which isn't necessarily illegal. Many corporations have invested billions abroad to pay a lower tax rate, perhaps by treaty shopping. You said the treaty, which meets the global standard, will help minimize this impact. Can you provide more details? What will be the results? Will we share more information with all the people who ask for it? How will we avoid this whole aspect? I think the OECD announced this week that about a hundred countries plan to sign a new agreement that will minimize this impact. Can we have more information on how to solve the problem?
Mr. Champagne: As you said, there are two objectives. One is to promote trade, and whether the trade is with Israel, Taiwan or Hong Kong, we all agree that it's the right thing to do. In addition, with regard to the modernization of our treaties, our tax treaties now incorporate the OECD's model provisions. These provisions facilitate the exchange of information between the respective states to clarify the things you mentioned.
We're modernizing our treaties to ensure that we align perfectly with the OECD and its new model provisions. Our treaties use the OECD's model provision with regard to the exchange of information. For example, in the case of a non-resident, from one state to another, on a reciprocal basis, the Canada Revenue Agency could obtain the information required from the foreign authorities to prevent tax avoidance and evasion.
In the last budget, we invested $444 million in the Canada Revenue Agency for three reasons. Among other things, we wanted to establish the systems, teams and technology to help us track the development of these cases, which change quickly. There's also a working group that focuses on the different issues with various countries, to see how we could do more at a faster rate to ensure we're on the cutting edge and to make Canada a leader in the field.
I think this requires transparency and the exchange of information, which is subject to the same confidentiality rules in force for the Canada Revenue Agency with regard to the protection of confidential information. However, it also involves an exchange that will enable Canada to lead the way in tax avoidance matters.
Senator Massicotte: To what extent can we share information? And what information is it? You still have an obligation to Canadians. When I submit my annual tax return, which contains a great deal of personal information, what information can we share with foreign countries to meet this objective?
Mr. Champagne: Many discussions were held with the authorities, even in Canada, so that the information meets the agency's standard when it comes to obtaining confidential information. I'll ask my colleagues to provide a proper answer to your question, Senator Massicotte, on the nature of the information.
[English]
Mr. Ernewein: The basic answer is that the information that can be shared is tax information that's relevant to the taxes covered under the treaty in question or tax information exchange agreement in question. Generally information related to income tax may be shared if it's relevant to that other jurisdiction's tax system. It also has to be in the possession of the Canada Revenue Agency or accessible by it.
Senator Massicotte: That means Canadians should be aware if it's that general that in spite of the fact they think they're dealing confidentially with Canada Revenue Agency, that information can be shared with a foreign government on their promise only that they will treat it confidentially. I presume if there's a court case or collection agency, that information will probably be shared in the courts in the foreign country and therefore become public.
In other words, Canadians are taking comfort in saying they're going to trust Canada Revenue Agency to make sure they treat this information confidentially, but now they find out it can be shared with a foreign government. Not all foreign governments are responsible, and if there's a dispute it will go through the international courts.
Mr. Ernewein: It is important to start by responding first to the point about confidentiality. That's an essential condition to sharing this information, and the CRA takes great pains and works with other revenue authorities to assure itself that the information that goes to another country is protected and used only for tax purposes.
The other point I'll make is this is not novel. We have had exchange of information with countries as part of our tax agreement since almost the inception of those tax agreements. That's not to say there shan't ever be some sort of issue with respect to disclosure, but as I say, Canadian and foreign revenue authorities work very hard to protect that, recognizing the risks in place.
The final point is that in relation to having information possibly disclosed in court because of the pursuit of a tax matter, that arises in Canada. Yes, it can also arise when the information is shared with a foreign tax authority.
Senator Greene: Thank you very much. I'm very happy to meet you.
We have a time crunch, of course. You want to ratify this in the House of Commons before the year is out. Given the importance of Taiwan to our economic relationship, economy and cultural exchanges, why did it take until now to get this arrangement, given the fact we have arrangements or treaties with 92 other countries?
Mr. Champagne: I would say respectfully there's a process where we're updating these 92 conventions, and I would not be able to provide you additional detail as to why, particularly Taiwan, at this stage.
What I know from our officials is it's a process we're constantly updating. I think Senator Massicotte was referring to modern provisions and the exchange of information. We're always trying to modernize our treaty as we go along. I think that was the normal sequence.
I very much appreciate your comment, however, and we're grateful to the Senate to do what it can to accelerate it, for the benefit of Canadians, I should say, because if we don't send our notices before year-end, we won't have the January 1, 2017, starting date.
We're doing that to help Canadian businesses and people wanting to trade between Canada and Taiwan. As you noted, Taiwan is becoming a very important partner in APEC. I was at the APEC summit. There are a number of initiatives. It is to the great benefit of Canadians if we can achieve that within that time frame.
Senator Oh: Thank you, minister. We have a substantial number of Canadian passport holders, Canadian citizens living in Taiwan. If this comes into effect, how does the treaty affect Canadians living in Taiwan?
Mr. Champagne: If my memory serves me well, I read somewhere that about 50,000 or 60,000 have nationality. This is obviously to avoid double taxation, so to the extent they receive income from one or the other jurisdiction, they would obviously benefit from the treaty. Those who do not have trading activities, whether as individuals or corporations, would not be affected, but corporations which would be dealing, whether import or export, on both sides, I would say, would certainly benefit because that is about predictability. People will know exactly what tax rule will apply, and also it would reduce the withholding taxes. We expect, as we should, that by clarifying the rules and making sure we reduce the withholding of tax, there should be more commerce between our two nations.
Senator Oh: If they're living in Taiwan now, do they have to file a tax return every year regarding their income?
Mr. Champagne: I would ask Mr. Ernewein to provide further detail on this with respect to who needs to file what.
Mr. Ernewein: The treaty wouldn't have that consequence. If the person in question is an expat, a Canadian who has moved to Taiwan and acquired Taiwanese residence, they wouldn't be subject to taxation except on Canadian-source income. As the parliamentary secretary suggested, if they should happen to retain Canadian investments and are receiving income from that, there may be a point of being subject to some withholding tax but at the reduced treaty rates. Apart from that, they won't be obligated to file a tax return, either because of this treaty or without it.
Senator Oh: Minister, I think the number of Canadian passport holders living in Taiwan is far more than 50,000, as you mentioned.
Mr. Champagne: What we have, senator, is that an estimated 50,000 to 60,000 Canadians live in Taiwan. That's the number we were provided in the brief by Global Affairs. There may be differences.
To your point, what we're trying to achieve is not to provide an additional burden to people, but it is to favour commerce between our two nations, which you would agree with me, senator, is a good thing because Canada is a trading nation and looking to APEC countries to boost our exports and create more jobs in Canada.
Senator Enverga: Like Senator Greene, I'll ask you why did it take us so long? We should have done this a long time ago. I know there are 92 treaties already. Just like any other treaties or agreements, have you experienced any challenges with regard to the other treaties? Are they being resolved here in this particular treaty with Taiwan and Israel?
Mr. Champagne: I'll comment generally and will ask Mr. Ernewein or Ms. Smith to provide further detail. But as we said, with the 92 treaties since the 1970s, we are going through a regular process, regular updates, as I pointed out to Senator Greene.
We're updating a number of treaties. The reason we're doing that, and going back to Senator Massicotte, is to implement and to make sure our treaties contain the latest provision of the OECD with respect, in particular, to tax avoidance and tax evasion to make sure we, as a leader in the world, are not only favouring commerce but being at the forefront of combating potential tax evasion and avoidance.
We are constantly updating and making sure that Canadians benefit from the best-in-class treaty provisions we can have, which requires a regular update, as you said with 92; so you will see others coming for revisions as our negotiators are making sure that we incorporate the latest and greatest provisions provided. You will see in this treaty we incorporate the latest model provision from the OECD to make sure we're at the forefront of trade, but also making sure people pay their fair share of taxes.
Stephanie Smith, Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: There are, if we look at Israel, a couple of provisions, since it was a very old treaty dating from 1975; in particular there is a reduction in the withholding tax rates to reflect the current Canadian practice in terms of what we try to negotiate for withholding tax rates. In general the rates in the Israel treaty were at 15 per cent, and as you can see we've now reduced those to 5 per cent and 10 per cent on the different provisions if dividends are paid from a subsidiary to a parent company. Maximum withholding has gone down to 10 per cent on interest and royalties, making it more consistent with the rest of our treaty network.
It was after the Israel treaty that Canada introduced departure tax rules, which effectively provide for a deemed disposition of any capital property when you leave the country or when you enter the country. What we have done in the Israel treaty is to ensure that there is no double taxation and that the other state recognizes that bump-up in the cost base and therefore won't double tax the amount when there is an actual disposition of the capital property. We always include a provision in the treaty where our partner country agrees to respect that bump up in the tax base, so we have included that in the Israel treaty to modernize it and reflect Canadian income tax rules.
In the treaties, we have also picked up mini anti-avoidance rules in the dividend, interest and royalties provisions to ensure treaty shopping can't happen. If someone tries to access the treaty when they are not truly a resident — in this particular example, of Israel — we do have a provision that says that if the dividend is being paid from Canada, the treaty rate would not apply.
We do have some of those mini anti-avoidance provisions, and as mentioned by the parliamentary secretary, we do have the most up-to-date version of the exchange of information article, which is a critical tool for the Canada Revenue Agency.
Senator Enverga: For the sake of argument here, is this treaty similar to those 92 treaties? Have we given any special treatment to other countries? Are all 92 treaties all the same?
Mr. Champagne: If you would like a comparative study, I would turn to Ms. Smith. The Israel treaty was negotiated in 1975, so we are modernizing it because, obviously, the withholding rates have changed over time, as Ms. Smith was saying. Compared to all the 92 treaties, to be more responsive to your question, I would have to defer to our officials to say whether and where there could be differences.
Ms. Smith: The one that stands out as having some differences is the treaty with the United States, and that reflects the very close relationship with a significant trading partner. We do have some provisions in the Canada-U.S. treaty that are not replicated in the rest of our treaty network. In general, however, the remainder of the treaties would be very similar, and it's a typically very consistent policy across the remainder of the treaty network.
The Deputy Chair: Just for clarification, Mr. Champagne, you did indicate that the policy, I assume, is to implement, with the Organisation for Economic Co-operation and Development, a model clause. Is the government policy to move toward that with these agreements? Presumably, then, there will there will be a clause understood worldwide, which would ease negotiations.
Mr. Champagne: As you said, Mr. Chair, as we modernize these model clauses, we are seeking consistency in promoting their adoption. That's why as we go into the process Ms. Smith mentioned, we are looking at consistency, but certainly, when it comes to the OECD Model Tax Convention provisions, we are always trying to be at the forefront of what they recommend, when it fits with our policy, in this case with respect to tax evasion and avoidance. We want to make sure we favour commerce, but as per our policy, as you know, Mr. Chair, we have invested almost half a billion dollars to make sure that we would be at the forefront of that, and that needs to be reflected internationally in our tax treaties. That is another tool in our tool box to help us make sure we do that efficiently across the world.
Senator Ringuette: It's not really a question, but rather two comments.
First, the U.S. is the only country in the world that taxes its citizens based on citizenry. All other countries tax on the basis of residency. That's a major issue that requires special negotiations, which I don't agree with anyway, so that's another story.
Mr. Ernewein could probably attest to the fact I don't do this often, but I want to take this opportunity to congratulate you on the fact that you've found the right terminology in the word "arrangement'' to solidify our trading relationship with Taiwan. I'm very grateful for that.
Mr. Champagne: Thank you, senator.
Senator Ringuette: As they say, take a positive comment when you get it.
Mr. Champagne: It's just like in the house. When it's positive, we take it, for sure.
The Deputy Chair: She's not nearly that bad, actually.
Would any other senators like to pose questions while the parliamentary secretary is still here?
[Translation]
Senator Massicotte: We talked about tax evasion, but I assume the OECD's forecast also concerns the money laundering issue. It's still a matter of billions of dollars moving between countries. A great deal of work has been done in this area for the past 30 years. However, we still see flaws in the system. I think these agreements will help us fight money laundering in all these countries.
Mr. Champagne: We use transparency as a tool to better understand the financial flows, in particular between corporations. We did it with the Isle of Man, not today, but as part of the last budget. We're starting to better understand the financial flows between certain states. Agreements such as these, which provide access to information, serve as additional tools to help us better understand the financial flows and take measures if we identify irregularities. We're studying other initiatives to determine how we could lead global efforts to prevent tax avoidance and evasion.
Senator Massicotte: Have we made this type of agreement with countries such as the Bahamas and Bermuda? Is there a provision in our treaty with the OECD?
Mr. Champagne: I would need to ask Mr. Ernewein or Ms. Smith. Do we have a model, Ms. Smith?
[English]
Ms. Smith: Yes, we have the OECD model provision for the exchange of information, and we meet the international standard in the vast majority of our treaties. For those that do not currently meet the standard, we are taking steps to try to update them.
One that does include the international standard is the treaty with Barbados. There is no tax treaty with the Bahamas, so we don't have that in a tax treaty; however, we have a tax exchange agreement with the Bahamas, and it does consist of the international standard.
Senator Massicotte: On that update, given that we have you here, it's important to note that the OECD has been very effective in trying to get the countries to agree and get on side with full transparency in spite of our agreements.
But, as you know, in the last several months the OECD has basically been very frustrated, because in spite of the fact that these countries all committed to cooperate and have signed the agreements, they haven't fully cooperated. They haven't taken the measures necessary to avoid all of this money laundering and these fiscal problems.
What do we do? We are shunning these countries. We are trying to force them to get there. Are we making any progress?
Mr. Champagne: Certainly, senator, perhaps not in the purview of that particular agreement, but more generally speaking we are talking with different tax and enforcement authorities in different countries to try to make sure we learn from best practices and whether, in the context of IMET and others, we are at the forefront of the fight.
Things are moving in the cyber world as well. As you know, there are various components of that. Flow of money goes quickly, so it's about preventing, detecting, disturbing, prosecuting.
There is a large number of things one can do, but I assure the honourable senator that we are looking at that to ensure not only that we do our share but that we talk with our allies and others to ensure we learn from practices that others have implemented to make sure we are at the forefront of the fight.
Mr. Ernewein: In some sense, I challenge the premise of the question. That is say that yes, not everything has been done and it's an evolution, but directionally, there has been a great deal of change in the last decade or so. Ten years ago, we were struggling to try to get any of the non-treaty countries, the so-called tax havens, to agree to exchange of information. In fact, some of our treaty partners and OECD member countries were not fully committed to exchange of information in reality.
About 10 years ago, we got this breakthrough with the TIEAs, the tax information exchange agreements. With a lot of pressure from G20, OECD and individual states, all OECD countries, G20 partners and almost all of the so-called tax havens — the offshore financial centres — agreed to the exchange of information, which led to extensive TIEA negotiations.
That was only on information on request, which means you have to have some sort of idea there is a taxpayer who has investments in that jurisdiction to ask the question.
Since then, most recently, we have developed the Common Reporting Standard. It was inspired by the U.S. FATCA, which has all kinds of issues around U.S. citizenship, but the Common Reporting Standard, which almost 100 countries and other jurisdictions have signed on to, provides information automatically. That means we will collect this information and set up a regime whereby we can share that information automatically with trusted tax authorities. That gives us much better information.
Then, to the parliamentary secretary's point, much work is being done internally in terms of information with electronic fund transfers and what we get from the Common Reporting Standard and other exchanges of information.
There is still some work to be done on beneficial ownership in Canada and elsewhere for anti-money laundering purposes as well as tax purposes, but I see all this positively, and we're making a great deal of difference.
Senator Massicotte: We are still at the forefront. Good. Ten years is not a long time, but we are at the cusp of getting information. Every time you get a leak, as we saw with the Panama papers recently, there are still a lot of Canadians who have thought they could get away with not paying taxes, yet the average Canadian does not have the resources to go to these countries and use those vehicles. We have a lot of work to do. Like you said, we should be encouraged that we are getting better cooperation.
It's a technology race. I remember Mr. Chrétien said, "Money has no nationality.'' It flows and goes quickly.
Mr. Champagne: That's why you'll be pleased to hear that the $444 million we put in was about that: having the right teams, technologies and systems. As you mentioned, things get sophisticated. We need to embed lawyers.
There are a number of initiatives to ensure we prosecute, disturb and disrupt things going on, but the word is out. I hear from CRA and others that with the investment Canada has made, people out there have the word, as Minister Lebouthillier said, that la trappe se referme. People are getting the word that Canada is aggressively pursuing those who evade taxes. We started with the Isle of Man. I think the minister announced recently there is a focus on Guernesey presently.
I won't disclose the future jurisdictions, which would be unwise as we are doing our work, but the word is out there that Canada is aggressively pursuing tax evasion and putting in the resources. It's nice to talk, but when put the resources — half a billion dollars almost in CRA to make sure we are doing it right — the word is out there that we are serious.
Senator Greene: You all will have to hide all that money a little better.
The Deputy Chair: If only that was our problem.
Senator Oh: Due to the diplomatic ties between Taiwan and Canada, the one-China policy, the convention of the treaty will be implemented by our trade office in Taipei.
Mr. Champagne: Yes.
Senator Oh: And the trade representative here from Taiwan in Ottawa.
Mr. Champagne: That's my understanding. We call it an arrangement, but for domestic law purposes, it would be considered a tax treaty; that's why we have the interpretation clause. It has the same effect in domestic law as the treaty has with Israel. It is to make sure it has the same legal status, but because of our one-China policy, we call it an arrangement. That serves the purpose of respecting our commitment with the one-China policy and making sure in domestic law, with the interpretation provision we have in Taiwan, and with respect to Hong Kong, it would have the same legal status that it would otherwise have.
Senator Enverga: I heard so many things about the tax treaty. Can you enlighten us on the costs and benefits of a tax treaty rather than a tax trade for foreign taxes paid? What are the differences?
Mr. Champagne: I'm not sure I got your question.
Senator Enverga: The costs and benefits of a tax treaty rather than a tax credit for foreign taxes paid — is that something that you've looked into?
Mr. Champagne: I'll give you a general answer. This is far more comprehensive, if you look at the provision in totality. It deals with different income and provides treatment, whether withholding or exchange of information. My view would be that it is far more comprehensive. What you are referring to is more limited in scope. That's why negotiating these treaties take more time, but they make more sense because they are more comprehensive than the specific arrangement the way you referred to it.
Mr. Ernewein: I just wanted to say that the propositions are not mutually exclusive. Tax treaties include almost always a tax credit mechanism so that when there is shared taxation, both the source country and the residence country have the right to tax. The residence country will generally provide a credit for any tax imposed by the source country.
In the earlier example, if a Canadian receives dividends from a foreign source that is subject to a treaty country, they are subject to 15 per cent tax rate. Then both domestic law and treaty will say that Canada will tax that income at, say, 30 per cent. It will give a credit, but it's bound by treaty to give a credit for the foreign tax paid so that the increment is payable in Canada.
The treaties also reduce taxation in both jurisdictions — or they can — to make sure there is a better share or make share there is not functional double taxation. Specifically, when you have a withholding tax on gross income, it could be a very high rate in terms of net income from that source. So having a lower withholding tax helps ensure you are not getting extortion-type rates of taxation.
The Deputy Chair: Seeing no other senators who wish to engage in questions and answers, I would like to thank you on behalf of the Standing Senate Committee on Banking, Trade and Commerce, Mr. Champagne, Ms. Smith and Mr. Ernewein. Thank you for being here and helping us understand this legislation. Mr. Champagne, thank you for the confidence of starting this legislation in the Senate.
Mr. Champagne: Thank you, senators. Thank you for understanding and helping us to make sure that we can provide that for Canadians starting January 1, 2017. Thank you for your time and for your questions.
The Deputy Chair: Is it agreed, honourable senators, that the committee proceed to clause-by-clause consideration of Bill S-4, An Act to implement a Convention and an Arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and to amend an Act in respect of a similar Agreement?
Hon. Senators: Agreed.
The Deputy Chair: Thank you. Shall the title stand postponed?
Hon. Senators: Agreed.
The Deputy Chair: Shall clause 1, which contains the short title, stand postponed?
Hon. Senators: Agreed.
The Deputy Chair: Agreed. Then we will go to the act itself. Shall clause 2 carry?
Hon. Senators: Agreed.
The Deputy Chair: Shall clause 3 carry?
Hon. Senators: Agreed.
The Deputy Chair: Shall clause 4 carry?
Hon. Senators: Agreed.
The Deputy Chair: Carried. Shall the schedule that is attached carry?
Hon. Senators: Agreed.
The Deputy Chair: That's schedule 1; shall schedule 2 carry?
Hon. Senators: Agreed.
The Deputy Chair: Shall clause 1, which contains the short title that we postponed, now carry?
Hon. Senators: Agreed.
The Deputy Chair: Shall the title carry?
Hon. Senators: Agreed.
The Deputy Chair: Shall the bill carry in its entirety?
Hon. Senators: Agreed.
The Deputy Chair: Thank you. I'm sorry to be so repetitious on all of this.
Is it agreed that I report this bill, without amendment, to the Senate at the earliest opportunity?
Hon. Senators: Agreed.
The Deputy Chair: Honourable senators, this concludes the work on this particular bill. Thank you very much for your cooperation, and as soon as I can get the report we will file it and table it in the Senate.
Senator Ringuette: Is that possible this morning, chair?
The Deputy Chair: It looks like we may be able to do it. We will do our very best on that.
Senator Ringuette: Thank you.
The Deputy Chair: Thank you very much. This meeting is now concluded.
(The committee adjourned.)