Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 32 - Evidence - April 18, 2013

OTTAWA, Thursday, April 18, 2013

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-17, An Act to implement conventions, protocols, agreements and a supplementary convention, concluded between Canada and Namibia, Serbia, Poland, Hong Kong, Luxembourg and Switzerland, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes, met this day at 10 a.m. to give consideration to the bill.

Senator Irving Gerstein (Chair) in the chair.


The Chair: Good morning and welcome to the Standing Senate Committee on Banking, Trade and Commerce.

This morning our committee will begin its study of Bill S-17, the tax conventions implementation act, 2013. The purpose of this enactment is to implement four recent tax treaties that Canada has concluded with Namibia, Serbia, Poland and Hong Kong. This enactment also implements amendments to provisions for the exchange of tax information found in the tax treaties that Canada has concluded with Luxembourg and Switzerland.

Today we are pleased to welcome the Honourable Ted Menzies, Minister of State (Finance). He is accompanied by Ted Cook, Senior Legislative Chief, Tax Legislation Division; and Alain Castonguay, Senior Chief, Tax Treaties.

Senators, Mr. Menzies is unable to stay for the whole meeting, but I have been assured that the officials can.

Hon. Ted Menzies, P.C., M.P., Minister of State (Finance): Thank you very much. Absolutely, these two gentlemen will be able to answer the technical questions to what is a very important piece of legislation, and I can see by the attendance this morning that senators actually recognize that. It is good to be here. I will make my comments very brief to allow adequate time for the committee's questions during my short appearance. I apologize, but I am wanted elsewhere this morning as well.

Before I begin, I would thank the chair, the deputy chair and all members of this committee for agreeing to undertake the parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act early in 2012. The committee's recently tabled comprehensive report contains important recommendations that will inform the government's future action in monitoring suspicious transactions to combat international terrorism and organized crime.

I am pleased that the committee has now turned its attention to this bill before us, the tax conventions and implementation act. Although this legislation is quite technical and covers a wide range of countries and issues, the new initiatives in Bill S-17 build on our government's long-standing commitment to keep taxes low. For example, since 2006, we have introduced more than 150 tax relief measures for Canadian families, individuals and businesses, and the average family of four now keeps $3,200 more in their pocket every year. These tax reductions give individuals and families greater flexibility to make the choices that are right for them and to help build a solid foundation for future economic growth, more jobs and higher living standards for Canadians.

During that same period, our government has taken significant action to put in place a competitive business tax system to promote new investment growth and job creation, and as a result, our country remains one of the most welcoming places in the world for international business and direct foreign investment. In fact, a recent study by KPMG concluded that Canada's total business tax costs, including corporate income tax, capital taxes, sales tax, property taxes and wage-based taxes as well, are more than 40 per cent lower than in the United States. Nevertheless, our government is committed to ensuring that our tax system continues to promote the highest standards of integrity and fairness.

That commitment brings us to the legislation we are dealing with here today that proposes further action to strengthen Canada's tax system. As taxpayers, we provide a portion of our hard-earned income to fund health care, social programs and other vital services for all Canadians. We do so willingly and honestly, asking only in return that the governments both manage our tax dollars wisely and ask no more from us than our fair share. Canadians can count on our government to do that.

Bill S-17 demonstrates our continued commitment to honour that promise. As an example, Canada's economic wealth also depends on foreign direct investment as well as inflows of information, capital and technology, and that is why we currently have comprehensive tax treaties with 90 different countries and continue to work on agreements with other jurisdictions. Bill S-17 is part of our ongoing effort to update and modernize our network of income tax treaties.

Jack Mintz from the University of Calgary, a noted economist, observed several years ago ``A bilateral income tax treaty seems to be one of those arcane and mysterious documents that only a tax lawyer would ever want to understand.'' I tend to agree with him sometimes, but it is, however, very important.

A quick item to point out also, and I quote: ``Yet, a treaty is an important instrument for encouraging economic growth through cross-border flows of investment, technology and workers.'' In short, the tax treaties contained in Bill S-17 will provide individuals and businesses in Canada and abroad with predictable and equitable tax rules.

Let me now address the issue of double taxation. No one wants to have their income taxed twice, nor should they, but without a tax treaty like those contained in Bill S-17, that is exactly what could happen. For example, in the absence of a tax treaty, Canadians who earn income in Hong Kong, for example, would be taxed twice: locally and back home.

Securing a treaty through Bill S-17 will promote certainty, stability and better business climate for taxpayers and businesses in Canada and for Canadians and businesses abroad. Equally important, these treaties will help to secure Canada's position in the increasing competitive world of international trade and international investment.

Returning to the example of Hong Kong, one of the tax treaties included in this legislation, the Canadian Manufacturers & Exporters agreed with this. According to their CEO, Jayson Meyers:

The . . . Agreement reduces barriers to two-way trade and investment between Canada and Hong Kong by preventing the double taxation of income, assets and transactions, streamlining taxation procedures, and improving investment conditions between Canada and Hong Kong.

Finally, let me turn the committee's attention to the issue of tax evasion, which we have heard a lot about in the recent past, a subject, I would suggest, that is very important to all taxpayers and it is all about tax fairness.

As honourable senators know, certain corporations, both foreign-owned and Canadian, have taken advantage of Canada's tax rules to avoid paying tax. In addition, a few wealthy individuals have used offshore jurisdictions to help them hide income and evade taxation. International tax evasion and aggressive tax avoidance entail a fiscal cost to governments and are unfair to taxpayers who play by the rules.

Our government recognizes that one of the best defences against international tax evasion is improving and expanding mechanisms for international cooperation and, as contained in these treaties, information-sharing. To ensure tax fairness for all Canadians, treaties like these contained in Bill S-17 permit the exchange of tax information between revenue authorities in accordance with OECD standards, helping them to identify tax evasion and take appropriate action.

In conclusion, I want to make it clear that Bill S-17 does not represent any new or significant change in policy and, as such, should be considered as standard, routine legislation. Indeed, both Liberal and Conservative governments since 1976 have introduced 30 such pieces of legislation.

Like many of the recent predecessors, the tax treaties covered by this proposed legislation are modelled after the OECD Model Tax Convention, which is accepted around the world.

Bill S-17 builds on our government's strong record of tax relief for all Canadians and will continue to help Canadian businesses in their drive to be world leaders while at the same time ensuring that everyone pays the taxes they owe.

Mr. Cook and Mr. Castonguay would be happy to answer the difficult questions, and I will take the easy ones.

The Chair: Thank you for your opening remarks. Let me ask a somewhat easy question for you, minister. I would like to refer particularly to the comments you made about the increased media attention recently to taxes, specifically tax evasion.

Some observers have tried to draw a link between the media stories, this bill and what is perceived as a cut to the Canada Revenue Agency's compliance budget. Although the Main Estimates, which are before us in the Finance Committee, are not the final budget document and we recognize that supplementary estimates may come through, could you clarify the reduction of approximately $90 million between the 2011-12 estimates and this year's Main Estimates, with, of course, particular reference to CRA's interests to fulfill the compliance you are looking for?

Mr. Menzies: It is a pertinent question, and I believe Minister Shea, the minister responsible for the Canada Revenue Agency, has answered this question a number of times in Question Period.

Many of these are one-time costs to do with the implementation of the HST in Ontario and the implementation and ``de-implementation,'' if I can put it that way, in British Columbia. Those were one-time costs that were unavoidable. I think you folks around the table understand the HST and how helpful harmonization is for the taxation system; it actually simplifies things.

However, implementation takes more bodies. In fact, we have 400 more tax auditors at CRA than we did in 2006. We increased the size of the international audit program by 40 per cent. Recognizing exactly what we are dealing with here today is that it is more complex and more electronic than it ever used to be, so we brought in new people to look after that. Since forming government in 2006, we have identified almost $4.6 billion in unpaid taxes, if we can use that term.

The other thing is very simple. I just referred to electronics. Many taxpayers do not fill out paper anymore, yet up until this last year we were mailing out quite a thick form to everyone and most of them ended up in the garbage. It is a simple fact that we have changed. I do not think I have filed a paper return in years.

Senator Massicotte: You did file them, we hope.

Mr. Menzies: I assure all honourable senators that, yes, I have filed returns. I will go back and check for sure, but I am sure I have. I am sure you would know if I had not.

That is it, simplistically, but when you add up the amount of trees we save by not sending all that paper out, it can be significant. Anyone can still request that paper form; we understand that lots of people still use it.

In our recent budget, Canada's Economic Action Plan 2013, new measures were put in place, as were an additional $15 million for administering the increase in electronic transfers of funds. Once again, not that long ago, we did not deal with that, so we need to keep on top of those things.

Senator Massicotte: We have talked about tax evasion in the last little while and with good reason. I think your government has taken a highly motivated drive to collect fairness from all taxes. As you know, tax treaties are important to achieve that aim, because that defines our relationship with these countries to obtain more information and get to the objectives.

In the legislation, we talked a little bit about reciprocal rights to obtain information. Could you describe how these treaties help us get more information and if there are any limits to it, specifically regarding Luxembourg — the amendments — and Switzerland and Hong Kong? Can you describe how this helps and how important it is?

We have heard experts say that these treaties have existed and are reasonably standard, but it has not allowed us to achieve what we want to achieve. Could you comment on that also?

Mr. Menzies: I will start, but I will defer to my experts for the intricacies.

Plain and simple, it is being obliged to provide information. We take on the obligation, as well, to provide information if another country feels concerned that they need this information. It is a reciprocal agreement that we would provide information on our taxpayers, especially those with joint companies operating in different countries; that gets to be one of the major ones and many of our countries are operating.

Double taxation is a concern, and I referred to that earlier. We know that taxes are being collected in one country or the other, and that is important. We do not expect to go after people twice if they have paid tax.

Senator Massicotte: It is a reciprocal right for companies, as well as any residents of both countries — we have a right to any information we wish, subject to it remaining private; is that right?

Mr. Menzies: Yes, but I would defer to one of the experts to see if I am accurate on that. I do not know if it is any information or if there are specific limitations.

Alain Castonguay, Senior Chief, Tax Treaties, Department of Finance Canada: The minister is quite right. The information exchange in our treaties is quite wide. It includes any information relevant to the administration of our tax laws or the treaty. It is any taxpayer, company, trust or individual, for any reason, whether it is tax evasion, tax avoidance or any other motive. As long as it is relevant to the computation of income tax in Canada, we can ask for information.

Without a treaty, the CRA does not have the authority and the other country does not have the obligation to get us information. We need to be tied by a treaty obligation that says, ``Either you give us the information that you have or, if you do not have it, seek it and give to us.''


Senator Massicotte: If that is the case — and I assume that the agreements are clear — why is there a lack of results? In the United States, they have recovered billions of dollars. The amount is so low in Canada. Why is that?

Mr. Castonguay: I am not sure I can comment on the lack of results. As part of our bilateral relationships — in cases where information may be available — the agency has tools to obtain information as soon as it is suspected that an individual is failing to meet their tax obligations.

Some cases in the United States have received media coverage. I cannot really comment on their way of doing things. Here, when the agency uses data to take action against a taxpayer, the information used remains private. It is not made public, unless the case is challenged and goes to court. But generally speaking, the information is not necessarily made public.

Senator Massicotte: And this agreement with Switzerland is in place? Is bank secrecy going down the drain? Switzerland is relinquishing that right it has had for decades.

Mr. Castonguay: That is an extremely important point. Switzerland and Luxembourg do have bank secrecy, which is set aside by these agreements so that we can obtain the information we need to ensure tax compliance in Canada.

Senator Massicotte: We acquired that right when the treaty was amended. We will have the right obtain information from Switzerland and Luxembourg on any suspects. That is very good.

Mr. Castonguay: Of course.


Senator Black: Mr. Minister and officials, thank you very much for this presentation and for the work you are doing. Before coming to this place, I had an active business and legal practice. I understand the importance of what we are talking about today, and the relevance of this to the Canadian economy.

How do you choose jurisdictions to enter into treaties with, and once you choose a jurisdiction, what is the process and the general timeline to come to success?

Mr. Castonguay: As you have noted, we have already developed quite a network of tax treaties; we have 90 tax treaties in force, which takes us to the third or fourth highest in the world as far as the number of treaties. Our treaty network covers all of our major bilateral relationships. Hong Kong, for example, was one that was missing and we took care of that by negotiating a treaty with them.

Right now, we are at the stage where we have to maintain the treaties that we have and keep them up to date. For instance, in the case of Poland, it was signed in another era. The gist of our efforts is to keep older tax treaties up to date by renegotiating part of all of them.

The process involves negotiations between people like me and my colleagues on the other side. We start from the OECD model tax treaty. There are a lot of things we do not need to talk about, because we already agree on them. Basically, negotiation means we have to reconcile where we do not necessarily follow to the letter the OECD model.

A typical negotiation can take two rounds over six months, nine months or even a year, depending on how many you do. After that, to the extent there is language, we need to translate and seek approval from cabinet for signature and these things take time.

We have to follow the internal process, put them into a bill like this one today and seek Parliament's approval so we can ratify.

In the case of those bills, most of the countries have either already ratified or pledged they would this year so that should this bill receive Royal Assent this year, we will be in a position to ratify and trigger entry into force.

Senator Black: Are there any of our major trading the partners with whom we do not have an agreement to your satisfaction?

Mr. Castonguay: I think all the major ones are covered, I would say.

Senator Harb: As the minister has stated earlier, we have a template that is modelled after the OECD model. My question to you is specific regarding information on the convention with Serbia and that of Poland. In particular, I want to take you to the convention where you set a maximum tax rate. In the case of Poland, you set the tax rate at 5 per cent for dividends paid to a company that holds at least 10 per cent of the capital in the company that pays the dividends and a maximum of 15 per cent in all other cases. However, the convention with Serbia sets the maximum at 5 per cent on dividends paid to a company that controls at least 25 per cent. What comes to bear on the decision in terms of whether it is 10, 15 or 25?

Mr. Menzies: I trust that question is for Mr. Castonguay, not me.

Mr. Castonguay: That is a good question.

Obviously, at the end of the day a tax treaty is a compromise between positions that may diverge. In this particular example, the 5 per cent, it is common that you have different ways of going at it. In our case, we prefer 10 per cent of the voting power as the threshold. Some countries are not prepared to go that low and prefer 25. We have a number of treaties where the threshold is 25. Even though I was not involved with the negotiations with Serbia, I understand it was as far as they were prepared to go with respect to the rate of 5 per cent.

Mr. Menzies: Hong Kong is 10, I see.

Senator Harb: How often do we go and see the value for the money? We have all those treaties and I know we also have the Foreign Investment Promotion and Protection Agreement and as well the free trade agreement, so we signed with those countries. How often do we see, in the case of the double taxation, the value-added?

Mr. Castonguay: Treaties are meant to encourage trade and investment. Do we follow up to measure the impact? I do not think we do. By the fact that we get positive reactions, especially from business, you know they make a difference. They make our companies more competitive in the other states. They say, ``Without a treaty I do not have the same legal certainty and am overtaxed because of those high withholding rates.'' Obviously they have an impact, just by the fact that companies come to us and say we should have a treaty, or modernize one with that country. I think they have a positive impact.

Senator Harb: My final question deals with the overall approach to all of those treaties. You have said it correctly, minister, that we have an agreement with about 90 countries, making Canada one of the biggest countries in the world in terms of doing those agreements. At what point do we say maybe this is the time to make those kinds of agreements mandatory, as we do with other types of agreements, so that we stop this ad hoc approach? At what point should Canada take a lead role and go to, for example, the WTO or the United Nations and say that with the way the global economy is going and with corporations setting up shop everywhere, this must become the norm and that every country member of the WTO or the UN has to sign those agreements?

Mr. Menzies: You make a good point. You did mention the WTO, and I would remind you that we could not even agree on the Doha round of negotiations. They have been languishing for years.

In a perfect world that would be the case, but in a perfect world we would not have tax cheats and would not have to go after this.

To Mr. Castonguay's point about protecting Canadian companies with foreign investment protection agreements, it is very important to not only be able to seek information on taxpayers in other countries but also to ensure that countries are protected. I do not know if it is possible through the United Nations or through the WTO, but I guess the new Director General of the WTO that is appointed July 1 will be able to help with that.

Senator Oliver: I apologize, minister, for being late and missing opening remarks, but I have three short questions. They follow on Senator Harb's questions because his premise was that most of these treaties have the OECD model tax treaty as the base. He has pointed out a couple of the differences and I want to know if there are other areas in which Bill S-17 departs from the OECD model and, if so, could you highlight them for us?

Second, is there anything in Bill S-17 that is really unique, different and a departure from the OECD model convention and, if so, what is that?

The final question is that since Bill S-17 reflects an effort to update and expand Canada's tax treaties, are there other tax treaties that require updating and expansion?

Mr. Menzies: To your last question, I would suggest yes, but I will refer to Mr. Castonguay for a response.

The OECD is a model, but as was reflected in answering one question, we have a goal, the percentage of voting members. We do not always achieve that, so I guess we do not always get what we want. However, we have good negotiators, like Mr. Castonguay, who attempt to get to that. He can probably answer better than I can as to where, if any, there are deviations from the OECD model.

Mr. Castonguay: It could take a long time to go through all of them. Some of them are more important than others. We have to be careful as to what we mean by ``deviation'' because there is a model and a commentary that acknowledges that we can approach a particular issue in different ways and offers alternatives to the model in many cases.

For example, the OECD model says that pension benefits should be exclusively taxed in the state of residence of the recipient. Therefore, if a Canadian who has contributed registered RSPs or pensions all of his life moves out of Canada to another country, we would not be able to tax the pension arising in Canada. It does not work for us because that pension has been built with tax assistance. We insist on having some source country taxing right and our policy is to seek 15 per cent on a pension arising in Canada. It is an example where we do not follow the OECD model, but it is consistent with our own internal tax policy and provides a better result for us.

There are other instances. On royalties, for example, it is the same thing.

The OECD says it should be taxed only in the state of the recipient and we say not entirely. We are prepared to give an exemption on certain payment, copyright, but on other things we insist on having a source country taxing right. I think we are being consistent in our treaty policy.

In the case with the four comprehensive treaties we have here, they well reflect our treaty policy. As far as whether there countries that need amendment, we are currently in negotiations with Spain and the U.K. We have not announced anything yet, but we are preparing negotiations with other countries. We will be announcing them as we proceed.

There are always treaties to improve. At this point, we have a number under negotiation: We have the Netherlands, the U.K., Spain and others. Once those are done, we will go to the next set of treaties.

Sometimes it is us signalling interest; sometimes it is the other state coming to us to say we should renegotiate, and it is done within the resources we have.

Senator Oliver: This is a simple question, and I do not know the answer to it. Why is it that you would not have individual bills for each individual treaty? When you have three, do you say, ``Now it is time to do a bill,'' or is it when you have ten? Why do you not have individual ones and why are they grouped? They are different, as you have explained, and you do not always follow the model from the OECD.

Mr. Menzies: It might have to do with the parliamentary schedule.

Mr. Castonguay: There is some of that; if we had to do a bill for each, it would be more cumbersome and we would be here more often. There is a trade-off between doing a bill for each and waiting until we have critical mass and being ready. We must be mindful that we do not want to delay too much the entering into force of the bill when we are aware that the other side is also progressing toward ratification. It is a bit of a compromise. I think it has always been done that way.

Senator Ringuette: Our entire tax system for individuals in Canada is based on residency, whereas it is based on citizenship with our neighbour. Does that particular fact increase our need to have these bilateral agreements?

Mr. Castonguay: You are correct that our taxation is based on taxation of the worldwide income of a resident, whether individuals or companies. Individuals can earn income in a foreign state and a company can also and thus be subject to the tax laws of the other state.

Tax treaties are about coordinating the exercise of the respective taxation rights of each country to ensure that taxation is not burdensome or that multiple taxations arise.

Notwithstanding citizenship, there is a good reason to have tax treaties with countries that base their taxation on residence. All countries do that, as far as I know, except one.

Senator Ringuette: I am a hands-on kind of person. I am very curious in regard to corporations. How do you cross- reference where they have activity? How do you know that Canadian company X has an operation in Serbia, for example, and request information from Serbia?

Mr. Castonguay: I will turn it around: If a foreign company comes to Canada, either as an incorporated subsidiary or operates a branch here, we know about it because they have obligations in both cases to report income to the Canada Revenue Agency. If a Canadian company opens a branch in Serbia, they are subject to Serbian tax law and they have to file a tax return in Serbia. If we want to have information on that company, all we have to do is ask to see how much profit is earned in that branch.

Senator Ringuette: That brings me back to the question. These agreements are the requests for information. It is not Serbia saying that they have received an income tax report from company X that has a branch or main office in Canada. It is not a push system; it is a pull system. You have to pull the information from each of these countries.

That brings me back to my original question: How do you cross-reference? How do you know that you have to ask Serbia, Poland or Hong Kong for the information you need to get the corporate tax that you say you will get by these agreements?

Mr. Castonguay: In the case of a business, if they have subsidiaries, we have reporting forms that require them to identify where they are carrying on business through their subsidiaries. If they have branches, it will show on their tax return that they earn income in Serbia, and they will claim a foreign tax credit on account of the Serbian tax.

Therefore, we either take that at face value and we double-check how much income and tax was paid in Serbia by asking them — it is on the face of the return — or it is something that an auditor can ask the company here in order to ascertain whether they are paying the right amount of tax in Canada.

Senator Ringuette: Let us take a short time period. How many tax dollars have you recuperated through those conventions in the last five years? There must be an incentive for you to have those treaties.

Mr. Castonguay: I think you might be referring to tax evasion, the non-reporting of income and things of that sort. Am I correct?

Senator Ringuette: No, I am talking about the model treaties we have before us. They are implemented in order for you to have access, upon request only, to information about corporations that also are doing business in Canada. There must be an incentive — a monetary benefit — for us to be engaging in these treaties.

Maybe my question should be: In the last five years, with the treaties we already have in place, what have been the monetary benefits for Canada?

Mr. Castonguay: I do not think I have information on that. This is a pretty wide question you are asking.

Senator Ringuette: It should be a question that forms the foundation of engaging tax dollar expenses in order to pursue those initiatives.

Mr. Menzies: I could try and address that. It is one of these things where, when you know there is oversight and when you know that Canada has a treaty with the country in which you are operating a business, they would be of the understanding that they must report. Alternatively, we can seek that information and go after them. Part of it is that a business person knows that there is someone watching. In my view, that would be difficult to put a number on.

Senator Ringuette: No, actually, if there is someone watching or a group of people watching, then there must be some results.

Ted Cook, Senior Legislative Chief, Tax Legislation Division, Department of Finance Canada: It is a difficult question in the sense of allocating a specific number to a specific component of a treaty. CRA officials appeared before the House Standing Committee of Finance in February. At that time, they indicated that since 2006 they have audited 8,000 cases that have an aggressive international component. The tax related to that was $4.5 billion.

When you are talking about international audits and audits generally, the specific role of information exchange under a particular treaty is difficult to pinpoint other than that it contributes to the system more generally.

I will also add that the CRA provided figures with respect to voluntary disclosure, indicating that between 2007 and 2011-12 the number of voluntary disclosures related to international issues and assets increased from 1,500 voluntary disclosures in one year to more than double, or over 4,000, in 2011-12. Information exchanged under the treaties is part of the fabric of dealing with international tax issues, writ large.

The Chair: I might add, Senator Ringuette, that it is our intention to have CRA as a witness before this committee, and that might be helpful to you.

Senator Ringuette: I have one other major question. Under these conventions, maximum withholding tax rates are lowered from 25 per cent to 5 per cent for dividends, 10 per cent for interest payments, 10 per cent for royalties and 0 per cent for some things. All things being equal, these are considerable reductions in regard to tax rates. How many Canadian corporations will benefit from the lowered tax rates under these conventions that we have before us?

Mr. Castonguay: I do not have a number for you. I can tell you that every business that does business in those countries will benefit. Every company that has a subsidiary will be able to bring back dividends at a rate of 5 per cent instead of 25, and that means, probably, that more Canadians will be able to go there and invest. I do not have a count, but, by definition, we know that it is beneficial for businesses to bring back their dividends at a much lower rate.


Senator Hervieux-Payette: I want to welcome the minister and his assistants. I will begin by saying that I fully support the principle of eliminating double taxation at the lowest possible level in order to encourage Canadian investments abroad. Yesterday, I talked about Poland, and Bombardier and Pratt & Whitney, which can serve eastern countries. We know very well that those people do business with KPMG, Ernst & Young and Deloitte, and prepare globally consolidated financial statements. Those companies are usually listed on the stock exchange.

I will not hesitate to say that it is extremely important to continue moving in that direction. The fact that our companies are taxed in other countries and then taxed again here hurts them.

When will those countries' measures be implemented? What date has been set? We know that you conducted negotiations and that an agreement was reached. You have prepared a bill, which is yet to come into effect. Does legislation have to be adopted on the other side? Should we have a mechanism for knowing when, for instance, Bombardier will benefit from those measures?

Mr. Castonguay: To my understanding, most of the countries involved in Bill S-17 have already ratified the agreement or will be in a position to do so. They have their own domestic procedure, whereby the treaty usually has to be considered by their Parliament. I cannot comment any further on this issue.

As for your specific question, once Bill S-17 receives royal assent, the government will be able to officially announce to the other country that we have completed our internal procedures. As soon as the other country has done the same, the second letter exchange will bring the agreement into effect, generally on January 1 of the following year.

So, provided that the conventions can be implemented this year, they will generally go into effect in January 2014.

Senator Hervieux-Payette: Okay. I do not have to tell you that, in Switzerland, Hervé Falciani compiled a list of people who were not paying their taxes and were hiding their accounts in that country. Will this legislation enable our government to gather information — other than Mr. Falciani's lists — and recover the hundreds of millions — perhaps even billions — of dollars that have been hidden from our government? Will the legislation help us acquire information? We will be able to ask Switzerland for a list of information. Will the legislation make it easier to find all those secret accounts and take action?

The situation is not so bad for those who express remorse, confess, and write a cheque. But criminal proceedings usually await those who continue to hide and refuse to pay. However, will that really improve our situation?

Mr. Castonguay: Before the convention with Switzerland was amended in 2010, the previous version did not allow us to request information that is subject to bank secrecy in that country. As a result, we could not really ask any related questions.

Since then, in light of the 2010 convention and the minor amendment we are making here, we can ask Switzerland for information protected by bank secrecy regarding individuals, companies or trusts — so any taxpayers.

So the first difference is that we can ask questions and receive answers. The second difference is that Canadians who may be tempted to think that they can invest in Switzerland without meeting their tax obligations in Canada will perhaps reconsider because they now know that we will ask Switzerland questions about them. In my opinion, that knowledge has a considerable deterrent effect.

Senator Hervieux-Payette: So you are confident that the agreement will be implemented by the end of the year.

Mr. Castonguay: I do hope so. Under this agreement, the Swiss administer the convention. The same will go for the act. That is already the case.

Senator Hervieux-Payette: When will the Canada Revenue Agency provide us with the measures that were taken in the case of Hervé Falciani's list? There was a digitalized list of all Canadians who had invested money in Switzerland. I, as well as all Canadians, want to know that, if the system is enhanced, we are assured that it will be implemented and that the government will be able to recover that money and help pay the deficit. That is extremely important.

Do I have any time left?


The Chair: As I indicated, CRA will be here. You do have a moment.

Senator Hervieux-Payette: Just to put them on notice to have the information rather than have them send it weeks later. We know we will have them later.


I have some questions about the amount of trading activity with those countries. There has been an increase in certain cases. I have asked for some research to be done on the topic.


Since I will address the minister, I will ask you this information. For Namibia, Serbia, Poland, Hong Kong, Luxembourg and Switzerland, I asked for the trade regarding exports and imports. For me, this is a law that deals with that. Of course, when it comes to Hong Kong, we export $2.464 billion. We used to have $2.9 billion. Do you think that this will have an impact? Will reducing the tax rate create more exchange with Hong Kong? A reduction of $500 million is a significant reduction.

Mr. Menzies: These agreements are meant to protect our tax base, but we certainly do not want any negative impacts on investment or trade. Perhaps Mr. Castonguay can explain better how this actually has a cumulative effect.

It is a positive when you look at the FIPAs that we have signed with these countries as well. It gives our businesses confidence when operating in other countries. I would think this would give them some more confidence to be interested in investing.

The Chair: Before we turn to Mr. Castonguay, minister, you had indicated that you had to leave for another engagement.

Mr. Menzies: I am almost feeling redundant here anyway.

The Chair: On behalf of the committee, we thank you very much for your appearance today. I assure committee members that Mr. Castonguay and Mr. Cook will stay on to answer questions.

Mr. Menzies: Thank you very much.

Mr. Castonguay: To answer your question, tax treaties do not deal directly with trade in goods. There is no reduction in tariff. It deals with taxation of persons and companies. Obviously, it helps support bilateral investment. It helps the cross-border provision of services.

Hong Kong is mostly a service economy. Canadians providing services in Hong Kong will be protected by the treaty because there is a threshold in there that prevents taxation if a person is doing business in the other state, until he or she has a permanent presence, a permanent establishment. If you do not meet that threshold, there is no taxation imposed on you. It promotes cross-border trade and investment. It also ensures financing guaranteed or provided by EDC, to the point more specifically on exports, is free of withholding tax. Obviously, it helps trade in goods in that way.


Senator Hervieux-Payette: The $2.4 billion in exports to Hong Kong includes precious metals, pearls, furs, clothing, and electrical machinery and equipment. I think that a big portion of that money comes from the financial sector and the investments in the Hong Kong stock market. I do not think that most of that $2.4 billion amount comes from fur sales, even though Hong Kong women probably love wearing Canadian fur.

Let us discuss dividends and investing money in Hong Kong. Many people from Canada's west coast still have a home in Hong Kong. As a result, when they make a profit — the tax rate on the earnings made from the shares they purchased at the Hong Kong stock market — they will not be taxed twice or have reduced taxes.

Mr. Castonguay: Exactly. In the case of dividends, the treaty sets the limit at 5 per cent. So investment is definitely facilitated.

Senator Hervieux-Payette: Thank you, Mr. Chair.


Senator Nancy Ruth: Mr. Castonguay, I wanted to follow up on some of the questions Senator Hervieux-Payette was asking around Switzerland and Luxembourg and the privacy laws. From your 2010 comments on the convention, can Canada use any of this information it gets in criminal offences that are not necessarily related to taxation?

Mr. Castonguay: That is a good question. The exchange of information article protects the privacy of the information received from the other state and limits the purpose for which it can be used. Most treaties provide that it is for the enforcement of tax laws, whether it is an audit, court proceedings, recovery or any of these things. It is limited to tax enforcement.

The OECD has revised its model treaty, article 26, to provide that in some circumstances information obtained under this article can be provided to law enforcement authorities in limited circumstances and if both tax authorities agree. This is something that we are only beginning to reflect in our tax treaties. That is for the future.

Senator Hervieux-Payette: As a point of information, maybe our colleague has not read every line of our report about money laundering, but you have to know that this information will go to the Canada Revenue Agency and they will be in a position when it comes to money laundering, because it might be tax evasion or it might be money laundering. If you have a bank account in Switzerland and you want to have a very clear conscience, you have to pay your taxes up front. If you do not pay your taxes, you might be in one group or the other. In both cases, you have a problem with the law.

Senator Nancy Ruth: It is an act in process.

Senator Moore: In the materials we received, there is a schedule listing the 90 treaties now in force. Could you submit to the clerk the same list with the dates of coming into effect in brackets after them? It would be interesting to know how old some of these agreements are, because I see there are some here we will start to renegotiate. If you could do that, that would be helpful.

Mr. Castonguay: I think this information may be under tab 5 of your book, if I am not mistaken.

Senator Moore: I was just looking at the one schedule. Thank you for that.

As Senator Hervieux-Payette mentioned, and I think Senator Ringuette as well, there have been stories lately in the press with regard to the Cook Islands. Have you attempted to negotiate a tax treaty with the Cook Islands or with the Cayman Islands or any other alleged place with offshore accounts that are of interest to you?

Mr. Castonguay: Besides negotiating tax treaties, I also negotiate tax information exchange agreements. We have been involved in negotiation of 30 such agreements. We have one in force with the Cayman Islands. We are under negotiation with the Cook Islands.

Senator Moore: Are the terms of those agreements similar to the new Swiss deal or the old one where you could not get information?

Mr. Castonguay: They are functionally equivalent to the Swiss deal.

Senator Moore: The new one.

Mr. Castonguay: It is all about exchange of information for tax purposes.

Senator Moore: When did you commence negotiations with the Cook Islands?

Mr. Castonguay: If I am not mistaken, it might have been around perhaps 2010 or 2011. I am not sure. There have been a few of those.


Senator Massicotte: Is the wording used in treaties to ensure that the required information is obtained — and you surely know about this — similar in American treaties with those countries. The American treaties have been quite successful in terms of information and prosecution.

Mr. Castonguay: Our treaties follow the OECD standards, as do the American ones.

Senator Massicotte: So the Americans use the same model?

Mr. Castonguay: Yes.

Senator Massicotte: If I look at the rotations proposed for those countries, I see that, for instance, in Hong Kong, 25 per cent will be withheld on pension payments. However, that figure is 15 per cent in the case of Serbia and Poland, and 0 per cent in the case of Namibia. There must be a reason for that. It is clearly due to competitive negotiation. Could you explain why the figure is 25 per cent instead of 15 per cent? Are there more Canadians who receive pensions from their countries of origin than us? A financial calculation must have been done. How did you come to those percentages?

Mr. Castonguay: We are not really talking about a financial calculation. Without going into detail, we decided to reduce the rate to 15 per cent in the case of pensions. The resulting 25 per cent reflect the fact that the figure was not acceptable for Hong Kong.

Senator Massicotte: Is it unacceptable for us or for Hong Kong?

Mr. Castonguay: For Hong Kong.

Senator Massicotte: They turned down the 15 per cent because they wanted 25 per cent.

Mr. Castonguay: They wanted 25 per cent or another figure, and we were unable to agree. We decided to apply our national law.

Senator Massicotte: Am I wrong in saying that there are more people who do not live here and receive pension payments than vice versa? Is a higher rate to our benefit?

Mr. Castonguay: Honestly, I do not know. I could not tell you that.

Senator Massicotte: When you are negotiating those issues, some calculations must indicate whether the country's interest is being served, and those calculations need to be made. Right?

Mr. Castonguay: Generally, we try to keep our position consistent from one treaty to another. I like to describe our position as one of balance. We maintain the right to tax the pensions received by Canadian residents who come from other countries and receive those countries' pensions. However, at the same time, we try to maintain our ability to protect pensions paid out by Canada that have usually benefited from tax assistance in the past. Our position is one of compromise.

Senator Massicotte: In response to one of Senator Ringuette's questions, you said that we have a worldwide income concept. That is not the case for individuals. It applies more to corporations, but in the case of individuals, is taxation not based on the place of residence?

Mr. Castonguay: Residents, individuals and companies are taxed on income from all sources, worldwide.

Senator Massicotte: Is focus placed on the pro rata attributed to Canada?

Mr. Castonguay: Putting aside the pro rata attributed to Canada, no, individuals are taxed on income from all sources. That is why we want to obtain information when money is invested elsewhere.

Senator Massicotte: As for Switzerland, I do not understand the supplementary agreement that has been proposed. According to the notes we received, the agreement states that we cannot request information on the names of people under investigation, but we can request other information. I do not understand how we can request information without revealing the name of the person we are looking for. There is something there I do not understand.

Mr. Castonguay: I want to begin by explaining the context in which we came to this agreement. It is important to explain it. We concluded a convention in 2010. At the time, that convention reflected the Swiss policy on information exchange. They could go only as far as they were allowed. Like us, Switzerland is a member of the Global Forum on Transparency and Exchange of Information. The global forum subjects all its members to a very rigorous peer review. Shortly after we completed our negotiations with Switzerland, that country underwent a peer review. The resulting report stated that the Swiss practice in those tax agreements to ask for the name of the taxpayer or person likely to have information was not in line with the OECD standard. According to that standard, it is forbidden to exchange any data — not necessarily the name; it could be an account number — that may reveal a person's identity and can lead to information about a suspicious individual. The goal of this agreement is to bring our treaty in line with the OECD standard — which should have been respected all along — whereby Switzerland cannot actually ask for a name, provided that we are able to identify an individual in another way.

Senator Massicotte: Let us say that we are looking for information on Mr. Y. If we have no right to reveal their name, how can we obtain the information we are looking for?

Mr. Castonguay: We can investigate a taxpayer and come across some information that could apply to that person or their spouse. But we can say that we have a name, a bank account number, and we cannot necessarily make the connection between the two, but we would like to have information on that bank account.

Senator Massicotte: But the name cannot be revealed?

Mr. Castonguay: In cases where we are unsure what name is connected to the bank account, we at least have a piece of information that enables us to look for something else.

Senator Massicotte: Does the person have to be described? Six foot two, brown hair? We can look for information on the bank account, we can provide the bank account number, but we cannot provide the name.

Mr. Castonguay: When we investigate someone and have information that could be relevant about certain people, we don't necessarily have to prove that a bank account is in Mr. X's name. We only need to say that we have found information in the bank account that is likely relevant to Mr. X's affairs, but we don't have to tell Switzerland that we think that this is Mr. X's bank account.

Senator Massicotte: If I understand correctly, the treaties entitle us to information when it is related to tax evasion. But if we are dealing with a criminal offence, we don't have the right to ask for information under the treaties that are currently in effect? Is that correct?

Mr. Castonguay: Under current treaties, we are entitled to ask for information on tax avoidance, or any criminal tax matter; we are not entitled to ask for information on other criminal matters that are not tax matters.

Senator Massicotte: And is money laundering considered a tax matter?

Mr. Castonguay: No, not under the current treaty.

Senator Massicotte: Even if money laundering leads us to believe that someone chose a Swiss bank account to avoid paying tax, that information is not sufficient.

Mr. Castonguay: Not under our tax treaties.

Senator Massicotte: We are missing a big element.

Mr. Castonguay: That is what I was saying; we are beginning to incorporate a broader provision so that in future we will be able to ask for information, to the extent that it is relevant to other government services.

Senator Massicotte: That is the case for all of the treaties that are in effect.

Senator Ringuette: I have a supplementary question. We have just examined all of FINTRAC's operations. Can you use information that you receive from FINTRAC to identify an account number, and proceed from there?

Mr. Castonguay: I would rather not venture into areas I am not familiar with, but to the extent that FINTRAC provides the Revenue Agency with relevant information, I don't see why the agency could not use it.

Senator Ringuette: Following up on Senator Massicotte's questions, this means that you could only use FINTRAC to identify bank accounts or persons?

Mr. Castonguay: The treaty is a source of information, but is not exclusive. To the extent that other information sources are relevant, the agency will of course use them. In the context of tax agreements, the practice was to limit ourselves to tax information.

Senator Ringuette: In your experience, let us say a Canadian goes to open a Swiss numbered account — let us leave Switzerland for a moment because we are talking about the different provisions in treaties that are in existence currently.

Let us choose Luxembourg instead; if a Canadian goes to Luxembourg and opens a bank account with the intention of not paying tax, how can you know that if the system is not designed to send the information to the country of origin? How can you know if Mr. X went to Luxembourg to open a bank account?

Mr. Castonguay: First of all, anyone who opens a bank account in Luxembourg is obliged to report any income generated in Luxembourg. If he or she does not report such income voluntarily, he is committing tax evasion.

Secondly, the agency may submit questions to Luxembourg. The question is whether the agency can detect every case of tax evasion. Not necessarily, because the amended agreement with Luxembourg allows the agency to put questions on particular cases.

Senator Ringuette: I understand that it is very difficult to detect which Canadians have offshore accounts where. That is why I am wondering why these conventions are not based on the principle that information should be provided, even if it is not requested. It becomes extremely complex. If Canadian citizen Mr. X goes to open a bank account in Luxembourg, he has to provide his address, some kind of information.

Mr. Castonguay: Your question is whether we should have automatic information sharing, and whether Luxembourg should spontaneously provide us with information.

Senator Ringuette: Luxembourg or any other country.

Mr. Castonguay: Quite so. Regarding the convention in Bill S-17, that is not the case for Luxembourg, as this reflects their tax policy. But things are starting to change, and the idea of automatic information sharing is gaining greater currency. So there may indeed be some upcoming changes that will allow us to extend the concept of automatic information sharing.

Of the 90 tax conventions that are currently in force, there may be some 25 that provide for automatic information sharing, without our having to ask for it — these involve the United States, the United Kingdom, France, and so forth. Generally speaking, they are countries that have sophisticated tax administrations and are in a position to collect information and send it in a consistent way.

Can we do more? Of course, from the perspective of tax administration, that would be ideal.


Senator Moore: Mr. Castonguay, I would like to finish up on Senator Ringuette's question. In the example of a Canadian opening an account in Luxembourg and earning income on it, I expect he would have to file a return in Luxembourg, would he? He is a resident of Canada but has an account in Luxembourg.

Mr. Castonguay: In some countries you are taxable at source and in other countries you are not. Obviously, if he files in Luxembourg he will file in Canada. When you engage in tax evasion you are either completely off the radar or you file in all places you need to file.

I do not want to suggest Luxembourg is an insular place.

Senator Moore: It is just an example for discussion purposes.

Currently, if that happened and they filed a return in Luxembourg, the authorities in Luxembourg would not automatically let you know that a citizen of our country has filed a return there and may be subject to income tax in Canada. You would not know that.

Mr. Castonguay: That is correct.

Senator Moore: Are you hoping to have that sort of provision in future agreements? Is that part of the OECD model or was it discussed in that group of model makers?

Mr. Castonguay: It is being discussed right now.

Senator Moore: Under the agreements here today, the 11 countries, Luxembourg or Switzerland, for example, if this bill passes and if those countries pass a similar bill so the law is in place, is it for accounts only in place as of this year, or could you go back 10 years and ask about something that you had a suspicion of?

Mr. Castonguay: It is for income earned after the entry into force, notwithstanding when he opened the account.

Senator Moore: It is strictly income earned, but you cannot go back and ask if a certain party or company had an account and earned income 10 or 15 years ago.

Mr. Castonguay: No.

Senator Moore: It is just current and forward.


Senator Massicotte: I just want to make sure that I understood your comments correctly. The RCMP estimates that between $15 billion and $20 billion are being laundered in Canada every year. That is quite a substantive figure. The challenge for someone who wants to launder money is to find a way to recirculate that money in the Canadian economy, so that no one can track it, and the origin of those funds cannot be determined. It is a big problem and they are often willing to pay tax on this phantom income.

But if I understand correctly, rather than finding ways to solve that problem and reintroducing the money into the Canadian economy, they may also have the choice of depositing it in a Swiss bank account. If I understand your comments correctly, even if we think that the funds in the Swiss bank account may be ill-gotten gains, since we are talking about money laundering and not necessarily tax evasion, our treaties do not give us any additional powers to obtain information on these no doubt illegal manoeuvres. Did I understand you correctly?

Mr. Castonguay: Yes. Our tax conventions allow for information sharing on tax evasion. If the Revenue Agency has information that leads it to put questions to Switzerland, that is how we could obtain information. But the information the agency obtains in this way can only be used for tax matters and tax matters alone.

Senator Massicotte: Since legislation on money laundering was introduced in Canada some 20 years ago, and almost everywhere else in the world as well, how is it that we did not wake up sooner to the fact that there is an elephant in the room; how are we letting this get by us?

Mr. Castonguay: My expertise is limited to tax matters. I do not want to go out on a limb as to whether there are other instruments that would allow Canada to obtain information. That is probably the case, but this is outside my area of expertise.


Mr. Cook: We have been talking about tax, and I would not want to leave the committee with the impression that if there is no exchange of information on a tax matter then that is the end. You would have to have officials from the Department of Justice here to speak to it directly.

In terms of criminal investigations that are occurring and relate to crimes in other countries, there is a whole separate network of agreements between Canada and other countries, called MLATs, where there are treaties of mutual assistance in terms of investigative matters.

What we are talking about here is one piece of the puzzle, if you will. Where it veers into criminal matters and things like that, officials have another arsenal of tools.

In terms of the relationship between criminal and tax matters, the RCMP is freer in their ability to provide information to the Canada Revenue Agency to assist them with respect to their investigations than currently the CRA is with its ability to provide information to the RCMP.

I might note that we have been talking about one particular aspect of it, the exchange of information under tax treaties but, as I have indicated, there is a whole bunch of moving pieces on the international tax front.

In Budget 2013, there is a budget measure that would put the same requirement to report electronic funds transfers that currently apply in the money laundering context and apply in the tax context as well to assist the CRA. I was thinking specifically of Senator Ringuette's question about a person setting up a bank account. If large sums of money are transferred through financial intermediaries outside of Canada, there will be reporting with respect to that. As well, there is expansion of reporting requirements on the T-1135. Again, if someone is completely non-compliant, that makes things more difficult. There are a number of moving pieces to deal with the issue.


Senator Ringuette: So consequently, Mr. Castonguay, information sharing with the countries with which we have bilateral agreements is only going to take place if the citizens or companies in one country or the other complete a tax form. To come back to the example of Luxembourg, if a citizen does not complete a tax form in Luxembourg and has income in Canada. . .

Mr. Castonguay: My answer to that is: not necessarily. It is more difficult, but not impossible, since the agency has access to other sources of information that allow it to put questions to Luxembourg concerning a given person. It is possible to obtain information, but indeed, it is a little more difficult.

Senator Ringuette: And vice versa.


The Chair: Mr. Castonguay and Mr. Cook, we thank you for your most informative and comprehensive presentations.

Before we conclude our meeting, I reiterate that at our next meeting on Wednesday we will have Governor Mark Carney. It will be his last appearance on the Hill.

(The committee adjourned.)