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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Senator Moore: When did you commence negotiations with the Cook
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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 committee adjourned.)