Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 33 - Evidence - May 1, 2013
OTTAWA, Wednesday, May 1, 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 4:19
p.m. to give consideration to the bill.
Senator Irving Gerstein (Chair) in the chair.
The Chair: Good afternoon and welcome to the Standing Senate Committee
on Banking, Trade and Commerce.
This afternoon our committee will continue our study of Bill S-17, the tax
convention implementations 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 act also implements amendments to provisions
for the exchange of tax information found in the tax treaties that Canada has
concluded with Luxembourg and Switzerland.
We heard previously from officials from both the Department of Finance and
Canada Revenue Agency. They spoke to the policy development and implementation
of tax treaties respectively.
We are pleased to welcome today Cyndee Todgham Cherniak, Counsel for LexSage
Professional Corporation; and Nick Pantaleo, Partner of PricewaterhouseCoopers
LLP. By video conference, we are delighted to welcome Jack Mintz, Director and
Palmer Chair in Public Policy at the University of Calgary School of Public
Mr. Mintz, we would be delighted if you would like to say a few opening
words. You may say even more than a few.
Jack Mintz, Director and Palmer Chair in Public Policy, University of
Calgary School of Public Policy: Thank you very much. It is a pleasure to
join you from afar here in Calgary.
Normally when you are asked to talk about four bilateral treaties, as in the
case of these ones with Namibia, Serbia, Poland and Hong Kong, you kind of
wonder why you are doing such a long study of that, but of course there is now
extreme interest in understanding issues around the taxation of foreign-source
income and what Canadian public policy should be around that, particularly as
there has been heightened interest in people with offshore accounts and also
some of the questions that often get raised about some companies parking money
abroad and not paying tax in Canada.
I will say a couple of words about that, and then I will be pleased later,
when the discussion takes place, to be able to discuss or answer any questions
that might be relevant to these issues.
Let me first start from a very broad brush point. It is very important to
make the distinction between what you might call tax evasion and tax avoidance.
Tax evasion is when people actually misrepresent their income or misreport their
income in order to avoid paying taxes. It is illegal; it is subject to criminal
or civil penalties, and it is, therefore, a very specific type of issue that
needs to be dealt with.
Of course, that is one concept that one talks about, and some of the
discussions we have seen in the press about offshore accounts is the concern of
whether people are actually paying their tax on their offshore accounts that
should be reported to the Canadian government as part of their personal income
or potentially corporate income, if that is the case.
The other issue is a different one, and that is tax avoidance. Tax avoidance
is really quite legal ways of trying to avoid paying taxes by taking a different
type of action that would lead to a reduction in tax. Economists often talk
about the behavioural effects of taxes, and tax avoidance, in a way, applies to
any time someone tries to make decisions that are influenced by taxation. For
example, if you tax beer more than wine, people will then drink more wine
relative to beer. You can almost call that a form of tax avoidance.
At the international level, of course, we think of tax avoidance as companies
or individuals who decide to shift income from one jurisdiction to another, let
us say from a high-tax jurisdiction to a lower-tax jurisdiction, in order to
reduce the amount of tax they pay or to avoid some of their tax. It could be
perfectly legitimate; it could be perfectly part of public policy in
understanding it and tolerating it or even encouraging it, but that is a
completely different issue from tax evasion.
When you look at the bilateral treaties, as in these four cases, they have
two purposes. One is to avoid double taxation of income, and that can arise when
two different jurisdictions want to tax the same income and so then apply
different taxes on it. Most treaties either allow one country to credit foreign
taxes against taxes that they would normally levy on foreign-source income
earned by their residents, or they would have what is called an exemption system
where you allow let us say a resident, if the resident is earning income abroad,
to not have to pay home tax on that income; instead the presumption is they will
be paying tax in the foreign jurisdiction on that income. Those are two
different mechanisms of trying to avoid double taxation. That is usually
engrained in treaties.
In addition, there are withholding taxes often applied on non-resident income
so that the host country can get some money that is being paid as, for example,
rents or fees or royalties or interest or dividends to a multinational or to an
investor in the home country. In that case, there is a view that again those
types of taxes would be credited against the income tax that would be paid in
the home country by the resident to their own government.
That is clearly one role of these treaties. The other role of these treaties
is exchange of information. Treaties can help reduce the potential for tax
evasion because a government does have the right to go to another government
requesting information on a taxpayer that could lead to actions taken to ensure
that the taxpayer is paying the amount of tax owing to the home government where
the investor might happen to live. That is a very important part of these tax
treaties. In some ways it can help in dealing with tax evasion in that sense.
In the case of these four treaties, I have one final point with respect to
Hong Kong. About 12 years ago I wrote an article arguing that Canada should have
a treaty with Hong Kong. Hong Kong has a relatively low income tax rate. At that
time, it was around 16.5 per cent. When I wrote the article, Hong Kong had no
withholding taxes and a very different type of treatment of income compared to
other parts of the world. They have what is called a source-based tax, an owing
tax on income at source and no tax on foreign-source income, and they do not
allow any deductions from foreign sources to be taken in Hong Kong. It really
does operate as a pure source base.
However, because there were no withholding taxes there was a view of ``Why
should Canada have a treaty with them because we cannot negotiate lower
withholding taxes given they already have zero withholding taxes in Hong Kong?''
However, from the point of view of exchange of information, that treaty would be
very valuable. I had argued that we should be moving into that sort of treaty.
It also might deal with some of the other issues that arise in trying to
determine where income is sourced. Another part of the role of double taxation
treaties is to make clear what we mean by permanent establishment and other
kinds of distinctions that are important in determining that.
I am pleased to see this Hong Kong treaty and think it is exactly the right
thing to do, and I very much support it.
Mr. Chair, I am happy to finish my comments at this point.
The Chair: Thank you very much. We will hear from the next two members
of our panel and then move to questions. I will turn now to Mr. Nick Pantaleo.
Nick Pantaleo, Partner, PricewaterhouseCoopers LLP: Good afternoon. I
am a chartered accountant and lead partner at PricewaterhouseCoopers Canadian
National Tax Services group. I am also the current president of the Canadian
branch of the International Fiscal Association. I have specialized in
international taxation for most of my 27 years as a corporate tax adviser.
In December 2007, I was appointed by Finance Minister Jim Flaherty to serve
as a member of his Advisory Panel on Canada's System of International Taxation.
The panel's final report was issued in December 2008.
I want to thank the committee for the privilege of being before you today to
speak about and to answer your questions on Bill S-17. Similar to all of
Canada's tax treaties, the tax treaties covered by this bill are based on the
Organisation for Economic Co-operation and Development Model Tax Convention on
Income and on Capital.
I do support the enactment of Bill S-17 and the government's continued
efforts to enter into new tax treaties and tax information exchange agreements,
or TIEAs, with Canada's existing and future trading partners and also its
efforts to renegotiate and update existing treaties and TIEAs to ensure that
they reflect current international norms and practices.
As the honourable senators of this committee know, Canada has one of the
largest tax treaty networks among developed countries. By my count, the
enactment of Bill S-17 will bring the total number of Canadian tax treaties in
force to 93, to go along with 30 TIEAs that are either enforced, signed but not
yet enforced, or under negotiation.
Tax treaties play an important role in Canada's tax system by helping to
create a level playing field for domestic business activities carried on in
Canada by foreign and Canadian businesses while helping to ensure that Canadian-
source income is properly measured and taxed in Canada.
As the Advisory Panel on Canada's System of International Taxation further
noted in our final report to the minister:
. . . tax treaties can provide important tax benefits to investors, such as
lower withholding taxes on cross-border payments, reduced taxation of
capital gains in the countries where these gains arise, and double tax
relief in their home countries for taxes imposed abroad.
Tax treaties also enable governments to exchange information, provide mutual
assistance in tax collection and encourage foreign investment.
Also, a key objective of the Canadian government is to pursue new and deeper
international trade and investment relationships. This is not surprising given
that more than 60 per cent of the Canadian economy and one in five jobs in
Canada are generated by trade. In my view, tax treaties contribute toward the
success of such global trading agreements.
It is important that Canadian businesses be provided with greater unfettered
access to foreign markets, foreign investment protection and fair tax treatments
in foreign nations, particularly with emerging markets in Asia, South America,
Eastern Europe and Africa. These factors are critical to Canadian business
decision making and competitiveness. Access to more and bigger markets will help
Canadian companies be more productive.
The Hong Kong treaty is a good example of this. As PwC wrote in our 2011
pre-budget submission recommending that the government commence treaty
negotiation with Hong Kong, it is the gateway to Eastern Asia and a hub for many
Canadian businesses with interests in that part of the world. The Hong Kong tax
treaty will ensure that Canadian businesses have the same opportunities as their
competitors in other countries that do have a tax treaty with Hong Kong. The new
treaty will help ensure that Canada, through the exchange-of-information
provision, has the ability to better enforce compliance with its tax laws.
Thank you very much. I look forward to your questions.
The Chair: Thank you, Mr. Pantaleo. Ms. Todgham Cherniak, please go
Cyndee Todgham Cherniak, Counsel, LexSage Professional Corporation:
Thank you for inviting me here today. I am a lawyer, and I have founded LexSage,
a boutique international trade and sales tax law firm in Toronto, after 20 years
on Bay Street.
I am not here on behalf of a client; I am just a tax lawyer who happens to be
a trade lawyer, who also happens to be a director of the Canada China Business
Council, and I teach law school courses on free trade agreements. Trade is my
specialty, and that is where I add flavour today.
Bill S-17 is good law and should be supported and passed by the Senate.
I would like to make a few points for your consideration. Tax treaties
facilitate trade. Tax treaties are symbols of cooperation, trust and friendship
between nations. Tax treaties prevent double taxation, and Mr. Mintz spoke to
that. They improve stability, transparency, fairness, procedural fairness and
tax certainty relating to international trade and transactions. Tax treaties are
good for Canadian businesses with activities abroad through branches,
subsidiaries and other business enterprises. Tax treaties are good for
individuals, employers, directors of corporations, students, shareholders, et
As Mr. Mintz mentioned, the Canada-Hong Kong tax treaty is long overdue, and
I, too, have written in the past about this, wondering why we did not have a tax
treaty yet with Hong Kong, given the extensive business activities between
Canada and Hong Kong and Canada and China.
The Canada-Poland tax treaty is long overdue.
When passed, Bill S-17 will allow for the implementation of four new tax
treaties, five protocols, one agreement and one supplementary agreement. It does
One of the tax treaties — Namibia — was signed on March 25, 2010. That was a
while ago. The other agreements were signed in 2012.
Some of these treaties provide significant opportunities for Canadian
businesses doing business abroad. For example, the Canada-Hong Kong tax treaty
provides many opportunities for savings in Asia for businesses that operate in
Hong Kong and in China. We are in negotiations for the Trans-Pacific Partnership
Agreement. This will be a hub to Asia.
The Canada-Poland tax treaty provides a foundation stone for the Canada-EU
TIEA, which is currently being negotiated. Canada does have tax treaties with
other EU nations.
The Canada-Namibia tax treaty will benefit Canadian mining and petroleum
companies doing business in that country.
There is greater tax certainty when it comes to the withholding tax on
dividends for all four of the new tax treaties, and there is greater certainty
when it comes to withholding tax on interest. There is a lot of other tax
certainty; I just will not list it all.
Bill S-17 also helps Canada's tax authorities. The tax treaties prevent tax
avoidance and combat tax avoidance and evasion. The protocol on agreements
between Canada and Luxembourg incorporate mutual assistance, the exchange of
information, cooperation and coordination. The Canada Revenue Agency will have a
better, improved enforcement tool to obtain information about Canadians with
assets in Luxembourg and doing business abroad in that nation. The supplemental
convention between Canada and Switzerland also provides a better enforcement
As previously mentioned, the four new tax treaties also contain provisions
that deal with the exchange of information. Therefore, in all of these cases,
Canadian businesses doing business abroad will do good business, and for
anything that is improper, there can be mutual cooperation between Canada and
Canada's tax treaty negotiators have been very busy. If you review the
various agreements carefully, you will see that each of them is customized.
While they follow the OECD model, they are not identical in all respects. For
example, the Canada-Hong Kong tax treaty provides for a 0 per cent withholding
tax on interest between arm's-length parties. The Canada-Namibia tax treaty
covers petroleum taxes, income taxes and capital taxes. The Canada-Hong Kong tax
treaty covers all the taxes covered by the Government of Hong Kong, the Special
Administrative Region under the Inland Revenue Ordinance. The Canada-Serbia tax
treaty contains provisions for independent personal services and dependent
personal services while the other three tax treaties speak to income for
The Canada-Hong Kong tax treaty includes in the definition of a permanent
establishment the assembly or installation projects and the supervision of such
services. This is good for Canadian businesses involved in architectural design,
structural engineering, construction, project management, et cetera; those are
some big, important Canadian companies.
I have read these tax treaties with interest — the protocols, the agreements,
the supplemental conventions. I support them for what they are and what they do.
The details show the benefits to Canadian businesses and the Canadian economy.
Passing Bill S-17 is a vote for opportunities for Canadian businesses, and they
all represent progress in the right direction. Thank you.
The Chair: Thank you, Ms. Todgham Cherniak. Thank you all, witnesses,
for your comments. We will start our questions.
Senator Black: Dr. Mintz and witnesses here in the room, thank you for
those tremendous presentations. I have a question for each of the witnesses, if
I will start with my great friend in Calgary. Before getting under way as a
senator from Alberta, I want to remind everyone in the room that Dr. Mintz has
founded and leads the University of Calgary School of Public Policy, which I am
sure we all agree has become within a short period of time Canada's leading
school of public policy. Thank you very much for that.
You spoke about, and I think we are interested in, the distinction in your
mind between tax avoidance and tax evasion. I am particularly interested in
hearing any policy recommendations that you might have to ensure that Canada can
maintain an open economic trading environment while reducing incentives for tax
Mr. Mintz: First, as you probably know from many things I have said in
the past, I am a great believer, when it comes to business taxation, in two
principles. One of those is neutrality, which means similar levels of tax
burdens on different types of business activities and decisions. The second is
keeping rates low.
Those are two things that I always talk about; I keep harping on those points
all the time. For that reason, I get some people upset when I go after special
credits and exemptions in the system. I make people often very happy when I talk
about lower rates. I think the two go together.
When it comes to international taxation, the principles involved with
international taxation are very complicated. It is complicated because a country
does not control the whole tax system of the world. When you are looking at
someone who is investing in another country, it will be influenced by the taxes
in that other country. It will also be influenced by the tax regime we have in
If you look at what we mean by neutrality, it is a much more complex subject.
One part of neutrality is that you would like a tax system that does not, let us
say, have lower taxes on foreign income relative to domestic income, and I am
including the combined foreign and domestic taxes. One would not want to have
that more than at home. Otherwise, you would be encouraging more capital
investment abroad, or vice versa. This concept is called capital export
neutrality, where you have equal rates of taxation on capital no matter whether
it is invested abroad or at home. That actually gives rise to having a tax
credit system, as I mentioned earlier on.
The other principle is what I would call capital import neutrality. When you
are bringing capital into a jurisdiction, that capital should be taxed at the
same rate as other capital, no matter where it comes from. In other words,
everyone is on an equal playing field. That is also good from the point of view
The problem is trying to put all these things together. Unless you have equal
rates of taxation around the world, in other words, everyone has the same level
of taxation, you cannot ever get both these principles holding simultaneously
internationally. That is where some people argue maybe we should get rid of
these source-based taxes called corporate taxes or talk about other types of
mechanisms that would try to get you to that position. It really is very
difficult. As a result, countries have to do the best they can do relative to
When I ran the technical committee on business taxation 14 years ago, we made
some recommendations on issues that we looked at, and there are some things that
I find troubling around the world today. This is going to be reflected in the
OECD base erosion exercise they are now looking at. The big concern I have is
that the way international tax systems work — I am talking about them in total,
all the countries and how they operate — I would be very concerned that, in the
absence of taxation, you have a certain amount of investment that take place
around the world, which is based on good economic decision making. Then when you
have distortionary taxes, and I am talking about the whole system
internationally, we may end up either getting too much or too little
cross-border investment taking place because of the way the system operates.
In my view, we will need a certain amount of international cooperation, and I
think Canada should support that in terms of trying to deal with what I think
are some significant distortions that operate in the system. It is very hard for
any individual country to try to put a limitation on what you might think is
For example, I can make a very strong case for why we should put some
limitation on interest deductions taken in Canada for investments abroad. It is
not based on the principle that income abroad is not being taxed by Canada. That
is not the argument, in my view. The argument is that there are certain tax
structures that may be encouraging too much investment taking place, such as
where you get double-dip financing. This is actually not only eroding Canada's
base, and another base, but it is actually leading to too much capital
investment. There is one thing I really dislike, and that is when you have
negative effect of tax rates, when you can get double deductions for earning the
same amount of income, or triple deductions, in some cases, if you do the right
It is hard for Canada to put limitations on it because other countries might
not do it, and then you put your own companies at a competitive disadvantage
trying to operate in another country, and that is with respect to this principle
of capital import neutrality and level playing fields. This is a good example of
a difficult problem to get international cooperation on, but it is the only way
I can see solving it. When one country tries to do it themselves, they could put
their own companies at a disadvantage. Therefore, if you wanted to try to reduce
some of the tax avoidance that takes place in this respect, then it may be that
international cooperation will be the only way that one could maybe put some
limitations on this. There are some countries that do put tougher rules on, like
the United States with their interest allocation rules, but generally there are
many countries that do not. As a result, it is hard.
Senator Black: It sounds hard. Thank you.
Senator Ringuette: My question is addressed to all three of you.
Looking at the expertise you have in the area, it might be a simplistic
question, but all three of you have indicated the importance of tax treaties
with regard to trade, so why are we not including tax agreements when we
negotiate trade agreements?
Ms. Todgham Cherniak: In 2007, I looked at over 125 free trade
agreements in the world for the Asian Development Bank and wrote a report for
them. There are no free trade agreements up to 2007, and I have continued to
read free trade agreements as extra reading material, and it does not happen in
standard practice. One reason why we do not do it is this is not the place where
it is done traditionally, typically, and by our trading partners.
The other reason is that each country has international tax treaties, and
there is the OECD model, and it is through this mechanism that the tax
conventions are negotiated as a standard practice.
Mr. Pantaleo: As the titles of the treaties imply, the treaties are
there to avoid double taxation and also to ensure compliance and eliminate
evasion. It is probably more historical, treaties having been around as long as
they have been, that this process has been done separately. Trade agreements
have become a more recent phenomenon. I do agree with you that to have one
without the other is not as efficient, and perhaps the policy-makers would say
it is probably easier to do one at a time, given limited resources and time
constraints and the like. Certainly, with respect to some of these treaties, we
would urge that we be quick in getting them implemented if we are pursuing trade
agreements, because they do go hand in hand.
Mr. Mintz: Actually, there is a deeper reason why this happens and the
difference between trade and tax agreements, and this is around the world. One
department tends to be the one negotiating the trade agreements and another
department the tax agreements, in this case Foreign Affairs versus Finance.
Leaving that aside, governments tend to be jealous over their tax
sovereignty, in part because taxation and the financing of public services
raises a whole bunch of issues internally. That is one of the reasons you tend
not to have governments willing to go into trade negotiations, especially on a
larger basis that includes tax provisions. They tend to like looking at these
To give you a sense of that, when I was involved with some discussions
several years ago on the Canada-Europe free trade agreement, that was a perfect
example where it would be nice to have a multi-lateral tax treaty with Canada. A
bunch of issues arise because of the lack of coordination that goes along with
bilateral treaties that would be advantageous for Canadian companies operating
in Europe, where they would not be hit with certain awkward types of withholding
tax situations and other things that arise because of this lack of coordination.
I actually did try to get some of these tax issues to be part of the free trade
discussions with Europe, but it was almost impossible because immediately the
view of each country was, ``This is our own tax system. We have sovereignty over
this tax system, and we want to completely leave it to bilateral tax
It is endemic and something that, down the road, we might have some
rethinking of. The one area where taxes do come in is the area of subsidies,
under free trade agreement negotiations, because sometimes they do involve
so-called tax subsidies.
Senator Ringuette: I have a short supplementary question. Mr. Mintz,
you talked about the EU. I would suspect that many of the EU countries would
have tax treaties amongst themselves that could, on the whole, be implemented as
part and parcel of the trade agreement with Canada, notwithstanding their
authority with regard to their own tax system. I am trying to find out how we
could simplify and be more efficient in the process. It is somewhat ludicrous to
spend so much time talking with the EU for a trade agreement if, at the same
time, we are not discussing tax. On the one hand, efforts are being made to
increase trade and the very close connection between trade and tax treaties.
Notwithstanding a certain delay in the process and the jealousy of Foreign
Affairs and Finance, for the greater good of the business community, it would be
undesirable to wait until a trade agreement is signed and then move to a tax
treaty, would it not?
Mr. Mintz: I would agree, but let me also add another element to what
you are saying. When you look at the current bilateral tax treaties, you really
focus on two taxes — income taxes and withholding taxes on non-residents. There
are actually a number of other issues that arise with respect to other taxes
levied by governments. To give you another example in the European-Canadian
context, payroll taxes, social security contributions, medicare and other types
of taxes like that are not part of these treaties. Yet, there are some
significant issues that are involved around them, for example, when you have
individuals who might be working between two jurisdictions and be subject to
these taxes. However, there is no way of actually negotiating or having some
sort of relief provided to them. In fact, a number of companies actually
mentioned that to me.
There are a number of limitations we are facing now, and these are things
that maybe need to have more attention paid to them in the future.
Senator Maltais: My question is for Ms. Todgham Cherniak.
I want to begin by commending you. You must be a very good teacher because,
as I am sitting close to you, I see that you have taken all your notes by hand
and that you are well organized.
We know that Hong Kong is Asia's biggest financial centre and that many
Canadian companies have set up shop there. However, Hong Kong is only a point of
entry to Asia. How will we take into consideration Beijing and Shanghai, for
instance, and other countries close to Asia? Can Canadians who have set up in
Hong Kong do business in all those cities? China is heavily populated, and
Canadian companies understandably want to do business in different Chinese
cities and nearby countries. So why not sign a treaty with China instead of Hong
Ms. Todgham Cherniak: I have to be honest with you; I do not know
whether we have one with China already or not. I was thinking that we already
have a tax convention with China.
Senator Maltais: An agreement with China covers Hong Kong, right? Is
Hong Kong completely separate from China when it comes to finances?
Ms. Todgham Cherniak: For many purposes, Hong Kong is considered to be
separate from China, even though Canada does have a One-China policy. For
example, at the WTO, China, Hong Kong and even Chinese Taipei are separate
members of the WTO, even though Canada has a One-China policy. There is some
togetherness and some separation when it comes to China and Hong Kong.
Another thing I would like to raise is that China has its own tax treaty and
also a free trade agreement. One of its very first free trade agreements was
with Hong Kong, when Hong Kong joined China. A lot of structuring looks at the
Canadian relationship to Hong Kong, where Hong Kong has the holding company,
where the holding company then goes into China to do business and where the
holding company's activities, vis-à-vis China, are pursuant to the China- Hong
Kong taxation treaty. Then there has always been this small issue, given the
withholding taxes, or lack thereof, in Hong Kong, to get the funds out of Hong
Kong and back to Canada.
The Chair: I think Mr. Pantaleo has something he would like to add to
Mr. Pantaleo: I will just confirm that Hong Kong, in this respect,
does administer its own tax system. They do have their own tax treaty with
China, and Canada does indeed have a tax treaty with China. We have for a number
of years. In fact, we are in the process of renegotiating it.
Senator Maltais: Can you give us the assurance that China will honour
agreements signed with Hong Kong?
Mr. Pantaleo: Not from me.
Ms. Todgham Cherniak: I will not go out on that limb.
Senator Maltais: If we want to sign an agreement, a convention, with
Poland, my understanding is that we would be signing it with the country of
Poland and not with a Polish city. Does the same not apply to China? Explain
that to me.
Mr. Pantaleo: We do have an existing treaty with Poland, I believe.
This is a new treaty with Poland. It is just updating the existing treaty and
making it more reflective of current international norms and changes that have
been made to the OECD model convention.
The Chair: Thank you. Mr. Mintz, would you like to add to that?
Mr. Mintz: I just have a quick point that might help with clarity.
Hong Kong is recognized by the Chinese government as a special administrative
region. It is part of the deal that came after it got independence from Britain
and became part of China. As a result, Hong Kong has been able to have its own
quasi government but has been able to have its own treaties and function in many
ways as it did before 1997. That is the reason Hong Kong has its own treaty
The Chair: Thank you, Mr. Mintz.
Senator Maltais: Mr. Chair, no one has answered my first question. How
will you monitor Canadian businesses that set up shop in Hong Kong and do
business in major Chinese cities? How will Canada apply its tax laws and recover
its taxes in those situations? As you just said, companies will be doing
business in Shanghai and other cities. How will our authorities bring the money
back to Ottawa? Tell me how that will be done.
Mr. Pantaleo: As I stated, there is an existing treaty between Canada
and China, one of the purposes of which is to allocate income between the two
countries. To the extent that Canadian companies are earning income in China,
China has the primary taxing authority to that income. The treaty, among other
things, ensures Canadian companies' rights between jurisdictions.
Senator Hervieux-Payette: I want to begin by welcoming you. I think we
all agree that it is a good thing this bill is not very disputed.
I would like to know why the U.S. tax authorities would want to tax Canadians
born in the United States and permanently residing in Canada. Our agreements
contain no barriers to that kind of recourse.
Recently, Great Britain started going after companies like Starbucks that
were not paying taxes in the United Kingdom because they were sending all their
profits to a tax haven. Do we have any safeguards against those types of
situations? When Starbucks develops a coffeehouse network in Canada, we want
them to promise not only not to hire foreign employees but also to pay taxes.
How do we ensure that those foreign companies are paying their taxes? This
morning, we were told that $29 billion in taxes was not paid in Canada. So
someone must not be paying their taxes.
The Chair: To whom do we direct that? Did you direct it?
Senator Hervieux-Payette: It is for whoever wants to answer it.
Mr. Mintz: You are raising important questions in terms of policy. It
goes back to my point about distinguishing between tax evasion and tax avoidance
to understand what we are talking about.
First, if it is a matter of tax evasion where people are not reporting income
that they should be paying, then this is where the treaties help because they
allow for exchange of information. That is important.
If we are talking about tax avoidance, for example, a company is not paying
tax in the jurisdiction, as in the case of Starbucks, that is related to an
important aspect of tax policy, which is very complicated. For example, it has a
lot to do with the transfer pricing rules that many countries have agreed to so
far. I will not say they are opaque, but they are in some ways. They do
potentially allow for a significant amount of income to be shifted from one
jurisdiction to another. For example, if a company wishes to transfer its
intellectual property rights to a subsidiary in another jurisdiction, it is not
difficult under existing rules to be able to shift income from one place to
another. There have been some other interesting ways that companies around the
world have shifted income into low-tax jurisdictions.
In Canada, we have taken an attitude, which I have to admit I promoted
strongly, which is to try to get down our corporate tax rates to try to prevent
some of this base erosion that was happening at the international level. In
fact, going back well before 2000 when Canada had the highest corporate income
tax rate in the OECD, I strongly argued about the need for significant business
tax reform where we bring rates down and broaden our tax bases as well as trying
to have a more competitive system in Canada. Over the past 13 years since 2000,
both under Liberal and Conservative governments, we have been able to achieve a
significant gain in that, and our corporate taxes as a share of GDP, despite a
corporate rate deduction that has gone from 43 per cent in 2000 to today to a
little over 26 per cent, despite that major reduction in corporate rates,
corporate taxes as a share of GDP have virtually been unchanged in the past 10
years. As I have shown in a recent paper, that has been due to profit shifting
around the world in Canada. Those kinds of policy actions help. Whether we need
to do more, things like transfer pricing rules and the way we introduce issues
around the deduction of overhead expenses and interest deductions, will be
important issues that we have to think about in the future. However, they go
beyond what these tax treaties are all about. It has a lot to do with the way
that we define or develop our own tax rules in Canada.
The Chair: Are there further comments?
Mr. Pantaleo: I was going to try to address the first part of your
question, senator, because I think you were addressing an issue that has been
out there for some months now, and that is the U.S.'s attempt to battle against
what they perceive to be evasion of U.S. taxes.
The U.S. is somewhat of a different animal, as it is in most circumstances.
In this particular case, they tax their individuals on the basis of citizenship.
It is quite true that some Canadians recently found out that they are U.S.
citizens or dual citizens as a result of having been born there while their
parents were on vacation or whatever the case may be. They are getting caught up
in the net that the U.S. has thrown out there, which is effectively to deputize
foreign financial institutions to have them provide the U.S. government with
information on U.S. citizens residing, in our case, in Canada.
Canada happens to have probably the largest number of U.S. expatriates; I
think there is about a million. As you can probably imagine, this has caused
much consternation amongst those Canadian individuals. For the most part, these
Canadian individuals are not evading tax. Some may not have filed U.S. tax
returns up to this point in time because they did not know they needed to. They
might still not have an actual U.S. tax liability because being a resident of
Canada would mean, under the treaty, that we have the primary taxing authority
of their income in Canada. To the extent that they would be subject to tax in
the U.S., the U.S. could give them a tax credit for the Canadian tax.
Having said all that, though, this new legislation, which is coined ``FATCA``
is still problematic because it still requires some reporting, and some fairly
hefty penalties still could be assessed. From discussions that I have had with
Department of Finance officials, this is very much at the forefront of their
minds and of the minister's mind, namely, to come to some agreement with the
U.S. and it would be administered.
The U.S. has signed intergovernmental agreements with other international
jurisdictions to try to facilitate this particular law. Aside from the fact that
it is very cumbersome and expensive for financial institutions to implement the
necessary systems to capture the right individuals, among the positive aspects
is that it has drawn increasing attention to the fact that information should be
exchanged not as requested, but there should be automatic exchange. Currently
under the OECD model treaty, the exchange of information happens upon request,
so CRA asks the foreign jurisdictions for information on a particular taxpayer
in certain circumstances. FATCA would result in and many critics have been
advocating an automatic exchange. When a foreign country comes across tax
information that it thinks CRA should know, it would automatically provide it.
The G20 and the OECD have been strongly advocating this, and it is probably
where this is going next in terms of improving the existing treatment of
exchange of information.
Senator Massicotte: Thank you for being with us today. This is
obviously very useful.
Mr. Pantaleo, is your background as a tax expert?
Mr. Pantaleo: Yes.
Senator Massicotte: My interest is tax evasion, not tax avoidance. My
particular concern is that the treaty being proposed with Switzerland is very
specific relative to what information they will provide, and we must be very
specific on what we need. Contrary to most of the other treaties, where we have
more free-flowing information, with the Swiss it is very specific, and we cannot
speculate on whom an account belongs to. They can only respond to specific
Does that bother you? Is that adequate for our needs? Switzerland is saying
they are opening it up, but they are doing so with strict procedures and
methods. Is that good enough for us?
Mr. Pantaleo: We could argue that it is not, and we could argue, as I
said a moment ago, that we are heading to something that will provide for more
automatic exchange of information. One of the constraints under the current
provisions, as laid out in the model treaty, is that it is not intended to allow
countries, in this case Canada vis-à-vis the Swiss, to go on fishing
expeditions. Many have argued that that is a significant constraint,
particularly when some jurisdictions, such as Switzerland, Luxembourg and
Austria, have historically had bank secrecy laws, which some would say they have
hidden behind. Those domestic laws inhibit their ability to exchange
I suspect the changes to the Canada-Luxembourg and Canada-Switzerland
treaties were to accommodate some recent changes to the model that has broadened
this somewhat over what the existing treaties provided for. However, even as we
are speaking I think we are beginning to progress to the next level of more
automatic exchange of information. Indeed, recently Switzerland, Luxembourg and
Austria have indicated that they are falling in line with international norms.
They just have to go through a process to manage their domestic laws.
Senator Massicotte: This week Luxembourg announced that they are
opening up, but not before 2015. I understand from CRA that with all our
treaties, if the question pertains to money laundering, even if the money
laundering relates to evasion of taxes — in other words, many people launder
their money for the purpose of avoiding taxes — the other country has no
obligation to report that. They need to provide information only on tax evasion,
not money laundering.
The RCMP tells us that we have $15 million to $25 million a year of money
laundering, which means it is probably $15 million to $100 million. Is that not
a big hole we are missing? It may be nice to convince ourselves that it is good
enough, but are we mature enough for this process?
Mr. Pantaleo: There are two points there, and Mr. Mintz alluded to
them. Treaties are still fairly restrictive in terms of what they cover. They do
not cover all the taxes, and they do not go to the level that you are
suggesting. Other agreements have been reached on a multilateral basis. One is
referred to as the Multilateral Convention on Mutual Administrative Assistance
in Tax Matters. Canada signed that treaty in 2004, but we have not yet ratified
it. I believe that is because of a technical hang up in our tax rules. The
government needs the authority to get into multilateral agreements. It has the
ability to get into bilateral agreements but not multilateral agreements with
respect to tax matters.
That treaty has been signed on a multilateral basis; 50 to 60 countries have
signed it, and it provides for the exchange of information that goes beyond
income taxes. It covers many other taxes. Whether it will satisfy the point that
you are making about money laundering, I am not sure. Those are the types of
things that may have to be dealt with through other agreements.
Senator Massicotte: Mr. Mintz, do you have any comments on that issue?
Mr. Mintz: Mr. Pantaleo covered the ground very well on that. I agree
with what he said about the way we are thinking about these issues.
Senator Patterson: We are fortunate to have such distinguished
witnesses. I think all of them have agreed on the importance of a tax treaty
with Hong Kong.
Ms. Todgham Cherniak, I believe you said that having a tax treaty with Hong
Kong is key for a Canadian business trying to get a foothold in the Chinese
market. I believe you said that the treaty would make transactions from China to
Hong Kong and then to Canada much smoother. Could you elaborate on how the
treaty will assist, please?
Ms. Todgham Cherniak: Yes. I would not say that it is critical, but it
is a tool that can help. Many Canadian businesses are currently doing business
in Hong Kong and China. The tax treaty has not yet been passed and it will not
be implemented immediately when the legislation takes effect.
All that being said, it is helpful because it is hard to get money out of
China. When Canadian companies do business in China, the money stays in China
and is reinvested there rather than coming back home so that we can have
Canadian jobs and Canadian opportunities. Having certainty on money going
through Hong Kong and transparency and certainty as a result of limits to
withholding tax is helpful, and it will help that process along. It is going
along right now, but it is another tool that will be helpful.
Senator Patterson: Thank you.
Mr. Mintz, Hong Kong is among the largest financial centres in Asia and an
important conduit for financial investments, particularly in China. I believe
many Canadian businesses use Hong Kong as a regional centre for their
investments in China and other parts of Asia. Can you speak to the historical
nature of that phenomenon in its extent today?
Mr. Mintz: I am sorry, but I would not have numbers to give you on
that today; I would have to look it up. However, I will tell you about my own
experience, because I have done work in this area over the past number of years.
You are absolutely right that Hong Kong is a significant conduit for money
going into China. It has been important for Canadians. In fact, 10 years ago
when I was in Hong Kong I met many Canadian business people who were doing
business in China. They tended to go to Hong Kong before going into China
because it was English-speaking and had many British-type institutions that we
were used to. They had very good rule of law in Hong Kong, so it was a good
stepping stone into China for Canadian businesses. That is one reason that Hong
Kong, even today, remains a significant centre for money to go into China and
then come back into Canada.
Singapore has also played an important role. I am not sure how much Canadian
businesses use Singapore relative to Hong Kong, but it has been another
important regional financial centre. Many companies from around the world that
work in China go through Singapore. Of course, now China is trying to make
Shanghai an important financial centre for so that people will go directly into
One of the things — and this is because of work that I did with the IMF for a
number of years in China — that one needs to appreciate in China is that we talk
about Canada being a federal country, provinces having their own important rules
and sometimes barriers to free trade of capital, goods and services within
Canada. China is an amazingly decentralized country in many ways. Just because
you go into Shanghai, for example, does not mean you can go into anywhere in
China after that. There are a number of local rules and regulations that must be
dealt with as well.
The Chair: That concludes our questions in round one. I will move to
round two where I have two questioners.
Senator Black: To all three witnesses and for the benefit of the
record, I am very interested in your views. If we were not to pass this
legislation, what effect would it have on competitiveness for Canadian
Mr. Pantaleo: We said a lot about the Hong Kong treaty, as you know.
Going back to why a number of people pressed for a treaty with Hong Kong, one of
the key aspects of Canadian policies in making Canadian companies competitive
abroad is our exemption system on active business income. We afford that to
foreign subsidiaries of Canadian companies that are carrying on active
businesses, but only if they are doing so in countries that we have a tax treaty
with or that we have entered into a TIEA with. That is the obvious competitive
disadvantage that Canadian companies would have vis-à-vis a number of other
jurisdictions that provide for an exemption for such activities but do not have
the requirement to do so through countries with which their home jurisdiction
has a tax treaty. That would be a significant one.
I think the other aspect, in particular with Hong Kong, is that it provides
for lower withholding rates on certain payments. We do have some domestic laws
on interest that provide for a zero withholding. Although we are becoming a net
capital exporter and have been for the last 15 years, we still rely heavily on
investment into Canada. That is the stated policy of the government and one of
the reasons we pursued competitive tax rates. Certainly for investments coming
into Canada through Hong Kong, retaining the higher rates would put us at a
disadvantage. Those are two things I can point two, one from an outbound and one
from an inbound perspective with respect to the Hong Kong treaty.
Ms. Todgham Cherniak: I will rephrase your question as to how I
interpret it. What is the effect of the status quo, as where we are now these
treaties are not in effect? First would be the negative effect of embarrassment.
We have gone out and negotiated these treaties. Tax treaties are a symbol of
cooperation, trust and friendship through nations. Not passing treaties that
have been negotiated says something about that relationship. When you fracture a
relationship, what are the negative side effects of that?
Second, we are in a time of budget issues for governments around the world,
and countries need to raise revenue. They raise revenue by taxation. We have
alluded to the fact that tax treaties do not cover all forms of taxation, but
they do cover some. To the extent that countries may change tax rates on foreign
businesses — these four countries where we have the tax conventions covered by
this bill — we will have more tax uncertainty. At least having the conventions
in place, we will have more tax certainty because the caps on the withholding
tax and the rules will be established.
Third, when you look at the protocols with the agreement with Luxembourg and
Switzerland, there are greater exchanges of information. This is something the
Canada Revenue Agency has been asking for and said they need, so you are not
giving them a tool that they said they need to have. There is also exchange of
information provisions in the tax treaties as well. It is not just Switzerland
and Luxembourg; it will be all six countries that we are talking about. That
would be helpful.
Senator Black: Thank you very much.
Mr. Mintz: I would echo a lot of those things. To sum up, if we pass
this legislation I see only upside; I do not see any downside to doing so. As my
colleagues on this panel have mentioned, there are a number of positive gains:
certainty, lower withholding taxes, exchange of information, et cetera. I would
add two more points from an economic point of view. We always have to remember
that things like withholding taxes are like a tariff to capital flow. If you
have the view that free trade of capital is as important as free trade in goods
and services, then there is a positive argument to saying if we can reduce our
withholding taxes both for Canadian exports of capital as well as imports of
capital, and that only has eventually positive impact or for the Canadian
I think more importantly, going back to Ms. Todgham Cherniak's earlier
comment, which I totally agree with, one has to think of this in terms of
overall trade, the importance of global supply chains and the role that we have
in those global supply chains. That is where even the Polish treaty can play a
role, given the role Poland now has in the European Union. Certainly, it is
critical for Hong Kong. I have less to say about Serbia, not knowing as much
about the Canadian relationship with Serbia. With Namibia, we have important
mining interests there and that has some implications for the mining sector in
I just do not see any negatives by passing this legislation; I only see
Senator Maltais: My question is somewhat complex, but I will try to
simplify it. Let us take the example of a Canadian company that sets up shop in
Hong Kong while opening branches in Shanghai and Beijing, for instance. Will
that company be taxed in China, Hong Kong and Canada once the profits are
Mr. Pantaleo: Let me take a shot at that. I would say the activities
in China would be subject to Chinese tax. The income would not be subject to
Hong Kong tax. As Mr. Mintz indicated at the beginning, Hong Kong basically
taxes on a territorial basis. If the activity is considered to occur outside of
Hong Kong, then it will not be subject to tax in Hong Kong.
The income, on its return or patriation to Canada as a dividend, would be
received tax-free. There may be some withholding taxes on the dividends from
China to Hong Kong; I am not sure. There have been some changes to Chinese law
and I cannot remember off the top whether the Chinese-Hong Kong treaty provides
for a nil withholding rate.
Senator Maltais: So how is setting up shop in Hong Kong beneficial for
a Canadian company? If Hong Kong is only a transit point, could the company not
go directly to Beijing?
Mr. Pantaleo: As has been stated, China may be one of the locations
where Canadian companies are carrying on business in the eastern Asian region.
Canadian companies, for greater management simplicity and control, will
typically set up regional headquarters to manage the operations on a regional
basis. It does not take away from the actual on the ground management of the
activities, but they will do so on a regional basis. That would also include
treasury functions, dealing with foreign exchanges, procurement and those
aspects of it. I could see some real advantages for using Hong Kong in that
You are quite right, senator. Not all Canadian companies will decide to hold
their Chinese investments through Hong Kong. They could very well hold their
investments directly from Canada, but many larger Canadian companies do hold
their foreign investments through regional holding companies throughout the
world, and Hong Kong would be a logical choice in that type of structure for
Mr. Mintz: Hong Kong has a sophisticated financial sector compared to
many parts of China. As I mentioned earlier on, the rule of law is strong in
Hong Kong. It has been based on British tradition for a long time. That is one
of the reasons why many companies like to go through Hong Kong and to use Hong
Kong for a base to go into China, as well as potentially other countries.
I just want to reiterate that that is an important reason why I argued 12
years ago why we needed this Hong Kong treaty, and I am glad that it is finally
Ms. Todgham Cherniak: Going back to the initial question, I think we
missed one piece of the answer. If you have a manufacturing operation in China,
usually when a Canadian company sets up a subsidiary or something, manufacturing
operations in China, it is to ship the goods back to Canada as opposed to sell
the goods within China. When the goods are sent back to Canada and resold in
Canada, there would be Canadian income taxes with respect to those activities.
It is not 100 per cent of the time that there is no Canadian income tax paid.
It depends on the facts and circumstances of each arrangement and what they are
doing. When you have a manufacturing operation, based on what I have seen, a lot
of the goods are eventually sold in Canada where we get Canadian sales taxes and
Canadian income taxes, individuals are involved in the distribution network
where there are payroll taxes. It is not a situation where there is never any
Canadian tax paid. I am not sure whether we covered that part off.
Senator Maltais: I never said that no taxes were being paid in Canada.
My question is clear. If a Hong Kong-based company opens factories in China, I
just want to know how many times it will be taxed — in Canada, Hong Kong and
China. That is all I want to know. I do not want any additional explanations, as
my question is very clear.
The Chair: I think Mr. Pantaleo answered the question on the first
Thank you very much, panel. You have been very helpful in our deliberations
today. On behalf of all of the members of the committee, I would like to express
our great appreciation for your appearance today.