Proceedings of the Standing Senate Committee on 
Foreign Affairs and International Trade

Issue No. 65 - Evidence - Meeting of May 30, 2019

OTTAWA, Thursday, May 30, 2019

The Standing Senate Committee on Foreign Affairs and International Trade, to which was referred Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting, met this day at 10:30 a.m. to give clause-by-clause consideration to the bill.

Senator Paul J. Massicotte (Deputy Chair) in the chair.


The Deputy Chair: Good morning. My name is Senator Massicotte, and I am deputy chair of this committee. Welcome.


We’re meeting today to continue our study of Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting.


I am pleased to welcome to this committee Ms. Laura Gheorghiu, Partner, Gowling WLG LLP (Canada); and Mr. Toby Sanger, Executive Director, Canadians for Tax Fairness. Thank you for accepting our invitation.

Without further delay, I will ask that senators introduce themselves.

Senator Bovey: Patricia Bovey, Manitoba. Welcome.

Senator Coyle: Mary Coyle from Nova Scotia, and welcome to our two guests with Nova Scotia connections also.


Senator Saint-Germain: Senator Raymonde Saint-Germain from Quebec.


Senator Boehm: Peter Boehm, Ontario.

Senator Greene: Stephen Greene, Nova Scotia.

The Deputy Chair: Let me remind senators and witnesses that their remarks and questions should be precise and concise in order to cover as much as we can during the time we are given. We look forward to hearing your presentations and the answers to our questions. We will begin with Ms. Gheorghiu.

Laura Gheorghiu, Partner, Gowling WLG (Canada) LLP, as an individual: I am a tax attorney. I provide tax structuring advice to a number of multinationals investing in Canada as well as Canadian companies investing abroad.

I would like to thank the committee for the opportunity to provide comments on Bill C-82, the Multilateral Instrument, or MLI.

I also want to note that all the statements, views and opinions I will be expressing today are mine only and are made under my own name and not that of Gowling WLG.

As you have already heard from others, certain provisions of the MLI present challenges for Canadian businesses and may discourage foreign investment into Canada, but I want to add that the MLI also applies in the other direction, to subject Canadian enterprises to similar challenges when investing abroad.

I will focus my comments today on two specific areas of concern: First, the introduction at Article 7 of the principal purpose test, or PPT, as a condition precedent to obtaining the benefit of a treaty, read together with the amendment at Article 6 to the preamble, raise significant uncertainty both for existing and future development into Canada.

Given that there are no grandfathering rules, it appears that the PPT will apply to tax structures that were put in place prior to the coming into effect of the MLI. This, in result, represents retroactive legislation with respect to those investments that were otherwise in compliance with or even sanctioned by existing legislation and case law at the time of their inception. As the PPT is not a bright line test, there are no specific actions that investors can take to protect themselves from its application. This is why the PPT should not apply to structures that are already in place at the time of the coming into effect of the MLI.

Further, although relying on similar criteria, the PPT goes a step further on the general anti-avoidance rule, or GAAR. The GAAR applies only when tax is the principal purpose of a transaction, while the PPT applies when tax is one of the principal purposes.

As one can expect that all prudent investments take tax costs into account, there is potential for the PPT to be raised in many instances where tax was not the principal driver behind the investment decision.

For example, private equity funds and other collective investment vehicles often pool foreign investment into Canada. As the investors in these funds are from diverse countries, the fund must use a holding corporation in an intermediary country to stabilize the withholding tax on dividends and other returns from Canada. The investors do not control the choice of intermediary country but, as with all investments, take effective tax rates into account in choosing where to invest.

Despite some comfort provided by the Canada Revenue Agency that they will honour past tax rulings with respect to collective investment vehicles, there remains a substantive risk that the PPT may be raised to deny such investors treaty benefits.

Further, where the PPT applies, an investor through such a structure is worse off than if he had invested directly into Canada. Canada has not raised the reservation with respect to subclause 7(4) of the MLI to allow the competent authority to look through the intermediary to the investor and grant available relief under the investor’s only treaty with Canada. In short, the introduction of the PPT will make these types of investments into Canada more uncertain and therefore reduce access to foreign capital.

It is also unclear how the PPT will interact with the GAAR. Finance has expressed the view that the PPT should be applied first and then, if a treaty benefit still exists, the GAAR should be applied as a second resort, a second kick at the can.

Given that the PPT is an even more stringent application of the GAAR test, it is not clear how you could fail to meet the PPT test and still have GAAR apply unless GAAR were to address a different tax benefit from the treaty benefit, for example, a benefit under Canada’s own domestic tax laws. If this is the intent, then the language of proposed subclause 4(2) of Bill C-82, inconsistent law exception, should be clarified.

The second area of concern I wish to address is with respect to Article 8 of the MLI. This article targets the reduction under a treaty of the 25 per cent dividend withholding rate to 5 per cent where the dividend is paid to a corporation that at the time of the payment owns at least 10 per cent of the votes of the dividend payor.

Article 8 denies the reduced treaty withholding rate unless the shares were owned throughout a 365-day period that includes the dividend payment date. The hold period is meant to ensure that non-resident corporations cannot engage in short-term share acquisitions to benefit from the lower treaty rate.

Article 8 is an example of an anti-avoidance rule that in practice has unintended consequences, and I want to use it to exemplify why it is so important for Canada to be cautious when raising any other reservations with respect to the optional provisions of the MLI.

The issue with Article 8 is that the hold period can straddle the transaction date so that a dividend payor does not always know if the test will be met at the time it is required to make the withholding.

A Canadian corporation paying a dividend to an unrelated recipient that does not meet the hold period test has a difficult choice to make. It can either withhold at 25 per cent, which forces the shareholder to engender additional costs and delays to obtain a refund of the excess withholding and makes the Canadian corporation a less attractive investment option compared to a corporation in a country that does not apply the rule. Alternatively, in order to compete, the Canadian payor can withhold at the lower rate and expose itself to the risk of additional withholding tax liability and penalties if the shareholder ultimately does not meet the hold period test.

This concludes my introductory remarks. I’m very happy to answer questions. Thank you.

Toby Sanger, Executive Director, Canadians for Tax Fairness: Good morning, Mr. Chair and members of the committee. Thank you very much for inviting me to this session. I really appreciate it.

This is a complicated piece of legislation, and I commend the committee for taking this on. My apologies to the translators. I’m going a bit off text here.

We have a piece of legislation that amends some 75 different tax treaties and each one of those is different. Then there is a list of reservations that the federal government tabled with the OECD related to this, and then there was a subsequent note from Finance that will change that. So the whole area is complicated, but then there are additional layers on this. So I do commend you for taking this on. It is complicated.

I’m an economist, not a tax accountant or a tax lawyer, and this is a complicated area.

To start, as I expect you know, international tax avoidance and evasion are a massive problem. The International Monetary Fund, hardly a wild-eyed or fringe organization, estimates that governments around the world lose well over $600 billion U.S. in revenues to international corporate tax shifting — and that was for 2013. If you translate that into Canadian dollars and increase it to what the losses might be this year, I would say the amounts lost to governments worldwide are probably closer to CAN$1 trillion. That is a lot of money no matter what you use or how wealthy you are.

The IMF estimates that OECD countries lose an average of 1 per cent of their GDP from corporate tax revenues to profit shifting using various means, which would be about $20 billion for Canada. That seems high, but even if we take some of the lower-end estimates, the revenue losses for Canadian governments would be a minimum of $8 billion annually. That’s a lot of money. That could pay for a lot of public services.

I realize those are estimates but they do seem realistic. Cameco Inc. is the largest publicly traded uranium company in the world. The CRA recently took them to court for $2 billion alone for taxes they avoided because they shifted their profit to a small subsidiary in Switzerland. Partly because our laws are so weak, Cameco won the last round. The CRA is appealing but that’s $2 billion from just one company.

As massive as these revenue losses are, they’re not the only related problem. This is also a fundamental issue of tax fairness. The largest multinational corporations in the world are most able to avoid taxes through the current system and consequently to gain an unfair tax advantage over smaller and medium-sized businesses. That contributes to greater corporate concentration. We’ve seen the stories about Google and Apple and other corporations paying very low rates of tax.

It also contributes to less competition, so that’s bad. That’s bad generally.

It also contributes to corruption in different parts of the world. Some African countries reportedly lose more from profit-shifting and elicit financial flows than they receive in international development assistance. Corruption is tied in with secrecy jurisdictions.

Bill C-82 enables Canada and other countries to effectively implement wholesale changes to their numerous bilateral tax treaties. It is, in general, a positive step forward. It’s an efficient way of consistently adjusting the thousands of bilateral tax treaties that have been signed between nations in order to implement a number of action measures of the OECD base erosion and profit-shifting process, also known as BEPS.

So far, 88 countries have signed on to the MLI and 25 have already ratified it. Canada has indicated that 75 of our 93 tax treaties would be covered by it. By having a generally consistent set of measures, the MLI will limit but not eliminate the practice of treaty shopping. The included preamble and the interim principal purpose test, or PPI, which my colleague talked about, could function as strong, anti-tax-avoidance rules for those who use countries such as Luxembourg or the Netherlands which have already ratified the MLI.

However, Canada has a fairly lengthy list of reservations in relation to this MLI, including provisions not adopted through this convention including over-transparent entities and hybrid entities. Other countries may have similar or different provisions. This will be a multi-layered patchwork.

For some reason — I’m not sure why — we didn’t include our tax treaties with Switzerland or Germany. They’re not covered under this. They’re not included in the list. I understand that there are negotiations but those can be quite lengthy on tax treaties. For instance, this MLI wouldn’t have prevented the tax avoidance that Cameco has been practising.

There are also many other ways that multinational enterprises avoid taxes which won’t be addressed by this, including using debt financing and intellectual property to shift profits.

While this bill and other BEPS initiatives are positive, they are limited. Christine Lagarde, the head of the IMF, recently commented that the current international corporate tax architecture is fundamentally out of date, the ease with which multinationals seem able to avoid tax has undermined faith in the fairness of the overall tax system, and that we need a fundamental rethink of international taxation.

These are strong words coming from the head of an organization like the IMF. Just this week, representatives of 129 nations discussed proposals for a fundamental reform of our international corporate tax system. The arm’s-length transfer pricing system that underlies our international corporate tax system has been in place for about 100 years. It is so broken, complex and ineffective that major countries around the world are now leapfrogging it with a range of different tax measures, partly to tax large, digital corporations based on their revenues or sales or other measures of economic activity.

The United States introduced what is called the GILTI tax or BEAT tax. The U.K. has taxed digital service. France has proposed some things. A lot of countries are leapfrogging over this whole OECD BEPS initiative. The Canadian government has not yet advocated any reforms, which is a pity because we have some excellent experience to offer. The system we have had in place in Canada to allocate the taxable income for corporations between provinces for tax purposes, using a formula based on sales and payroll, is simple, straightforward and has been highly successful for over 50 years. Most people don’t know about it because it is so noncontroversial.

The G24 group of countries is proposing something similar, together with unitary taxation of multinational enterprises, so they can’t use subsidiaries or affiliated companies to avoid taxes.

I think we have a sense of how complicated the tax legislation can be, particularly when you’re dealing with tax treaties between different countries. This is something I hope the Canadian government will strongly support along with proposals to allow for a global minimum corporate tax, so we don’t have an ongoing race to the bottom with corporate income taxes.

Having a clear set of rules like this would also allay concerns about tax competitiveness and losing foreign investment. In conclusion, while this bill is a positive step and I urge you to support it as it is, we can and must take much bigger steps forward to develop a much more functional international corporate tax system. It doesn’t need to be highly complicated. In fact, we should strive to make it far less complicated. We need a simple, level playing field around the world so that there are fewer opportunities for loopholes and that it is fairer for all involved. Thank you very much.

The Deputy Chair: Thank you both.


Senator Saint-Germain: Thank you, Mr. Sanger, for your presentation. I have a question for you. I read your article, Bay Street and Tax Havens: Curbing Corporate Canada’s Addiction, and more specifically the section entitled “Canada’s cozy relationship with tax havens.” I believe that you’re saying that several tax cooperation agreements signed by Canada and other countries have become pretexts for different countries and companies to avoid taxation in their respective countries. Would you say that it’s better to not sign these treaties and to take measures only with regard to the examples of taxation that you provided, or do you still think that these treaties have a positive enough impact for Canada to continue to negotiate these types of treaties, while taking other measures to better control tax evasion?


Mr. Sanger: Thank you very much for the question. A number of these treaties have been very problematic, along with some of the tax information exchange agreements, simply because they have allowed double non-taxation. They were supposedly put in to eliminate double taxation, but they have allowed double non-taxation. That is what this bill, this multilateral convention, is intended to address in some ways. It will close some of those loopholes but it will not close all of them.

Those tax treaties will continue to be problematic in different ways. We have seen a number of leaks. I think we will see more leaks from tax havens. There are examples of people not paying tax and those are people with means.

Senator Saint-Germain: Would you recognize that, in having such a treaty, Canada would improve the management of the circulation and the respect of the fiscal laws?

Mr. Sanger: Yes, I do agree. That is a positive step forward.

Senator Saint-Germain: It is not enough but it’s a positive step?

Mr. Sanger: It’s not enough, but I do think other measures need to be taken. Fundamentally, as the head of the IMF has said, we need to move to a fundamentally reformed international corporate tax system.

Senator Coyle: Ms. Gheorghiu, yesterday we had witnesses from Bennett Jones who were advising us that with the implementation of the MLI, which will come into effect if we approve this bill, the ratification process continues. As you said, Ms. Gheorghiu, there would be disincentives for companies investing in Canadian projects. Largely resource projects is what we talked about yesterday.

You have said that you agree with that and you say it’s equally for certain Canadian companies making international investments. I’m right so far?

Ms. Gheorghiu: Yes.

Senator Coyle: Part of the problem is with the principal purpose test and there not being an allowance for grandfathering. I’m right so far with you?

Ms. Gheorghiu: Yes, that’s correct.

Senator Coyle: I just want to make sure I get the concerns.

In an article that I believe you or your company wrote, it was mentioned that:

The PPT has been criticized for causing uncertainty as to what constitutes one of the “principal purposes” of a transaction or arrangement. There is also the difficulty of interpreting what is the purpose of a given treaty provision —

— and here is what you say —

— although the next tax treaty preamble language provided in the MLI may assist to some extent.

Could you speak a little more about what is meant by that? How would that possibly alleviate the concerns with the PPT?

Ms. Gheorghiu: This is in line with a series of court cases, the last one being Alta Energy last year, which found there is no purpose to a treaty to prevent treaty abuse or shopping into a treaty and that is why the preamble specifically says that we are here to prevent that.

Senator Coyle: That’s very clear.

Ms. Gheorghiu: But if we look at the principal purpose test, which is a three-part test, and I didn’t go into all of the details, but after you say there is a tax benefit which you have, you get the withholding dividend rate, for example, and you say one of the principal purposes of putting this structure into place is to get the tax benefit and everyone looks at what the treaty will do for them. The last part of the text says the benefit is denied unless you, the taxpayer, can show that granting you this benefit — the reduced withholding rate, for example — is in line with the purpose of the treaty, either of the section or of the treaty as a whole. Then you’d have to go back and prove as a taxpayer, which is a different burden from what the GAAR test was imposing. There, the burden was on the government to show it didn’t meet the purpose of the provision; here, it’s the taxpayer. The taxpayer has to show that when the government negotiated the treaty to allow the reduced dividend withholding rate, it intended that the provision apply to that instance. You have to read that together with the preamble that is there to catch egregious scenarios there is no reason you did this except to get the lower withholding rate, but that’s not — it’s not always clear because there are so many different purposes that could be to an investment and also there is — it’s not always easy to know what is the reason the rationale or the purpose of a specific section. So it’s not just the treaty overall. The section itself has a reason why it’s there.

Senator Coyle: Thank you. Like Mr. Sanger, I’m not a tax accountant or a lawyer. The purpose here is that Canada, along with others around the world, is trying to plug some holes in their tax system in an efficient manner. You represent some of those companies that have been doing something legally; tax shop. They are looking for tax jurisdictions where the treaties have some openings so they don’t have to pay as many taxes and so they can be more profitable. That’s business. If you’re trying to produce revenue for your shareholders, that’s what you should be doing. But we know it’s a global problem. It’s a Canadian problem.

Here we are now with an instrument with some provisions that we have signed onto that, we’re hearing from Mr. Sanger and others, will go part of the way to plugging some of the legal holes that exist so that this tax jurisdiction shopping that goes on — you’ll have fewer options. Not just with Canada being one of the problems — problematic places for people looking for these kinds of things but other partners signing on. Am I painting the picture fairly?

So naturally we’re going to be hearing from people who represent the interest of these companies that there are problems with this, because this will have tax payment implications for these companies. We want to strike a balance. That’s what we’re here for. We want Canada and these other jurisdictions to get the taxes that are due to them, while at the same time we don’t want to create an enormous barrier that prevents the flow of investment capital.

What we’re trying to do with the MLI, and our OECD partners who have come up with this, is striking that balance.

We hear from certain people that it doesn’t go far enough and we’ve heard a few people saying that. We’ve heard Mr. Sanger and an academic yesterday say the same thing in a different language and we’ve heard from people in the industry, like yourselves, that it’s not just how far it goes but how it goes that far. Right? And there is a distinction there.

The Deputy Chair: Is there a question coming?

Senator Coyle: It’s an important —

The Deputy Chair: We all agree.

Senator Coyle: I’m trying to get to the point. We’re not all tax lawyers. The question is striking the balance that is good for the people of Canada, which is our concern, both those who make an income through investment and benefit from employment in those companies and everyone else who benefits from the services that are paid for by the taxes. Help us, each of you, make the case on where that balance should be with this bill.

Mr. Sanger: If I can respond to that and also respond to some criticisms about the impact on investment and investments that have been made.

Even though it’s cumbersome with all these different levels, it’s an elegant and administratively efficient way with making these changes. But it’s also very effective in dealing with some of the criticisms because so many countries are signing onto it.

With all those countries that are signing on, they’re all making these changes. I mean, with some exceptions. But with the PPT, that’s a minimum part of it. I think the preamble is a minimum part of it. If all these countries are signing onto it, the criticisms that would affect investment are — it’s raising the bar for everyone.

I would be less concerned about Canada being at a tax disadvantage in these areas. Yes, people have made investments in these areas expecting some return based on the tax rules, but there’s a lot of uncertainty in the world. I mean, the price of oil and gas goes up and down. That affects those things.

There are a lot of uncertainties and risks. This has been under way for about five years. It will take some time to come into effect. There’s always uncertainty. There is uncertainty about how the courts are going to apply this. But overall, this is quite an efficient and fair way of taking some steps forward.

Ms. Gheorghiu: If I could add to that, it was mentioned earlier that tax treaties are not only there to allow for tax avoidance. Often, they’re there to allow us to invest in a secure manner that allows us to know what the outcome of our investment will be. That’s important to remember because even when I get a dividend from a company in France, I know the withholding will be 15 per cent under the treaty with Canada. That’s something I can rely on as a taxpayer.

The second point is to remember that even when all countries sign on to the same provision, if there is uncertainty as to how it can be interpreted, that uncertainty can play in the favour of some countries over others. For example, look at the European Union and their tax rules. One which looks at anti-hybrid rules are supposed to be harmonized across the European Union, yet each country implements their own rules and regulations around it. There is a lot of flexibility, so you could still have some countries playing with how you interpret the same rules. The PPT is the same language, but there is no set way to interpret it, so our courts could be more stringent than the courts in Luxembourg and elsewhere. That’s what we want to point out.

When we have rules — and remember the MLI is one small tool — transfer pricing is much more sufficient at responding to some of the issues with where the funds are being taxed than the MLI. All the MLI can tell you is if you have a withholding rate reduction on a dividend interest, or royalty or capital gains exemption — a few other things under the treaty — we may deny you this benefit. However, if you are not declaring income in Canada, this is not a tax treaty issue. It’s an issue of where you should be declaring that income. This is one small tool, but we want to make sure it is well applied.

I snuck a lot of issues into my opening remarks to highlight that there are some applications we may not wish to have, and we need to be addressing these issues. I have spoken at a lot of conferences and with a lot of practitioners, and we are not comfortable with how these things should work. It has been five years and if we are still not comfortable, that means our clients and others are also uncomfortable. We don’t want to have that kind of uncertainty here.

Senator Boehm: Thank you, Ms. Gheorghiu and Mr. Sanger, for joining us today. I wanted to focus on dispute resolution. In international negotiations between countries the toughest sounding words are always “mandatory binding arbitration,” and sometimes the teeth are not there at the end. I would like to get your views on the mechanism that is involved in this case.

I know that Canada has opted for the so-called final offer approach, which is, I think, what we have with the United States in our tax treaty. But I also know, Mr. Sanger, in your testimony in the other place, the House of Commons, you said that there was a real lack of transparency in this particular provision.

The articles are 18 to 26, and I’d really like both of your views on the benefits and the challenges regarding the final offer approach and whether the mandatory binding arbitration element in this particular case will do the trick, or is it just another small step along the road? At the end of the day, you can have a mandatory binding arbitration decision and no action after that.

Mr. Sanger: That’s a good question. I didn’t raise the issue of mandatory binding arbitration. It’s not a mandatory part of the MLIs, but Canada has signed on to it. Concerns are lack of transparency. We’ve seen this in other international tribunals.

I think there are particular concerns with some developing countries that might not have as strong representation in some of these things and would prefer for these things to be transparent. I’m sorry, I’m not a tax lawyer. I haven’t dealt with these issues so I can’t speak in detail about it, but in general I think it’s preferable for them to be transparent and open on these issues. But they can go either way, right?

I’m not entirely sure of the reasons for why we included this in it. There are some concerns.

Ms. Gheorghiu: We have to remember that the provisions are limited as to what they cover. Not all disputes under the treaty can be brought to arbitration. For example, if you are denied a treaty benefit under the PPT — that is, you’re being taxed in one country and now you’re taxed in the other one — you cannot bring that to arbitration. You can only go to the courts and, if the courts don’t rule in your favour; and if the other country does not want to give you a refund, that’s too bad. There are other scenarios where it’s not available. I think the rationale is it’s maybe more efficient than trying to argue the facts. For the taxpayer here, however, it’s a risk. Either you make your best offer or you may not get anything. I think it provides another level of support because, as we discussed, in some countries you might not be comfortable relying only on the courts to give you relief.

Whenever we look at treaty amendments, whether bilateral or multilateral, what’s good for the goose is good for the gander. If we accept an amendment, then the other side may also use those rules and they may not have as good a court system as we have in Canada. From that point of view, arbitration offers investors some comfort that they will have a more unbiased venue for the dispute.

The Deputy Chair: If I could ask a question to Ms. Gheorghiu. Let’s take your example earlier, whereby the Canada Revenue Agency confirms they will respect any tax ruling they’ve given. However, you said there are transactions where there is not tax ruling. Given the lack of application of the GAAR rules compared to what’s in the agreement, you say it could be unfair to those investors who use Canada as an intermediary to invest in natural resources, or real estate, or whatever.

What would be the solution? What would you like the agreement to say to make sure we treat these people fairly? What’s the solution there?

Ms. Gheorghiu: Could you maybe rephrase your question?

The Deputy Chair: Relative to the problem you referred to in your explanation of unfairness, and given that the GAAR rules are not exactly equal in application to the principal purpose, what would be the solution to ensure your client was fairly taxed?

Ms. Gheorghiu: I want to make a clarification. Finance had said with respect to past rulings that they will honour them to the extent it does not look like taxpayers are trying to get a benefit under the treaty. It is sort of a yes and a no answer. For everyone else going forward, the issue is this idea that you can get two kicks at the can. First, you try PPT. If that does not work, you try GAAR. It’s questionable how long you want to drag out the dispute and how much proof you have to provide with respect to this?

One solution could be to limit the ability of GAAR to apply in cases where the PPT was found not to apply to the tax benefit, which I mentioned could be an amendment to clause 4(2) of the actual bill.

The Deputy Chair: Of the bill or the tax act?

Ms. Gheorghiu: The bill recognizes the precedence of the Interpretation Act, which has a section 4.1 that allows the GAAR to apply notwithstanding any provision of any treaty. Of course, a subsequent bill could amend that to limit what the Interpretation Act can do, basically limit what section 4.1 could do.

The Deputy Chair: We heard some testimony that, as you know, relative to real estate and natural resources, there is a capital gains tax. Therefore, there is a request to be made that we should grandfather the gain that currently exists — and you referenced grandfathering. That is, we should cap and protect that accrued gain from the future rules, given the uncertainty. Do you favour that also or is that not necessary?

Ms. Gheorghiu: I know what you’re referring to. When you have real estate investment or investment into mining in Canada —

The Deputy Chair: Or timber.

Ms. Gheorghiu: Yes. Those are the kinds of assets that you would tax in the hand of non-residents when they dispose of them. It’s an active business that we’re taxing in those cases and they’re exempt under some of the treaties, for example, Luxembourg and the Netherlands. Alta Energy Luxembourg was a decision about that and there was a series of them before.

In these cases it makes sense. My argument is broader to say there should be broader grandfathering, at least for scenarios where you have relied on a treaty and made an investment and it’s a sector where we want to continue to encourage that type of investment. It would be very helpful to allow those companies to freeze the value today. We have examples in Canadian tax legislation of this. All our capital gains rules have a special day in 1972 where everything froze and we started applying capital gains tax.

We have experience in how to do it, and it would be helpful to do it again. Obviously, it’s a one-time solution because going forward they would no longer be able to benefit from those treaties, but at least it wouldn’t be changing the rules halfway through the game.

The Deputy Chair: Shouldn’t it bother us as Canadians, or legislators, if you wish, that, to my understanding, the Luxembourg channel rule was created in response to a change in the Income Tax Act in 2012 and, therefore, that became very popular?

You’re saying we should grandfather the gain for those, but let’s not forget the reason they chose the Luxembourg route was to get around the objectives of our own Income Tax Act to tax these revenues. Now you’re saying we should protect the investors and grandfather the investors for that gain and, therefore, the country will have less tax collected. But their purpose was also to avoid Canadian taxation. Should it bother us that we are following their rules and they would benefit again from this mechanism where they reduce their taxation?

Ms. Gheorghiu: They have not benefited until they sell because the gain is only triggered on the sale. They were planning for that and arranging their affairs in that way, and we have a long history of jurisprudence that says taxpayers in Canada are allowed to plan their affairs to save taxes. That is our law, and it’s not just laws but also case law that determines our law in Canada. If that’s the law in Canada, is it right to change the rules? It’s all right to decide going forward that we would like to amend those rules and have the PPT and the preamble, as you mentioned, that specifically says we do not allow this anymore.

To change everything that has been decided for so many years, we can’t be fixing the past because that was not the rule at the time. If it were not acceptable, we wouldn’t have as many cases that accepted those structures.

The Deputy Chair: When we introduced GAAR, it must have been 15 or 20 years ago. We did not grandfather any transactions. We simply let GAAR apply to all transactions as we so deemed and judged at that point in time. Why would we do it differently for the present purpose?

Ms. Gheorghiu: There was a lot of case law that said GAAR did not apply to treaties and there was a retroactive amendment there as well. Remember that GAAR is applied in very rare cases. There is a process in place to ensure we do not apply it all the time. We do not yet know if the PPT will have a similar structure in place to ensure it is not raised on assessment by auditors much more often. Even though it theoretically applied, the practice was to be much more selective of when it would actually be applied.

The Deputy Chair: Thank you very much. I think that is the end of our questions. If I can ask all members to stick around, we should have an in camera discussion for a couple of minutes and then proceed to clause-by-clause.

Thank you very much.

(The committee continued in camera.)

(The committee resumed in public.)

The Deputy Chair: Honourable senators, we are resuming the meeting of the Standing Senate Committee on Foreign Affairs and International Trade to complete our examination of Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting.


The committee has heard from several witnesses and is now ready to proceed with the clause-by-clause consideration of the bill.


Honourable senators, is it agreed that the committee proceed to clause-by-clause consideration of Bill C-82?

Hon. Senators: Agreed.


The Deputy Chair: At any time, if you aren’t sure exactly which stage we’ve reached, please ask me for a clarification. We must ensure that we always know exactly where we are in our clause-by-clause consideration.


In terms of the mechanics of the process, I wish to remind senators that when more than one amendment is proposed to be moved in a clause, amendments should be proposed in the order of the lines of a clause.

If a senator is opposed to an entire clause, I would remind you that in committee the proper process is not to move a motion to delete the entire clause but, rather, to vote against the clause as standing as part of bill.

I would also remind senators that some amendments that are moved may have consequential effect on other parts of the bill. It would be useful to this process if a senator moving an amendment identified to the committee other clauses in this bill where this amendment could have an effect. Otherwise, it would be very difficult for members of the committee to remain consistent in their decision making.

If committee members ever have any questions about the process or about the propriety of anything occurring, they can certainly raise a point of order. As chair, I will listen to the argument, decide when there has been sufficient discussion of a matter or order and make a ruling.

The committee is the ultimate master of its business within the bounds established by the Senate, and a ruling can be appealed to the full committee by asking whether the ruling shall be sustained.


Honourable senators, as the deputy chair, I’ll do everything in my power to ensure that those who wish to speak can do so. Nevertheless, for this to happen, I must be able to count on your cooperation. I’d like to ask all of you to think of your colleagues and to make your comments as relevant and brief as possible.

Last, I’d like to remind the honourable senators that, in the event of uncertainty regarding the outcome of a yea or nay vote or a show of hands, the simplest option would be to request a recorded division, which will provide clear and unequivocal results. The senators know that, in the event of a tie, the motion will be defeated.

Are there any questions? If not, we’ll begin.


Is it agreed that the committee proceeds to clause-by-clause consideration of Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting?

Hon. Senators: Agreed.


The Deputy Chair: Shall the title stand postponed?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall clause 1, which contains the short title, stand postponed?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall clause 2 carry?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall clause 3 carry?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall clause 4 carry?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall clause 5 carry?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall clause 6 carry?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall the schedule, pages 3 to 55, carry?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall clause 1, which contains the short title, carry?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall the title carry?

Some Hon. Senators: Agreed.

The Deputy Chair: Shall the bill, as amended, carry?

Some Hon. Senators: Agreed.

The Deputy Chair: Does the committee wish to consider appending observations to the report?

Some Hon. Senators: No.

The Deputy Chair: Is it agreed that I report this bill to the Senate?

Some Hon. Senators: Agreed.

The Deputy Chair: This concludes our study. Thank you for your cooperation. Our next meeting will be next week, as usual.

(The committee adjourned.)