Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 20 - Evidence
OTTAWA, Tuesday, May 26, 1998
The Standing Senate Committee on Foreign Affairs met this day at 4:25 p.m. to examine and report on Bill S-16 to implement an agreement between Canada and the Socialist Republic of Vietnam, an agreement between Canada and the Republic of Croatia and a convention between Canada and the Republic of Chile, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.
Senator John B. Stewart (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, this afternoon we have two witnesses from the Department of Finance: Mr. Jean-Marc Déry, Chief, Tax Treaties, Tax Legislation Division, and Mr. Daniel MacIntosh, Director, Tax Legislation Division.
I have suggested to our witnesses that it would be useful for the committee to have them begin their explanation of Bill S-16 by telling us the general purpose of such legislation and any unusual considerations that would be addressed by this bill.
Mr. Jean-Marc Déry, Chief, Tax Treaties, Tax Legislation Division, Department of Finance: Bill S-16 is designed to implement tax agreements with three countries: namely, Vietnam, Croatia and Chile. Such legislation is necessary because the provisions of the respective agreements are sometimes different from the provisions of the Income Tax Act and it is necessary to ensure that, in those situations, they will override the Income Tax Act. That is the main reason for the legislation.
The bill itself is very similar to several tax treaty bills introduced into Parliament in the past 25 years. It is divided into three parts and has three schedules. Each part contains six clauses, all of which are patterned on the same wording. The first clause provides for a short title; the second defines the agreement; the third approves the agreement; the fourth ensures that, in the case of inconsistencies between the agreement and any other law, except the Income Tax Conventions Interpretation Act, the agreement will prevail; the fifth authorizes the Minister of National Revenue to introduce regulations, if necessary, to implement these agreements; and finally, the sixth requires the Minister of Finance to ensure that the dates of entry into force and termination of the respective treaties are published in the Canada Gazette.
The balance of the bill contains the three schedules and each schedule reproduces the agreement as it was signed with a treaty partner.
Tax treaties are necessary to avoid double taxation and to prevent fiscal evasion. They also provide tax certainty to individuals and companies carrying on business abroad, foreigners carrying on business in Canada, or individuals receiving income from Canada. There is currently no tax agreement with Vietnam, Croatia or Chile. The three treaties are patterned on the model convention prepared by the Organisation for Economic Co-operation and Development, OECD, but, because the tax systems and policies of the respective countries are different, differences are necessary to ensure that the treaty is acceptable to both sides.
To give you a few examples of these differences, the rate of withholding tax on inter-company dividends has been set at 5 per cent in the treaties with Vietnam and Croatia, but in the case of Vietnam that rate applies only where the company receiving the dividends controls at least 70 per cent of the company paying the dividends. In the case of Croatia, the 5-per-cent rate applies where the receiving company controls either 10 per cent of the voting power of the paying company or 25 per cent of the capital of that company. Chile was not in a position to agree to a 5-per-cent rate on inter-company dividends but did accept a 10-per-cent rate. However, should Chile agree in a similar agreement with another OECD country to a lower rate, that lower rate -- but in no case lower than 5 per cent -- would automatically apply in the relationship between Canada and Chile. Similar most-favoured-nation provisions are also included in the treaty with Chile with respect to the rate of withholding tax on interest and royalties, and in the treaty with Vietnam with respect to royalties on computer software, patents and know-how.
With respect to interest and royalties, the rate of withholding tax has been set at 10 per cent in the case of Vietnam and Croatia, and 15 per cent in the case of Chile.
Concerning pension payments between the respective countries, the rate of withholding tax has been limited to 15 per cent in the case of Vietnam and Croatia but, in the case of Croatia, the 15 per cent applies to any excess over $12,000 or the Croatian equivalent in a calendar year. In the case of Chile, all pension payments will be taxable only in the country in which they arise. In the case of Canada, that means the domestic rate will apply, namely, 25 per cent.
Social security payments under the treaty tax conventions are taxable only in the country in which they arise and, again, in accordance with domestic legislation.
In order to avoid double taxation, each of the treaties also contains specific rules which, in the case of Canada, refer to an exemption for certain dividends received from foreign affiliates and for credit in other cases. There is a difference amongst the three treaties in that the treaty with Vietnam contains a rule that we refer to as a "tax-sparing" provision. Essentially, a tax-sparing provision ensures that the most developed countries will not tax away some incentives that were provided under the domestic legislation of the less developed countries. The provisions in the treaty with Vietnam are limited in time and they would end after a period of 10 years after the entering into force of the agreement.
Finally, each of the treaties provides for the exchange of tax information between the revenue authorities of the countries to assist them in the fight against tax fraud and evasion. They also provide for a mutual agreement procedure between the tax authorities so that they can deal with any problem of application or interpretation that may arise in these agreements.
The Chairman: What is the situation with regard to tax treaties between Canada and Australia, Germany, Italy and Japan, for example? I assume that we do have some tax agreement, but am I correct in thinking that those agreements are under renegotiation?
Mr. Déry: Yes, Mr. Chairman, all the countries you have mentioned are being renegotiated. In the case of Australia and Japan, we are negotiating a protocol to amend the existing treaty, but in the case of Germany and Italy we are attempting to revise entirely the existing agreements.
The Chairman: Senator Bolduc asks; "Why?"
Mr. Déry: Our practice has been to suggest full revision in all cases, but certain countries do not wish to reopen certain specific provisions which they will find difficult not to change. We renegotiate for a number of reasons. One such reason stems from the 1992 and 1993 budgets, wherein the minister indicated that Canada would be prepared to agree to a 5-per-cent rate on inter-company dividends on a reciprocal basis, and wherein he announced, in the 1993 budget, that Canada was willing to agree to a zero rate on patent royalties, know-how royalties and computer software royalties. That is the main reason. Another reason relates to the fact that most of these treaties are quite old and the language of tax treaties has evolved over the years. We found some problems in the application of some of them for that reason. Yet another reason is that certain other policies have changed. There are many reasons for redoing the work.
The Chairman: Would it be fair to assume that the substantive provisions of the new agreements are all virtually identical?
Mr. Déry: They are almost identical except, as I mentioned, that some countries have higher rates than others which reflects the bilateral relation with that particular country. However, the coverage is more or less the same and most of the policies are in line with any differences. For example, the definition of "permanent establishment" normally would specify that a building site will exist only if it lasts at least 12 months. However, although in some of the treaties it is 12 months, in others it is six months, or even three months in some treaties which were signed earlier.
Senator Di Nino: Am I correct in understanding that these are standard agreements that are signed, generally, with any country with which Canada establishes a tax treaty relationship?
Mr. Déry: Yes. We do not have tax agreements with all countries.
Senator Di Nino: It is a standard agreement between Canada and all of the countries with which we enter into relationships; is that correct?
Mr. Déry: That is correct.
Senator Di Nino: The only difference is in the percentages. This is a relationship which is established and which is dictated by the terms and conditions that each country wishes to impose; is that correct?
Mr. Déry: That is correct.
Senator Di Nino: These are relatively fluid; they can change from time to time and they do change from time to time. Do they have an expiry period?
Mr. Déry: No, they do not have an expiry period. They could be terminated in most cases with six months notice. Some treaties do have a fixed period of application, for example, five years, and then they can be terminated with a six-month notice, but they do not die 15 years or 20 years after their coming into force. They are not renegotiated very easily.
Senator Di Nino: I wish to ask two specific questions. One relates to the fact that there are many very talented people who can get around certain taxes provisions. Sometimes new instruments are created, and new avenues are found to garner income which is not covered by a tax treaty between two countries. Is it at such time that either country may ask for a change to the agreement?
Mr. Déry: That is one possibility, yes. If we discover a major problem with a particular country, we would certainly request renegotiation.
Senator Di Nino: Are mutual agreements renegotiated without too much trouble?
Mr. Déry: I would not say that. I believe the biggest problem is the lack of available people who can be involved in these negotiations and, with some countries, it could take a year or two before we agree on even dates. It is easy to get an agreement. The major difficulty is always related to when it can be done.
Senator Di Nino: My major concern with these agreements is the matter that you discussed at the end of your presentation when you talked about sharing information. Have you found that, in some cases, that may have created difficulties for some Canadian citizens who may be dealing with these countries?
Mr. Déry: My understanding is that Revenue Canada finds the exchange of information very useful. I am not sure I understand exactly what you mean by "difficulties". If the difficulty is that someone must pay taxes that are owed, that is useful reporting information.
Senator Di Nino: The concern I have always had about these treaties is that not all countries have a high standard of confidentiality or a high standard of responsibility such as we have in Canada or some European countries. When we are talking about tax treaties and sharing information with Vietnam, as an example, I must be concerned about how information related to Canadian citizens or Canadian corporations may be used in that country.
Mr. Déry: That certainly is a concern shared by Revenue Canada. I believe there have been bad experiences in the past.
Senator Di Nino: I wish to find out more about that.
Mr. Déry: My understanding is that they would certainly look at the situation before taking such a step.
Mr. Daniel MacIntosh, Director, Tax Legislation Division, Department of Finance: More often, the information would be flowing in the other direction; that is, if there were a Canadian company carrying on business in Vietnam, the Vietnamese authorities would give Revenue Canada the information about the Canadian company and its operations in Vietnam. By the same token, if a Vietnamese firm were operating in Canada, the Vietnamese government would be interested in getting information from Revenue Canada about the operations here. More often, the treaty country is getting information about its own residents.
Senator Di Nino: Unless of course those residents have business endeavours in both countries.
Mr. MacIntosh: If a Canadian resident, for example, had business endeavours here and in Vietnam, we would not get the information relating to operations in Canada from Vietnam; we would have it because that person is a Canadian resident. We would get information from the Vietnamese government only about the Canadian resident's activities there.
Senator Di Nino: The answer was given that there has been some difficulty in the past. The limited knowledge I have in this area is that some foreign countries have misused or abused information they have received not only about their own residents but in some cases about Canadian companies and Canadian residents who have had to pay taxes in that country. It has created some rather touchy problems. I assume the same situation may apply to residents of other countries with which we have these treaties.
Mr. MacIntosh: You are right. The treaties merely provide that information may be exchanged; they do not require that it must be exchanged. In view of some problems in the past, Revenue Canada is striving to be prudent in situations where there is an exchange of information.
Senator Andreychuk: Do we still have in place a mechanism that ascertains whether the country with which we are planning to sign an agreement has sufficient processes that have been tested, and has sufficient laws and sufficient taxation and support systems to warrant us entering into the agreement? I know that, in the past, that kind of assistance has come from our diplomatic missions; they have scrutinized the situation and made a recommendation as to whether the country is in a position of readiness to enter into an agreement. Is that precondition still in place and, if it is, was it applied to these three countries?
Mr. Déry: I am not aware of any formal system which has been established in Revenue Canada. Normally, during the negotiation, the exchange of information is one article out of 30 in these treaties. In the course of the actual negotiation we do ask questions as to how the laws of the other country work and how they are applied. We do have some information for Revenue Canada to use whenever there is a request.
I believe that, because of some limited bad experience in the past, Revenue Canada is very cautious when the requests come from certain countries that are known to be in trouble with other countries. This is also discussed at the OECD level in the context of the working party on tax avoidance and evasion. There is an excellent exchange of experience as to how these provisions in the bilateral treaties are applied and what countries are creating difficulties. As well, there is always the right not to provide the information.
Senator De Bané: On that same topic, when I look at the list of the countries with which we have that kind of treaty, without mentioning names, it is obvious that some of them do not have an impartial tax collection system like we have in our own country. For instance, it is well known that, in some of those countries, the tax collector officially earns a salary of $400 a month but he has a big Mercedes parked in front of his home, and we know why that is so. In our country everyone is equal before the law, but in some of those countries we know that is not the system. That being the case, how can Canada enter into a treaty with those countries?
In regard to the treaty with Vietnam, which is a communist country, the chances of that country having any businesses in Canada are, to say the least, remote. Conversely, of course, many North American companies are now active in that country, particularly since the United States lifted its embargo. What incentive does Vietnam have to limit its capacity to tax foreign businesses operating there?
Mr. Déry: It is probably true that, for a large number of countries listed, the flow of investment is one way. It is difficult to imagine requests for tax information coming from those countries, certainly not for quite some time. I am not saying that in 10 years or 15 years even Vietnam might not be a new dragon or tiger but, for the time being, I would say that, if there is a need for information it will be a in the form of a request by the Canadian side. I believe that is true for a large number of countries.
The exchange of information is important. It certainly gives a signal to anyone who would like to play around with the tax system that there is an additional risk that the tax authorities could obtain the information. There is a practical part in the exchange of information article, but there is also a deterrent part which cannot be measured but certainly is of some help.
Mr. MacIntosh: In response to your second question, senator, as to why a country such as Vietnam, which has very little investment in Canada, would wish to enter into a tax treaty with a country like Canada which has much more investment there, I believe it is because it is to the mutual benefit of both countries. It is to the benefit of Canada because it means that our Canadian investors in Vietnam will be subject to lower Vietnamese withholding tax rates on investments that pay dividends or interest or royalties, and it is to the advantage of the Vietnamese because these lower rates of withholding tax in Vietnam will encourage investment from other countries. The tax treaty creates an atmosphere of stability, and Canadians who wish to invest in Vietnam know that while it is in effect they will not be subject to tax increases by the Vietnamese government. Obviously the tax treaties exist because each country believes it is to their benefit to enter into these agreements.
Senator De Bané: Why would the Vietnamese limit their capacity to tax Canadian businesses in their country when they would not derive the same benefit because the Vietnamese do not have any businesses here? Are they not limiting their revenues in their own country and getting nothing in return?
Mr. Déry: Their benefit is the Canadian investment.
Senator De Bané: Then perhaps Canada should be entering into a treaty with the Vietnamese which guarantees foreign investment.
Mr. Déry: I am not sure that we have a foreign investment protection agreement with Vietnam but, if we do not, I am sure it is on the negotiating table. Canadian investors, having the choice to invest in several countries, would normally invest in a country where there is a tax treaty.
Senator De Bané: Even before there is an agreement to a tax treaty for the protection of foreign investment?
Mr. Déry: In some instances my colleagues in Foreign Affairs are faster than I am with the Foreign Investment Protection Agreement. In other cases they conclude the FIPA before I even start the double taxation agreement. Both are extremely important. I could find out the status of the negotiation of the FIPA.
Senator De Bané: I did not understand your answer to my question about how you can enter into an agreement with a country where taxpayers can bribe officials in order not to pay tax. How can you enter into an agreement with a country like that?
Mr. MacIntosh: It is advantageous for us not to have Canadian residents or companies subjected to that sort of tax system. Our tax treaties will reduce or even in some cases eliminate the foreign country's right to tax certain types of cross-border payments.
Senator De Bané: Let us say a Canadian businessman has a business in a foreign country. He has two sets of books, the real ones and the phoney ones, and the phoney ones are accepted by that other country. He comes back to Canada, and he demonstrates that his business in that country unfortunately is not making money. That set of books has been approved by that other country. You have no way of knowing the truth of the matter.
Mr. MacIntosh: In most cases that could work to the taxpayers' disadvantage because more often than not they will be carrying on business in the other country in the form of a corporation. Canadians carry on business overseas in the form of branch operations of Canadian companies and in the form of foreign incorporated companies. Tax treaties provide benefits in both cases. If a Canadian firm incorporates a foreign subsidiary in the other country and then understates that foreign company's profits, when those profits are repatriated to Canada, by reason of the existence of the tax treaty, many of those profits can be repatriated to Canada and be received here free of Canadian tax. The policy underlying this is that they were subjected to foreign tax. However, if taxpayers understate their profits in the foreign country so that they are not subject to foreign tax, then there will be only a small amount that is capable of repatriation to Canada to be received free of tax here. Therefore, that would work to their disadvantage vis-à-vis the Canadian tax system.
Senator De Bané: You do not believe that many companies park three-quarters of their income in Liechtenstein, or in other tax-holiday mini-states, and report to Canada only a quarter of their income?
Mr. MacIntosh: I believe the overwhelming majority of Canadian companies are not operating in tax-haven jurisdictions but, rather, are carrying on legitimate businesses in countries that have legitimate tax systems.
Senator De Bané: I have just met with a tax expert in Cyprus which is a tiny island. Deloitte & Touche have 400 people in their office there, more than in Toronto. Last summer I went to Luxembourg which has 80,000 people. Each one of the big five accounting firms has offices in Luxembourg, and their offices there are greater than any office they have in Toronto. Do you know that 25,000 foreign companies have registered in Cyprus in the last two years. Do you believe that there are no Canadian companies among them?
Mr. MacIntosh: No, I believe there are Canadians among them.
The Chairman: The question which should be asked, so that you can put the answer on the record, is: Are they registering in those places in order to hide the profits that they are making, or are they registering there for other reasons?
Senator De Bané: Mr. Chairman, I am most intrigued to learn that each of the "big five" has in its employ more people in a small city than in our largest financial centre. We are one of the G-7.
Senator Bolduc: It is because of local taxation and the financial market.
Senator De Bané: Secrecy is also a reason.
Senator Bolduc: It is mostly because of taxation.
Senator Stollery: It seems to me that, although there are individuals who secret their money in various places, in order to do business there must be a turnover of money; profit must be reinvested. I understand that they are better off with a tax treaty if they wish to repatriate their profits, so they can be in the mainstream of the company's activity. They are better off to have information from the treaty country transferred to Ottawa so that it is taken into consideration in the calculation of their taxes. Then they are able to carry on their business in a normal way. Once they start operating in secret, of course, they cannot easily carry on their business, and they would then be at the mercy of every corrupt tax official in the world.
Mr. MacIntosh: First of all, with respect to tax treaties, I believe that the minority of people who practice tax evasion by secreting funds to offshore locations do not need the benefit of a tax treaty to do so, and they would not use a tax treaty because tax treaties are used in cases where someone is reporting income.
Second, with respect to the problem of some Canadians attempting to evade taxes by hiding income as investments in jurisdictions, generally tax-shelter jurisdictions, the government recently introduced the foreign asset reporting rules in an attempt to ensure that there is greater reporting of individuals in these sorts of cases.
Finally, with respect to offshore offices of major Canadian accounting firms, my knowledge of those firms is that they do not practice tax evasion. They can do plenty of business out of helping people tax plan and comply with their tax obligations in a legal way. Personally, I know many people in those professions, and none practices tax evasion.
Senator Grafstein: Just for the record, both Luxembourg and Cyprus have tax treaties with Canada, so there is a flow of information between the two countries. It is not a complete answer to Senator De Bané, but there is a tax treaty; there is access to information.
I wish to deal with the information question, not with respect to Luxembourg, which is an established country with rules of law, but with respect to Vietnam and the question about exchange of information and whether or not Article 26 of the proposed Canada-Vietnam agreement might be contrary to the Charter or at least to rights to privacy. I use Vietnam as an example because I believe Senator De Bané put it very well: we are dealing with, in effect, a Marxist-style regime that has different value systems with respect to domestic law than we do, and we must take that as a given. Privacy and disclosure in that system would be much different from the privacy and disclosure in our system. However, this provision is rather open-ended in the sense that it states that the information can be used by the taxofficials on the other side in accordance with the domestic laws of the contracting state. That seems to me to be questionable.
The same thing may apply to the other agreements, although I am not familiar with the laws of Croatia at this moment. Croatia is coming out of a Marxist system and I do not know whether the domestic law has been fully liberalized or not. I am not familiar with their domestic regime or their privacy laws. Quite frankly, I do not even know what the privacy laws are in Chile. I would presume that they would have a higher system than most, but that would be a different system as well.
I raise the questions of privacy and disclosure, Mr. Chairman, as a serious issue for Canadians doing business who would now be put at risk with respect to their rights. Would you focus on Vietnam for the moment since I believe it is the most extreme example?
The Chairman: Are you, perhaps, misleading us on Article 26?
Senator Grafstein: That may apply to Chile. Let me see.
Senator Di Nino: Article 25.
Senator Grafstein: The witness did say, Mr. Chairman, that all the provisions were similar, so I assumed the article was the same. It looks similar at a quick glance.
The Chairman: Will you repeat your question now that we have identified the article?
Senator Grafstein: We have a high standard of privacy in Canada under our tax laws. Now what we are doing is not using the standards of our own law but the standards of the contracting parties with respect to disclosure of information for tax purposes. Does that mean that, if Senator Di Nino does business in Vietnam, his tax records might be available to authorities in Vietnam?
Mr. Déry: The information to be provided to a treaty partner is only information that relates to the taxes covered by the convention. It is also information that treaty partners request on the grounds that they need the information because they suspect that there are some dealings going on under the table and they must identify what they are after.
I cannot answer your question about whether the senator's tax return will end up in Vietnam. I do not believe that will happen.
Senator Grafstein: I only use that as an example, by the way; I am not suggesting that.
Mr. Déry: In order to provide information, we must have a very specific request. If we do provide information to a treaty partner, the treaty partner shall keep that a secret in the same way it keeps secret its own tax information. Some of the countries that you mentioned, I believe, have more secrets than we do. If the information eventually could be used for going after a taxpayer, then, of course, they may use the information in a court.
These are all hypothetical questions. Apart from minor modifications, the article in the three treaties in question is the same article that we have in 62 other treaties. Some of the older ones do not contain it.
The Chairman: I notice that it is the agreement with Vietnam which is prompting these questions, yet we do have in force tax a treaty agreement with the People's Republic of China and we had one with the USSR.
Senator Bolduc: Our question is: Are the ethics of the police state administration lower than ours, and is it prudent for us to enter into that type of agreement?
The Chairman: I suppose the point is this: If the Canadian company wishing to do business in one of these other countries decides to go in and take the risks of operating in that particular regime, its status is certainly not harmed but probably improved by the fact that there is a tax treaty between that country and Canada. Is that an approach to the answer?
Mr. Déry: That is a very good summary. Certainly, tax treaties do override domestic legislation and they cannot produce a tax charge that is higher than that provided domestically, so you cannot lose if you are carrying on normal business. If you are playing games, there is a chance the information might be found and passed on.
The Chairman: While we are talking about the People's Republic of China and Vietnam, do we have an agreement with Cuba?
Mr. Déry: No, we do not.
The Chairman: Have we thought at any time of attempting to negotiate with Cuba?
Mr. Déry: We have not negotiated, although we have acted as an advisor to the Cuban ministry of finance on the question. They wish to find out more about double taxation conventions. I do not believe they have any with other countries.
Senator Grafstein: I have another short question. Articles 11, dealing with interest, I believe, are similar in all the agreements. You gave us in your evidence your view that there was a floor of less than 15 per cent. The three agreements call for a cap on interest charges, namely, 10 per cent, 10 per cent, and 15 per cent for Vietnam; Croatia 10 per cent and 10 per cent; and then Chile 15 per cent. You also indicated in your evidence that there was a floor below which it could not go but I see no mention of the floor in the articles. Would you show me where that would be? Is that a discretionary item?
Mr. Déry: It is in the treaty with Chile. It is at the very end, in the protocol, in paragraph 1. In my version of the bill it is on page 71, but I am not sure we have the same version.
Senator Grafstein: We set up in this provision a differential between OECD countries and non-OECD countries. Why is that?
Mr. Déry: I do not know. It seems to have been the practice over the past 10 years or 15 years where these most-favoured-nation provisions have been inserted in tax treaties. The practice has been to refer to OECD countries. I believe one of the reasons would be to allow the treaty partner in a particular regional grouping agree to different treatment amongst the members of that particular group. In most cases where we have this type of provision, it refers to other OECD countries.
Mr. MacIntosh: Presumably it is there because the OECD is a group of wealthier countries that export capital to other countries in the world, and what the provision basically is saying is: If you treat one of these other countries in a more favourable fashion that is exporting capital into your country, we wish to be treated like them because we also export capital to you.
Senator Grafstein: The United States and some other countries have tax-free bonds, tax-free interest. If Canada decided to have tax-free bonds as an example, following the American practice, this treaty would impose a taxation that in effect would not apply domestically because of the provisions that say that even for government-labelled instruments you must collect interest.
Are there no exemptions if a government, say, the Chilean government or the Canadian government, decides to issue interest-free bonds, for example, or stipulated bonds? As this is drafted, it strikes me as capturing the interest without capturing the tax exemption.
Mr. Déry: As I indicated earlier, the tax treaty cannot be more onerous than the domestic legislation. If we were to introduce such tax-free bonds domestically, we would say that there would be no withholding tax on payments to non-residents. Therefore, even though the treaties provide for a 10-per-cent rate in most cases, we would not legally be able to collect it.
I believe with Vietnam there is already an exemption for interest on government debentures, or indebtedness of the government.
Senator Grafstein: Where does that show?
Mr. Déry: Article 11, paragraph 3(a).
Senator Grafstein: Mr. Chairman, does the committee intend to call other witnesses on this bill?
The Chairman: No one has asked to appear.
Senator Grafstein: Have we made inquiries of any groups to determine whether they wish to give evidence on this bill?
The Chairman: No.
Senator Di Nino: Just to be clear, what we are talking about here, gentlemen, is the treatment of dividends, interest and profits of non-residents between the two states. We are talking about the elimination of double taxation. If you are paying taxes in one state, and if you have an agreement with them, obviously you can claim that when you pay tax in your home state.
We are also talking about, I gather, the ability of the Canadian government from our standpoint, and it would be the same in the government of the other party, to ensure that Canadians are paying their fair share of tax and are not evading taxes by hiding it in some way in another state. Am I correct that, in effect, this is the principle of the bill?
Mr. MacIntosh: Yes, that is correct, senator.
Senator Di Nino: Has anyone ever questioned the exchange of information issue that we have been talking about today? Has this issue been raised before?
Mr. Déry: Not to my recollectionof the studies of these agreements in the past several years, although I have not attended all the hearings of this committee. The concern is there, and the way to deal with it on the Canadian side is for the revenue authorities to ensure that they will pass on only information that will end up in the proper hands and be used properly in the foreign country. There is the awareness.
Senator Di Nino: Mr. Chairman, I do not believe that this is the responsibility of Mr. Déry or Mr. MacIntosh, but it is an issue which I feel is very important. I do not wish to ask Mr. Déry specifics about problems that have resulted from the exchanges of information in the past. However, our committee should find a way to consider that. I believe Senator Grafstein had a good point, maybe we should hear from some other witness who can deal with that issue specifically because it is a concern that I have had because of my dealings in the financial services sector. The exchange of information with certain countries has always been very suspect. I do not believe it is suspect with all countries, and we should not single out Vietnam. There are many other countries, some of which were mentioned, whose respect for the rule of law is somewhat different from ours.
Our committee should look at that issue as it deals with treaties and agreements between Canada and other states; not only tax treaties but other treaties that would require that certain information be exchanged, in order to ensure that Canadian interests are being protected.
The Chairman: Then you do not accept the proposition that I put forward earlier that the existence of the tax treaty agreement does not cause a deterioration in the potential Canadian investor's position, but in fact may improve greatly the Canadian investor's position?
Senator Di Nino: I accept that, Mr. Chairman, in the sense that a Canadian investor paying taxes in Italy is able to claim those tax payments as an expense so that there is no duplication of tax. I also accept that, if a Canadian resident moves to Mexico and there was a treaty which covers the income from a pension, or dividends on investments or interest on deposits that it does give protection to Canada in the sense that, by sharing information, assets and income cannot be hidden so that a proper payment of tax is applied in accordance with the laws of our country.
I am not certain, though, that the sharing of information, particularly with those countries who do not have the respect for the rule of law that we have in Canada, is appropriate. I am not even sure that this creates a problem, but I would like to know that it does not create a problem.
Senator Grafstein: The witness in a way dealt with the issue. I believe the witness told us that the Canadian government is not immune to the understanding of the jurisdictions it is dealing with and, therefore, there would be some restraint on behalf of the ministry to deal with these tax issues as it relates to questions of abuse and privacy. That is what I took him to say. I am not trying to put words in the witness's mouth, I merely want to know if that is the case or not.
We are in a difficult situation. On the one hand, we do not know if, in fact, Canadian taxpayers are abusing the system by going to foreign countries -- one of these three countries -- and in effect taking undue advantage of the tax differentials between the two countries. On the other hand there is a question of disclosure about someone who is abusing the system. Even in those cases there would be some sense of restraint on behalf of the government with respect to the exchange of information because they are bound.
This agreement, and correct me if I am wrong, does not protect someone in officialdom from breaching Canadian privacy laws even with an agreement approved by Parliament. It does not allow a person to be exculpated from local jurisdiction. I am not clear about that but it seems to me that might be the case. It is a delicate matter, Mr. Chairman.
Senator Bolduc: I gather, in an exchange of information, we do not have the guarantee that the people in those countries will behave as we do.
Senator Andreychuk: That was the essence of my question. My understanding is that some initial political analysis is done to determine whether any particular country is a country with which we wish to enter into a tax agreement before we start negotiating the agreement. What the witness has said is certainly contrary to my understanding. He is simply saying that, if there is a request from a country, we enter into negotiation.
My understanding is that there was a political analysis to determine that there was a sufficient regulatory system, that it was a reasonable system, that it was a responsive system, and that we were reasonably assured although the agreement would not give a guarantee. That was the one precondition to going into an agreement. Then, after the agreement is signed, the other condition is that our taxing authorities have a permissive section, not a mandatory section, to give out the information and that they must carefully scrutinize these requests to ensure that they are being handled properly. After we are into an agreement we consider what is, in fact, happening and, if we are not satisfied, we will not share the information quite as freely. There is a discretion in the revenue department.
What I am hearing now is that there was no political analysis about whether there is a "readiness", in the jargon of diplomacy, to enter into these agreements with, for example, Vietnam. I do not know whether we can ascertain that from another witness.
The Chairman: Mr. Déry and Mr. MacIntosh have heard what you have said. They may wish to amplify what they said earlier.
Mr. Déry: I can assure you that the entering into negotiations with Vietnam was fully supported by the Department of Foreign Affairs. Perhaps I have been misleading in saying that they do not have a set procedure they follow in making the study. They do not give me the information. There has been no negotiation without the support of the Department of Foreign Affairs and I am sure they collect that type of information for other purposes, not necessarily tax purposes. They have certain questions that they pose to all the countries with which we have relations. Once the Department of Foreign Affairs inform me that they fully support the convention and they consider it is extremely important in the context of the overall relationship between two countries, including requests from Canadian businesses who want to do business in those countries, that is sufficient for the tax purposes.
Senator Andreychuk: That leads to the fact the Department of Foreign Affairs has been involved, and that gives me some assurance without getting into any details. As I said, a political analysis of the country seeking to enter into these agreements, including an assessment of whether the laws of that country are adhered to, and whether there is a sufficient system upon which we can rely.
Senator De Bané: There is no discrepancy between what Senator Andreychuk has said and what the witness said. Mr. Déry said he is not privy to that analysis by the department, but he gave the assurance that he does not enter into negotiations without the concurrence of the Department of Foreign Affairs. From Senator Andreychuk's experience she is aware that that analysis is done before approval is granted. There is no discrepancy between the two.
Senator Andreychuk: It used to be done.
The Chairman: Yes, and I believe Mr. Déry is implying that it is still done.
Senator Andreychuk: We can assume from what Mr. Déry has said, and he can correct me if I am wrong, that the Department of Foreign Affairs has indicated on these three cases that, in their opinion, we should go ahead with the negotiation for the tax treaty. At least they did not oppose it.
Mr. Déry: They have fully supported the negotiations but, again, they have never said that they have information on the legal rights in that country and so on. It is a general support of the entering into the negotiation.
Senator Andreychuk: It would be interesting to know from the Department of Foreign Affairs what kind of analysis they do and what kind of assurance they have that the systems are adequate to protect Canadians, not by a guarantee, but by a reasonable assurance.
Senator Bolduc: We know, for example, having discussed this recently with Senator Grafstein and our American counterparts, all about the softwood lumber problems in Western Canada. The American house builders like to have our product but the American producers do not wish to compete with Canadian products. There are two sides to the question. Likewise, some businessmen may wish to operate in Vietnam but some people might be hurt by that. That is the line of questioning of my two colleagues.
It would be of interest to have a discussion one day with representatives of the Department of Foreign Affairs on how they balance the interests of some and the rights of others.
Senator Grafstein: The country-risk assessment.
The Chairman: I wish to ask a purely technical question. Why is the word "agreement" used relative to Canada-Vietnam and Canada-Croatia, whereas in the case of Canada-Chile the word used is "convention?" What is the important meaning that is concealed therein?
Mr. Déry: There is no difference whatsoever. In the Canadian model that we send to other countries we use the word "convention." Some countries prefer to have an agreement instead of a convention, but for our own purposes there is no difference whatsoever.
The Chairman: I am uncertain as to how you wish to proceed. There seems to be no objection in the case of these particular agreements or conventions, but two questions have been raised: first, as to what the Department of Foreign Affairs and International Trade has done preliminary to the negotiation and, second, what assurance do we have that information provided as a result of these agreements, if any, is treated properly.
Do you wish to hold up the bill or do you wish to proceed further with the bill now?
Senator Di Nino: Mr. Chairman, I do not feel we should hold up the bill. There are some 60-odd agreements of this nature that we have signed with many countries around the world. This is a standard format.
However, I am truly concerned that the issue of the sharing of information has not been considered, at least by a parliamentary committee, to the degree that it should be. I would suggest that we go ahead and deal with the bill but, as a separate item at some future date, we engage in an inquiry, if you wish, with the Department of Foreign Affairs, as well as others who may be able to answer those questions that are outstanding.
Senator Andreychuk: As with other bills at other times, would it be appropriate to pass the bill but note by way of comment in the report that we are signalling this issue for the government's reflection?
The Chairman: I believe we could do that in a report, yes.
We will report the bill without amendment but with a second report, as it were, asking, first, what procedure was undertaken by the Department of Foreign Affairs and International Trade preliminary to the negotiation of the treaty or convention, as the case may be; and, second, what evidence there is that information provided under comparable acts has been improperly used.
Senator Di Nino: We can use wording similar to that. In effect, what I would wish to ensure is that, at some future time, preferably some time this year, we invite witnesses to our committee hearings to discuss those two issues.
Senator Bolduc: That should happen before we approve the next such bill that comes before us, because we deal with a similar bill every three months.
Senator Grafstein: I agree with Senator Bolduc.
The Chairman: Honourable senators, we have a bill containing 19 clauses and 3 schedules.
Shall clauses 2 through 7 carry?
Hon. Senators: Agreed.
The Chairman: Shall clauses 8 through 13 carry?
Hon. Senators: Agreed.
The Chairman: Shall clauses 14 through 19 carry?
Hon. Senators: Agreed.
The Chairman: Shall schedules 1 through 3 carry?
Hon. Senators: Agreed.
The Chairman: Shall the short title carry?
Hon. Senators: Agreed.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Shall I report the bill without amendment?
Hon. Senators: Agreed.
Senator Di Nino: With comment.
The Chairman: With comment?
Hon. Senators: Agreed.
The committee adjourned.