OTTAWA, Wednesday, May 29, 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 4:15 p.m. to give consideration to the bill.

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


The Deputy Chair: I am Senator Paul Massicotte, the deputy chair of this committee. Welcome.


We are meeting today to begin 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. We are pleased to welcome our first panel of experts to the committee.


I am pleased to welcome to the committee, from the Department of Finance Canada, Stephanie Smith, Senior Director, Tax Treaties, Tax Legislation Division, Tax Policy Branch, and Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch; and from the Canada Revenue Agency, Alexandra MacLean, Director General, International and Large Business Directorate, International, Large Business and Investigations Branch.

Without further delay, I will ask the senators to introduce themselves.


Senator Dawson: Dennis Dawson from Quebec.

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


Senator Bovey: Patricia Bovey, Manitoba.

Senator Coyle: Mary Coyle, Nova Scotia.

Senator Ngo: Thanh Hai Ngo, Ontario.

Senator Boehm: Peter Boehm, Ontario.

Senator Greene: Stephen Greene, Nova Scotia.


The Deputy Chair: Let me remind the senators and witnesses that their comments and questions must be to the point and concise so that we can cover as many topics as possible during the time we have. Let me also remind you that a vote is scheduled in the Senate Chamber at 5:30 p.m., so we will suspend the committee meeting to vote. The Senate will adjourn after the vote. I ask that the senators return quickly to the committee room so that we can continue our study with a second panel of witnesses.


To our witnesses, thank you for being with us today. We look forward to hearing your presentations.

The floor is yours, Mr. McGowan.

Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: We appreciate the opportunity to speak about Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting.

This convention is generally referred to as the MLI. The substantive provisions of the MLI are based on the results of the OECD and G20 base erosion and profit shifting, or the BEPS project, including the final report on BEPS action 6, preventing the granting of treaty benefits and inappropriate circumstances, and the final report on BEPS action 14, making dispute resolution mechanisms more effective.

The OECD/G20 Base Erosion and Profit Shifting Project was initiated in 2013, with the objective of developing a coordinated approach to addressing concerns over base erosion and profit shifting, or BEPS. The project now involves not only OECD and G20 countries but over 120 jurisdictions, known collectively as the inclusive framework on BEPS.

BEPS is a term used to describe aggressive but nonetheless legal tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift income to low or no tax jurisdictions. Encountering such strategies requires a coordinate international response. The MLI is an important component of that coordinated international response.

Over 100 jurisdictions participated in the negotiations that led to the conclusion of the MLI and, to date, 88 jurisdictions are signatories to the MLI. The written materials say 87, but another one just signed.

Bill C-82 would bring the MLI into force with respect to Canada and allow Canada to swiftly modify the application of many of our bilateral tax treaties to include BEPS countermeasures without the need for separate bilateral negotiations.

The MLI represents a big step forward in strengthening international tax integrity and fairness. Specifically, the MLI would allow Canada to address treaty abuse in accordance with the minimum standards established by the OECD/G20 BEPS Project. This includes the adoption of a new treaty preamble, stating that the object of a tax treaty is not to create opportunities for tax avoidance. It also includes the adoption of a principle purpose test, which is a substantive anti-abuse rule to counter treaty abuse.

In addition, the MLI would allow Canada to incorporate provisions in its tax treaties dealing with the resolution of tax disputes, in accordance with the minimum standards, and to adopt mandatory binding arbitration with many of our key treaty partners.

Mandatory binding arbitration is a mechanism that obligates the parties to a tax treaty to submit unresolved cases to an independent and impartial decision maker, an arbitration panel. The decision reached by the arbitration panel is binding on the parties and resolves the case.

This concludes my introductory remarks. My colleagues and I would be pleased to answer any questions that the members of this committee may have.

The Deputy Chair: Does Ms. MacLean have any comments?

Alexandra MacLean, Director General, International and Large Business Directorate, International, Large Business and Investigations Branch, Canada Revenue Agency: Not really. Just to reiterate my introduction, I am the Director General of the International and Large Business Directorate and the international and large business audit at the CRA.

I am here to answer any questions you might have on the tax administration side in relation to the multilateral instrument. Thank you.


Senator Saint-Germain: Thank you for your brief presentation. I will take heed of the deputy chair’s instructions, and my question will be short. It is only a matter of clarification, because I have read the bill and I agree with its objectives and most of the clauses.

My question is about part II, hybrid mismatches. Paragraph 5 of Article 3 is connected to paragraph 1 of Article 3, which relates to the income of a resident of a contracting jurisdiction, but only to the extent that the income is treated, for purposes of taxation by that contracting jurisdiction, as the income of a resident of that contracting jurisdiction. So paragraph 5 of Article 3 states that a party may reserve certain rights, which I consider to be cumulative rights, and the exclusions go as far as subparagraph (g). There are seven types of exemptions. Can you remind me of the purpose of those exemptions? They seem very broad in scope. So, in comparison to other similar agreements, can you tell me whether those exemptions are very often used and whether they apply to a number of entities, including Canadian entities? I am therefore referring to part II, paragraph 1 of Article 3, by making a connection with paragraph 5 of Article 3, which states: “A Party may reserve the right...”. There is a list of seven exemptions.


Stephanie Smith, Senior Director, Tax Treaties, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: Thank you for the question. If I understand correctly, the question is directed at Article 3, Transparent Entities.

Senator Saint-Germain: Article 3, yes.

Ms. Smith: There are many reservations that may be made in respect of that article.

Senator Saint-Germain: Yes, there are seven of them.

Ms. Smith: First, to clarify, at the present time this is not an article that Canada intends to adopt.

Canada has made a reservation in respect of this article. That was made public at the time of the tabling of Bill C-82 last spring or early summer. It indicated which articles Canada intended to choose and which it did not. This is an article that we do not intend to choose at this time.

The way that the multilateral convention works is that Canada could adopt this provision at a later date. To the extent that there was a match with another partner, it would be included in our tax treaties, subject to reservations which may have been made by other parties. Typically, these reservations restrict some of what the provision is or restrict entirely the applying provision.

Canada has a hybrid mismatch article in the Canada-U.S. Tax Treaty. That provision was specifically tailored to the bilateral situation with the United States. Our view is that it is the jurisdiction with which we see the most transparent entities. To date, it is a provision that may be bilaterally negotiated, or more specifically targeted, so that you can best anticipate the particular entities in both jurisdictions than can be done through a multilateral convention.

Senator Saint-Germain: Thank you for this clarification.

Senator Boehm: Thank you for coming. Mr. McGowan, you are one of our more frequent visitors; it is good to see you again.

I want to focus on the principal purpose test. I know there are different views, certainly in the legal community, about its ambiguity. Is Canada adopting the principal purpose test for treaty abuse as an interim measure? What is the rationale for not adopting the limitation to address treaty abuse immediately?

I would like to drill down a bit on that.

Ms. Smith: Yes, Canada has proposed to adopt the principal purpose test. The section in respect of the principal purpose test is one of the mandatory provisions in the treaty. With respect to the mandatory provisions, there’s effectively a choice to choose the principal purpose test or to make a reservation and say, “I would rather bilaterally negotiate a detailed limitation on the benefit clause.”

Why did Canada choose the principal purpose test? There are a couple of reasons. First, it’s believed that it is a good test and will be effective in trying to ensure there is not an abusive use of our tax treaties. It is a test that is not dissimilar to the general anti-avoidance rule, which is already contained in the Income Tax Act and for which Canadian taxpayers have significant comfort with respect to how such a test applies. It is a subjective test because it is a principal purpose test.

The second reason for adopting the principal purpose test, as opposed to immediately going through the approach of bilaterally negotiating detailed LoB clauses, is that by signing the treaty the only thing you can get today and in the near future is the principal purpose test.

The whole reason for having this multilateral convention was to avoid the need to bilaterally negotiate our network of 93 tax treaties, soon to be 94. That would be a very long time in coming, so it was decided to adopt the principal purpose test. It is the test that has been adopted by every other signatory to the treaty, which is another 88 signatories as of yesterday afternoon.

A statement was expected to be made on ratification, as was made on signature. It is provided in the convention and indicates that Canada adopts, where appropriate, the PPT on an interim basis subject to the negotiation of a detailed limitation on benefits clause.

Perhaps people have read more into the term “interim” than was the intention of the drafters of the treaty. We would expect to see, at least for the next medium term, the principal purpose test in our treaty with the possibility of negotiating detailed LoB clauses where we had a willing partner on the other side.

Senator Boehm: Would the same apply if we are renegotiating existing agreements?

Ms. Smith: If we are renegotiating existing agreements based on the commitment that Canada has made, we would seek to ensure that there is an anti-abuse rule in the treaties. There would be a discussion with the other party as to whether a principal purpose test or a detailed limitation on benefits test was the most appropriate for the bilateral situation.

Senator Coyle: Thank you for being with us. I am curious. We know that there are 88 signatories now to the convention. I am interested to know about the countries we might consider to be tax havens.

Among those 88, are there any that would fall into what one might consider a tax haven? Then I’ll follow up with a question.

Ms. Smith: I always hate to list something as a tax haven, only because there is no specific definition of a tax haven.

The Deputy Chair: Are the Cayman Islands there?

Ms. Smith: The Bahamas and the Cayman Islands have not signed this agreement. By and large that is because they do not have double taxation treaties. This would be irrelevant for them to sign. Luxembourg and Barbados are two of the signatory countries. Many people would think of them as real tax havens, but they just don’t have double taxation agreements.

This treaty tries to ensure that there is no abuse of a double taxation agreement. There would be no impact it if there were no double taxation agreement.

Senator Coyle: I think it’s important to get that information out.

I have another question on something that came up at second reading in the Senate. Perhaps this is for CRA, but I am not sure. A question came up about our actual implementation and enforcement.

We pass another act. We try to plug some more holes. The idea is to capture the tax revenues that are due to Canada. Could you speak to the implementation side of that?

Ms. MacLean: The Canada Revenue Agency has a number of tools to detect aggressive tax avoidance and tax evasion. In particular, we require fairly detailed reporting regarding cross-border transactions. We have a number of forms that allow us to examine those transactions and ask more questions regarding their nature. I have brought some of them with me.

We think our existing tools will be helpful. Fairly recently, Canada implemented country-by-country reporting for multinational entities with revenues over 750 million euros. Through that legislation, which is implemented in Canada and in many other countries in the inclusive framework, we receive high-level information, including all the jurisdictions in which a multinational operates, all its legal entities included in the corporate group.

In combination with our other reporting tools, that will give us a good line of sight on which transactions are going through which countries.

The Deputy Chair: Let me give you the big picture. For years, we’ve talked about the fact that in Canada we have not been very successful in managing the exaggerated forms of tax reporting. We have often said that there are international definitions we haven’t worked out re double residents.

We have been dependent upon the OECD. We have been talking to the OECD for the last five to seven years. As countries we have to establish the base rules so that we can define principal residents and so on.

We have high expectations for the discussions with the OECD, and finally we have come to a standard format that will hopefully be applicable to many countries. We seem to be making progress on what many consider to be a poor performance by ourselves at collecting all these monies.

Yet, when it comes before us, what does Canada do? It adopts the minimum requirements. Of all the options we have under this treaty, we are doing the minimum. We’re doing very little, and we’re not even adopting many measures. If we adopt, we can’t reverse, so we say, “Let’s delay it.”

When you look at it this way, I am disappointed to say we aren’t gung ho. We are not using every tool we have to resolve this major issue in our country.

Could you comment on that perspective? Why am I wrong?

Ms. Smith: I’ll start in terms of what provisions Canada adopted or has proposed that it will adopt currently. In that respect, the initial, on signature, was picking up the minimum plus binding mandatory arbitration with a view that further study was needed before determining whether the MLI was the appropriate instrument to update our bilateral treaties for the particular provisions or whether we were seeing issues that needed to be addressed by such a treaty provision.

At the time the bill was tabled in Parliament, the government issued a press release indicating that another four provisions would be adopted. We have adopted more than just the minimum. We have the minimum, plus an additional five provisions. We are very much in the range of what the majority of G20 countries and other big countries have adopted. We are very much in the norm on that front.

We will also continue to monitor on a go-forward basis. If new problems or issues develop, there is an opening to adopt provisions at a later date. Some of the provisions can be included and considered on a bilateral basis with treaty partners.

The Deputy Chair: What did we not adopt, and why not?

Ms. Smith: We did not adopt the transparent entity rule that we spoke about earlier. There was one concern from Canada with respect to that provision. Canada has a reservation on the OECD model tax convention.

There is a concern that the application of the rule looks at fiscally transparent entities even in third states. We were concerned that there could be some abuse if we were looking at entities in third states and not just in the two contracting states.

As well, there is the hybrid entity risk. The biggest risk exists with the United States. We already have a very tailored provision with the United States that works quite well. The view was that this provision would be better tailored between the two countries. That provision, to date, has not been adopted.

Also, we have not proposed to adopt the permanent establishment situated in third jurisdictions.

The Deputy Chair: What does that mean? What is the situation?

Ms. Smith: In some cases you may have a company resident in Canada that is operating in another country. Then there is a payment made from that permanent establishment to another third state with which Canada has a tax treaty.

Under the laws of some countries, they don’t view that permanent establishment and the payments coming from that permanent establishment. That is not the case with Canadian law. We do not have an issue, generally speaking, with these third state PEs. In our view, it was better to bilaterally address this issue. We had a treaty partner with an issue as a result of their domestic law to deal with these entities in third states.

We did not adopt the savings clause, which reserves the right for you to tax your own residents. Largely speaking, that is incorporating something which is generally understood in any event. The vast majority of Canada’s treaties already contain a type of savings clause. That has not been an issue for us where there has been any restriction on our ability to tax our residents, despite having a tax treaty in place.

We did not pick up the provisions with respect to permanent establishments because they were very mixed in terms of the countries that did pick up the permanent establishment provisions. We would not have picked them up in all of our treaties because of the choices of treaty partners.

The inclusion of the permanent establishment provisions by way of a multilateral instrument is a difficult task because of the wide variance in the permanent establishment articles and provisions in existing tax treaties.

It led to some uncertainty in terms of how our treaty would be updated. It was not clear whether the countries that chose to apply the permanent establishment provisions would be the countries of most benefit to Canada. A decision was taken at that time that it would be more beneficial to negotiate them on a bilateral and as-needed basis.

In respect of the other provisions, they were adopted.

Senator Ngo: I see the list here but I don’t see the United States. Could you explain why the United States is not a party to this agreement?

With Mexico being on the list and with the USMCA, what kinds of implications, if any, will this have on the new NAFTA?

Ms. Smith: Generally speaking, I don’t think the new NAFTA, the Canada-United States-Mexico Agreement, will have any impact in respect of our tax treaties or in respect of the multilateral instruments. By and large, all of our trade agreements defer to tax treaties for issues that are covered under the tax treaties, so there is not usually any interaction between the two agreements.

It is correct that the United States has not signed this agreement and Mexico has. As a result, the Canada-U.S. treaty will not be modified in its application by the MLI. However, a large part of the reason the United States did not sign this agreement is that the major benefit of this convention is the inclusion of a treaty anti-abuse rule in bilateral tax treaties. For some time, the U. S. has had a policy that includes a bilateral anti-abuse rule in its tax treaties.

They have adopted the detailed limitation on the benefits clause, which I believe is in all of their negotiated tax treaties with the exception of two. They are in the process of updating those. Therefore, most of their treaties already contain many of these items and the minimum standards provisions, including the Canada-U.S. Tax Treaty.

I don’t think the fact that the U.S. has not signed provides an opportunity or a risk to Canada, given the state of our treaty and of the treaties the U.S. already has containing these anti-abuse provisions.

Senator Bovey: I appreciate your clarifying the provisions that Canada didn’t accept.

Did any of these countries accept all the provisions? If so, which ones?

Ms. Smith: Yes, a few countries accepted all of the provisions. I don’t have that information with me today, but it is something that could be followed up on.

Senator Bovey: Mr. Chair, if they could follow up, I would appreciate it.

Do you know of other countries that are considering joining the convention?

Ms. Smith: Yes. The OECD website indicates that six countries have expressed their intentions to sign the convention. There are: Algeria, Eswatini, Kenya, Lebanon, Oman and Thailand.

Senator Coyle: Let me clarify Senator Ngo’s point. I want to make sure I understood your answer on the U.S. Then I will ask another question.

As I understood it, the U.S. has not signed on and has no intention to sign on to the MLI because it has already included most of the main provisions of the MLI in its existing bilateral tax treaties. Therefore, it would be a redundant exercise for them. Is that correct?

Ms. Smith: Yes, that is correct.

Senator Coyle: Just remember that I am not a tax expert, but I need to understand it.

As a follow-up to a question by Senator Bovey, you mentioned that most of the G20 partners, which have signed on, have signed on to around the same number of articles as we have. Are they the same articles or the same number of articles? Do we know that? Is there a discrepancy there?

Ms. Smith: A generalization is to say around the same number of articles. They are not all the identical articles that have been picked up by all G20 countries.

Senator Coyle: Is there anything that we should know about that? Why have some G20 countries signed on to some and not others, where we have chosen others in that mix?

Ms. Smith: I don’t know if there’s a single reason, necessarily, as to why countries chose some provisions and did not choose others.

For some, it was for a policy reason. For some, it was because they felt that bilateral negotiations would be the better way to update the tax treaty. For some of the G20 countries, they’re not willing to adopt binding mandatory arbitration.

Those countries would not have adopted the binding mandatory arbitration. That is one of the significant differences, but there are other differences as well among the G20 countries.

Among the G20 countries, as well, the United States is a big country that has not signed. Brazil is another G20 country and significant partner that has not signed. However, as was announced last fall, the Department of Finance initiated bilateral negotiations in November with Brazil. The intention was that the update to the tax treaty would include measures and at least the minimum standards contained in the BEPS project.

The Deputy Chair: Just to talk about the OECD, we have had high expectations of that for many years now. We thought that would be a key component for our tightening the definitions to make sure there is no double taxation and no avoidance of taxation at the same time.

What is our expectation today when we see a lot of countries like the United States did not sign and countries like Canada did not apply for all the options? Do we expect that to significantly improve our success at collecting people who abuse their taxation responsibilities?

Ms. Smith: Ms. MacLean may want to comment afterward.

The United States and Brazil have not signed. This is no indication that they don’t fully support the work done by the BEPS group or that they don’t have the intention of implementing at least the minimum standards. As well, Canada did not immediately adopt all of the provisions. This was not because it didn’t fully believe in the project or the outcome.

The inclusion of a principal purpose test in all of our tax treaties, in addition to the explicit preamble language that will now be included in all of our treaties through the MLI, says explicitly that while tax treaties are intended to avoid double taxation, they are not intended to create non-taxation. The parties do not intend there to be treaty abuse.

These very important statements will help inform the interpretation of our courts of the rules when viewing cases that come before them. I am very optimistic that this is a positive step forward.

The Deputy Chair: Ms. MacLean, do you agree with that?

Ms. MacLean: I largely agree with that. I am also optimistic. There are no panaceas in a world of aggressive tax planning. A lot of money is at stake for governments and multinational enterprises, in particular. We can anticipate that they will attempt to plan around almost any new tool or legislative policy instrument.

The government’s experience with our general anti-avoidance rule might be instructive because the principal purpose test is fairly similar in its approach. There was a lot of uncertainty or a lot of perceived uncertainty when the GAAR was introduced 30 years ago. The government has had quite a lot of success applying the GAAR. It has definitely moved the goalposts. It is harder to do aggressive tax planning now, domestically, than it was in the 1980s.

It will depend to some extent on the courts and their interpretation of the principal purpose test, which will undoubtedly be challenged.

The Deputy Chair: Do you think we will be okay with the efforts of the OECD, or will we have to wait another 10 years to get another form of agreement among the countries to get effective taxation?

Ms. MacLean: Today, this is an effective tool and a very good start. I defer to my colleagues for more policy commentary than that.

Mr. McGowan: As has been noted, it is a significant step forward in international tax cooperation and updating our international tax rules. As Stephanie Smith said, a principal purpose test and a clear statement of policy in the preambles to our covered tax agreements are not small things. They are expected to be beneficial in preventing aggressive international tax avoidance.

I mentioned in my opening remarks that this was part of the OECD/G20 BEPS Project. There are a number of other steps as well, so this is not the entirety of the project. As Ms. MacLean mentioned, we introduced country-by-country reporting and we introduced a common reporting standard, both of which came out of the BEPS project. A lot of work has been done on the transfer pricing front.

While this doesn’t address every manner of aggressive international tax planning, base erosion and profit shifting, in the context of the OECD/BEPS project, it was initially seen and is still seen as a big step forward. This is an important component.

Some of the limitations were noted earlier in response to questions about planning involving the Cayman Island or other countries with which Canada does not have a tax treaty. To be frank, an instrument that modifies the application of tax treaties won’t necessarily affect countries that don’t have tax treaties.

This government and previous governments have continued to refine the rules in the Income Tax Act to deal with aggressive tax avoidance transactions as they arise. We’ve seen a number in recent years. I don’t want to go through them in too much detail but rather to put them in the context of the ongoing efforts. It is a significant step.

The Deputy Chair: Thank you to all three of you for being with us this afternoon and for your help. This is not an easy subject for us, but you gave us a pretty broad understanding of what is happening.

For the second panel, we will start with Professor Arthur Cockfield, Professor at the Faculty of Law at Queen’s University, and then continue with our panel after the vote in 20 minutes.

Thank you very much, Mr. Cockfield, for being with us. The floor is yours.

Arthur Cockfield, Professor, Faculty of Law, Queen’s University, as an individual: It is an honour and a privilege to be here today. When I prepared my handout for distribution, I wasn’t aware that we would hear from officials from CRA and the Department of Finance prior to my testimony. The handout replicates some of the testimony you have just heard. Therefore, I will mainly skip through it.

Since 2008, when we had a global financial crisis, a lot of governments were worried about the implications of aggressive international tax avoidance on revenues and all the various revenue losses.

Many of you will recall we had a phenomenon with PIIGS, Portugal, Italy, Iceland, Greece and Spain, that were near bankruptcy as a result of the crisis, the economic slowdown and the resulting revenue loss. Governments then began to cooperate and think about better ways to maintain their revenues. Thus, the G20/OECD BEPS Project, or base erosion and profit shifting, was born in 2013.

Today, we’re here mainly to focus on action 15, although from prior testimony I think some of you may wish to explore other areas beyond the MLI. I will refer to MLI by its acronym, but I am talking about the multilateral convention to implement the BEPS measures.

It was a good idea that Canada signed on to the BEPS agenda. As well, there are four minimum standards. Canada has agreed to implement three of them fully. On action 5 on harmful tax practices, Canada has only agreed to exchange private tax rulings. In part, we’re not complying with that minimum standard. However, we did agree to sign the MLI, and that is why we are here today.

It was an interesting development in the world of international tax law that he modern international tax regime arose after the First World War, largely as a result of League of Nations developments. In a globalized world, as I think you’re aware, we have over 4,000 bilateral tax treaties around the world. Countries normally don’t enter into a multilateral treaty such as the World Trade Organization agreements with respect to international trade. Instead, to protect our fiscal sovereignty, we enter into these different bilateral agreements. Canada actually has a bigger network than almost any other country in the world. We have over 70 of these bilateral treaties.

The movement from a bilateral treaty, the Canada-U.S. Treaty, the Canada-Mexico Treaty and so forth, to this new world of multilateralism is a big leap forward and an interesting one from an intellectual perspective.

I would be happy to answer any questions you may have.

The Deputy Chair: We have been talking about the objective of this treaty with the OECD for many years. Everybody thought we needed to come to a common definition of regions and profitability.

How do you define erosion and avoid it? Multinational corporations have been allowed to play the rules to their benefit. We all said that we needed a world agreement on some of these common bases.

We are at this point. Is this an important achievement? Will this resolve the arguments and the definitional arguments we’ve had for many years now? Is this the beginning of the end where we will see less erosion, less double taxation or less avoidance of taxation?

Mr. Cockfield: I don’t think it is the end. When the reform process started in 2013, in some of the literature produced by the OECD they said things like it was the most significant renovation of the international tax regime in a century, thinking back to the 1920s and again League of Nations developments.

Instead, in my humble opinion, we have more of an incremental change in the regime. We’re seeing some efforts, which will reduce some aggressive international tax planning, but most of the game will continue.

The Deputy Chair: No significant change.

Mr. Cockfield: No significant change, no. In part, we are a democracy and we have a number of provisions within our Income Tax Act that encourages our resident multinational firms to engage in aggressive tax planning. Until we change our domestic laws, I can’t see any real progress.

The Deputy Chair: That is disappointing. What will the solution be to amend our Income Tax Act, and in what sense?

Mr. Cockfield: One example might be a common cross-border structure deployed by Canadian multinationals. There is something called double dip financing. It’s a technical horror that I won’t get into in any detail.

The basic idea is you create a financing affiliate in a tax haven like the Cayman Islands. You lend money to it. From that one loan of let’s say $100 million, you get two interest deductions: one in Canada that erodes the Canadian tax base and then a second interest deduction in a country like the United States to reduce taxable profits in that other high-tax country.

Section 95 of the Income Tax Act enabled that particular structure since the 1970s. It is much beloved by the Canadian multinational community, and it is a way for them to reduce their global tax liabilities.

The Deputy Chair: Why do we permit that? In the way you describe it, it doesn’t make any sense to me.

Mr. Cockfield: Sometimes I have called our international tax policy schizophrenic. On the one hand, we’re here today because we want to protect the Canadian tax bases. We want to make sure we raise sufficient revenues to pay for the goods and services that Canadians demand. On the other hand, we say things like let’s promote BEPS, the MLI and so on.

On the other side of the coin, we worry about international tax competitiveness. We want to make sure that our firms can compete on a tax competitive basis with foreign companies. The United States, the U.K., Spain and Italy — virtually all countries — give these tax breaks to their resident multinationals. The theory is that we feel we must engage in the same game to let our multinational firms flourish.

Academics tend to be suspicious of this competitiveness argument because it doesn’t really tell us anything about tax policy. We could say that essentially the double dip is a negative tax. It subsidizes multinational firms, but technically it ends up being a reduced cost to capital. It makes it cheaper for the multinational firm to raise debt and equity capital.

That is how we rationalize the system. There is always this tension. We want our firms to go global, to prosper and to help Canadians in that way. However, we don’t want them to rip off the fisc.

The Deputy Chair: How did you read the decision that Canada only chose to do it a bit more than a minimum?

Mr. Cockfield: It wasn’t a surprise. As we heard from the earlier panel, the United States has not agreed to sign it at all. That was one potential response.

Incidentally, I am currently appointed to the OCAC, the Offshore Compliance Advisory Committee, by the Minister of National Revenue, to work on these files. CRA and Finance tend to be fairly conservative in terms of how they move forward. Arguably, that’s the proper way, so that we don’t destabilize our multinational community.

If we have a whole bunch of new rules, the worry is that it will be very expensive for our firms and our taxpayers to comply. They won’t be as competitive. They won’t be as willing to do Internet sales all around the world.

Senator Coyle: Picking up on that point and on your final statement in the document you provided in advance, you mentioned that the MLI will have very little practical effect on Canada, at least in its early stages. You’ve said that it will gain greater importance, to the extent that Canada decides to adopt other BEPS provisions beyond the MLI. That wasn’t clear because there are other BEPS provisions, and I wanted to clarify what you meant by that.

The Government of Canada is taking a conservative approach, as you’ve said, and the MLI is incremental in terms of the global response to the issue at hand here. Is that a bad thing, or is that a prudent thing?

Mr. Cockfield: In my own academic research in this area I support incrementalism, so I tend to say that it is a good thing. That is what other scholars in our country, such as Brian Arnold and Richard Bird who are more senior than I am, have always professed.

Again, if you go too far, it will destabilize, make the investment environment uncertain and arguably hurt Canada in that way. Maybe, because of the Panama Papers and other recent developments, Canadians actually care about international tax possibly for the first time ever. We have to do a lot more hard thinking about real changes to the system.

Senator Coyle: Thank you.

Senator Bovey: This is a new field for me.

How can there be an international standard when it seems very few countries have embraced all the measures and different countries have embraced different measures? Where is the standard?

Mr. Cockfield: It all comes back to trying to protect fiscal sovereignty. Unlike trade in other areas, Canada and many other countries, in particular the U.S. in the last few decades, are extremely reluctant to be bound to any multilateral agreement that would restrict their tax policy options. That is why we have seen such a varied response all over the world.

Until things change politically, I don’t see much hope for significant change. In other words, we have the 2008 financial crisis. We had a series of tax haven data leaks, actually culminating in a much bigger one than the Panama Papers. The most recent one was the Paradise Papers of 2017 and 13 million documents. That gave a political inertia to do some interesting things. I think we’re here to talk about one of them.

There is the common reporting standard, where Canada has agreed to exchange bulk taxpayer data automatically with all participating countries. There is the CBCR, country-by-country reporting. For the first time in our history, large multinationals with over 750 million euros will have to report their global earnings in Canada. We will see how much they’re paying in tax havens, and so on.

In a strange way, this has not been a sea change necessarily. It’s incrementalism, but certainly in my career it is the biggest step forward. Those three agreements, namely MLIs, CRS and CBCR, are all administrative so that countries do not have to go back to their citizens and say, “Hey, we’re restricted now in terms of our tax policy.”

In a strange way they are easy to enter into. The harder stuff is to agree on common tax bases. That is when you will hear from our multinational community because that has happened in the past when there have been proposals for significant change. They will be quite upset, to the extent they think that reform is subverting their own interests.

Senator Bovey: Perhaps I could ask a follow-up question. With these differences and with the face that the three foundations are administrative, what will be the impact in your best guess?

Mr. Cockfield: It is very tricky. Looking around the world today, we are seeing disinvestment in Barbados, which has traditionally been our main tax haven. They prefer the term, “international financial centre.” That is our number two traditional destination for outward foreign direct investment. Actually, it is Luxembourg this year for the first time.

There is an interesting development where the European Union has blacklisted certain countries. I just came back from a conference of the University of West Indies, Queen’s and the Organization of American States in Barbados. There was commentary suggesting that the E.U., for instance, had only sanctioned 17 countries that happen to be Black-led, middle income or low-income countries in the Caribbean.

Many of us look at the international tax game as a power game. On the surface, it seems like the E.U. and other bodies may be taking action. However, we are really seeing them push down on competitor nations in a region from where lots of our fellow citizens are drawn, in an arguably unfair fashion.

More monies are being directed to European tax havens like Luxembourg, which itself was the subject of a 2013 LuxLeaks scandal. It is a bit ironic that only six years ago that country was in the paper because of one of these large-scale tax haven data leaks. Basically, nobody suggested the Luxembourgians were doing anything illegal. They were issuing private tax rulings to taxpayers that allowed them to gain the system.

It’s not illegal, but still somewhat unseemly. Now, because of the E.U. action, they’re actually richer than ever. That tends to make one a bit cynical about some of these developments over time.

The Deputy Chair: We have one minute left.

Senator Boehm: Picking up on something the chair said earlier, in a previous life I was negotiating G8 and G7 communiqués for Mr. Harper and then for Mr. Trudeau. We spent a lot of time on tax evasion, tax avoidance, base erosion and profit shifting. A lot of this then bled into the G20 and went back and forth, but the G7 was seen as setting the trend of cautious incrementalism, which I think is what you have said.

What is to be the catalyst for us to go further? For the countries with similar systems, let’s say in the G7, will it require another sovereign debt crisis like the Lehman Brothers collapse in 2008 and the subsequent crisis in 2009? Or, will it require some big reveal, whether it’s Panama Papers, Paradise Papers or another version? Increasingly I think stakeholders and taxpayers are concerned, so what would it take?

Mr. Cockfield: I am not entirely sure what it would take. The developments you’ve just gone through were very serious. Some thought threatened Liberal democracies in terms of legitimacy of the system.

You are exactly right. If we can’t show that multinationals are paying their fair share, if high net worth individuals or gangsters are engaging in criminal offshore tax evasion, as a researcher I worry that will demoralize regular Canucks who will be less likely to comply in the future. We call this the taxpayer morale concern.

It is hard for me to think of anything more pressing than the 2008 financial crisis or these unprecedented mega tax haven data leaks. It was my job, starting in 2012, to go through them. I was retained by the CBC at that time. A number of stunning revelations were revealed in the largest ongoing global journalist collaboration in history. Over 700 journalists and 80 partner organizations around the world are still working on it. I can’t think of any more media attention or pressure on governments. If the fiscal situations of the OECD member states and the G20 countries somehow continue to deteriorate, then maybe they will ultimately have to take some significant action.

The Deputy Chair: Thank you very much, Professor Cockfield, for being with us this afternoon. It was very informative and very useful.

I remind all senators to please rush back after the vote for the video conference with the other witnesses on the second panel. Thank you very much.

(The committee suspended.)

(The committee resumed.)

The Deputy Chair: Honourable senators, for the continuation of our second panel, I am pleased to welcome to the committee, by video conference, from Alberta, Mr. Jared Mackey, Associate; Mr. Greg Johnson, Partner; and Mr. Darcy Moch, Partner, all from Bennett Jones.


Welcome to our witnesses. Since the meeting is shorter because of the vote that took place earlier in the Senate, I would ask the senators and witnesses to have specific and concise questions and answers, in order to cover as many topics as possible during the time we have. Without further delay, I give the floor to the representatives from Bennett Jones LLP.


The floor is yours.

Jared Mackey, Associate, Tax, Bennett Jones LLP: Thank you for inviting us to participate on this panel to talk about Bill C-82. We are lawyers at the law firm of Bennett Jones in Calgary, Alberta. We provide legal services to a number of multinational corporations and private equity funds with respect to their business and investment in Canada. While our clients are diverse, the bulk of our practice concerns investments in the Canadian oil and gas and energy sector.

As lawyers, we are not here to express a view on whether the enactment of Bill C-82 is right or wrong from an overall policy perspective. We understand our role today as providing the committee with insight into our perspective on how Bill C-82 could affect the decisions of our clients to invest in the Canadian energy industry and the uncertainties created for current and future investors in Canadian energy.

It is clear that capital investment in Canada’s energy industry is lagging behind that of other countries, particularly the United States. Many Canadian projects across the sector simply do not have the funding to proceed. In contrast, the United States has become more attractive for energy investments and Americans are reaping the economic benefits. Part of the reason for this trend is that the United States is reducing and streamlining regulations and reforming its taxes to be more competitive, while Canada is doing the opposite. Unless there is a change in policy, we expect the shift of foreign capital out of the Canadian energy industry to continue.

Taxes are a key factor in evaluating the viability of an investment. Up to now, foreign investors have been able to structure their Canadian investments in a tax efficient manner, promoting both initial interest and ongoing contribution to the Canadian energy industry and economy. These structures are sanctioned by Canadian courts and have kept foreign capital flowing into the industry. They have allowed Canada to remain competitive relative to other countries.

With the enactment of Bill C-82 and implementation of the MLI, we are certain that a number of our clients will divert their capital toward more profitable opportunities outside of Canada. We have already seen a number of our foreign-based clients divest their Canadian energy holdings and invest elsewhere. Tax uncertainty fundamentally affects these key investment decisions.

In the specific context of Bill C-82, basic issues remain in how the MLI will apply in principle and in practice. Of the many provisions of the MLI, the most important are the preamble text in action 6 and the general anti-avoidance provision, the so-called principal purpose test in action 7, which have been adopted by all signatories to the MLI. These provisions have been drafted broadly and will require analysis of ambiguous language, including object and purpose and principal purpose. Language of a similar nature has already created considerable uncertainty in the interpretation of our domestic tax legislation.

Our clients will look to us for guidance on the intended ambit and application of these rules to their individual circumstances. Yet, as the rules are drafted, there is significant grey area about how the rules will be applied, particularly to private equity and other collective investment vehicles. The current OECD guidance is ambiguous and open to different interpretations. If Bill C-82 is enacted, additional guidance from Finance will be necessary on these aspects of the MLI.

If Bill C-82 is enacted, there is also a need for an appropriate transitional rule. Many of the investors affected by this legislation have established relationships, structures and investments in reliance on current law. That reliance should be respected through a reasonable transitional process. Restructuring existing corporate relationships, including internal group structures, is a complex and expensive undertaking and often includes arm’s-length commitments and obligations. Looking to other Canadian bilateral treaties in this respect, we suggest that the committee consider a form of step-up or valuation day protection to protect gains that accrued prior to the effective date of the MLI.

Finally, from our perspective, it is important to emphasize for the committee that foreign capital invested in the energy sector is taxed much more aggressively in Canada than investments in other sectors. A foreign investor can grow and sell a Canadian business in the automotive, services or IT sector without being personally taxed in Canada on the capital gain. No similar exemption applies to foreign investors in the energy industry.

While the Canadian tax system encourages investments in these industries, it disproportionately targets investments in Canadian energy at a time when those investments are needed most. Regardless of the overall merits of the MLI, we think it makes sense from a policy perspective to expand the scope of existing exemptions in our domestic tax legislation to improve foreign investment opportunities for Canadian energy. Such an expansion would not be for passive investments but invested capital that is directly used in carrying on business in Canada.

That concludes our opening remarks. We are available to the committee to answer any questions.

The Deputy Chair: Does anyone else from your firm wish to add something?

Darcy Moch, Partner, Tax, Bennett Jones LLP: No. I am fine with answering questions.

The Deputy Chair: Let me start by summarizing what I heard you say. There are two asks here. For the first ask, you said that the existing capital gains or the existing earnings should be grandfathered or should be sheltered from this revision in their taxation. At the same time, you also said that there should be an exemption for the national resource industry, whereby the MLI will not be applicable because obviously it will seem to cause an increase in taxation.

Am I correct in saying that those are the two things you’re looking for?

Mr. Moch: I’d say there are three things. The first one is that there is no step-up transaction for an existing gain. Someone who has had an investment for 10 years has been relying on the treaty since they made their investment. If they dispose of their asset after the MLI comes into effect, they will be taxed. That’s the first one. There should be some sort of step-up or valuation day protection provided.

The second one is that, as Jared Mackey indicated, in all sectors in Canada foreigners can invest in shares of any Canadian company. They’re only taxed if over half the value is from Canadian resource property, Canadian real property or timber. Any other investment in Canada is simply not taxed. That has been the rule.

Historically, any Canadian gain was taxed, but a number of years ago the rules were broadened or effectively relaxed so that foreigners could invest in all sectors and not be taxed, with the exception of resource companies, real property and timber companies.

The MLI effectively precludes structuring foreign investment into Canada through treaty countries. In many cases some could argue on the merits as to whether or not it’s proper to invest through treaty countries. Simply put, with the MLI, we may not have the investment in the first place. The MLI prevents relying on treaties. The treaties themselves only allowed for an exemption if the business that was being carried on in Canada was in fact an active business, all of which promotes energy and promotes investment. That’s the second issue.

The third issue is the fact that the rules in the MLI are very broad. In cases that we’re finding, there are multinationals that will be concerned about whether or not they can continue to rely on the treaty. Even though they believe they have sufficient substance, there’s uncertainty and perhaps the uncertainty will not be factored into investment.

The Deputy Chair: Let me ask, from a policy point of view: What were the objectives in your mind when the Government of Canada decided to tax the natural resources or real estate gains and not the other sectors? Why that exception?

Mr. Moch: That’s a good question, frankly. It used to be any gain on any Canadian company. If you held shares in a private Canadian company, you were taxed on the gain. There was also at the same time a parallel provision. We have to go back into Hansard or something to figure out why these provisions are there.

However, if you invested in a public company, you were only taxed if you held more than 25 per cent of the shares and it was a resource company, a real property company or a timber company.

When they broadened the rules to no longer have tax on gains, they carried forward that real property exemption or the real property taxation didn’t provide an exemption for real property because in a public company context there was already tax on those. That’s the only explanation I have.

Greg Johnson, Partner, Tax, Bennett Jones LLP: I would add that most of Canada’s treaties, with the exception of some that are the target of the MLI, such are Luxembourg, Netherlands, Switzerland and the like, still give Canada the right to tax gains on shares where those shares derive more than half their value from real property situated in Canada. Some of the change in about 2010 was to align Canada’s domestic rules with some of the treaties that were out there, but not all.

As Darcy Moch mentioned, there are several treaties out there where we have clients who invest. We know there are clients out there in the private equity space that need to invest through some entity that is a blocker. They have investors throughout the world. They have to make the investment usually through one entity. Those entities were typically Luxembourg and Netherlands. That’s really the target of what the MLI is going after.

Going back to the question, some of the changes were just to align Canada’s domestic laws with what Finance thought was the prevailing view in Canada’s treaties with other countries.

The Deputy Chair: The bottom line, in spite of the objective in 2010 to basically tax the real estate gains, the national resource gains or lumber gains, is that you were able to find a structure such as Luxembourg whereby your clients did not suffer that taxation.

Am I correct in saying that?

Mr. Johnson: If you were carrying on an active resource or mining business in Canada, it is fair to say that the treaties in place with Luxembourg and the Netherlands provided an exemption from the gain in Canada. The investors might be taxed in their home jurisdiction, but in Canada there was an exemption from tax.

Those treaties were put through some processes where the courts found that the treaties did apply and it was appropriate to do. In 2013, that led to the domestic anti-treaty shopping rules that Finance put out in the draft and then ultimately the MLI.

What has happened is that the courts have sided with the taxpayers in most of these treaty cases and not with Finance or CRA. We’re seeing the MLI come in as a backstop and something that Finance thinks will kind of stop this. As Darcy Moch also mentioned the broad scope of principal purpose, object and spirit. It’s very tough to delineate where you’re on the right side of the ledger versus the wrong side, and that’s what our clients ask us about.

The Deputy Chair: Because of that uncertainty and the lack of definition or the lack of experience with those two terms, you’re saying that investors will therefore pay higher costs on their capital, given they may be subject to greater taxation. In your mind we may lose investments in our country as a consequence.

Is that a good summary of why you think we should be interested in seeking amendments?

Mr. Moch: That is really the guts behind what we’re talking about here. It isn’t so much from a policy point of view whether or not treaty shopping is right or wrong. From a Canadian perspective, a lot of investment in the resource sector that has come into Canada has relied on structures. First of all, if you’re private equity you can’t, as Greg Johnson said, invest through a partnership because hundreds and in many cases thousands of investors behind these private equity funds would have had to file tax returns in Canada.

They couldn’t invest simply in Canada if they invested directly through their partnership structure. They had to put a company in place. Their investors are all over the world. Why would that company need to be in the United States, as an example? Is it just because six people in New York manage it? No, that doesn’t make any sense.

Many of their investors are in the U.S. but many aren’t. They needed a company and a structure, so they put substance in place in jurisdictions that had a favourable treaty outcome.

Would have they done that but for it? No. But would they have made the investment at all into Canada if they were taxed? In many cases, no. It’s the investment and the monies spent on developing the properties that we are more interested in.

With the rules the way they were before, many were able to structure it and be comfortable that they weren’t taxed. They were complicated. They were expensive. If we have the MLI in place, some might still be able to invest because of substance and these other rules, but most will simply say that it’s an additional cost when we exit. If they’re going to invest, they’ll factor that in and may not make the investment.

We have already seen many that are looking at making investments, and the tax cost is one factor in them shying away from the investment. That’s difficult in a time when we need investment most.

Senator Bovey: I am going to change direction, if I may. I thank you for your input.

We’ve heard that many of the signatories of the agreement have agreed to only some of the provisions and that not all they have agreed to are the same. From earlier testimony, and indeed your discussions today, you’re pointing to differences by field and differences by country.

Will there be or can there be an international standard, or does it even matter if there’s an international standard? I would like your thoughts on that.

Mr. Moch: To the extent that you have a multilateral where companies opt out of different provisions and you have multiple outcomes as a result of it, it is no longer an international standard. You’re going to find that where certain provisions don’t apply in certain treaties you will still have holes and gaps, and it’s no longer multilateral.

Some of those become bilaterals because you still have a different rule for a particular country.

Mr. Johnson: I would add that some different jurisdictions have different meanings of different protocols. I’ll take the principal purpose test as an example. Even if countries agree on including that article in their adoption process, you could have differing views between countries on what a principal purpose test is.

In Canada, MLI Article 7 refers to one of the principal purposes. Our courts would say that if any purpose is to engage in some form of treaty shopping, then the MLI potentially applies and you are denied the treaty benefit. In other jurisdictions, that might not be the case in terms of how they interpret that.

We also point out that object and spirit in some countries is mainly a substance test, whereas in Canada it is a bit more of an anti-avoidance analysis. As Darcy Moch mentioned, we see differences in which countries adopt, which articles are implemented, and how each country then interprets the articles that are implemented. It can lead to differences in terms of country by country and article by article.

Senator Coyle: Thank you very much for your very interesting presentation. I want to test a couple of things and then go to a question.

We’ve already signed on to the MLI, but your main concern with our enacting it through this law is that current investors and potential investors in the natural resources sector in Canada will be discouraged and will therefore divert their investments to other jurisdictions in many cases but perhaps not all. Is that right?

Mr. Johnson: Correct.

Senator Coyle: It’s a disincentive to investment in Canada’s natural resources sector, according to you, and you are the guys who advised these companies.

Mr. Mackey, I would like to get what exactly you said in your presentation. I thought I heard you mention, at the end, the overall merits of the MLI. Could you speak to what you see as the overall merits of the MLI to be and how those merits weigh against what you are now talking about?

Mr. Mackey: Sure. There are probably a couple of merits of the MLI. The biggest one I see is the efficiency of it. It would be inefficient for Canada to amend 88, or however many, bilateral tax treaties across the world. The MLI is a much more efficient process than putting an overlay across all of Canada’s tax treaties. If Canada had to amend all of its tax treaties, it could take a decade or longer. I am not going to say how long it would take, but it would take a long time.

Does anyone else have any thoughts on the merits?

Mr. Johnson: I would agree. The merits of the MLI are its ease of implementation because it’s kind of one document. There is a process where each country has to domestically implement, notify OECD that it has been implemented, and then there’s a period when it comes into force. It’s a pretty elegant instrument in terms of its breadth of application, which would be the merit.

We are here to talk about the issue that we see. Some of the provisions disproportionately impact certain industries in Canada at a time when they need and are starved for capital.

There are some issues with the MLI. Is it appropriate to then have a blanket rule, for example, a principal purpose test across most of Canada’s tax treaties? What impact would that have in resource mining, timber and real estate? It will make investors shy away from making investments in those industries.

Senator Coyle: Have you raised these concerns with the officials in the Canadian government? If so, what responses have you had?

Mr. Moch: We’re not lobbyists, so we’ve not registered and spoken on behalf of our clients as lobbyists with the Department of Finance.

I was on what’s called the Joint Committee. From the Canadian Bar Association’s perspective, I was the chair of the Joint Committee. I co-chaired with a member from the CPA. Historically, the taxation of capital gains has always been an issue.

In my mind, if I could speak personally on behalf of general investment, I would say that capital gains is a very inefficient process. If you take the money off the table and spend it, yes, you should be taxed; but we should have much broader rules to allow you to replace that investment and not pay tax on capital gains.

Those sorts of comments have been made on a consistent basis. Specifically in the context of the MLI, have we raised this with the Department of Finance? No.

Mr. Johnson: I haven’t either.

The Deputy Chair: Of your three requests, the first one is basically a stepping up or, in other words, a freezing of the existing capital gains. It’s basically a treatment like old that has already been captured.

Let me ask you a stupid question. At the same, given the future risk of being taxed for the capital gains and so on, you say that people will go elsewhere. If they get a step-up on the existing gain, would that change the decision people or corporations have to make or stay or not stay in the Canadian resources sector?

If I were to guess your answer, I would say it’s not going to change because when corporations make such decisions they look at the future costs and not at the past. The past is sunk. It is dead. Therefore, Canada would not gain by allowing the step-up because the company would leave us anyway if the cost of capital is not competitive.

Could you comment on that, please?

Mr. Johnson: It’s a question of fairness. You have firms investing hundreds of millions of dollars in Canada expecting a certain tax result based upon existing law. When you change the law and you do not provide grandfathering, you’re really changing the economics midway through the cycle of buying, holding and selling.

It may not be that you will impact the future. I think those investment decisions will be made based upon many different factors, such as regulatory, tax, investment opportunity and management team. It is more of a matter of general fairness. You expect the playing field to be a certain way when you invested, and that should be preserved and not changed midway through the process.

Mr. Moch: In the context of that decision, let’s assume we had an allowance for a step-up and that the current gain up to the current value is not taxed. If I understand your question, wouldn’t they just leave anyway if we did that?

The point is that these are millions of dollars invested in a project for which there is no buyer. Right now in the energy sector it would be the worst time for them to sell in many cases. It’s not as though, if we allowed this step-up, they were going to leave anyway and we would lose the future investment anyway.

As Greg Johnson said, today it’s really a matter of their having invested and having made a business decision. As they see it, Canada has changed the rules midway through the game and they may not come back.

It’s not as though they’re going to leave anyway if you have the step-up because they don’t have to leave. If they do exit they will look less favourably, even more so, because we changed the rules midway through their investment. We weren’t fair, and going forward we put a tax on the gains. They have two knocks against them without being fair.

Senator Boehm: Thank you very much for your presentation and your excellent answers to our questions.

I would be interested in knowing your views on mandatory binding arbitration, and particularly the arbitration mechanism in the MLI. We have heard a variety of views, ranging from this being a completely untransparent mechanism to it being very effective. I’d be interested in your views.

Mr. Moch: We don’t have a strong view on it. In many of our bilateral treaties we already have competent authority. I can tell you from personal experience that to try to solve something by competent authority is difficult, if not impossible.

I would expect the same will happen with binding arbitration. It’s a mechanism, but ultimately you will have to rely on the Canadian court system. If you have two different countries reaching different conclusions, some process of solving it is better than none. Whether the MLI process will be effective in the end or whether there are other ways to do is open to debate.

The Deputy Chair: Thank you very much for being with us. It’s obviously an important subject not only to yourselves but to our country relative to competing in the world for capital. We appreciate the light you have brought to us in that respect. We thank you very much.

(The committee adjourned.)