CANADA VOLUME 135 S NUMBER 016 S 1st SESSION S 36th PARLIAMENT OFFICIAL REPORT (HANSARD) Monday, October 20, 1997 Speaker: The Honourable Gilbert Parent CONTENTS (Table of Contents appears at back of this issue.) All parliamentary publications are available on the ``Parliamentary Internet Parlementaire'' at the following address: http://www.parl.gc.ca 799 HOUSE OF COMMONS Monday, October 20, 1997 The House met at 11 a.m. from one country to another, which country has the right to tax it. Obviously both countries cannot if we are to have a modern world. _______________ Otherwise the rates of tax would easily exceed 100% of that income. Prayers Through these treaties one country foregoes the right to tax in _______________ certain circumstances. For purposes of simplicity we have coun- tries of source and we have countries of destination, usually where the recipient is resident. Will it be the country where the income is GOVERNMENT ORDERS owned or the country where the recipient is resident that will determine the primacy of taxation? In this exercise we have D (1105) followed the general outlines set out in the OECD model conven- tion for the avoidance of double taxation. [English] In five of these treaties, those of Ireland, Denmark, Lithuania, INCOME TAX CONVENTIONS IMPLEMENTATION ACT, Kazakhstan and Iceland, one of the main provisions involves 1997 reducing the withholding tax that would otherwise be payable by Hon. Jim Peterson (for the Minister of Finance, Lib.) moved the source country, in this case Canada, 25% under the Income Tax that Bill C-10, an act to implement a convention between Canada Act, reducing it down to a level which is far less punitive. In most and Sweden, a convention between Canada and the Republic of of these cases we have reduced it to 5% where the foreign resident Lithuania, a convention between Canada and the Republic of has a controlling or major interest in a Canadian corporation. The Kazakhstan, a convention between Canada and the Republic of rate is often reduced to 10% where interest payments go abroad. In Iceland and a convention between Canada and the Kingdom of many cases where there are payments on government debt, there is Denmark for the avoidance of double taxation and the prevention no withholding tax whatsoever. of fiscal evasion with respect to taxes on income and to amend the One of the main concerns in bilateral negotiations has been to try Canada-Netherlands Income Tax Convention Act, 1986 and the to reduce the withholding taxes to zero, where they deal with Canada-United States Tax Convention Act, 1984, be read the royalties on scientific know-how, computer software and things second time and referred to a committee. which are necessary to produce a modern industrial state. He said: Mr. Speaker, I intend to be very brief this morning. D (1110 ) We intend to enter into three new tax treaties with Lithuania, Kazakhstan and Iceland and we are making revisions to four I regret that in some of these five treaties we are not able to get existing taxation treaties, those with the Netherlands, Denmark, that rate down to zero on such royalties. However, in the treaties Sweden and the United States. with Sweden and Netherlands we have confirmed that we will have Canada currently has 61 treaties for the avoidance of double a zero withholding rate on those types of payments. This is taxation and the prevention of fiscal evasion. With these three new significant progress in a world which is increasingly dependent on treaties we will be up to 64. This is very important for Canada as a the flows of information and technology. nation which is outward looking and which depends on 40% of its economic wealth in any one year on its exports, on its commerce Perhaps the most important change being made today is with abroad, on its foreign direct investment and the flows of informa- respect to the tax treaty with the United States. Its main provision tion, capital, technology, royalties, dividends and interest. deals with social security benefits which flow across the Canada- U.S. border: a person resident in the United States who receives In five of the treaties, those with Ireland, Denmark, Lithuania, Canada or Quebec pension plan or old age security benefits or a Kazakhstan and Iceland, the major provisions, apart from avoiding person resident in Canada who receives from the United States its the double taxation of income, i.e., deciding that if income flows social security benefits. 800 COMMONS DEBATES October 20, 1997 Government Orders Just so we understand these provisions I would like to go back 1996. To help in the transition, if someone has already paid their to the law as it existed prior to 1996. At that time the country taxes for 1996 or 1997, we have said that they will pay no more paying the benefit did not exercise any taxing jurisdiction or taxes than they otherwise would have. Therefore if a person is in a taxing power. That taxing power was exercised only in the country higher bracket than the 25.5% withheld, they will not have to pay of residence. Therefore a person resident in Canada who was that for the years 1996 and 1997. It will only be on an ongoing receiving U.S. social security was taxable in Canada. The rule was prospective basis that these full rates of tax, applicable to domestic that only half of that social security benefit went into the resident or resident taxpayers, are going to be applied. taxpayer’s income but it is obvious to members on all sides of the House that this produced unfairness. There is also one other amendment that deals with capital gains. For example, if persons resident in Canada were receiving social We know that if a U.S. resident owns real estate or resource security from the U.S. of say $8,000 they were taxable on only properties in Canada and disposes of them they would be subject to $4,000 of it, whereas if they were receiving $8,000 of old age Canadian tax. Suppose they own those properties through a corpo- security they were taxable on all of it. This was not equitable and ration resident in the United States and sell the shares in that not fair. corporation. It would seem natural that they should not be able to get away with something by doing it indirectly through a corpora- tion, that they could not get away with it even if they owned those Therefore we entered into negotiations with the United States to change that law as of January 1, 1996. We said that rather than the properties directly. This is why Canada has always had a law in its country of residence taxing the pensions or the social security it books which states that where one owns those Canadian assets would be the country of source. If a resident of the United States indirectly through a U.S. corporation, they will be taxable as if one received Canada pension plan or OAS, Canada would withhold owned those assets directly. 25% on those payments to the resident in the U.S. However, the U.S. does not tax Canadian residents on this basis. If the U.S. person was a low income taxpayer and his or her Accordingly, we have amended the tax convention with the United marginal rate of tax was either zero or less than the 25%, Canada States in order to reflect that both of our laws be brought into this gave that person the option of filing a tax return in Canada. To the more modern mode. Quite frankly, in terms of administering a law extent that the tax would have been less than that 25% withheld by when a resident of the U.S. sells the shares of a particular company Canada, Canada would give a refund. It worked well for a person it is very difficult to look behind that corporate shell and find out resident in the U.S. receiving pension benefits from Canada. On the what all the assets are. In a modern world this does not make a lot other hand it did not work so well going the other way. of sense. The U.S. withheld 25.5% on social security payments going to a resident of Canada but it did not allow the Canadian who was in a I am very pleased to say that we have settled this issue of low income or no income bracket to file a U.S. tax return and be transporter pensions or social security in a way that is fairest to taxed on a net basis; i.e., to be taxed at less than 25.5%. those who have the lowest income and whose tax rates would otherwise be under the 25.5% U.S. rate or the 25% Canadian rate when they are taxed on a net basis. This is a desirable result. It is Accordingly, negotiations were entered into with the United fair and is evidence of the ongoing good co-operation and strong States and that is the result of this protocol. We are saying that the country of residence of the taxpayer or the recipient now has the relationship between our two countries. exclusive right to tax. The country paying the social security, the United States will forgo its withholding tax or Canada will forgo its Mr. Jason Kenney (Calgary Southeast, Ref.): Mr. Speaker, I withholding tax when paid to the United States. rise on behalf of the official opposition to address Bill C-10, an act to implement a convention between Canada and various conven- D (1115 ) tions between the countries of Sweden, Lithuania, Kazakhstan, Iceland and Denmark for the avoidance of double taxation and the prevention of fiscal evasion and also to amend the 1986 Canada- Second, the resident of Canada will include only 85% of U.S.