Colin William George Gibson (Minister of National Revenue)
Hon. C. W. G. GIBSON (Minister of National Revenue):
Mr. Speaker, for the
information of the house I would like to make the following announcement:
A tax convention was signed at Washington on the 4th day of March between Canada and the United States for the equalization of tax deductions at the source, for the avoidance of double taxation, for the prevention of fiscal evasion and for the general promotion of the flow of commerce between the two countries.
This convention follows along the lines of the previous convention which existed from, and during, 1936 until April of 1941.
Deduction at the source in the United States was increased in 1941 to 27J per cent on dividends, interest, rents, royalties and other periodic payments coming to residents in Canada. The present convention reduces this to 15 per cent as and from the first day of January, 1941. Canada also deducts 15 per cent in respect of interest, dividends and royalties going to the United States, so that there now exists substantial equality of deduction at the source between the two countries.
Individuals, resident in Canada, who are not citizens of the United States, are not subject to thp graduated rates of tax in the United States and are not required to file United States returns, unless they have an office or place of business therein.
For parent companies in Canada, receiving dividends from wholly-owned subsidiaries in the United States, the tax deduction at the source is reduced to 5 per cent. Dividends from Canadian subsidiary companies are, as heretofore, transmitted to parent companies in the United States free of any tax deduction at the source, but the Canadian government will be free to tax these dividends as it chooses, at a rate not exceeding 5 per cent.
As the convention comes into force on the first day of January, 1941, a refund will be made of all taxes deducted at the source in excess of the said 15 per cent or 5 per cent rate, without application being made therefor, as the refunds will be made by direction of the government of the United States through the medium of corporations and institutions which initially made the deductions.
The convention shall remain effective for a period of at least three years in respect of all its features, and continuously beyond the three years until at least six months' notice of termination has been given by either country, in which case the termination becomes effective on the first day of January following the expiration of the said six months' period.
However, after the fixed period of three years, the rate of 15 per cent may thereafter be altered without notice and without affecting other parts of the agreement, as it was felt that neither country wished to preclude a change in the tax rates at any time, if a subsequent parliament or congress desired to change them.
Canada for some time has been making representations in connection with tax claims raised by the revenue authorities of the United States on profits or gains made by Canadians trading in securities and commodities in the United States. The tax was claimed, even though in subsequent years losses were sustained which more than offset the prior years of profits on which the tax claim was based. While the profits were in hand, Canadians had no knowledge of their liability. In fact, there was a general belief that no such liability could be raised or would be raised.
Now by reason of this convention, all such persons may effect a settlement with the United States revenue officials on a basis of paying 5 per cent on the dividend and interest yield received by such investors in the years during which they held the securities, provided they file a request for settlement with the Commissioner of Internal Revenue, Washington, within two years from the date of signature-not the effective
date-of this convention. Otherwise they will not receive the benefit of this convention.
This is in effect a change from a capital gains tax to a 5 per cent deduction at the source, based on net revenue, if any, received from such securities.
Capital gains by Canadian residents derived from sources within the United States shall not be subject to tax therein, provided such Canadians have no permanent establishment in the United States.
There are certain extra-territorial features of the revenue laws of the United States, included not only in the 1941 act but in prior acts of that country, which impinged upon any Canadian company if 50 per cent or more of the income of the Canadian company were derived from sources within the United States. These extra-territorial features also impinged upon such Canadian company paying dividends to a Canadian resident, and also upon any such Canadian company accumulating undistributed income.
These are technical in character and the technical features need not now be mentioned in this general announcement. Those particularly interested should refer to the terms of the convention itself.
All these extra-territorial features, so far as Canadians, and Canadian-controlled companies, are concerned, have been eliminated by the terms of the convention.
Charitable organizations are exempt from deduction at the source, if the organization is a charitable organization within the meaning of the laws of each country, when read together. If a charity is such within the meaning of the United States law only, the terms of which perhaps are a little wider than the Canadian definition of charity, but is not a charitable institution within the meaning of the Canadian law, then the deduction at the source would not be waived. The charitable organization must be such within the meaning of our law as well as within the meaning of the United States law.
All persons in the employ of the dominion or provincial governments, or any political subdivision, agency or instrumentality thereof, whose duties require them to reside in the United States are to be taxed by the Canadian government, while like officials of the United States government, or any political subdivision, agency or instrumentality thereof, residing in Canada and paid from the United States are not to be taxed in Canada.
On the other hand, pensions shall be taxed in the country where the recipient resides and not in the country where the pensions arise. Life annuities also will be taxed only in the country where the recipient resides.
Each country will refrain from taxing any person from the other country, in respect only of compensation for labour or personal services, if such person-
(a) remains for a period or periods not exceeding 183 days, and
(b) receives 85,000 or less in the aggregate during such stay;
(a) remains for a period or periods not exceeding 90 days, and
(b) receives $1,500 or less in the aggregate during such stay.
This is intended to exempt a number of persons who are for a short time in industrial activities, but the convention by special mention does not grant exemption in respect of professional earnings such as those received by actors, artists, musicians, and professional athletes who are taxable in the country in which they exercise their skill.
The income derived from the operation of ships or aircraft shall be taxed in the country of registration.
Students or business apprentices are exempt from tax in the country in which they are studying in respect of remittances received by them for the purpose of their maintenance or studies.
Any actual case of double taxation within the purview of this agreement, and not otherwise dealt with, may be dealt with by consultation and appropriate adjustment between the countries.
Each country undertakes to supply the other country with information in respect of dividends, interest, rents, royalties and other periodic payments passing from one to the other.
There is provision in special cases, and at the request of either government, for consultation where the authorities of one country might desire information in respect of any particular taxpayer's activities in the other country.
Finally, there is provision for equality of treatment, namely that the citizens of one of the contracting states residing within the other shall not be subject to the payment of more burdensome taxes than those which are borne by the citizens of the other contracting state, or in other words, citizens of the United States within Canada are not to be discriminated against by more burdensome taxation than that imposed upon our own citizens within Canada.
It should perhaps again be stated that all moneys that have been deducted and collected at the source under the 16i per cent rate that arose immediately after the repeal of the former convention on the 29th April last, and all moneys collected under the 27J per cent rate as provided by the 1941 United States
revenue laws, are to be refunded to Canadian residents to the extent that they are over the basic 15 per cent or, in the case of parent companies, over the 5 per cent rate now agreed upon, without application having to be made therefor. Hereafter, only 15 per cent will be deducted.
From a reading of the convention, it will be realized that this is probably the most extensive fiscal convention that has yet been entered into on the subject of direct taxation. It is tangible evidence of the growing intimacy between Canada and the United States.
The agreement itself, which, as I stated, was signed yesterday, will be tabled at the earliest possible date.
Subtopic: CONVENTION BETWEEN CANADA AND THE UNITED STATES SIGNED AT WASHINGTON MARCH 4