Evidence of meeting #31 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was question.
A video is available from Parliament.
5:20 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
Thank you, Chair.
I'll share my time with the chair.
I just wanted to mention, Mr. Ernewein, you were responsible for negotiating a big part of this IGA, were you not?
5:20 p.m.
General Director, Tax Policy Branch, Department of Finance
I had a role in it, yes, sir.
5:20 p.m.
General Director, Tax Policy Branch, Department of Finance
He did the heavy lifting.
5:20 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
On behalf of Canadians and our government I want to thank you both for negotiating this IGA, which is a significant improvement over the FATCA. It's leaving us in a much better position as a result of your efforts, so I'd like to thank you both for those efforts.
Mr. Chair.
5:20 p.m.
Kevin Shoom Senior Chief, International Taxation and Special Projects, Department of Finance
Thank you.
5:20 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you, Mr. Saxton.
I just wanted to pose some very basic questions here. I'm getting a fair amount of correspondence on this, as you can imagine. When I'm phoning people back I'm asking if they are talking about FATCA or the IGA. Many people actually believe FATCA is Canadian legislation that is somehow included in Bill C-31. So when I explain the difference in that FATCA is U.S. legislation that takes effect whether the Canadian government acts or not and the IGA is in fact a response to that....
You stated very clearly before this committee that we didn't have the choice of doing nothing. But just for argument's sake suppose the Canadian government did not negotiate the IGA and suppose for argument's sake the Canadian financial institutions chose not to comply with FATCA. If they just said they were not going to comply with this U.S. legislation what would be the repercussions to those institutions and thus to Canadians?
5:20 p.m.
General Director, Tax Policy Branch, Department of Finance
Thank you.
First of all can I just make a comment?
5:20 p.m.
General Director, Tax Policy Branch, Department of Finance
I think people do confuse FATCA with IGA, where in fact the IGA displaces FATCA. It says instead of FATCA we'll do this, so that is an important point.
I would also say that as a result of FATCA and the discussion around it and FBAR a couple of years ago I think there are a number of Canadians, accidental Americans, or otherwise, who are kind of becoming aware of the issues of U.S. citizenship taxation. So that's an issue more generally. It doesn't relate to this but it's spurred on by this.
I just wanted to say that quickly.
Now I'll answer your question.
5:20 p.m.
Conservative
The Chair Conservative James Rajotte
You are correct because many people actually link all of those issues together.
5:20 p.m.
General Director, Tax Policy Branch, Department of Finance
I think that's right.
So in the absence of an IGA—and I don't want to sound apocalyptic but there were very serious issues. The U.S. said it was about exchange of information and it's always been about the exchange of information but their penalty, their lever, under FATCA to get information was to impose a 30% withholding tax on payments made from the U.S. to foreign financial institutions. It was a wide range of payments, not just interest and dividends but possible derivative transactions and other things. To be apocalyptic for a moment, it appeared to us and to people and our colleagues in the financial sector area that it essentially would shut out a bank or other financial institution from any interaction with the U.S. markets. I don't think that was the U.S. goal but it could have been the effect.
Also, for those financial institutions that wanted to comply with FATCA and found some way to overcome the privacy conflicts that we think existed with doing it, their clientele would have been subject to not just the same requirements as this legislation but much more onerous requirements. All of their accounts, including registered accounts, would have been subject to examination and the account closure could have been a consequence of it and withholding tax could have been applied by them. Ostensibly there would have been a debate about this but in fact the Canadian financial institution would have been required to withhold payments made to its own Canadian customers on behalf of the United States.
I don't mean to go overboard but I think there would have been real serious consequences for the financial system generally and it would not be a better world for Canadian financial institutions or for Canadian customers.
5:25 p.m.
Conservative
The Chair Conservative James Rajotte
I appreciate that clarification.
So for a financial institution, say like TD Bank, which is headquartered here in Canada and has more branches in the United States than it has in Canada, something we should be proud of, let's say they as an institution said they were not going to comply with FATCA. It seems to me that's not even an option for them. What would be the repercussions for that institution if they chose not to comply with the U.S. legislation?
5:25 p.m.
General Director, Tax Policy Branch, Department of Finance
I think that any of their U.S. presence would have been separate and apart from this but in relation to their Canadian operations and indeed their third country operations outside of the U.S., it would have been as I described. That is to say, they would have had these issues with either being in some sense shut out of the U.S. market or having to do the same thing as the intergovernmental agreement would require but on a much wider scope and on a much more onerous basis.
5:25 p.m.
Senior Chief, International Taxation and Special Projects, Department of Finance
I'll just add that part of the FATCA withholding that could have potentially applied to a Canadian financial institution, let's say with U.S. subsidiaries, is that any remittances from the U.S. to Canada associated with those subsidiaries could have been subject to the 30% withholding tax. If a Canadian financial institution were attempting to access liquidity through dividends from the foreign affiliate, from the U.S. affiliate, or through loans from that foreign affiliate, those could potentially have been subject to a withholding tax. Potentially also, if the financial institution attempted to divest itself of those U.S. assets, then the withholding tax could have applied to the gross proceeds associated with that divestment.
5:25 p.m.
Conservative
The Chair Conservative James Rajotte
I only have about a minute left, and the other topic I think is going to take a longer time, but the committee has received a brief from Moodys Gartner Tax Law.
Have you, as department officials, been aware of their concerns? I don't think you'll have time to address them here with respect to the definition of financial institutions, but do you want to provide a short comment now and then perhaps provide something in writing to the committee to address that?
5:25 p.m.
General Director, Tax Policy Branch, Department of Finance
We are aware of the comment. I can give you a moment now, and then we can see where that takes us.
Yes, we are aware of their view. It's that we haven't fully complied with, effectively, our commitment and agreement with the United States and what we've done in our implementing legislation. We, in fact, think we have.
To give you a very quick overview of it, the intergovernmental agreement has a definition of financial institution with some subdefinitions. What we have done in our implementing legislation is to say that there's a specific list of regulated financial institutions that are required to report under the intergovernmental agreement, under our implementation of it. They're suggesting that we've left some stuff off the list, that there's something in the intergovernmental agreement in relation to the definition of a financial institution that is not captured in our list.
The difference seems to be based on the fact that the intergovernmental agreement has kind of a functional definition of what a financial institution does, that is, describing it by its operations, and then says it's to be informed by the Financial Action Task Force's definitions of financial institution. We've taken that Financial Action Task Force definition, which is found in our own anti-money laundering legislation—I'm getting to the end shortly—and we think that actually does conform with the agreement and delivers what was intended.
5:30 p.m.
Conservative
The Chair Conservative James Rajotte
Okay, I appreciate that very much.
I appreciate your appearance here today.
I suspect that there are some more questions on part 5. Yes, I'm correct on that.
Colleagues, on Tuesday we will start with the minister. I believe we have the minister for an hour. We'll start back with part 5, so we'll have our three officials back, and then we'll move to part 6.
Could I just have colleagues' attention for one minute, please?
I just want to indicate that on May 28, the estimates meeting.... Because the leader of the opposition, I believe, has designated Finance and Transport as the two departments for committee of the whole estimates, that in fact supercedes our committee meeting on May 28. So the meeting on May 28 will not happen. The calendar will be adjusted, but obviously, the members will want to be there in the House for the committee of the whole debate.
5:30 p.m.
Conservative
The Chair Conservative James Rajotte
That was the meeting on the estimates, so the estimates will be dealt with in the House.
I want to thank our officials for being here.
Thank you, colleagues.
I'll ask the members of the subcommittee to stay after just for a couple of minutes. I want to get their reaction to something very quickly.
Thank you.
The meeting is adjourned.
