Finance Committee on May 1st, 2014

[Scott Brison, Liberal, Kings—Hants, NS]

But on their way out....

[Brian Ernewein]

Right.

The question wasn't discussed with the U.S., by my recollection, but I don't believe there's a question that they're taxing it, because that's not income by any measure.

The question we had before, and that we asked, was about the grants themselves, the government grants that go into these. These are taxable by us. The U.S. view was that it appeared to be income to the beneficiary if, and only if, it actually went to the beneficiary, if all the conditions were satisfied. But that would also be the point at which we're taxing, so it would be matching up, and quite conceivably, there would be no additional U.S. tax as a result.

[Scott Brison, Liberal, Kings—Hants, NS]

Yes. On the way out, when people are withdrawing from them, that will be considered taxable in these accounts?

[Brian Ernewein]

As we do in the grants themselves is what we understand.

[Scott Brison, Liberal, Kings—Hants, NS]

If a Canadian disagrees with the finding that they are a U.S. person, is there an appeals process? How does that work?

[Brian Ernewein]

Is this question in relation to the intergovernmental agreement, or more generally in terms of U.S. taxability?

[Scott Brison, Liberal, Kings—Hants, NS]

If they are considered a U.S. person under FATCA, and they don't want to be, what is the appeal process?

[Brian Ernewein]

Let's take the position—

[Scott Brison, Liberal, Kings—Hants, NS]

It's a pretty significant incentive not to.

[Brian Ernewein]

Right.

First of all, whether or not somebody is subject to U.S. tax, as a U.S. taxpayer, as a U.S. resident, or as a U.S. citizen, is a question of fact or law, or mixed fact and law. That stands separate from the intergovernmental agreement itself. The intergovernmental agreement is strictly about information reporting.

If the question is about how one sorts out an assertion by the U.S. that they're American residents for tax purposes, and they disagree with that, the tax treaty can have relevance to that in terms of determining the breaking of the tie between our two countries' laws. It was fine to be resident under both. Our tax treaty also sorts out for Canadian residents, and I mean real residents, who are U.S. citizens, and I mean real citizens, in terms of the pecking order of taxation.

But if you're speaking about the intergovernmental agreement itself, that's really a question between the taxpayer and the financial institution they're dealing with. Perhaps your question relates to what the financial institution does when the person says, “I am not a U.S. citizen.” In that circumstance, it's generally the case that the financial institution relies on what they're told by the person, in the absence of clear, contradictory evidence.

I'm sorry, I've tried to cover everything there.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Brison.

We'll go to Mr. Keddy, please.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you, Mr. Chairman.

Just a couple of points of clarification.... Mr. Brison in his question stated “Canadian citizens”, and I think what he meant was American citizens living in Canada. If they're American citizens by default because they happen to be born in the United States but had never officially taken out citizenship and moved to Canada at a very young age, that's immaterial really to this discussion.

The difficulty here is that the Americans have engaged in a far-reaching tax policy that taxes American citizens who live outside of the geographical boundaries of the United States. However, there are a number of things that this person can do. They can renounce their American citizenship if they don't want to pay American taxes. That's not been suggested here, but that's the reality of this situation. There are many American citizens living in Canada and many that I know who have been paying taxes for years in the States on U.S. investments and on any investments they have that pertain to America.

A lot of people have been following the rules. We have an intergovernmental agreement. We have a situation where because of this, Canadian financial institutions will not have to report directly to the IRS. This protects Canadian privacy, and I think that's what most of us here are really worried about, protecting that financial privacy of Canadian citizens. As for American citizens living in Canada, they have some tough decisions to make on whether or not they want to continue to be American citizens and pay American taxes when they're living offshore.

How far does this go to protect the financial information of American citizens living in Canada and dual citizens?

[Brian Ernewein]

First of all with the earlier question, I had made reference to Canadian citizens, yes. I thought we were talking about U.S. citizens living here or American residents, so thank you for pointing that out.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Yes.

[Brian Ernewein]

The second point, although it wasn't your question, I will say that I think it should be emphasized that there's a difference here between what the U.S. does in terms of its tax base, including taxation of citizens, and what the intergovernmental agreement does. We don't tax citizens. Perhaps no other country apart from the U.S. does tax on a citizenship basis. In our view at least to a lot of issues, that's clear, but as to whether or not they're entitled to enforce their laws, we've kind of accepted since probably our first tax treaty with them in the 1940s that they can, and this is part of that.

By virtue of my preamble, I've lost your question, sir. I'm sorry.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

The protection of the material...but not reporting directly to the IRS.

[Brian Ernewein]

Yes, thank you.

By virtue of the model or the intergovernmental agreement, and this was a very important point to Minister Flaherty, we would use the protections of the existing Canada-U.S. treaty on our own and our own protections. Under the Canada-U.S. treaty and indeed our other treaties, this information can only go to the revenue authorities, the IRS. It can only be used for the purpose of taxation and not for other purposes, subject to strict safeguards. It's also collected by our own revenue agency for transmission as opposed to having information being provided directly by Canadian taxpayers, financial institutions, to foreign authorities.

There's this whole architecture around the collection and sharing internationally or bilaterally of tax information that comes into play when you use the procedure that this agreement does. In addition to the other advantages that, Mr. Saxton, we talked about, I think this is a very important one and should not be lost sight of.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

That's good. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Keddy.

We'll go back to Mr. Rankin then, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair.

We talked about privacy constitutionality of this intergovernmental agreement. As you may know the leading constitutional lawyer of Canada, Mr. Peter Hogg, has said it's unconstitutional. One of our leading constitutional lawyers, Joseph Arvay, has now embarked in a constitutional challenge to this law.

At the briefing, your officials told us that the minister and Department of Justice are responsible for making sure that our laws are consistent with our constitution. However, legal experts have said that the intergovernmental agreement implicitly repeals a number of laws. Since our meeting, have you obtained an opinion from the Department of Justice on the constitutionality or from outside counsel?

[Brian Ernewein]

Well, may I be clear, first of all, that I think there are two separate legal questions that may have been bundled up in yours. One is whether or not it's possible for Parliament to enact a law requiring a collection of information, and whether or not by virtue of that law the Privacy Act makes space for it to apply. That was my point before. I think that's the way the laws work. The Privacy Act says that it's subject to other acts of Parliament, so if Parliament enacts a law for the collection of information, as is proposed, or if Parliament enacts a law, as it has already done, for the sharing of information, then I think the Privacy Act makes space for that.

I think a separate point you're making is whether or not there's a constitutional issue with this legislation. My understanding of Mr. Hogg's view is that he thought there might be some claim that because there's at least part of this that's based on a collection of information determined by reference to citizenship, this could be an issue.

I'm afraid I don't know, Mr. Arvay's views on that.

The direct answer to your question on the constitutional point is that the Minister of Justice is charged with conveying to Parliament a view, if it ever arises, that there's a constitutional or charter issue with the legislation. It has been examined, and no such view has been conveyed.

[Murray Rankin, NDP, Victoria, BC]

You therefore have a legal opinion from Justice and/or outside counsel to that effect.

[Brian Ernewein]

The Minister of Justice, as I understand it, has discharged his responsibility to review the legislation and assess it on constitutional grounds, on charter grounds.

[Murray Rankin, NDP, Victoria, BC]

You spoke about privacy a moment ago, but we're talking about the inequality of our dual citizens and their rights being different from others'. Has that aspect been examined as well?

[Brian Ernewein]

It was the second or latter aspect that I was speaking about in terms of what I understand to be the constitutional question that some have raised. It's suggested that there has been a charter issue. That's been examined by our Minister of Justice or the Department of Justice.

But I'm not at liberty, and I'm certainly not qualified, to speak to the opinion.