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.
4:40 p.m.
Conservative
The Chair Conservative James Rajotte
Okay, only a brief response, this will be something I think we'll have to come back to.
A brief response, Mr. Ernewein....
4:40 p.m.
General Director, Tax Policy Branch, Department of Finance
My understanding is that another law of Parliament can be read together with the Privacy Act so that the Privacy Act will not be in conflict with it.
4:40 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
Thank you, Chair.
I'd like to continue along the same questioning regarding the Foreign Account Tax Compliance Act, more commonly known as FATCA.
An absence of an intergovernmental agreement, an IGA, would have meant there still would have been an obligation on Canadian financial institutions to comply with FATCA. It would have been a unilateral and automatic obligation imposed by the United States that would have come into effect on July 1, 2014.
Can you please explain what the consequences would be for Canadians and financial institutions had the IGA not been arrived at?
4:40 p.m.
General Director, Tax Policy Branch, Department of Finance
Thank you. I think it's a very important question.
To be clear to this committee, I don't think it is the case that it was a question of whether to do this intergovernmental agreement or nothing. It was a question of how this intergovernmental agreement would compare relative to the U.S. congressional act, or the higher act, and the provisions of FATCA within it.
FATCA itself would have required non-U.S. financial institutions, including Canadian financial institutions, to sign agreements with the Internal Revenue Service, under which they'd have to undertake due diligence on their own accounts—that is, to identify their U.S. account holders—and report on those directly to the Internal Revenue Service.
In some circumstances financial institutions would be required to withhold 30% of payments that were made to their account holders, or alternatively, potentially to close those accounts. Again, in possible conflict with Canadian law.
A financial institution that decided not to enter into such an agreement with the Internal Revenue Service would itself be subject to 30% withholding on payments going to it and to its clients from U.S. sources.
That raises, as we've already had a discussion about, concerns about privacy laws, the potential application of the 30% withholding tax, the impact on financial institutions and indeed the financial system, the possible requirement to close accounts, and really a grave compliance burden for everybody, affecting both financial institutions and of course their clients.
We think the intergovernmental agreement addresses a lot of that by eliminating the withholding tax issue, eliminating the risk of potential account closure, addressing the issue with the Privacy Act, and by virtue of some of the exemptions we've obtained for financial institutions not having to report on a large number of registered accounts not having to be reported on, the compliance burden is not eliminated but is much moderated.
4:45 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
So as a direct result of the IGA, Canadian financial institutions will be saving a tremendous amount of resources—financial, administrative, time—as a result of the benefits of the IGA. Would you agree with that?
4:45 p.m.
General Director, Tax Policy Branch, Department of Finance
I would agree with that. I think for them and their clients it's certainly not, in their view, something perfect from the financial institutions' perspective, but I think it's much better.
4:45 p.m.
Conservative
4:45 p.m.
General Director, Tax Policy Branch, Department of Finance
Well, it doesn't raise the conflict of laws issue that we talked about earlier. I believe that's true.
4:45 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
Due to the fact that we now have an IGA, which was negotiated by our late finance minister, Jim Flaherty, we were able to get concessions from the U.S., concessions that other countries probably didn't get. Can you just elaborate on some of the exemptions and the concessions that we were able to achieve through the negotiations of the IGA?
4:45 p.m.
General Director, Tax Policy Branch, Department of Finance
First of all, the U.S. sought as much as possible to have identity in the agreements they negotiated with every country. Understandably, if they're trying to negotiate with the world, and I think they've signed as of today 30 of these agreements, they weren't much minded to be very novel. That made it very difficult, a tougher discussion, but we did push to achieve as much as we could in relation to Canada.
The two types of exemptions—the key ones I would identify so I don't take up the whole hour with this answer—are for small financial institutions, those having less than $175 million in assets. Also, another definition was those that had 98% or more of their client base as Canadian, and weren't part of a multinational group. Those institutions would be exempt from reporting. I rush to add, that's common to other agreements as well.
Something that's specific to Canada is the exclusion of a wide range of accounts, specifically registered accounts. It's not a complete list but it's nearly so: registered retirement savings plans, registered retirement income funds, pooled registered pension plans, registered pension plans generally, tax-free savings accounts, registered disability savings plans, registered education savings plans, and deferred profit-sharing plans. These are all exempt from reporting under the IGA in support of FATCA.
4:45 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
Just to summarize, then, are Canadian financial institutions and Canadians much better off as a result of this negotiated intergovernmental agreement than they would have been in the absence of an agreement?
4:45 p.m.
General Director, Tax Policy Branch, Department of Finance
As opposed to FATCA itself applying, there would have been many more issues and a much higher compliance burden in that circumstance. So on that measure, yes, they were much better off. We are much better off as a result of this agreement.
4:45 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
I'd like to actually follow up with the discussion of the RESPs and RDSPs. These both include matching grants provided by the federal government. Of course, these grants are intended to help families save for post-secondary education or help disabled Canadians avoid poverty. They weren't intended to somehow make their way into the U.S. treasury.
How does the U.S. view these Canadian registered accounts? If a Canadian were to volunteer the information to the Americans or someone who is considered a U.S. person, a Canadian who's considered a U.S. person under FATCA, are they subject to federal U.S. taxes?
4:45 p.m.
General Director, Tax Policy Branch, Department of Finance
Actually, this question only came up quite recently, and we hadn't considered it before. As a result of subsequent discussions, we've learned that the U.S. hadn't considered it before either. But having received the question, it was good to try to sort through the answer.
The second thing I will say is that, yes, U.S. citizens are subject to U.S. tax, which means that if you are a U.S. citizen resident in Canada, you're essentially exposed to both the Canadian and U.S. tax systems.
To get to your point about RESPs and RDSPs, we do not tax the government grants when they go into the plan. That's kind of antithetical to the point. But when those grants or other income generated by the plan do come out of the plan in the beneficiary's hands, they are subject to Canadian tax.
Ideally, the U.S., if they chose to tax it at all, would try to match that taxation to tax it at that time. So we would tax. If there is citizenship tax on top of that, there rarely would be, but if there were, then the timing would be right.
We had the opportunity to discuss this with the U.S. since the question has been asked of us. As I said, they hadn't considered the question before, but based on the description of the plans we provided them, they told us that indeed they consider there to be no taxation at the time of the grant or other contribution to either of these types of plans, but when the amount comes out and represents income to us, they would consider that it would represent income for U.S. purposes, too. So there'd be taxation at the same time.
4:50 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
Earnings on the grant, the contribution by the Canadian government to these accounts, would they be taxed upon withdrawal by the Americans?
4:50 p.m.
General Director, Tax Policy Branch, Department of Finance
On the grants themselves, and the earnings thereon, my understanding of the answer we've received is that those are taxable on receipt by the beneficiary.
4:50 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
Okay, I'm sorry, you said when the grants go into the accounts they're not considered taxable by the Americans.
4:50 p.m.
General Director, Tax Policy Branch, Department of Finance
That's right. That's my understanding.
4:50 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
But in the future, when there's a withdrawal from the account for a Canadian with a disability, or a young Canadian who's cashing in part of their RESP for their education, at that point would it be considered taxable by the Americans, on the way out?
4:50 p.m.
General Director, Tax Policy Branch, Department of Finance
Yes. The specific question we've had a discussion with the U.S. about was in relation to the grants themselves. On that, they've said that because of the conditionality of it, it's not clear that these will go out to the beneficiary. They would be included in income for U.S. tax purposes only at the same time and to the same extent as they would be for Canadian tax purposes, that is, on payout.
4:50 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
Just to be clear, when there's a withdrawal from these accounts, the earnings on, and in fact, the capital from the contribution by the Canadian taxpayer will be taxed by the Americans. This is what I think a lot of Canadian taxpayers and citizens would view as perverse, that the Canadian taxpayer is funding grants into these accounts, RESPs and RDSPs, to help people with disabilities or to help their children get a good education, and ultimately, the American treasury is benefiting from that. That would not make a lot of sense to Canadians making these contributions.
4:50 p.m.
General Director, Tax Policy Branch, Department of Finance
You made reference to contributions. If you're talking about capital contributions by the parent or other subscriber—