Finance Committee on May 6th, 2014

[Brian Ernewein]

Certainly there's a cost to the CRA, which was $5.7 million over five years, if my recollection is correct, and the banks have their own estimates. But we did not speak to that and couldn't speak to that. The question is how the banks will seek to absorb that cost. I don't know the answer to that. It would be a question for the banks, but it will have to be recovered in their business, I assume.

[Murray Rankin, NDP, Victoria, BC]

Right. So those of us who use banks and credit unions would have to absorb that. Either the banks would have lower revenues, or there would be higher fees, or something would have to deal with it, not only U.S. persons.

[Brian Ernewein]

Yes, but I can't speak to the question as to how they will seek to recoup that cost, whether it will be from those involved, or generally.

[Murray Rankin, NDP, Victoria, BC]

The simple point is that it's going to affect all of us. The minister suggested that there was no collection of unpaid taxes, no collection of taxes by IRS from Canadians. I think I understood that, but isn't it odd to say that the CRA is not assisting the IRS in collecting U.S. taxes? Isn't it assisting it in many, many ways by providing the banking information and turning it over to the IRS? Isn't that, indeed, assisting it?

[Brian Ernewein]

What the CRA does today and, indeed, what the IGA may further enhance, is the ability of the American tax authorities to determine whether a liability for tax exists. That's true. As I say, it's already the case today that this agreement would enhance it in both directions. I don't believe it actually helps in the assistance of collecting that tax liability.

[Murray Rankin, NDP, Victoria, BC]

I asked the minister to respond to the suggestion that there's nothing in it for Canada except the avoidance of economic sanctions from the United States. He referenced the 30% withholding tax, etc. Is there anything else in it for Canada? Is reciprocity, for example, real in the existing agreement?

[Brian Ernewein]

First of all, the question of what would have happened in the alternative matters a lot, we think, but secondly, yes, there is reciprocity. It's not full reciprocity. The scope of information that the U.S. is asking its IGA partners to provide is not being committed to by the U.S. to that same level immediately.

[Murray Rankin, NDP, Victoria, BC]

So in other words what we're doing for the United States they're not doing for us to the same degree.

[Brian Ernewein]

It's not to the same degree, although there are some additional points of information that the U.S. has agreed to provide that they can do under their existing law.

[Murray Rankin, NDP, Victoria, BC]

There are promises that in the future they might do that, but at the moment we gave up way more than they did under this agreement.

[Brian Ernewein]

They are providing some information immediately and they commit to equivalent levels of exchange in the future.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Rankin.

We'll go to Mr. Keddy please.

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

Thank you, Mr. Chairman.

Welcome back to our witnesses. We're going to see quite a bit of one another in the next few finance committee meetings. I want to revisit FATCA. I'm listening to the sky is falling scenario coming from the opposition and I just can't quite buy it. So I want to ask what I think are pretty straightforward questions.

American citizens have always had a responsibility to report income in the States, and report earnings, and to pay tax, or to, I should say, file a tax return in the U.S. Is that correct?

[Brian Ernewein]

Since the last century. I think it was in 1913 that modern citizenship taxation was introduced in the U.S.

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

Most of us here can handle the last century. I'm talking about 2014, right?

So there's nothing new here. I live in a part of the world where, quite frankly, there are a lot of American citizens, quite a few dual citizens, and some American citizens by accident who happen to have been born in the U.S. I think we have to look at reality here. The idea that somehow this is going to affect us all is simply not true. It's not going to affect us all. This was targeted because Americans base their tax compliance on citizenship and not on residency. Obviously, if you're a Canadian citizen living in the States and have a residence and investments there, you're going to pay taxes in the States, but to make sure that their citizens are compliant with their taxation regime.... This is not something that the Canadian government made up. This is something that the Americans decided a long time ago and are enforcing.

For us to suggest that somehow we're complicit in this is further out there than I can think. Quite frankly, we have no right under the law to interfere in American tax legislation. Am I incorrect in saying that? What right does Canada have to tell the Americans how they're going to write their tax policy? We don't have to think it's the right thing to do. We don't have to agree with it, but quite frankly we have no right to intervene. There are individuals—again in my part of the world, many of them are friends of mine—who are dual citizens. They're dual citizens, though, for a reason. They're dual citizens because they either work in the States, they cross the border on a regular basis, or they have investments in the U.S. With that dual citizenship comes some responsibility to comply with the American tax rules. So this is not about the Canadian name on the passport. It's about a dual citizen who happens to be an American as well and who, therefore, have to comply with American tax rules. Is it more complicated than that or am I oversimplifying it?

[Brian Ernewein]

First of all, I think you're raising a number of important points and I won't be able to do justice to them all in my response, but in the main I would say yes, you are properly identifying the two different things that are sort of running through this file, if I can call it that.

One is the fact that the U.S. does tax on a citizenship basis. We don't. No one else does, functionally, and that difference leads to a lot of the consternation that arises with people who may not have been aware of their tax obligations, or who may have been aware but thought there really wasn't any sort of net tax owing because Canadian taxes are probably sufficiently high such that if they did a U.S. tax return on top, and taking credit for Canadian taxes, there wouldn't be anything remaining. Also, there has been.... To be fair to those people who are troubled by some of this, I think there has been a sort of ramped-up enforcement by the U.S. That shock, I think, is leading to a lot of the consternation I talked about.

But this agreement is not about enforcement of U.S. taxes, or collection of U.S. taxes, or the application of U.S. citizenship taxes. It's about exchange of information in support of each country's tax system. On that front, it's quite like what we already do on many fronts and is not novel in that respect.

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

On the intergovernmental agreement and the enhanced exchange of tax information on the Canada-U.S. tax convention, the point of that, in my understanding, is to avoid double taxation, if you will. You pay the appropriate taxes in the appropriate country and you back that fact up: that can be based on citizenship. But citizenship comes with a whole realm of responsibilities. Quite frankly, if you hold American citizenship, you have to pay American taxes.

Again, most of the folks in my part of the world have American passports. They may be permanent residents living in Canada, but they still travel on American passports. They hold investments and some still own property in the U.S. They're Canadian citizens or permanent residents because they live in Canada and they have no intention of returning to the U.S., but they still have ties.

That leads to my question and the very difficult decision that some individuals may have to make. If they really don't want to pay taxes in the U.S., then they would have no choice, I would expect, but to renounce that American citizenship and the benefits that come with it. If they do that, is there a liability up and to the point that they do that?

[Brian Ernewein]

Certainly, there's that potential reaction to this tougher enforcement, you can call it, of U.S. citizenship taxation, with people becoming appreciative of the obligation it creates and judging it not worth their while to remain U.S. citizens as a result. I've forgotten the stats, but whatever the baseline was.... I think a recent report suggested that something in the order of 3,000 American citizens were renouncing citizenship in the last period, whatever that may be. I think they are observing that.

Here I'm really freelancing, because I can't speak with any authority as to U.S. tax or citizenship law, certainly, but my understanding is that the U.S. tax law does have some rules that seek to neutralize the consequences, or neutralize the tax consequences, of renunciation of citizenship, and that in some circumstances they might still seek to apply taxation or at least ensure that taxes have been paid for the past period. So there are complications, I guess I could say with some confidence, to trying to renounce citizenship.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you very much, Mr. Keddy.

Mr. Brison, please.

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

Thank you.

Each year, Canadians provide the CRA with information on their registered accounts, their TFSAs and their registered disability and education savings plans, on their tax returns. Once a Canadian is identified as a U.S. person, can the CRA then share that information on these registered accounts with the IRS?

[Brian Ernewein]

Not as part of the IGA, but separately from that, it's possible that on a request for information that could be provided.

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

What personal information will the CRA be sharing with the IRS in that case? What do you envision?

[Brian Ernewein]

Again, this is not part of the intergovernmental agreement, but it would be a question as to the application of the Canada-U.S. treaties' exchange of information provisions generally. Under those provisions, it's possible for the U.S. to request information that's relevant to the administration of its tax system. If it's relevant to the U.S. tax system, the request could be made.

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

Let's look at it in a different way. When it comes to U.S. persons living in Canada, what tax information is the CRA not willing to share with the IRS?

[Brian Ernewein]

On a request basis again, the postulation?