Finance Committee on Feb. 14th, 2013

[Marion Wrobel]

Okay. Transferring money from one account to another is a legitimate function of a financial institution. It is reportable to FINTRAC if it is large, over $10,000, or if there is any suspicion about the nature of the transaction. If the bank is uncomfortable with the transaction, the bank can say it's not going to do it. Again, reputation is very—

[Shelly Glover, Conservative, Saint Boniface, MB]

How often does that happen?

[Marion Wrobel]

I work for the association; I don't.... I couldn't tell you.

[Shelly Glover, Conservative, Saint Boniface, MB]

That's why I wish the banks were here.

[Marion Wrobel]

I couldn't tell you.

Well, again, Mr. Chair, we're here representing the industry broadly. I'm going to try to answer all of your questions and try to be helpful. That's why we accepted to come before this committee.

[Shelly Glover, Conservative, Saint Boniface, MB]

I appreciate that, and I don't mean to put you on the spot, but to define best practices, you have to ask the people doing the work.

[Marion Wrobel]

There are particular rules that are put in place by governments. There's a “know your customer”, there are the anti-money laundering rules, there are the FINTRAC reporting requirements, and there are also just the policies and procedures that individual banks put in place to make sure they understand what their employees are doing.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Glover.

Mr. Caron, you have five minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

I would like to talk about something Mr. Wrobel said. We have been talking about tax evasion. I think we all understand the difference now between tax evasion, tax planning and tax avoidance. I think it is clear.

Tax evasion involves various methods or options. The transfer to a foreign account of over $10 000 is reported. We understand that. However there are many different ways to transfer money to an area with legislation that allows the use of a tax haven. This includes, among other things, transfer prices.

So the problem is serious. One can't simply state that a transfer of $10 000, $100 000 or $1 million is reported. Furthermore, many transactions are illegitimate and others are less so. Tax evasion is illegal. I think that the majority of Canadians feel that using tax havens is immoral. Given that one of the principles underlying the Canadian tax system is fairness, everyone paying their fair share, Canadians in general do pay their fair share and they want everyone to pay their fair share. I think one has to be cautious when providing answers.

I would like to talk about something that was only briefly raised by my colleague about the Foreign Account Tax Compliance Act in the United States, the FATCA. This is fairly controversial. I believe this was mentioned by most speakers. The Canadian Bankers Association is opposed to it, and understandably so. The main reason is that this is a unilateral action.

Could we use the FATCA's principles? It should be acknowledged that this is one of the first serious attempts to deal with the issue. If we were to take some of the main elements of the FATCA and apply them in a multilateral fashion, would that be an acceptable way of dealing efficiently with this plague?

I am putting the questions to all our witnesses, beginning with Mr. Wrobel.

[Marion Wrobel]

Mr. Chairman, my colleague, Darren Hannah, is really the expert on FATCA, so I'll let him answer.

[The Chair, Conservative, James Rajotte]

Go ahead.

[Darren Hannah, Director, Banking Operations, Canadian Bankers Association]

Sure.

Thanks for your question. I'm glad you raised it.

We've been saying since day one on the FATCA issue that ultimately what this is, is an issue of state. It has to be addressed from a state-to-state level through information exchanged between states. You can't try to enforce a relationship on financial institutions in one country reporting to a tax authority in another. So since day one our view has been that this is ultimately a matter that has to be resolved on a state-to-state level through information exchange. And ultimately it does seem to be going that way through the intergovernmental agreements that are being created.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I would like to pick up on that before the other witnesses speak about the FATCA.

I understand what you are telling me, however, currently, Canadian financial institutions are under the obligation of reporting this to the Canadian government. If we had multilateral agreements with these countries, that would be the equivalent. There would have to be information-sharing.

Refusing to share that information is a rather feeble excuse for avoiding doing what is necessary to acquire the information. Tax evasion exists and it is a problem, as we have seen, precisely because of this inconsistent information.

[Darren Hannah]

I think what you're talking about is something that was raised earlier, which is: should we move to a system of automatic information exchange? I think what we said is, from our point of view, that would be a good thing.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I would like to hear what the other witnesses have to say about applying the FATCA multilaterally.

[The Chair, Conservative, James Rajotte]

Okay. There's about a minute and a half.

Mr. Howlett, do you want to comment?

[Dennis Howlett]

Yes.

The problem with the bilateral information exchange agreements—

[Prof. Arthur Cockfield]

Yes, sir.

The first thing I'd like to point out is that we already have automatic information exchange between Canada and the United States with respect to cross-border portfolio interest income. If I open a bank account in New York City at the Bank of America, they report this automatically to the IRS, and the IRS exchanges this information automatically with the CRA.

There are dozens of examples of these automatic information exchange processes around the world. This is yet another problem with FATCA. It doesn't account for the fact that we have this enhanced cooperative measure already in place between Canada and the United States.

Having said all that, to respond to your question, I think some of the principles behind FATCA could be imported to a broader multilateral agreement—again, automatic information exchange. Also, importantly, we'd have to have a system to ensure that taxpayer identification numbers were relatable by each country; in other words, you can tie the income to an actual human being. Combine that with protections for taxpayer rights, traditional protections offered under Canadian law, and I think that would be a very good idea.

I outline some of this in a 2001 article in Minnesota Law Review.

Thank you.

[The Chair, Conservative, James Rajotte]

I'm trying to be fair on time. We're well over Mr. Caron's time, but I'll go to Mr. Howlett and Mr. Murphy also.

Perhaps colleagues could ask a briefer question and target it to one witness.

We'll go to Mr. Howlett and Mr. Murphy, briefly.

[Dennis Howlett]

The problem with bilateral information exchange agreements is that you have to know a lot of information first before you can ask for information. Because of secrecy, it just doesn't allow the Canadian government to get very far, in a practical way, with these bilateral information exchange agreements. The automatic information exchange, I think primarily through regulations of financial institutions...rather than putting the burden on individuals, like FATCA does.

So the principle, yes, but some of the details of FATCA are problematic.

[The Chair, Conservative, James Rajotte]

Thank you.

Briefly, Mr. Murphy, please.

[Richard Murphy]

Look, the first principle of a tax system is to find the tax base, what you're going to tax. At the moment, the problem is that we can't find the tax base.

My design for an information exchange system would simply be saying that this person has an account in this tax haven and Canada needs to know that fact. If there were a simple exchange on the existence of the interest in the account, the Canadian tax authorities could then say, “But it's not on your tax return. Why isn't it on your tax return? We need to know.” That's the smoking gun.

About 90% of the benefit of automatic information exchange would come from compliance. People would know that they could be found out if just that information were exchanged.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

I want to ask two brief questions, and perhaps, Mr. Cockfield, I'll just focus on you.

It was mentioned earlier, and we all know, that Canada has very high compliance rates. Canada seems to be doing something right. In perhaps a minute or less, because I do want to go on to something else, could you tell me what would be the fundamentals of maintaining a high compliance rate?

[Prof. Arthur Cockfield]

One important thing that tax researchers always talk about is maintaining high taxpayer morale. This is why the international issue is so very important. To the extent it gets out in our media that there are a bunch of tax cheats putting their money offshore and not paying taxes, that could eventually demoralize the domestic taxpayers, and we'd see a reduction in their compliance rate.

So it's very important for the Canadian public to perceive the system as being fair and transparent.

Thank you.