Finance Committee on May 1st, 2014

[Murray Rankin, NDP, Victoria, BC]

I want to talk now about the cost of this. At our briefing we asked you how much it would cost for the CRA to implement this agreement, and we were told then that the department had not produced cost estimates, which we found quite shocking. Here we are with this bill at committee stage.

Today, do you know what the cost...? I'm going to break down the cost. The cost for the CRA to implement the agreement is one category, the direct cost to the Government of Canada. Then do you have any estimates of the costs to the banks and other financial institutions to deal with this law? Let me stop it at that, those two levels of costs.

Do you have those now?

[Brian Ernewein]

Yes, thank you. I was participating in that parliamentary briefing and made the point that we didn't have it then, but we'd use it as notice to ask our CRA colleagues. I'm sorry, we have the number. I'm just having trouble locating it.

I'll run from memory. I think I have it right.

The CRA has sought to put together an estimate. I think it is still subject to approval by the parliamentary committee, but it's an estimate of $5.7 million to the CRA, to be precise about your question, over the next five years to implement this regime. There are some additional costs because of the information technology requirements that are associated, and CRA's estimate at this point is that on an ongoing basis that cost would be in the order of $715,000 annually.

[Murray Rankin, NDP, Victoria, BC]

The other part of my question related to the banks. I have it here that Scotiabank, one of Canada's large banks, has spent almost $100 million implementing a system to report to the United States the account holdings of Canadians of American origin and their Canadian-born spouses in order to comply. That's one bank, not credit unions and not the other banks. Have you had in your discussions or consultations a global figure as to the cost to our financial institutions to comply with this law?

[Brian Ernewein]

No, that I can't speak to.

We have heard that $100 million figure. It was used actually very early on by one or more of the banks as a very rough estimate, but I frankly don't recall any longer whether it was in relation to FATCA, or.... I think it was in relation to FATCA rather than this new model. My suggestion would be, if I could be permitted to make it, to ask the banks.

[Murray Rankin, NDP, Victoria, BC]

Yes, well, I wanted to ask you, because you presumably had some consultations with financial institutions. It would seem to be a question that might have come up.

So it was $100 million for one bank. That's presumably going to be passed on to all.... It's not just U.S. persons, in other words, who will pay that. It will be all of us—Scotiabank customers, for example, or shareholders who will get less return.

Isn't that logical?

[Brian Ernewein]

Well, I want to be clear, first of all, that I'm not subscribing to the number because I don't know if that is the right number.

I also want to make the point that apropos the point that Mr. Saxton made, the scope of the obligations on financial institutions and on their clients is much reduced by virtue of this agreement as compared to what FATCA itself would have required.

It's not a current statistic, but when the government announced the tax-free savings account a few years ago it made the point that over the course of time 90% of taxpayers will be in a position to have all of their savings in registered accounts. On that basis, it gives you an indication of the helpfulness of this agreement in relation to FATCA itself.

[The Chair, Conservative, James Rajotte]

You have 10 seconds. I can come back to you in another round.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair.

[The Chair, Conservative, James Rajotte]

We'll go to Mr. Allen, please.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you very much, Mr. Chair.

Thank you to our witnesses.

I want to follow up on the last question from Mr. Rankin with respect to the cost to the banks. One way or another, this was going to happen to the banks—either way. To say that the banks would have been better off under this....

With regard to the costs that they were going to incur, they would have had to incur costs anyway to meet the requirement of directly reporting to the U.S., which might have even been more.

Is that correct?

[Brian Ernewein]

I think I can say without any hesitation that it certainly would have been more. This is an obligation on the banks. I've made the point more recently, in another discussion, that I'm sure the banks aren't tickled by this, even with what we have done. I do think they have taken the position and would continue to take the position that this is much less onerous on them than the alternative would have been.

That's not to say they like it, but I think they consider it superior to what otherwise would have been done for them and for their clients.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Okay.

I want to ask you a few things. You look at the citizens who are in Canada and put them in a bunch of broad categories. You have the ones who have worked in the U.S. and are now living in Canada. There are the ones who are maybe U.S. citizens, to the extent that they are U.S. citizens by accident of birth because they happened to live in a border community and the U.S. hospital was the only one that happened to be open. “Sorry, but you were born in the U.S., so tickety-boo there you go”. Then you have your dual citizens of course, which some of those people would be.

What does FATCA do to ensure the protection of these citizens living in Canada against any possible penalties from the IRS? Where is the line as to where CRA will help or not help the IRS to act against someone living in Canada?

[Brian Ernewein]

Thank you.

This is purely an information agreement, so it's about collecting information from financial institutions and providing that information through the Canada Revenue Agency to the IRS.

As to what systems and collection provisions we have with the United States, there is such a provision. For the last 15 or 18 years, perhaps, in the Canada-U.S. treaty, there has been provision in that treaty for Canada and the U.S. revenue authorities to help each other in the assistance and collection of taxes.

However, that does not apply to penalties outside of the tax system, and it also does not apply to citizens. For any dual citizen who might be discovered and assessed U.S. tax liability, the treaty does not allow assistance and collection in relation to that person because they are a Canadian citizen. If they were only a U.S. citizen, then it's possible that the collection assistance provisions could apply. However, there are other considerations that have to be weighed before that rule kicks in. It has to be in relation to the basic tax, or tax related, and only after the final tax liability has been determined.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

So for a permanent resident it might well apply, as opposed to a dual citizen.

[Brian Ernewein]

If they are not a Canadian citizen.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Right.

When you look at the exchange of information that's coming under FATCA, how does that compare to our existing tax exchange? I guess there would probably be a lot of detail within the existing tax exchange agreements. Is it comparable information? I can't imagine it would be the same as tax evasion, for example. How does this compare to existing provisions within our tax exchange agreement?

[Brian Ernewein]

It's a very good but very involved question. At a high level I will say this. We already require entities and other taxpayers who are making payments to non-residents to identify those payments and to provide that information to Revenue Canada.

When the payment is going to a resident of the U.S., there is already an exchange of information that happens. Indeed, when you or I invest in the US, and receive some income from the U.S., the U.S. will send us a form. They'll also send the IRS a form, and that information will be exchanged with Canada as well, on at least the basic sources of income.

So in that respect, what FATCA does is not different. However, FATCA does go further in relation to that example I've given in that it seeks a bit more information, not only the account holder and the financial institution, it requires that the taxpayer identification number—it's a U.S. tax identifier—be provided. It looks for the account balance to come, not just the amount of income that went but the account balance also to be provided.

The other aspect of it at a very high level that I think is different is the so-called due diligence procedure. Under—I call it FATCA—the intergovernmental agreement, there's a bit more digging required by the financial institutions to follow up on markers or indicators of a U.S. connection, whether it's a U.S. address or the like, to find out whether there's a real U.S. connection there. If it proves that the person is actually a U.S. person, then the information is to be provided.

But it's not novel in the sense that we already collect information on payments going to non-residents, not based on citizenship but on residence, and that information is reported to the Canada Revenue Agency and shared with our treaty partners.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Does this agreement have a reciprocity provision in it?

[Brian Ernewein]

It does, so we'll be collecting some additional information from the U.S., particularly in relation to what I've talked about as taxpayer identification numbers.

I do want to say though, for completeness, that it's not at the same level at the outset. The U.S. has asked the countries that enter into these IGAs to provide the information that I've talked about, to do the due diligence procedures that I've talked about as well. They aren't actually undertaking to do all of that immediately themselves. They're doing some of what I've referred to. There's a commitment in the agreement that they will work towards that equivalent treatment.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you.

[The Chair, Conservative, James Rajotte]

Okay, thank you, Mr. Allen.

Mr. Rankin, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Mr. Chair.

When we talk about U.S. persons, are we talking about individuals alone, or are we talking about corporations and other entities?

[Brian Ernewein]

We are not talking about individuals alone. We've often, because that's where the conversation has led, talked about U.S. residents and citizens, but there's some relevance to entities as well.

If you'd like, we could give you some more information on the entities.

[Murray Rankin, NDP, Victoria, BC]

Yes.

Here's where I'm going with the question. If it does cover corporate persons, or other trusts of the like that are subject to this as U.S. persons, has there been any study done on the implications, for example, of improperly revealed information that might harm the competitiveness of industries in Canada, or entities—as you put it—in Canada?

[Brian Ernewein]

Well, I'll answer that question first, and then if you're still interested we can talk about how the rules work in relation to entities. It's the same restrictions on the use of taxpayer information that I talked about earlier that would apply there. There is a question of reliance and reliability of the foreign country with which we are exchanging information that comes into play on this.

The conditions for provision of information—whether it relates to individuals or to entities—is that the information can only be used for tax purposes, and not otherwise.