Thank you, Mr. Chairman.
My name is Ian Russell. I'm president and CEO of the Investment Industry Association of Canada. I am pleased to appear before the finance committee this afternoon to make the case for the passage of part 5 of Bill C-31.
This legislative package includes important provisions related to compliance with U.S. FATCA legislation. It is the product of almost five years of extensive consultation between the Canadian securities industry, other institutions in the Canadian financial sector, and the Canadian and U.S. tax authorities.
This legislation will greatly facilitate Canadian financial institutions and their clients' compliance with the sweeping provisions of the U.S. FATCA legislation. The Investment Industry Association of Canada urges members of the committee to recommend approval of this legislation expeditiously.
No one doubts that the FATCA legislation is an aggressive policy approach to force compulsory U.S. tax reporting by U.S. citizens resident outside of the United States, effectively exerting extraterritorial reach to meet its policy objectives.
This approach, however, is not without precedent. In the last five years since the 2008 financial crisis, the Canadian securities industry has experienced similar aggressive tactics in the reform of securities regulations that have taken place under the G20 directives. Both U.S. and European securities regulators have imposed new regulations with little regard for coordinating these efforts for more harmonized cross-border rules. The extraterritorial application of these regulations has resulted in much duplication and complexity, raising costs and inefficiencies for foreign institutions dealing in the U.S. capital markets. The regulatory burden has not been mitigated through measures such as regulatory recognition of respective jurisdictions.
The United States and the EU can engage in these aggressive tactics to force compliance with their own rules, recognizing that compliance is the condition for needed access to U.S. and European capital markets by Canadian investors and their financial institutions. U.S. regulators, in effect, use the size and importance of their capital markets as leverage to force compliance with their own aggressive rules, engaging in extraterritorial rule-making.
FATCA follows this same aggressive practice. The failure to comply with U.S. tax reporting rules would have serious consequence for Canadian institutions and their clients. Canadian investors would be subject to the full 30% withholding at source on U.S. investments. Moreover, Canadian financial institutions would be required to disclose the financial information of their FATCA affected U.S. clients, or otherwise risk penalties and sanctions that could seriously interfere with their U.S. financial business. All major Canadian financial institutions, banks, and insurance companies have built a significant presence in U.S. capital markets. This offshore business is increasingly important to the overall growth of these institutions and their underlying profitability and shareholder returns.
The Investment Industry Association of Canada has taken a leading role in coordinating with other institutions and in consultations with the U.S. Treasury and the Internal Revenue Service, as well as the Canadian tax authorities, to develop an acceptable framework of exemptions from the reporting obligations, phased-in reporting rules, and an overarching intergovernmental agreement that builds on the existing Canadian-U.S. information sharing tax protocol. This comprehensive framework is designed to achieve an effective and cost-efficient tax reporting mechanism under FATCA legislation, one that treats Canadians fairly; avoids inconvenience to innocent tax-paying Canadians by eliminating provisions requiring account closure and punitive U.S. withholding tax; focuses efforts on tax avoidance schemes; and respects privacy considerations.