Finance Committee on May 13th, 2014

[The Chair, Conservative, James Rajotte]

I call to order meeting number 34 of the Standing Committee on Finance. The orders of the day, pursuant to the order of reference of Tuesday, April 8, 2014, are that we resume our study of Bill C-31, An Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.

We want to welcome our guests here this afternoon for this bill. We have first of all, as an individual, Professor Allison Christians from McGill University. Welcome to the committee. We also have from Credit Union Central of Canada, the director of financial sector policy, Monsieur Marc-André Pigeon. From Moodys Gartner Tax Law LLP, we have Mr. Roy Berg, director of U.S. tax law. Welcome. And from Toronto, we have by video conference the president and CEO of the Investment Industry Association of Canada, Mr. Ian Russell.

Mr. Russell, can you hear me okay?

[Ian Russell, President and Chief Executive Officer, Investment Industry Association of Canada]

I can hear you fine, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Okay. Welcome to the committee.

Each of you will have five minutes maximum for an opening presentation. Then we'll begin with members' questions.

We'll begin with Professor Christians, please.

[Prof. Allison Christians, Professor, H. Heward Stikeman Chair in Tax Law, McGill University, As an Individual]

Thank you, Mr. Chair.

Thank you so much for inviting me to speak to the committee regarding the portion of Bill C-31 that enacts FATCA in Canada.

While tax law professors are generally not known for brevity, I hope to be succinct and clear in conveying two points to this committee. First, Canada generally does not and should not furnish information to foreign countries on Canadian citizens living in Canada, or assist countries in gathering any information in aid of tax administration, except according to very specific standards to which they formally agree. In that regard, the agreement before you falls short, as it's not clear that both sides are agreeing to the same thing, nor that these standards are respected when they subject many Canadian citizens to foreign financial jeopardy, and even criminal liability.

Secondly, Canadian officials may not furnish information to other countries except under very specific terms. Thus the lack of clarity in Bill C-31 may expose Canadian officials to liability as well.

I'm going to try to explain these two points in simple terms and therefore I'm going to risk oversimplification and I apologize for that. I'm more than happy to explain the complex legal concepts formally should you have any questions for me. Please let me state at the outset that I fully understand the purpose of this law. We must ensure the integrity of the global tax system. Canada's government has demonstrated its commitment to cracking down on tax evasion by working to exchange relevant tax information with other countries. That's a goal we all want to work toward, yet there are important limits on this practice. We are working here with one of the world's most important treaties, important because of the close connections and shared economic interests of Canada and the United States.

There are long-standing limitations on how we and how countries generally react to the revenue and penal laws of other countries. We call these limitations the "revenue rule". The revenue rule says that Canada won't lend assistance to the U.S. to collect U.S. debts of people who were Canadian citizens when the debts arose. Period, full stop, no qualifications. To amplify this point, Canada does not assist in tax collection in any case unless the U.S. tax claim has been finally determined after a full measure of due process. Put this another way, we have a long history of not assisting or allowing other countries to engage in revenue collection activities in Canada for their own tax purposes.The U.S. has a very similar, if not stricter position.

But FATCA, as reflected in the bill before us today, tells us to ferret out our own citizens as likely U.S. tax debtors and present them and their financial resources to our most important treaty partner in an agreement of dubious status that may not even be a tax treaty. The bill suggests that this will be done in furtherance of the existing tax treaty. It goes significantly further. It forces us to ask ourselves how we can open our citizens and their money to the U.S., yet claims this does not constitute lending assistance. Canada must protect Canadians, and that is what the lending assistance rule and the limits on information disclosure do. They assert that the U.S. should have no enforceable tax claim that should be assisted by Canada on Canadians.

We need to make clear we won't take part in any enforcement in any form of assistance, whether it be in information or collection when ·it comes to Canadian citizens. I believe that is the spirit in which the government has accepted the terms of FATCA in the bill before the committee today, but this spirit must be reflected in the law. We cannot use a phrase like "information gathering” to blind ourselves to what is really occurring. Information sharing is not the end, it is the beginning. Our information exchange must also comply with Canadian law concerning when Canadian tax officials may divulge confidential taxpayer information. The law is not ambiguous: an official may disclose protected taxpayer information when we have agreed to do so under a tax treaty or other listed international agreement and not otherwise.

FATCA as implemented in Bill C-31 is not a tax treaty in U.S. law, nor is it a protocol to our tax treaty. Indeed, I am not sure what it is and I am not alone. Lawsuits have been initiated in the U.S. on this point and the issue is far from resolved.

The fact is that with this agreement, the U.S. will be the only nation with which Canada has both a tax treaty and a separate tax information exchange agreement, making the relationship between these two documents all the more confusing. So, what is this document when the two parties don't have a common view? If we do not know for certain, we may be in for a rude awakening in the context of civil or even criminal litigation.

There also appears to be a false impression that there is urgency in this matter, yet the U.S. has a list of countries it will "deem" to have an agreement like this in place, and Canada was the very first country on that list and it was there before we signed an agreement. Even if we weren't on the list, the U.S. Treasury recently announced another 18-month grace period, so we have the time to get this right. Let us not act in haste and repent at leisure.

I thank you for the opportunity to make these remarks today.

[The Chair, Conservative, James Rajotte]

Thank you. Thank you very much for your presentation.

We'll now hear from Credit Union Central of Canada, please.

[Marc-André Pigeon, Director, Financial Sector Policy, Credit Union Central of Canada]

Thank you Mr. Chair and honourable members of the committee for this opportunity to share with you our thoughts on Part V of Bill C-31.

As you know, Part V implements an intergovernmental agreement on FATCA, or the Foreign Account Tax Compliance Act.

Before addressing our views on this agreement allow me to begin by making a few preliminary remarks regarding the role of my organization, Canadian Central and, more generally, the credit union system in Canada.

Canadian Central is a national trade association for its owners, the provincial credit union centrals. Through them we provide services to about 330 affiliated credit unions across Canada. These credit unions currently operate in more than 1,700 branches, serve 5.3 million members, hold $160 billion in assets and employ about 27,000 people.

Credit unions in Canada come in all shapes and sizes, as you probably know. Our smallest credit unions such as iNova Credit Union in Halifax, Nova Scotia has less than $30 million in assets and only 10 employees. Our biggest credit unions, such as Vancity in British Columbia, has just under $20 billion assets and employs thousands of people.

But even our biggest credit unions are small next to the country's biggest banks which are at least 20 times bigger than Vancity, for example. This disparity means that new regulations like FATCA can pose a real challenge to all credit unions big and small alike. While the government is to be congratulated on signing an agreement that mitigates some of the regulatory burden of FATCA, we have some concerns.

Our major concern at this point is that the unavoidable regulatory burden imposed by FATCA may, in the near future, be compounded by the OECD's efforts to create a single, unified standard for automatic exchange of financial account information. Specifically, we worry that credit unions will end up with two different tax compliance regimes. We'll have an intergovernmental agreement on FATCA that includes some exemptions for smaller financial institutions like credit unions and we'll have the OECD requirements which, to date, do not contemplate any such exemptions and, though modelled on FATCA, appear to require significantly greater reporting. For that reason we're encouraging the federal government to hold strong to the view expressed in a recent declaration which it signed, that the OECD's multilateral approach “not impose undue business and administrative costs”.

For us, that means including small institution exemption thresholds, harmonizing the OECD rules with FATCA, and not having to file the same information—or worse yet, different information—with two different organizations.

The second issue we want to discuss has to do with regulatory burden more generally. Last year we conducted a survey of affiliated credit unions to gauge the impact of regulatory burden on the system. We found that small credit unions, those with fewer than 23 employees, like iNova Credit Union, for example, devoted fully 21% of their staff time to dealing with regulatory matters, whereas bigger credit unions, like Vancity with more than 100 employees or thousands of employees, only averaged about 4% of their full-time staff on compliance issues.

These results show that regulatory burden, like that imposed by FATCA, disproportionately harms smaller financial institutions and hurt their ability to compete, even with some of the exemptions and thresholds embedded in the intergovernmental agreement.

Our survey also found that the number one regulatory burden for credit unions comes from federal rules around anti-money laundering and terrorist financing. To date, the federal government has resisted applying its red tape reduction strategy to these regulations because apparently the rules do not affect small businesses. The fact is, however, that credit unions are the small businesses in the financial service sector and we are affected.

So, we're asking that the federal government revisit these rules to help offset the FATCA regulatory compliance burden faced by credit unions. We believe this request is consistent with the federal government's one-for-one regulatory burden initiative which is designed to offset new regulations which the elimination of older ones.

To conclude, we wish to thank the committee for the opportunity to participate in its review of Bill C-31, and Part V in particular.

Our general view is that the federal government has made the best of a bad situation in negotiating its intergovernmental agreement on FATCA. We are asking that it continue to be sensitive to the needs of smaller financial institutions in the negotiations with its OECD partners, and that it more diligently apply its red tape reduction approach to the anti-money laundering and terrorist financing rules.

I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Next we'll hear from Mr. Berg, please.

[Roy Berg, Director, US Tax Law, Moodys Gartner Tax Law LLP]

Good afternoon, Mr. Chairman and members of the committee.

My name is Roy Berg. I'm a U.S. tax lawyer with Moodys Gartner. I was born, raised, and educated in the U.S. I practised in the U.S. for 17 years in tax law before immigrating to Canada three years ago. Therefore, I think there are very few individuals who have more personally and professionally vested in this issue than I do.

On March 9, 2014 our office submitted extensive analysis and commentary to the Department of Finance regarding our concerns about the draft legislation, and on April 10 we submitted a brief on these concerns to the committee. I will be happy to elaborate on any of the materials we have submitted, as they're quite detailed and quite specific.

Before I summarize our comments on the draft legislation, however, I want to emphasize that we do agree with the Minister of Finance that entering into the IGA with the U.S. was beneficial to Canada. Had Canada not entered into the IGA, Canadian financial institutions would have faced the unenviable dilemma of either complying with Canadian law and risking FATCA's 30% withholding tax or complying with FATCA and risking violating Canadian law.

Unfortunately, as FATCA is drafted and the IGAs are designed, there is no middle ground. Those are simply the facts. Life under the IGA is better than life without the IGA. As Senator Patrick Moynihan of the U.S. said, “everyone is entitled to his own opinion, but not his own facts”.

The committee is likely going to be aware of rather jingoistic hyperbolic rhetoric admonishing Finance for ceding Canadian power, ceding sovereignty, and also encouraging Canada to stand up to FATCA. As the committee hears such comments, we encourage it to remember that FATCA is U.S. law, and the way it's designed, it's enforced not by the IRS, not by the Treasury, but by the markets themselves. In that, it is like a sales tax. The withholding obligation is on the person making the payments.

While the IGA is unquestionably beneficial to Canadians, the legislation before you requires refinement, specifically in the manner in which a financial institution is defined under the legislation. The definition is actually much more narrow in the legislation than in the IGA, the intergovernmental agreement.

The Department of Finance disagrees with that assertion. The Department of Finance believes that the definition of financial institution under the legislation is consistent with that in the IGA. However, in our briefs and in our submissions to Finance, we go through the legal analysis to support our position.

One thing I believe the Department of Finance does not disagree on is that the definition of financial institution is more narrow in the regulations and the implementing legislation of other FATCA partners. Therefore, the definition of financial institution for certain Canadian financial institutions will be different under Canadian domestic law from what it will be under U.S. domestic law, for example.

This difference will likely lead to unintended and unnecessary withholding of certain Canadian trusts that otherwise have no U.S. connections at all, for example, a spousal trust created at death, where the spouse, the beneficiaries, and the trustees have no U.S. connections whatsoever, and the only connection would be a U.S. bank account.

In that case, under Canadian domestic law, that trust would be defined as a non-financial foreign entity, whereas in the U.S., it will be defined as a foreign financial institution. Payments coming out of the U.S. to that Canadian trust will be subject to withholding, because under U.S. law, when there's a discordance between the stated classification of the entity and the classification of the entity under U.S. law, there is mandatory withholding.

That's all.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Berg, for your presentation.

We'll now got to Mr. Russell please, for your opening statement.

[Ian Russell]

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.

[The Chair, Conservative, James Rajotte]

You have one minute, Mr. Russell.

[Ian Russell]

We believe that this package of legislation embeds the best possible tax reporting framework for Canadian investors and their financial institutions, and should be passed expeditiously.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll begin members' questions, five-minute rounds for members.

We'll start with Mr. Rankin.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair.

Thank you witnesses, one and all. I'm sorry that I've only got five minutes, so forgive me if I go rather quickly.

I'd like to address my questions to Professor Christians. Thank you for your scholarship on this issue. You mentioned in your remarks that the intergovernmental agreement may not even be a treaty. How does FATCA and the IGA from existing tax-sharing agreements that Canada has with the United States?

[Prof. Allison Christians]

Canada has a tax treaty with the United States that goes back several decades. There is tax information exchange under it. Since 2008, I believe, or 2009, Canada has had a series of tax information exchange agreements it has signed with countries that do not have tax systems like ours.

This agreement is not like either one of those. It's something else, and I'm not sure what it is.

[Murray Rankin, NDP, Victoria, BC]

What are the consequences, then?

[Prof. Allison Christians]

What are the consequences of not having a tax treaty? In section 241 of the Income Tax Act, disclosing confidential taxpayer information would not be authorized.

[Murray Rankin, NDP, Victoria, BC]

Right, okay.

The Conservative government keeps saying that they're not assisting with U.S. tax collection. It seems to us rather absurd when you consider that they'll be systematically gathering information and spending millions of Canadians' tax dollars to send this information to the IRS.

Would you agree that they are in fact assisting, and what are the implications of doing so if they are?

[Prof. Allison Christians]

It seems to me, Mr. Rankin, to strain credulity to say that rounding up Canadian citizens and putting them in a pen and telling the United States that their money is here and here they are for the taking does not constitute lending assistance.

[Murray Rankin, NDP, Victoria, BC]

Right.

[Prof. Allison Christians]

The mutual assistance on administration in tax matters calls information exchange a form of assistance. It is one of two forms of assistance.

[Murray Rankin, NDP, Victoria, BC]

Okay.

You may know that the official opposition, the NDP, has asked that the intergovernmental agreement provisions of Bill C-31 be withdrawn from the bill for further study.

You made reference just now in your remarks to the U.S. Treasury just announcing an 18-month grace period. In fact, Mr. Berg just mentioned continuing concerns with such things as spousal trusts.

I'd like you to comment on how real the threat is of a withholding tax if our financial institutions didn't comply right away, and whether there really is such a need for haste?

[Prof. Allison Christians]

There is no urgency. There never has been any urgency, in my mind, because Canada has been the only country on the list since before the IGAs were even conceived by the United States. The United States has used our exchange regime with them as a carrot with the rest of the world. They have not given us anything new. We were on the list. We were the only country on the list.

They conceived of the list, and added other countries to it because we had this regime.

The United States would have to go to the pretty dramatic step of taking us off a list that we've been on since 1996, far before FATCA, and long before IGAs. Nothing would shock me, really, but it would surprise me if they would go to that diplomatic step of taking us off a list we've been on under a separate agreement.

[Murray Rankin, NDP, Victoria, BC]

Thank you.

I think you said during your remarks just now that we should say that we won't do any information collection or enforcement if it concerns Canadian citizens, by which I think you meant to say including those Canadian citizens who might also be “U.S. persons”. Is that what you meant to say?

[Prof. Allison Christians]

That is correct. That is what the revenue role is. That is the common law in Canada. You will find that principle in the U.S. tax treaty. You will find that principle in the mutual assistance tax treaty. You will find that in principles of public international law. Nothing should have changed. This agreement could be seen in conjunction with that. That's a simple fix that I would be very happy to speak to you about how to make that happen.