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Evidence of meeting #34 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was fatca.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Ian Russell  President and Chief Executive Officer, Investment Industry Association of Canada
Allison Christians  Professor, H. Heward Stikeman Chair in Tax Law, McGill University, As an Individual
Marc-André Pigeon  Director, Financial Sector Policy, Credit Union Central of Canada
Roy Berg  Director, US Tax Law, Moodys Gartner Tax Law LLP
Arthur Cockfield  Professor, Faculty of Law, Queen's University, As an Individual
Ralf Hensel  General Counsel, Corporate Secretary and Director of Policy, Investment Funds Institute of Canada
Katie Walmsley  President, Portfolio Management Association of Canada
Lynne Swanson  As an Individual
Max Reed  Attorney, White and Case LLP, As an Individual

4:25 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you, Mr. Cullen.

Colleagues, we're bumping up against time to change the panels.

Mr. Van Kesteren, I'll give you maybe one question, then we'll wrap up. Is that okay? I'm sorry for that.

4:25 p.m.

Conservative

Dave Van Kesteren Conservative Chatham-Kent—Essex, ON

Sure.

I guess there are a number of things I wanted to ask, but the question remains. Under U.S. law, citizens are obligated to surrender this information, are they not, Mr. Berg?

4:25 p.m.

Director, US Tax Law, Moodys Gartner Tax Law LLP

Roy Berg

Yes, that's correct.

4:25 p.m.

Conservative

Dave Van Kesteren Conservative Chatham-Kent—Essex, ON

In essence, that's not going to change. Whether or not we accept that fact, it's still going to be U.S. law that these people who have U.S. citizenship have to surrender their information.

4:25 p.m.

Director, US Tax Law, Moodys Gartner Tax Law LLP

Roy Berg

That is correct.

4:25 p.m.

Conservative

Dave Van Kesteren Conservative Chatham-Kent—Essex, ON

Mr. Chair, I have more questions.

4:25 p.m.

Conservative

The Chair Conservative James Rajotte

I'm sorry about that, Mr. Van Kesteren.

I want to thank our witnesses on our first panel for being here and responding to our questions. If you have anything further to submit to the committee, please do so through the clerk. For instance, Mr. Berg, if you have any amendments further to your submissions, please do that through the clerk as well.

Colleagues, we'll suspend for a couple of minutes, and then we'll bring our second panel forward.

Thank you.

4:25 p.m.

Conservative

The Chair Conservative James Rajotte

I call back to order meeting number 34 of the Standing Committee on Finance. We are continuing our consideration of Bill C-31, An Act to implement certain provisions of the budget.

Colleagues, we have five witnesses for our second panel. We have Professor Cockfield. Welcome back to the committee. As an individual from Queen's University, we have from the Investment Funds Institute of Canada, Mr. Ralf Hensel, general counsel. Welcome. We have the president of the Portfolio Management Association of Canada, Ms. Katie Walmsley. Welcome back to the committee as well. We have from London, Ontario, presenting as an individual, Ms. Lynne Swanson. Welcome, from London. By video conference, from New York, as an individual, we have Mr. Max Reed, an attorney. Welcome.

Thank you for joining us this afternoon. You each have a maximum of five minutes for an opening statement.

We'll begin with Professor Cockfield, please.

May 13th, 2014 / 4:25 p.m.

Prof. Arthur Cockfield Professor, Faculty of Law, Queen's University, As an Individual

Thank you, Chair.

Sir and mesdames, thank you for this opportunity, once again, to appear before your committee. I'm a professor at Queen's University Law School, where most of my teaching and research focuses on tax law.

I did want to note up front that I have had the privilege of appearing before this committee on three separate occasions and have critiqued FATCA, the subject matter of today's discussion, in the past, although I hope to tease out some of these critiques in greater detail today.

Before I launch into a one-minute spiel on my opening comments, I'd like to say that these comments draw from two published reports. One is my co-authored submission to the Department of Finance, dated March 10, 2014, co-authored with professor Allison Christians.

The second is a commissioned report to the Office of the Privacy Commissioner of Canada, called “FATCA and the Erosion of Canadian Taxpayer Privacy”, and my outline sets out the websites where you can get those documents. My comments will focus on FATCA and how it affects Canadian privacy laws and interests.

I know you've heard from a lot of witnesses so I'll be quite brief. What do we know about FATCA? It was enacted the U.S. in 2010. It contains a significant economic sanction if we don't play ball. It's my understanding that our government, for the most part, has entered into the intergovernmental agreement to avoid the imposition of this punitive economic sanction.

What's different between FATCA and the current regime? In fact, Canada and the United States already share more tax information with each other than they do with any other country in the world. We have automatic information exchange in place under the Canada–U.S. tax treaty. However FATCA is really a sea change in this cross-border tax information relationship in two key ways.

One, it targets different people. Under our current regime, it focuses on temporary residents in each country. Here, we have a focus by the United States on permanent residents in Canada—of course, U.S. citizens, dual citizens, joint account holders with U.S. persons, and so on. This is what, I think, upset our former and late finance minister Jim Flaherty, who was one of the globe's most vocal critics of FATCA when it was initially legislated by the Americans.

The second real change is the type of information we're thinking about sending across the border. Currently, we track so-called cross-border portfolio income, interest, dividends, and so on. Here, the Americans want us to hand over account information, including deposits and withdrawals. Under current Canadian domestic law, banks do not provide that to the CRA. They only provide income information that's needed to assess a taxpayer's tax liability. This is very personal information and very sensitive information that Canada has never shared with any foreign country previously.

So, now we're going to be sharing it. We're not sure how many Canucks are going to be involved, but certainly the number is in the hundred of thousands. Thousands of Canadian businesses will also be implicated in this new regime. For instance, if you are a U.S citizen who has signing authority over an account, then that account information will go south of the border. A U.S. person who substantially owns a Canadian business will now have a foreign government looking at that account information. It could, in my view, harm cross-border competition, frustrate cross-border mobility. I believe it violates the NAFTA agreement. I've written a book on the topic of NAFTA tax law and policy, and it's my opinion that FATCA, again, violates certain provisions within NAFTA.

What are we getting in return for this privacy giveaway? Well, as far as I can see—

4:40 p.m.

Conservative

The Chair Conservative James Rajotte

You have one minute.

4:40 p.m.

Professor, Faculty of Law, Queen's University, As an Individual

Prof. Arthur Cockfield

—it's nothing. We're not getting anything other than the relief of the threatened economic sanctions. The Americans, in the intergovernmental agreement, give us vague assertions of reciprocity, but they will never come through. U.S. lawmakers and U.S. citizens will never accept the evisceration of their privacy rights and their privacy laws, which of course is what they're asking of you.

My main recommendation is to amend Bill C-31 so that the legislation is in place, is implemented, but only affects temporary residents of Canada—U.S. citizens who are here temporarily and not permanently. I believe this will be in compliance with the American demands and that hence there will not be any economic sanction.

Thank you.

4:40 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you for your presentation.

We'll now hear from Mr. Hensel, please.

4:40 p.m.

Ralf Hensel General Counsel, Corporate Secretary and Director of Policy, Investment Funds Institute of Canada

Good afternoon.

As you've heard, I am Ralf Hensel, general counsel, corporate secretary, and director of policy at the Investment Funds Institute of Canada. I thank the committee for inviting IFIC to participate in its consideration of Bill C-31 and I'm privileged to be its representative here today.

IFIC is the trade association representing the Canadian mutual funds industry. The fund managers, fund distributors, and service providers to the Canadian industry all contribute to IFIC's work. Canadians currently entrust more than $1 trillion of their assets in mutual funds. The industry takes its responsibilities to these investors very seriously.

IFIC's interest is in Bill C-31's implementing legislation for the intergovernmental agreement between Canada and the United States concerning FATCA. Recognizing that non-compliance with FATCA is not a realistic option, we have advocated for requirements that impose the least possible burden and cost on mutual fund investors specifically and on the industry generally.

As you are aware, the U.S. imposes income tax based on U.S. citizenship regardless of jurisdiction of residence. As such, FATCA applies to U.S. citizens resident in Canada. We support the federal government's work and negotiations with the U.S. that have led to completion of the IGA on this initiative.

We believe the IGA is essential. It minimizes impact by reducing the number of Canadian investors who will be impacted by FATCA, the number of accounts that will be reported to the Internal Revenue Service, and the amount of administration and re-documentation that will be required.

The IGA will also significantly reduce the costs to implement FATCA, costs that are ultimately borne by investors. In fact, without the IGA, Canadian investors may have their access to U.S. financial assets, held either directly or through mutual funds, significantly curtailed or have the rates of return on such assets significantly reduced.

Let me elaborate.

Under the IGA, all of RRSPs, RRIFs, PRPPs, registered pension plans—you've heard the list—all the way to TFSAs are exempted from any documentation or reporting requirements under FATCA. The benefits to fund investors are clear: millions of mutual fund accounts will be exempt from FATCA reporting. Investors will not be asked to provide any additional information to document or demonstrate their non-U.S. taxpayer status in any such accounts.

Without the IGA, Canadian financial institutions would each need to sign an agreement with the IRS that would prevent them from opening or maintaining accounts for investors who do not provide sufficient information about their U.S. taxpayer status. The IGA eliminates any need to refuse or to open new accounts or to close existing accounts.

FATCA requires tax information on U.S. investors to be sent directly to the IRS. If to do so would breach domestic privacy laws, the regulations require the financial institution to obtain from every impacted investor a waiver or consent allowing the institution to send their tax information to the IRS. We believe this is a virtual impossibility.

Financial institutions would eventually be required to close the account of every investor not willing to provide a waiver. Under the IGA, the information will be sent to the Canada Revenue Agency, which will forward it to the IRS under established intergovernmental protocols.

Canadian financial institutions that cannot comply with FATCA requirements would be subject to a 30% withholding tax on any U.S.-source income. This would significantly reduce the returns of all investors in Canadian funds that hold securities generating such income.

The IGA for practical purposes removes the threat of withholding taxes, since reporting will be taking place. Without the IGA, investor accounts would need to be re-documented every few years at substantial inconvenience and cost. Under the IGA, an investor need only fill in the form once. It remains valid unless the investor's status changes.

Finally, the IGA gives the Canadian government and the CRA authority to set the rules for FATCA implementation in Canada. With industry, rules have been developed consistent with FATCA principles but tailored to reduce the scope of impact for Canadian investors. For example, mirroring well-established industry practices used to comply with anti-money laundering identification—

4:45 p.m.

Conservative

The Chair Conservative James Rajotte

You have one minute.

4:45 p.m.

General Counsel, Corporate Secretary and Director of Policy, Investment Funds Institute of Canada

Ralf Hensel

—and reporting requirements should result in an efficient process, with reduced administrative burden and costs. This benefits both investors and those who must administer FATCA.

I wish to leave no doubt that even with the IGA and the implementation regime established by the legislation, the impact on the industry and its investors remains very significant. However, as I've noted, FATCA compliance without the benefit of the IGA would multiply that impact and cost many times over.

I thank you for your time and look forward to your questions.

4:45 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you for your presentation.

We'll now go to Ms. Walmsley, please, for your presentation.

4:45 p.m.

Katie Walmsley President, Portfolio Management Association of Canada

Thank you, Mr. Chair.

Good afternoon, everyone. My name is Katie Walmsley. I am the president of the Portfolio Management Association of Canada. I also have joining with me today in the audience Mr. Paul Harris, who is chair of PMAC's board of directors and managing partner of Avenue Investment Management.

PMAC represents more than 180 investment firms across Canada, which in total manage assets of more than $800 billion and more than $1 trillion including mutual fund assets. PMAC members manage investment portfolios for private individuals, foundations, universities, and pension plans.

For FATCA purposes, portfolio managers are considered to be an “investment entity” under the FATCA rules, as they provide individual and collective portfolio management services. Portfolio managers also fall within the definition of “financial institution” under the Canadian legislation.

Our recommendation this afternoon is that portfolio managers should fall under the “deemed compliant” foreign financial institution exemption, thereby exempting portfolio managers from the registration and reporting requirements under FATCA.

Currently, given the narrow scope of the exemptions included in annex II of the Canada-U.S. intergovernmental agreement, it appears that portfolio managers in Canada will need to register with the IRS and report on their client accounts to the CRA in order to be FATCA-compliant. This is because in Canada portfolio managers have been included in the definition of “financial accounts”. As a result, they cannot avail themselves of the deemed compliant foreign financial institution exemption and therefore must register with the IRS and report on their client accounts.

There are two key reasons for our recommendation opposing both this registration requirement and reporting requirement.

First of all, custodians are the most appropriate financial institutions to report on portfolio-managed client accounts. Portfolio managers do not maintain custody of the assets for their clients; these client accounts are in actual fact maintained by a third-party custodian. The custodian has reporting responsibilities for these accounts by virtue of holding the legal title to the assets in the accounts. Custodians are already reporting on the portfolio client accounts for other tax reporting purposes and act as qualified intermediaries for these purposes. If portfolio managers cannot avail themselves of the deemed compliant foreign financial institution exemption, reporting on client accounts will occur from both the portfolio manager and the custodian. We believe this duplication is a both unnecessary and avoidable result.

The current definition of “financial accounts” under the Canadian implementing legislation will cause unnecessary duplicative reporting. As per the definition of financial accounts, portfolio managers do not maintain these financial accounts—they do not hold the assets—and the reporting should only be required by the custodial institution, which is the entity that does maintain the financial accounts. To this end, we believe that portfolio managers should be carved out of the definition of financial accounts.

The second reason for this view is that there should be a consistent application of FATCA for portfolio managers across other jurisdictions around the world. We strongly believe that the treatment of portfolio managers under the Canada-U.S. IGA should be aligned with approaches taken in the U.S. and the U.K. The “certified deemed compliant financial institution” exemption is available for investment advisers in the U.S. and the U.K. but is not available to portfolio managers in Canada.

In the U.K., when the sole activity of an entity is to act as an investment adviser of its customers' investments and the investments are held with a custodian, the investment adviser will be regarded as a certified deemed compliant financial institution. No registration or reporting is required for these investment advisers in the U.K.

Similarly in the U.S., financial institutions that are financial institutions under FATCA solely by virtue of being investment entities, but which do not maintain financial accounts, are referred to as deemed compliant financial institutions. Again, no registration or reporting is required.

We submit that there should be alignment in the application of the rules. Canadian portfolio managers and their clients are being disadvantaged unnecessarily by the approach taken in Canada. Ultimately, Canadian investors will be at risk of over-reporting on their accounts, as their accounts will now be scrutinized and reported on to the CRA by both portfolio managers and custodians. In our view, this is a very inefficient and unnecessary application of the FATCA rules.

In summary, we submit that portfolio managers who do not have custody of client assets should not be included in the definition of “financial accounts”, given that in the portfolio management context the financial account is maintained by the custodial institution. We believe that an approach similar to that taken in the U.K. or the U.S. would be more appropriate and that it ought to be made clear to portfolio managers not to maintain financial accounts for the purposes of FATCA reporting.

Investment entities in Canada, including portfolio managers, need clearly articulated rules and guidance. In all cases, it should be clear with whom the reporting responsibility lies in respect of financial accounts in order to ensure CRA receives reporting financial information on financial accounts from the appropriate source and from one single source.

Thank you.

4:50 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you for your presentation.

We will now go to Ms. Swanson in London, please, for your five-minute opening statement.

4:50 p.m.

Lynne Swanson As an Individual

I come before you as the voice of one million Canadians. We are Canadians. Many have been Canadian citizens for life or for decades. We chose Canada. We expect Canada to now choose us and our rights over foreign bully demands.

Why do our most heinous criminals have more charter rights than I do, asked a Nova Scotia police officer of 33 years. He was born in Maine almost six decades ago when his New Brunswick mother was sent there to give birth. A Quebec woman who has been a Canadian citizen since birth says her ancestor who came to Canada in 1682 must be turning over in his grave at FATCA.

A widowed grandma in Vancouver was told by a U.S. consulate when she became a Canadian citizen in 1972 she was permanently and irrevocably relinquishing American citizenship. She insists, “my financial records are definitely none of the business of the IRS”. An Ontario first nations husband and father is horrified his Canadian government will help the United States seize his family's private financial records because his wife was born there.

An Alberta woman reports her mother, who upheld Canadian laws for many years as a justice of the peace, is now medically and physically too frail to deal with FATCA stresses. They and one million other Canadians were betrayed by the FATCA intergovernmental agreement.

We were offended and insulted to hear the Minister of State for Finance call us American citizens abiding in Canada in the House of Commons. If Canada mandated financial institutions to seek Canadians born in China, India, Iran or Eritrea, the CRA to transmit private financial information to those nations, there would be outrage. Canadians born in the United States should have the same rights as all other Canadians. Canada should strongly defend those rights and not sacrifice them to a foreign country.

Two prominent Canadians described FATCA well. In 2011 and many times after that, the Finance Minister, the late Jim Flaherty, said:

But FATCA has far-reaching extraterritorial implications. It would turn Canadian banks into extensions of the IRS and would raise significant privacy concerns for Canadians.

Terry Campbell, president of the Canadian Bankers Association, in 2012 said: FATCA is the poster child for the problem of extra-territoriality.... It threatens to erode Canadian sovereignty.

Those statements hold true now. Under threat of economic sanctions and penalties, Canada surrendered its sovereignty to a foreign power with the IGA. Canadians affected by FATCA were stunned last week when a member of this committee said “Congress has spoken”. Canadians expect Parliament to speak for Canada. Canadians expect Parliament to uphold Canada's laws, rights, and Constitution. Anything less is an affront and betrayal to Canada and to Canadians.

FATCA is complex. I give you a simple solution. I urge you to adopt an amendment to the implementation act. Notwithstanding any other provision of this act or the agreement for all purposes related to the implementation of this act and the agreement, U.S. person and specified U.S. person shall not include any person who is a Canadian citizen or a legal permanent resident who is ordinarily resident in Canada.

I implore you, do the right thing. Stand up for Canada and for all Canadians.

4:55 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you very much, Ms. Swanson.

We will now go to Mr. Reed in New York, please, for your opening statement.

4:55 p.m.

Max Reed Attorney, White and Case LLP, As an Individual

Good afternoon, can you hear me?

4:55 p.m.

Conservative

The Chair Conservative James Rajotte

I can hear you, yes. Please proceed.

4:55 p.m.

Attorney, White and Case LLP, As an Individual

Max Reed

Thank you very much for the invitation to be appear before you. I just want to say at the outset that my views are my own and are not associated with my employer.

I'm a Canadian-trained lawyer and I currently practice U.S. tax law at White&Case LLP, an international law firm based in New York City. I'm a co-author with Richard Pound of a book called A Tax Guide for American Citizens in Canada, which tries to explain in as plain a language as possible how the one million American citizens in Canada should comply with their U.S. tax reporting obligations.

So, what I want to talk to you about today are the tax compliance issues that FATCA exacerbates—and I wanted to pause here and say that because of these issues, because the U.S. has had citizen-based taxation for a very long time.... But FATCA makes these issues worse for approximately one million citizens of Canada. There are four issues that I want to go through.

The first, to be frank, is that FATCA frightens people. American citizens in Canada read articles in the newspaper saying that they all of a sudden have tax reporting requirements to the IRS, an institution most of them are unfamiliar with, and they don't know what to do. I get a reasonable number of emails, because of my work on this book, asking me what the potential liabilities are and asking for my help so some of these American citizens can comply with their reporting obligations. These people are scared and FATCA exacerbates their fear.

The second point is that by exacerbating their fear, FATCA and citizenship-based taxation is going to cost Canadians money. Imagine if you will that you are a U.S. citizen living in Canada and you have a salary of about $70,000. You're never going to owe the IRS money. You're not going to owe the U.S. government money, but you're going to have to fill out quite an extensive amount of paperwork in order to report your income to them. To hire H&R Block to do this—H&R Block being the most common franchised tax preparer in Canada—costs you at least $500 a year. That's at the lowest end for the simplest return.

For a specialist cross-border accountant, you're looking at a cost of $2,500 a year, and that's just for your current tax year. If you're like many of the U.S. citizens in Canada and you've never thought about this issue before reading about it in the newspapers, it's going to cost you thousands of dollars more to comply with your prior tax filing obligations and to file the form that instructs the IRS not to tax your RRSP and those sort of issues.

Because of the complexity of international tax law, it's very difficult for the average U.S. citizen in Canada to do this themselves. Let me give you just one example. Everyone in Canada is familiar with the tax-free savings account. Well, the U.S. government may or may not, because we just don't know, treat the tax-free savings account as something akin to a Cayman Islands trust. You can imagine the amount of paperwork that comes with disclosing your Cayman Islands trust. That paperwork may or may not apply, because we don't know yet, to the tax-free savings account as well. The tax-free savings account doesn't function the way it's supposed to. It doesn't protect your dividend or capital gains income that accrues on the money that's inside of it from U.S. tax. It basically renders the tax-free savings account expensive and useless.

Another aspect where FATCA and U.S. citizenship-based taxation is going cost the average Canadian more money—and this is all Canadians, not just these one million people—is that the compliance costs imposed on large financial institutions may be passed down to consumers.

Third, FATCA may, and we have seen elsewhere, impact the ability of U.S. citizens in Canada to access proper financial services. Members of the committee may be familiar with the story of—

5 p.m.

Conservative

The Chair Conservative James Rajotte

You have one minute, Mr. Reed.

5 p.m.

Attorney, White and Case LLP, As an Individual

Max Reed

Yes, thank you.

It has refused U.S. persons as customers. Some Swiss banks are the same. The government should include a non-discrimination clause in the IGA so that U.S. citizens cannot be disadvantaged from accessing financial services.

The solution to all of this, I think, is administrative. If the CRA and the Canadian government were to push the IRS to have simpler and clearer rules on things like tax-free savings accounts, RRSPs, Canadian mutual funds, then the compliance burden on U.S. citizens in Canada would be reduced.

So my suggestion to you here today is that FATCA is not going away. There's going to be an IGA, but the government can take steps to work with the IRS to translate common Canadian financial products better so that all of the million U.S. citizens in Canada have an easier time complying with the U.S. tax obligations, which are now much more important to them because of FATCA.

Thank you very much. I will be happy to answer your questions.