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—