Finance Committee on May 13th, 2014

[Scott Brison, Liberal, Kings—Hants, NS]

It's one that could have been on the table and negotiated as part of a discussion on the IGA. That could have been one of the exemptions, a specific exemption to protect Canadian account holders of those registered accounts, and we're concerned that this negotiation or this concession was not demanded or ultimately attained.

Mr. Berg, the government argues that the IGA is the best way to prevent Canadian financial institutions from being subject to FATCA's non-compliance penalties. What is preventing private trusts and private holding companies from being in the definition of financial institutions?

[Roy Berg]

Right now that's the biggest issue that we have with the draft legislation. Under the draft legislation, private trusts, private holding companies, are not Canadian financial institutions. They're not FIs. And for those type of entities that have purely Canadian affairs, that's going to be just fine. But when those entities have U.S. accounts or U.S. affairs, or they have an interest in a U.S. REIT or limited partnership, that's where we're going to have the problem. That's where there's going to be withholding on payments to those type of entities, because although it's a non-financial institution under Canadian domestic law, the U.S. withholding agent has to follow U.S. law, and under U.S. law it's something different. When there's a discordance in classification, the withholding agent is obligated to withhold.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Brison.

We'll go to Mr. Allen, please.

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

Thank you very much, Mr. Chair.

Thank you to our witnesses.

Mr. Berg, I'd like to start with you.

I know that one of the comments made, which I think you quoted, is that the U.K. realized some of the risk of this. It was about some of the inconsistent definitions in the IGAs that you were concerned about in your testimony. I think we're at some 24, and counting, IGAs now.

[Roy Berg]

It changes every day.

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

It changes every day, so we might even be higher than that now.

You commented that the U.K. realized this risk early on and has taken the lead in developing domestic legislation to avoid the result. Specifically, it realized how this would cause increased compliance costs and uncertainty in the marketplace. Can you comment on just how the U.K. actually tried to do that?

I ask because, as you pointed out, we're into a he said-she said situation. You said your thing and the government lawyers have said another. So I'd just like to get your opinion on that.

[Roy Berg]

Yes, exactly. Who's right?

We know that you're just doing the legal analysis. We've come up with a different answer than the Department of Finance has. It doesn't mean that the Department of Finance is wrong, but if we look to other jurisdictions such as the U.K. and how they've dealt with this, we see that the U.K. has taken a much different approach. Their definition of financial institution, specifically as it relates to private trust, is very, very close to the definition that we find in the Treasury regulations.

There have been a number of U.S. treasury department officials who have come out and officially stated that they know model 1 IGAs are dependent upon domestic law for implementation. Canada has a model 1 IGA. But we expect domestic legislation to very closely follow the Treasury regulations, and that's what the U.K. has done.

Canada has not followed the lead or the analysis set forth in the Treasury regulations. One Treasury official even said that there should be very little daylight between domestic legislation and the Treasury regulations as they relate to these various definitions.

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

So the U.K. actually tried to mirror that as best they could—

[Roy Berg]

And so the U.K. mirrored the definitions found in the regs.

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

Okay. Mr. Pigeon, I'd like to go to you.

A number of your members, obviously, would not be exempt under the $175 million, so there is going to be something there. I appreciate the comments that have been made today, that life under the IGA is better than not, and that it is beneficial to Canada. So I do appreciate that.

By having the IGA in place, and the certainty of an IGA, there's going to be cost to the financial institutions of actually having to comply with this and there would have been costs to the financial institutions of having to comply with FATCA, as opposed to with the IGA.

So what are you seeing in your financial institutions with respect to the cost to comply with this? Is it better under the IGA or is it relatively the same? Because you're going to have to pick this information up out of the accounts.

And the second part of that would be, do you have the U.S. indicia that you're going to be able to pick up from these accounts in the first pass?

[Marc-André Pigeon]

Right. Thank you for the question.

Right now I'd say our major challenges relate to staffing, just having the personnel devoted to this IGA implementation, and updating databases to capture the indicia that you mentioned. Probably a lot of the credit unions have most of that, but some of them don't, especially the smaller ones. They may have to do some updating there—and that, by the way, will probably compel or force some mergers. This is one of the other challenges we face in the credit union system: the regulatory burden is compelling smaller credit unions to merge to handle these kinds of challenges.

In terms of the counter-factual, it's hard to say because up until the IGA I know that there was a lot of uncertainty about where it would actually land, and I think that uncertainty was probably the biggest concern we had coming up to the IGA. It was just not knowing how things would play out. So now we have a bit of certainty. I think people can plan for that and do the investments they need to meet the requirements.

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

Thank you, Chair. I won't press my luck with you.

[The Chair, Conservative, James Rajotte]

Thanks, Mr. Allen.

Mr. Caron, go ahead for five minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much, Mr. Chair.

Ms. Christians, we have discussed with the officials the matter of the bill's constitutionality when it comes to intergovernmental agreements. They told us that they kept the Privacy Commissioner abreast throughout the process of drafting the bill, but they didn't say what she thought about it.

A brief we received from you essentially states that FATCA and, by extension, the agreement, transform certain entities into information collectors for the

Internal Revenue Service.

I would like to hear where you stand when it comes to the bill's constitutionality or lack thereof in terms of privacy.

[Prof. Allison Christians]

Thank you for the question.

The constitutionality of this is an issue of expertise that really goes beyond my pay grade. There are privacy and discrimination concerns raised.

I'd like to just state, however, that we should remember that we do not have an anti-discrimination provision in the IGA. So absent an IGA, there would have been nothing to stop a Canadian institution from deciding not to implement or comply FATCA, but instead to become non-compliant, and thereby have choices that they do not have because of the IGA. The IGA says Canada will make all institutions comply with FATCA whether they want to or not. So a choice has been taken away, whether that was a good choice or not. No cost-benefit analysis was done on any of those.

So we could ask about discrimination and privacy. Those are important questions, but I think we should also be asking where the analysis is of what the cost benefit has been, and whether this is legally acceptable, not just under the constitution but under the Income Tax Act.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I will come back to you later, Ms. Christians, as I now have a question for Mr. Pigeon.

Last week or two weeks ago, we also learned that a major Canadian bank had estimated its cost of complying with the agreement at about $100 million.

Have you estimated what the cost would be for your network members to comply with the new legislation so that the agreement could be implemented?

[Marc-André Pigeon]

Thank you for the question.

Unfortunately, we have not conducted such an assessment. However, I can briefly repeat what I said earlier.

In our case, the costs are mostly related to staffing and database updates. Additional costs will arise later on because, every year, we have to check the accounts to ensure no significant changes have occurred that would place someone on either side of the law.

There are also costs stemming from a potential loss of clientele. We are already hearing some related stories and anecdotes from our members. They are telling us that clients are saying they can no longer do business with them. We cannot provide you with an overall figure because we don't have a harmonized system like banks do. Our members are independent entities, and that somewhat complicates matters.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I will now ask Mr. Berg a question, but I would also like Ms. Christians and Mr. Pigeon to comment afterwards.

Mr. Berg, the argument used by the government to convince us to finally implement the agreement is that we would have FATCA anyway and, therefore, the current intergovernmental agreement should be adopted as is.

Do you feel this argument is logical and acceptable, or should the government be able to explore certain modifications before confirming the agreement?

[Roy Berg]

That's a very good point, and thank you for your question.

Several jurisdictions have asked the U.S. to enter into memoranda of understanding where there are questions as to interpretation of the IGA. The reason that you would enter into the memorandum of understanding is precisely that issue. There is the possibility, and there is precedent for this, of getting a ruling, or an understanding, if you will, by reaching out in that regard.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I don't have much time left.

Ms. Christians, should we go with FATCA or the agreement? Are there any other options?

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Prof. Allison Christians]

It's a false dichotomy. Is it this or that, or neither of them? It is not a question of whether we have to deal with FATCA. FATCA is U.S. law. The question is, what will Canada undertake to lend assistance to the United States? That is a different question. We can solve that problem. We can invoke laws that stand.

Obviously, an MOU is one way to do that, as Mr. Berg has suggested; that is, to state the understandings. Now, if you look at the implementation act, you see that certain things have been put in there that don't need to be in there. For example, the inconsistency part does not need to be in this agreement. It's in the tax treaty. Why is it in this agreement? You don't need that here. We've added that. Why are we undertaking to do things that we don't need to do?

You say, what do we have to do here—?

[The Chair, Conservative, James Rajotte]

Thank you.

[Prof. Allison Christians]

What are we undertaking, as a government? That's the question we need to ask.

[The Chair, Conservative, James Rajotte]

Thank you.

I'll just remind members to ensure that they allow enough time for witnesses to answer.

I'll go to Mr. Adler, please.