Finance Committee on May 14th, 2014

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is meeting number 35 of the Standing Committee on Finance. Our orders of the day, pursuant to the order of reference of Tuesday, April 8, 2014, are the study of Bill C-31, An Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.

Colleagues, we have two panels before us this afternoon.

In the first panel, we're very pleased to welcome Mr. John Richardson, and, from the Canadian Bankers Association, the acting vice-president, Mr. Darren Hannah. From the Canadian Council of Chief Executives, we have Mr. Brian Kingston, and from the Office of the Privacy Commissioner of Canada, we have Privacy Commissioner Madam Chantal Bernier.

Bienvenue. Each of you will have five minutes maximum for your opening statement.

We'll begin with Mr. Richardson, please.

[John Richardson, As an Individual]

Thanks very much for the chance to appear today.

I did take the time to watch yesterday's session, which was actually enormously helpful to me, as I'm sure it was to you. I have a couple of thoughts, though, that are my own but directly link to that. The signing of the FATCA IGA can be seen as either good news or bad news.

First, interestingly, is the good news. It's the point that Professor Cockfield made yesterday. In fact, what this does ensure is that Canada is absolutely 100% in compliance, no ifs, ands, or buts about it. That's what it means to have signed that agreement.

Interestingly, the agreement specifically states that nothing happens until Canada makes it clear that it has done all of the legwork needed to actually implement the agreement, which I would assume to be all of the enabling legislation that we find in Bill C-31. Given that's the case, as Professor Cockfield pointed out, there's absolutely no reason to rush this whatsoever, absolutely none. This should not be in the dark recesses of an omnibus bill. It should in fact be brought to see the light of day in a separate bill.

The second aspect of this that's very interesting in the IGA itself—and this question was asked yesterday—is who this applies to. It applies to U.S. persons and is defined in the agreement as “U.S. citizens or residents”. Now, what is extremely significant is that U.S. citizens are defined solely by the United States today, tomorrow, and forever. That means that someone who is a U.S. citizen today might not be a U.S. citizen tomorrow—and I'll have more on this as we continue the discussion—but given that the U.S. has the right to define who a citizen is, given that I presume Canada would cede that right to them, I think it's extremely important, absolutely essential, under any FATCA agreement that the definition of a U.S. citizen could never, never, never include any Canadian citizen who is a resident in Canada.

Third, we've got the whole problem of what FATCA actually means. Having watched a few of these committees, I see a lot of technical discussion of FATCA and a lot of discussion of regulations. In other words, there's a lot of talk about how to implement this agreement, but precious little on what it actually means in terms of the lives of Canadians, and precious little in terms of what it means in terms of the country itself.

The simple fact of the matter is that FATCA, once implemented, will allow the U.S. to put a permanent capital tax on Canada every day of every year for as long as this agreement is in effect, simply by virtue of using U.S. citizens in Canada to tax and siphon revenue out of the country. It is a myth, an absolute myth, and it is completely wrong that under U.S. tax laws, U.S. citizens will not owe tax to the IRS. This is for two reasons. The first is that the U.S. tax code is hostile to anything foreign, and that would include anything in Canada in general, but secondly, anything that involves tax deferral, and it is plainly obvious that all of the pillars of Canadian retirement planning do in fact involve tax deferral.

So it is a myth that U.S. citizens would not owe tax. It is a myth. Interestingly, as I read in something yesterday, the opposite of truth is not the lie: the opposite is in fact the myth. This agreement will have severe consequences for Canada and Canadians.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Mr. Hannah, please.

[Darren Hannah, Acting Vice-President, Policy and Operations, Canadian Bankers Association]

Good afternoon.

My name is Darren Hannah. I'm the acting vice-president of policy and operations with the Canadian Bankers Association.

I'm very pleased to be here today at the committee's invitation.

The CBA strongly supports the government's decision to enter into the intergovernmental tax information sharing arrangement with the U.S., because it relieves Canadians of the burden they would otherwise face due to the U.S. Foreign Account Tax Compliance Act.

As you know, FATCA, as legislation, was passed in the United States in 2010 and is intended to detect U.S. persons who are evading tax using financial accounts held outside the U.S. Under FATCA, non-U.S. financial institutions would be required to report relevant information to the U.S. tax authorities about financial accounts held by identified U.S. persons.

The CBA has been very clear on FATCA from the beginning. We understand that the U.S. government is attempting to address tax evasion; however, we have opposed how they're going about it with FATCA. Canada is not a tax haven, and Americans do not move here to evade taxation. We actively opposed FATCA publicly and appeared before and made submissions to U.S. government authorities.

Unfortunately, despite worldwide efforts by the CBA and others, U.S. officials have no intention of repealing FATCA, and simply ignoring FATCA is not an option. Non-compliance would mean that both financial institutions and every customer of that financial institution, both in Canada and around the world, would face a 30% withholding tax on U.S. source income and the sale of any U.S.-source investments, and potentially a withholding tax on Canadian source income due to so-called “foreign pass-through payment” provisions.

This means that any bank customer or retiree who has mutual funds, stocks, or bonds would face potentially billions of dollars of lost income to withholding tax even if they had no other ties to the U.S.

For financial institutions, non-compliance would effectively mean that they would no longer be able to do business in the U.S. capital markets or with any institutions that do business in U.S. capital markets, which is effectively every major financial institution in the world.

To ensure that Canadians did not face the substantial negative consequences that would have come with FATCA, the Canadian government announced on February 5, 2014, that it had entered into an intergovernmental agreement with the U.S. government under the existing Canada-U.S. tax convention. The requirements of the IGA are reflected in the proposed changes to the Income Tax Act in Canada under Bill C-31, and financial institutions in Canada will be required to comply with the changes under Canadian law.

We have agreed with the federal government that entering into an intergovernmental agreement is the best approach under the circumstances. We recognize and support the efforts that the Canadian government has made.

Under the intergovernmental agreement, financial institutions in Canada will report relevant information on accounts of U.S. persons to the Canada Revenue Agency rather than directly to the U.S. Internal Revenue Service. The CRA will then exchange the information with the IRS through the provisions of the existing Canada-U.S. tax convention. The 30% FATCA withholding tax will no longer apply to retail clients of Canadian financial institutions.

So what does this all mean for bank customers in Canada? Well, for the vast majority of Canadian bank customers who are not U.S. persons, the IGA has no impact at all. Under the intergovernmental agreement, banks would be required to review their customer information. If there is no information indicating that an individual may be a U.S. person, then they won't have to do anything. If a customer has an existing account and there is an indication that they may be a U.S. person, or if they're opening a new account, their financial institution may ask them to provide additional information or documentation to demonstrate that they're not a U.S. person.

Under the intergovernmental agreement and Canadian banking law, proof of citizenship is not required to open a banking account. The vast majority of Canadians can open an account with a financial institution in the way they always have; however, if there is some indication in a new or existing account that they might be a U.S. person, then the financial institution may ask them to self-certify that they are or are not a U.S. person for tax purposes.

In conclusion, as I've said, FATCA is here to stay, and ignoring it is not an option. We fully support the government's work in putting in place an intergovernmental agreement.

I look forward to your questions. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Hannah.

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

[Brian Kingston, Senior Associate, Canadian Council of Chief Executives]

Mr. Chairman and committee members, thank you for the invitation to appear before you concerning part 5 of Bill C-31.

The Canadian Council of Chief Executives represents 150 chief executives and leading entrepreneurs in all sectors and regions of the country. Our member companies collectively administer $4.5 trillion in assets, employ more than 1.4 million people, and are responsible for the majority of Canada's private sector exports, investment, and training.

The CCCE supports the government's decision to enter into an intergovernmental tax information sharing arrangement with the U.S. The agreement will ensure that Canadians are not exposed to punitive U.S. withholding taxes on income from their investments under the Foreign Account Tax Compliance Act, or FATCA. Fortunately for the overwhelming majority of Canadian account holders, the agreement will have no impact on how they deal with their financial institutions.

The CCCE is of the view that Canada should have been exempt from the FATCA. Canada is not a tax haven, and has a good reputation for sharing information that assists other governments in collecting their taxes. Unfortunately, an exemption from FATCA was not considered.

Without this exemption, obligations to comply with FATCA would have been unilaterally and automatically imposed on Canadian financial institutions and their clients. This would have required Canadian financial institutions to sign agreements with the Internal Revenue Service under which they would have to identify their U.S. account holders and report directly to the IRS. If a Canadian financial institution did not comply with reporting requirements, the financial institution and its clients would be exposed to punitive U.S. withholding taxes of 30% on income from their investments. This would also mean that non-compliant financial institutions could no longer do business in U.S. capital markets or with any institution that does business in U.S. capital markets.

Given the size and importance of the Canada-U.S. relationship, non-compliance was simply not an option. Canada cannot risk our partnership with the U.S., which has delivered enormous benefits to both countries over many decades.

Canada is not alone in negotiating an intergovernmental agreement with the U.S. The U.S. has engaged in negotiations with over 80 countries to reach intergovernmental agreements, and 32 other countries have signed such agreements.

The agreement is consistent with the government's support for recent G-8 and G-20 commitments intended to fight tax evasion globally. G-20 leaders have committed to the automatic exchange of tax information as the new global standard, and endorsed a proposal by the OECD to develop a global model for the automatic exchange of tax information. The OECD has also signaled an intention to begin exchanging information automatically on tax matters among G-20 members by the end of 2015.

Going forward, it is important that there is coordination among G-20 members. This exercise will not prove effective if not properly coordinated, with countries imposing unilateral measures.

This is part of a global trend toward tax transparency. In line with this trend, the CCCE recently released a report that shows the tax contributions made by our members to all levels of government. There is ever-increasing public interest in how much tax is paid by companies. This report shows that Canadian companies are significant taxpayers, with an average total tax rate of 33.4% of profits.

In conclusion, the CCCE strongly supports the intergovernmental agreement negotiated by the government and looks forward to its full implementation.

I'd be happy to answer any questions. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

I will now give the floor to Ms. Bernier.

[Chantal Bernier, Interim Privacy Commissioner, Office of the Privacy Commissioner of Canada]

Thank you, Mr. Chair.

Thank you, members of the committee, for inviting me to discuss the privacy implications of Bill C-31.

Like my colleagues, I will focus on the United States Foreign Account Tax Compliance Act, or FATCA, and I will conclude with some brief comments on two other parts of the bill that have privacy implications.

FATCA is a U.S. law which requires financial institutions in countries outside of the United States, including Canada, to report certain information on accounts of a U.S. person to the U.S. Internal Revenue Service, or IRS. Bill C-31 includes an agreement to implement this through the Canada Revenue Agency.

While there is a long-established practice of information sharing between nations for the purposes of taxation enforcement, all information sharing activities must be undertaken in a way that respects privacy obligations. These obligations include limiting the amount of personal information collected to only that which is necessary for the stated purposes and safeguarding it appropriately.

The risk to privacy here, then, is mainly related to over-collection, over-reporting, and information security. To avoid over-collection and over-reporting, education and outreach to institutions affected by this new reporting requirement will be crucial. To address information security considerations, appropriate technological measures, as well as controls, will be called for.

Beyond this, Bill C-31 introduces other legislative amendments that affect privacy.

First, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act—the PCMLTFA—will be modified in a way that broadens the amount of personal information collected and increases information sharing capabilities and requirements by the Financial Transactions and Reports Analysis Centre of Canada, FINTRAC.

I'm encouraged, however, by the provision of Bill C-31 that requires FINTRAC to destroy the personal information it receives that is not related to the suspicion of criminal or terrorist activity. This corresponds to our recommendations in our audits of FINTRAC.

Second, changes to the Income Tax Act will allow for broader disclosure of taxpayer information to law enforcement authorities. This means that if CRA officials have reasonable grounds to believe that taxpayer information provides evidence of certain crimes, they may disclose this information to law enforcement. It appears that this information would be shared between the CRA and law enforcement authorities without judicial oversight. We would urge the committee in its examination of this provision to seek demonstration that this provision is necessary, and if it is necessary that appropriate oversight mechanisms will apply.

In closing, thank you, Mr. Chair and members for the opportunity to discuss this issue. I welcome your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll begin members' questions with Mr. Rankin, please, for five minutes.

[Murray Rankin, NDP, Victoria, BC]

Thank you.

I only have five minutes, as the chair says, so I welcome all the panellists here, and I'll get right into it.

Mr. Richardson, in your remarks, you say there's no reason to rush this through, yet you've heard from Mr. Hannah that there would be problems with the 30% withholding tax and the access by banks to the foreign capital markets in the United States. What's your response to that?

[John Richardson]

He's completely wrong. The obligation is satisfied upon entering into the IGA. That has been done. The agreement states very specifically that it doesn't take effect until Canada gives notification.

[Murray Rankin, NDP, Victoria, BC]

Is it your view that this has had sufficient study, that FATCA, in all of its complexity, has had sufficient study? If not, do you agree with our position that it ought to be taken out of Bill C-31 and given further study?

[John Richardson]

Well, I think it has had absolutely no study. It's quite apparent that very few people even understand what it is, and clearly it needs to be taken out of the omnibus bill, not hidden, and given the light of day, precisely so people can understand it and then have a reasonable debate about it.

[Murray Rankin, NDP, Victoria, BC]

All right.

My next question is for Mr. Hannah of the Canadian Bankers Association.

Just now you said that when a person comes to a bank and opens an account there won't be many changes. You say that if there is some indication for a new or existing account that it might be for a U.S. person, then the financial institution may ask them to self-certify if they are or are not a U.S. person for tax purposes. What mechanisms will the bank have to apply to determine whether that person is indeed a U.S. person?

[Darren Hannah]

The intergovernmental agreement sets out what are considered to be indicators of a U.S. personage. I don't have the exact section number, but it's the usual things you would expect: U.S. address, U.S. phone number, U.S. place of birth, and standing instructions to forward funds to a U.S. account—

[Murray Rankin, NDP, Victoria, BC]

If those are there, then, and it's a situation like we've heard about, where people have lived in Canada for 30 years and have a child who was born here, but for U.S. law they are U.S. persons, or if they marry somebody who's a Canadian, that person is a U.S. person.... Do you think that if a person says “I'm not a U.S. person” that should be the end of it for the banks?

[Darren Hannah]

If there's nothing to suggest that they are a U.S. person, then there's nothing more to do.

[Murray Rankin, NDP, Victoria, BC]

Okay. That's excellent.

Now I have a question for Madam Bernier, from the Office of the Privacy Commissioner of Canada. We had testimony from Mr. Ernewein, of the Department of Finance, who said, “Our understanding is that in relation to Canadian law, the Privacy Act and its various provisions are subject to other laws of Parliament.” We're led to believe that this agreement could supersede the Privacy Act. Is that your opinion as well?

[Chantal Bernier]

The Privacy Act has been declared to be quasi-constitutional by the courts. He was perhaps referring to section 8 of the Privacy Act; that section does mention “subject” to other laws. However, in general, the Privacy Act has quasi-constitutional status.

[Murray Rankin, NDP, Victoria, BC]

Therefore, what that means, in lay terms, is that if the intergovernmental agreement or the provisions of Bill C-31 are in conflict with the Privacy Act, the Privacy Act would prevail.

[Chantal Bernier]

That would be my view, certainly.

[Murray Rankin, NDP, Victoria, BC]

Okay.

I'd like to ask you about something else you said just now. I'm very pleased to see that you've also drawn this committee's attention to the provisions of the Income Tax Act that allow CRA officials to tell the police about things that concern them, without any warrant. You've said that this information would be shared between the CRA and law enforcement authorities without “judicial oversight”. I take it that you think that would be an aberration. What word would you use to describe that situation?

[Chantal Bernier]

I would describe it as an exception, and that exception needs to be justified as necessary and proportionate, so I urge you to seek the demonstration that indeed it would be necessary to have this exception.

[Murray Rankin, NDP, Victoria, BC]

Necessary? Do you mean in terms of compliance with the Charter of Rights and Freedoms?

[Chantal Bernier]

Yes, absolutely. Obviously you have section 1 of the Charter of Rights and Freedoms, which speaks of necessity “prescribed by law” and “justified in a free and democratic society”. That is the test to meet, and I think evidence should be gathered from this committee as to why this provision is felt to be necessary.