Finance Committee on May 29th, 2014

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is meeting 39 of the Standing Committee on Finance. We are televised, colleagues. Pursuant to the order of reference of Tuesday, April 8, 2014, we are continuing our clause-by-clause consideration of Bill C-31, an act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.

We are dealing with part 5. As you know, we dealt with parts 1 to 4 at Tuesday's meeting. Part 5 deals with the Canada-U.S.A. enhanced tax information exchange agreement implementation act.

We have with us two officials from the Department of Finance, Mr. Ted Cook and Mr. Brian Ernewein, whom colleagues on the committee know very well. Thank you for being with us.

(On clause 99—Enactment)

We will start with clause 99. I'll just indicate, as your agenda shows, that we have an awful lot of amendments pertaining to this clause, so I suspect there'll be quite a debate on this.

We are going to start with amendment NDP-6, and I will just identify that if NDP-6 is moved, LIB-2 cannot be proceeded with, as they are identical. Obviously that deals with LIB-2.

If LIB-3 is adopted, Green Party amendment PV-1 cannot be moved, line conflict, nor NDP-7, as it's consequential. Also, if Green Party PV-1 is adopted, NDP-7 cannot be proceeded with.

We have all of these amendments. We'll start with the NDP. It's up to members, but sometimes they wish to group their amendments, or sometimes they wish to speak individually to each amendment. I'll leave that up to the respective members and parties themselves.

I will start with NDP-6, and I'll go to Mr. Rankin, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Mr. Chair.

I'd like to set the context before I move the first of several amendments to part 5 of the budget implementation act pertaining to the implementation of the U.S. Foreign Account Tax Compliance Act, or FATCA, as it's more popularly known.

I'd like the members across to carefully consider the serious issues that have been raised at this committee concerning the implementation of this deeply flawed agreement. I hope they'll carefully consider and support our NDP amendments that address some of the serious problems that have arisen.

It has become increasingly clear through departmental and witness appearances at this committee that the Conservative government simply has failed to adequately study the implications of FATCA and the implementation agreement with respect to privacy, constitutionality, and cost.

Rushing it through in an omnibus bill without proper study is not only reckless, but it's also entirely unnecessary. The U.S. has recently delayed the application of FATCA sanctions until January 2015. Canada is already deemed in compliance with the U.S. law, and legal experts have testified to this committee that there's ample time, therefore, to properly study and amend this agreement.

More than one million Canadians could be negatively affected by this deeply flawed agreement. So, we're simply asking, yet again, that the Conservatives slow it down and remove FATCA from this budget bill, so it can be properly scrutinized and amended, and so we can ensure that Canadians' privacy and constitutional rights are protected. Surely that's of concern to every member of this committee. It's more important, we say, to fix this and protect those many Canadians who are going to be affected than it is to ram this through in an omnibus budget bill, in which this agreement has no place being in the first place.

The first amendment, Mr. Chair, is NDP-6, which simply would say, in clause 99, that it be amended by adding after line 11 on page 73, the following:

“(2) Despite 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” does not include any person who is (a) a Canadian citizen within the meaning of the Citizenship Act or a permanent resident within the meaning of subsection 2(1) of the Immigration and Refugee Protection Act; and (b) ordinarily resident in Canada.”

This amendment is intended to address one of the most central issues pertaining to FATCA and perhaps its greatest flaw, that this will impact Canadian citizens who are deemed to be U.S. persons and targeted by this agreement, but who are in every other way our fellow Canadian citizens and permanent residents of this country.

I'd like to thank Lynne Swanson, who appeared before this committee, Dr. Stephen Kish, and so many others for their dedicated work to advocate for those who will be undeservedly caught in the FATCA net. Many experts have analyzed the agreement, and it was really negotiated with the protection of banks in mind, they have told us, not the people who will be affected.

I ask the members opposite to carefully consider and support this amendment which, if passed, would protect our fellow Canadian citizens who, for all practical purposes, should not be affected by this agreement, and who should have the same rights as every other citizen. We should not create a second class of Canadians with a second set of rights just because American law deems them to be U.S. persons. Even those born in Canada can be caught in the FATCA net.

Finally, this would help the government avoid an inevitable charter challenge, which I hope they would be interested in avoiding.

That is the purpose and intent of NDP-6, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Okay, thank you, Mr. Rankin.

We'll go now to Mr. Keddy and then we'll go to Mr. Cullen.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Mr. Chairman, of course, what the honourable member's really asking us to do is change how the Americans apply their own laws, which they have a right to do. We don't have to agree with it, but they tax based on citizenship and that's simply how it is. Worse yet, his amendment would really not just change the way the Canada and the United States enhanced tax information exchange agreement works, but it would actually override the terms of the intergovernmental agreement negotiated with the U.S. providing that the terms “U.S. Person” or “Specified U.S. Person” do not include a person ordinarily resident in Canada who is a Canadian citizen or a permanent resident. Of course, what they leave out of that is that person would also have to be a U.S. citizen or a dual citizen.

The amendment would mean that the financial accounts of U.S. citizens who have such connections to Canada would not be reported. It is clear, Mr. Chairman, that the scope of persons in respect of which the U.S. seeks information under the IGA consistent with the U.S. tax legislation includes all U.S. citizens, including those who are dual citizens or residents of another country. This is based on the requirements of the U.S. tax system, as I mentioned earlier, which places tax filing obligations on all U.S. citizens, even those who are also citizens of another country. At the end of the day, this would result in Canadian financial institutions and their clients being exposed to the U.S. FATCA withholding tax.

Finally, I want to say there's really some misleading information being put out here. U.S. citizens have always been applicable to paying taxes in the U.S. if they were following the tax regime of the U.S. Most of us have some U.S. relatives or U.S. family members or U.S. connection, especially if you live in Atlantic Canada. The reality is the difference here is no different from U.S. tax law. The difference is they're enforcing the rules that have always been in place. If you're a U.S. citizen, you have to comply with U.S. tax rules and you have to file income tax. It doesn't mean that you're going to pay income tax, but you've always been responsible to file. That comes with the duty of citizenship. We can like it or not, but it's not up to us to make that judgment.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Keddy.

Mr. Cullen.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you, Chair.

I wonder if I can put some questions through you to Mr. Ernewein as we approach this amendment .

Just with the scope of previous treaties.... I deem this a tax treaty. Am I incorrect in calling it such, this intergovernmental agreement? Is it a tax treaty by any other name?

[Brian Ernewein, General Director, Tax Policy Branch, Department of Finance]

I would describe it as a tax treaty. It's an agreement in relation to an exchange of information, but I think that falls under the heading of treaty, yes.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you. I don't want to misappropriate or misuse terms.

Typically, when Canada has signed other tax treaties, do we do some sort of assessment within Finance Canada as to the impact of the treaty in terms of incurred costs or who the tax treaty is meant to affect, the number of people affected? Or is that not something that a department estimate would try to achieve when seeking or signing a tax treaty with another country?

[Brian Ernewein]

I would say generally not in terms of a numerical assessment of number of taxpayers affected. When there's a change in the treaty policy, for example, a change in withholding tax rates, that Canada might be willing to offer in most or all of its negotiations, that's something that would be costed. Sometimes it's actually been a budget pronouncement announcing that change in policy and providing an estimate of costs, but not on a treaty-by-treaty basis for the most part.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

So a treaty of this scope—and forgive me, Chair, but I wanted to clarify some things before I got into the recommendation of this amendment—in terms of the potential number of people impacted, may I describe it as large? Am I being...? I don't want to paint the picture unfairly, but typically, if we were signing a tax treaty with France or even the entire EU, the number of people who might be implicated by this wouldn't be as large as with something we do with the United States just by the sheer number of people across the border, the sheer number of families that are interconnected.

Is that a fair assessment to make?

[Brian Ernewein]

I think it would depend on what the relative change was as to how many people were affected.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

To my specific question then, does the department have an estimate of the number of people in Canada who may be impacted by this tax treaty?

[Brian Ernewein]

No, we do not have a specific estimate. That will depend on the number of citizens who have the type of accounts that fall within the reporting regime and who are not exempted because of the nature of the accounts themselves.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

To be clear, would somebody who is a dual citizen of this country and of the United States, by your understanding of the treaty that Canada has signed, be considered to be in that group?

[Brian Ernewein]

What matters for reporting is U.S. citizenship, which triggers a report, or U.S. tax resident, which means either being a resident of the U.S. according to our general definition of the term or being a U.S. taxpayer by virtue of another heading, which would be citizenship. Whether dual or non-dual, if they are a U.S. citizen, they're potentially subject to reporting.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I didn't hear the specific answer to the question, but a dual Canadian-U.S. citizen, by your.... I know this is dealing with American law, which is difficult because we have to interpret, but is it that a dual Canadian-U.S. citizen would be somebody implicated by this tax treaty?

[Brian Ernewein]

Yes, and that is by virtue of their U.S. citizenship; that is what matters.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

That's right. That's all. There's no trap in this line of questioning; I'm simply not that skilled.

One question that has been raised through this process, and I think this is what Mr. Rankin is trying to address here, concerns the deemed U.S. persons. The process that we've understood to this point is that the assessment is initially made by the bank itself as to whether a client of theirs may fall into this category—either having some relations that trigger within, I suppose, their computer systems.... I can't imagine the banks are going to go through all 15 million or 17 million accounts that they have one by one. There will be some sort of computer program that will sift through their accounts to try to find these triggers, either this dual-citizenship trigger, or the trigger of somebody having accounts or holdings within the U.S.

Is that your understanding of how this is going to be applied?

[Brian Ernewein]

It will depend on whether we're talking about existing accounts or new accounts. With respect to existing accounts, it's much along the lines, at the general level, that you describe. An electronic search is generally the procedure. If the electronic search shows up a U.S. indicator, then that could be the prompt for further inquiry. That's all that's required. There's no other sort of investigation involved, except with high-value accounts.

For new accounts, it will be open to the banks to see, on the basis of the documentation they receive, whether there are U.S. indicators. It may also be the case that a bank would wish to put the question to new account holders, to ask the question explicitly.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

One more time, can you remind us again why we have the insertion of the CRA into this equation? Why, once the banks do that screening on either new or pre-existing accounts, do we then have the information first go to the CRA rather than directly to the IRS? That is where it's eventually going to end up.

[Brian Ernewein]

Well, the intergovernmental agreement achieves a number of different benefits, but on this particular point, the ability to collect information under our own law and provide it to the Canada Revenue Agency and then to transmit it under our own law and the Canada-U.S. tax treaty seems to avoid potential concerns on privacy issues, as well as with—sorry, regulatory issues—whether or not access to basic banking would be a concern. That is on the account closing. That's a FATCA test.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I'm sorry. Can you...?

[Brian Ernewein]

Forgive me; I'm melding two things. There's the consequence of FATCA versus an IGA, and FATCA itself, in the event of information not being furnished as required under FATCA, could involve account closing. It is not specific to your point about why information is provided to the CRA and over to the U.S. versus directly to the U.S. That is about privacy concerns.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I'll get to this, Chair.

You mentioned something about its limiting some of the privacy concerns raised if it were to go directly from the bank—the institution, whatever it is—to the IRS. Is that right?

What I'm trying to understand, and what Mr. Rankin is trying to do in terms of improving this agreement is to understand whether there is some sort of extra security test or something, some enhancement of privacy, that happens simply by going through this middleman, the CRA, rather than directly to the IRS.

[Brian Ernewein]

Yes, I would say so. First of all, the scope of the information to be provided is narrower under the intergovernmental agreement than under FATCA. Second, the transmission of that information is, under the Canada-U.S. treaty, subject to the safeguards of the treaty and our own laws, which require that it only be used for the purposes of U.S. taxation and not for other purposes, and only if it is relevant to U.S. taxation and not to other purposes.