Good morning, ladies and gentlemen. Welcome to our meeting here in One Wellington. It's been a long time since I've been in this building. I trust everyone found their way here okay. We have a one-off meeting today.
I would like to welcome to the committee the Honourable , our new Minister of National Revenue.
Of course, Madam Minister, you're here to discuss with us business arising out of a motion passed by the committee just before the Easter break to discuss the transfer of files from your department to the United States according to the tax agreements and so on that we've signed as countries. I very much look forward to this discussion.
The way we'll proceed, Madam Minister, is that we'll have opening comments from you. We have one hour with you, I believe, as we agreed to, and then we'll hear from the Privacy Commissioner afterwards.
We'll have time, Madam Minister, for about 10 minutes of opening remarks, if that's okay. Feel free to introduce those who are assisting you at the table today. After your remarks, we'll proceed to as many questions as we possibly can.
We thank you for making yourself available, Madam Minister. The floor is yours.
Thank you very much, Mr. Chair.
I welcome this chance to address the committee.
I am joined today by senior officials from the Canada Revenue Agency: Ted Gallivan, the Assistant Commissioner of the International, Large Business and Investigations Branch, and Marie-Claude Juneau, the Director of the Access to Information and Privacy Directorate in the Public Affairs Branch.
Mr. Chair, as the world becomes increasingly globalized and cross-border activities become the norm, tax administrations need to work together to ensure that taxpayers pay the right amount of tax to the right jurisdiction. Cooperation with other tax administrations is critical to protecting the integrity of Canada's tax system and revenue base. In fact, Canada is part of one of the world's largest treaty networks, with no less than 92 tax treaties and 22 tax information exchange agreements in force.
In 2010, the U.S. Congress passed the Foreign Account Tax Compliance Act, or FATCA. FATCA requires non-U.S. financial institutions to enter into agreement with the Internal Revenue Service, the U.S. tax department better known as the IRS. This act, therefore, requires the reporting of information on accounts held by U.S. residents and U.S. citizens, including U.S. citizens who are residents or citizens of Canada.
If a financial institution, Canadian as far as we are concerned, is not compliant with FATCA, FATCA requires U.S. payers, that is, corporations and other entities that pay amounts such as interest or dividends, making certain payments of U.S.-source income to this financial institution, to withhold tax equal to 30% of the payment.
This 30% FATCA withholding tax can also be levied in respect of a compliant financial institution, on individual account holders that do not provide documents showing that they are U.S. residents or U.S. citizens. In some circumstances, FATCA could even require financial institutions to close the accounts of certain clients.
In February 2014, Canada and the U.S. signed an international intergovernmental agreement, an IGA, under the longstanding Canada-U.S. tax treaty. We should mention that the first fiscal agreement between Canada and the United States dates back to 1942. While our countries have been exchanging tax information without any problems for decades, this 2014 agreement provides for an enhanced exchange of financial information to improve compliance with our respective tax laws.
Less known is that the agreement is reciprocal. So, the IRS is required to provide the CRA with enhanced information on certain accounts of Canadian residents held at U.S. financial institutions. The intergovernmental agreement was signed in February 2014 and legislation to amend the Income Tax Act to reflect the agreement was passed by the Canadian Parliament in 2014.
Canadian financial institutions that comply with the IGA and related Canadian legislation are now exempt from the 30% withholding tax. Further, Canadian financial institutions report to the CRA the financial accounts they maintain for U.S. citizens. We, in turn, securely transmit that information to the IRS.
Concerning privacy, the CRA is committed to administering this agreement, and all of Canada's tax agreements, in good faith. During the drafting process of the agreement with the Americans, the CRA, together with the Department of Finance, took great care to consult with the Office of the Privacy Commissioner (OPC). We received valuable input and adopted our approach accordingly as the negotiations progressed.
The CRA completed a privacy impact assessment in August 2015. The goal of this assessment was to identify, assess, and mitigate privacy risks. We then submitted this assessment to the Office of the Privacy Commissioner for review. These communications with the OPC and the resulting actions were undertaken with the specific intent of protecting taxpayer privacy.
Information can be disclosed only to persons or authorities who assess, collect, administer, or enforce the taxes and tax laws to which the convention applies. This information can be used for income tax purposes only.
The IGA further stipulates that the information exchanged is subject to strict confidentiality and other protections provided for in the convention, including the provisions limiting the use of the information exchanged.
The CRA exchanged information with the IRS on September 30, 2015. This exchange was done while the CRA followed all of the confidentiality protocols of the treaty and the IGA. Just over three months ago, on January 4, 2016, the CRA received the OPC's recommendations pertaining to the agreement.
My officials have provided to the committee both the OPC recommendations and a copy of our response to them for your information. It is important to mention that, following our submission to the OPC, none of their recommendations suggested that we were not to share this information last September. The next annual transfer of records with the IRS is scheduled for September 30, 2016.
I want to reassure Canadians that all tax treaties and exchanges of information are subject to strict confidentiality requirements. Mr. Chair, this is a priority for our government.
These information-sharing agreements are very important because they allow us to better combat tax evasion and tax avoidance. Canadians are telling us that they want us to crack down on tax evasion and tax avoidance, and the government is committed to do so, as I mentioned earlier this week. This sharing of information is critical to allow us to follow through on that commitment to Canadians.
In conclusion, I emphasize that Canada and the international community continue to move ahead towards greater tax transparency. But rest assured that confidentiality of taxpayer information remains a fundamental cornerstone of Canada's tax system.
Thank you for your attention.
Thank you, Mr. Chair. Just to let you know that I will be sharing my time with Mr. Boulerice.
Madam Minister, thank you for joining us today. I am happy that you are here this morning to discuss this very important matter.
The transfer took place on September 30, meaning that the previous government was still in power. So that was before you took office as the minister. That said, I am happy that you are here to assume your responsibilities. I hope that that will also be the case at 11 o’clock, at the Standing Committee on Finance, about another matter.
I have a lot of trouble understanding that you asked for an assessment or recommendations from the Privacy Commissioner about the transfer of information to the American government, but that you did not wait until you found out what the assessments were. In my opinion, that was why it was worth studying this matter.
What drove the Canada Revenue Agency to action even before it received the recommendations and assessments from the Privacy Commissioner?
I would like to go back to the commissioner’s assessments.
On February 10, 2016, Forbes magazine reported that 700,000 IRS files, files of American citizens, but of Canadian citizens too, had been hacked. The IRS has major and recurrent problems in terms of the confidentiality of information. Some came to light recently.
What mechanisms have you put in place to make sure that, once the transfer is done, the information remains confidential and that the United States will comply with what Canada and the Office of the Privacy Commissioner have established?
This whole situation is dangerous. We have to be able to protect that information once it is in American hands.
Certainly, if you don't mind, and if that's okay with our colleagues.
Other than myself, Mr. Boulerice, and Mr. Dusseault, I'm the only member of Parliament at the table who was actually here when these debates were happening in the last Parliament. I'm not going to ask political questions in my capacity as chair. I'm going to be as neutral as I can, but if you'll allow me....
Madam Minister, in my recollection, the change came about with the change in the U.S. government's administration and with their legislative compliance with their legislation that we came into an agreement with. We've had a long-standing tax treaty with the United States government, but it was about four or five years ago that they started to actively enforce their tax policy, whereas earlier they didn't actively enforce their tax policy.
The tax policy is that the United States of America taxes citizenship and not residency, which is a difference between Canadian tax policy and the United States tax policy. Would you agree with my assessment?
In coming to compliance, the Canadian government of the day had to enter into an agreement, as you've aptly pointed out, in order to protect Canadians; otherwise, the banking institutions or financial institutions in Canada would be directly dealing with the U.S. government. There would be no government intervention to provide that bottleneck for the purposes of protecting Canadians' information, had the Canada Revenue Agency not stepped in.
While you and I may disagree on whether or not the process was done in a way that it should have been done, we both agree at this table that the result that was needed was actually accomplished because the current government seems to be okay with the legislation and the changes that were made by the previous government.
I'm not here to debate that with you, but during the debates in the House of Commons in the past Parliament, I remember that one of the arguments put forward was that Canada fared very well in its agreement to come into compliance with the American change in policy compared to how other countries did in their negotiations with the United States.
I would just like some clarification from you, Madam Minister. Do you think that still holds true?
Minister, yes, we're almost done. There are a few more minutes left here.
I just want to bring one additional example to the table. In 2012, the hon. member for Bourassa, who's joined us here today, who is also your parliamentary secretary, mentioned—again, that was in 2012—that he'd vigorously fight against a similar change.
Again, for the record, we have the Minister of Transport, we have the Treasury Board president, we have yourself to an extent, we have a member from Nova Scotia, we have the parliamentary secretary, and we have the Right Hon. Prime Minister who have said that this is something that they do not want, something they do not want to support. However, on October 19, 2015, they had a complete reversal of opinion on it, and again, just to be clear, your position is now that it's because you have had a chance to read through the legislation in more detail than you had before, and that's why there's this reversal of opinions that have been long held going back to 2012.
Again, Minister, could you just clarify for me one more time this is the position that you take?
Thank you, Madam Minister, Madam Juneau, and Mr. Gallivan, for coming.
I want to correct something. I made an incomplete statement earlier when I identified just me, Mr. Boulerice, and Mr. Dusseault as being here from a previous Parliament. Mr. Dubourg was also here in the previous Parliament, and I want it to be clear that I failed to recognize that in my comment.
We thank you very much for your time and your answers. It was very helpful, I think, not only to us around this table but for Canadians who watching this at home.
We're going to suspend for a moment, and then we'll hear the Privacy Commissioner's opinions on this matter.
Thank you very much.
The meeting is suspended.
: Merci, monsieur le président.
Ladies and gentlemen of the committee, thank you for inviting me to provide my views on certain aspects of the tax information exchange agreement between the Canada Revenue Agency and the IRS in the United States.
The minister explained a little about the legal framework under which this transfer is made. I do not want to repeat what she said, except to remind you that there are two important documents in this matter. We have an intergovernmental agreement, an agreement between the two governments, and we have the provisions of the Income Tax Act that were passed in 2014.
Under the IGA, the Canadian government agrees to collect certain information on accounts held by Americans in Canadian financial institutions and report that information to the United States.
This happens in two steps. First the Income Tax Act sets out requirements for Canadian financial institutions to report information with respect to those accounts to the CRA. In turn, the CRA shares this information with the IRS. The IGA is reciprocal in that the CRA also receives information from the IRS.
In previous appearances before Parliament on FATCA, my office has recognized the long-established practice of information-sharing between nations for purposes of taxation enforcement. For example, the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, which lays the foundation to exchange information under the IGA, was signed in 1980. In more recent years, there have been international efforts by the OECD for the automatic exchange of tax information. However, we also conveyed our expectations that information-sharing activities be undertaken in a way that respects privacy rights of individuals. This holds true both for the CRA and for financial institutions
As we said in our appearance on Bill , which amended the Income Tax Act, as well as in our review of the privacy impact assessment submitted to us by the CRA, we expect there to be limits to the collection, use, and disclosure of personal information, defined retention periods, and appropriate safeguards. For example, all parties involved must limit the collection of personal information to what is necessary and not collect data elements that are not required. This applies not only to the CRA, but also to reporting institutions governed by PIPEDA.
The use and disclosure of personal information must likewise be limited. The IGA specifically notes that information received under the IGA is subject to protections provided for under the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, which limit the use and disclosure to only the collection, administration and enforcement of taxes.
With respect to retention, as we understand it, the CRA retains its records for seven years, which is consistent with CRA's retention of individual returns.
With respect to safeguards, we note that the IGA states that exchanges are subject to confidentiality and protections under the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital. The convention mentions that information received shall be treated as secret in the same manner as information obtained under the taxation laws of that state.
The CRA is expected to protect personal information from unauthorized uses and disclosures of personal information, especially considering the sensitivity of financial information and the reasonable expectation of individuals that it generally be kept confidential.
My office received a privacy impact assessment from the CRA in August 2015.
We are pleased that the CRA has adopted all our recommendations: first, reducing its retention period from 11 to seven years; second, educating financial reporting institutions to guard against the risk of over-collection; third, committing to safeguarding information, including the use of specific measures to mitigate risks identified through its threat risk assessment; fourth, updating the privacy impact assessment to reflect all proposed uses and disclosures of personal information and ensuring that these are strictly limited to purposes of tax administration.
While my office acknowledges the need to combat tax evasion, it is important for the enabling legislation to be clear in the obligations it imposes on all reporting entities, including the CRA and organizations that have FATCA reporting obligations, such as financial institutions.
For example, the IGA states that unless a reporting institution elects otherwise, accounts under certain thresholds, such as deposit accounts under $50,000—U.S., I believe, although perhaps Canadian—are not required to be reviewed, identified, or reported. However, part XVIII of the Income Tax Act seems to require reporting on all U.S. reportable accounts unless the financial institution specifically designates an account to not be a U.S. reportable account. This leads to a concern: given the apparent discretionary nature of the threshold exemptions, it may not be clear when accounts under $50,000 will be reported to the CRA.
My office has written to the CRA with follow-up questions following their response to our earlier comments of December 2015. These questions included the number of accounts under $50,000 U.S. they have received and transferred, clarification on how threshold exemptions are applied, clarification with regard to the level of review the CRA performs on records that are transferred to the IRS, and notification of how many records it received from the IRS about Canadian persons. We've also requested clarification as to why the first round of records sent to the IRS was larger than originally estimated.
In conclusion, FATCA reporting requirements are an example of co-operation among states on tax enforcement. In that respect, FATCA is neither unusual nor objectionable. That said, privacy principles have to be respected and provide balance in the implementation of the arrangement. The IGA and implementing legislation create legal effects vis-à-vis privacy law by creating an obligation to share information without the consent of the individual under the Privacy Act or PIPEDA, the private sector legislation.
There's also some lack of clarity around questions on reporting threshold exemptions. To this extent, we are again following up with the CRA. We wrote to them earlier this week on these issues as part of our privacy impact assessment review process. Protecting the privacy rights of individuals and advising on improving protections under information-sharing agreements are key parts of my mandate. Given that Parliament has chosen to pass implementing legislation to support FATCA reporting requirements, we continue to strongly recommend that these obligations not be over-broadly applied but appropriately balanced against privacy rights.
I'll be glad to take your questions.
An example would be these accounts under $50,000.
Again, you start from the principle that it is legitimate for the two states, Canada and the U.S., to share information to avoid tax evasion. In order for Canada to obtain information from the United States, we have to provide some information to the United States in reciprocity.
The purpose of the whole scheme is to ensure that the tax regimes of both Canada and the U.S. are applied properly, yet the arrangement provides for certain exceptions. You've heard tax officials refer to some of them having to do with TFSAs and so on and so forth. Even though the rule is exchange of information for tax purposes, the arrangement provides for certain exemptions, including this question of whether or not accounts under $50,000 should be reported.
The rules should be clear. What happens to records under $50,000? If the rule is that they should not be reported, then that would be an example of information that theoretically would be relevant to a tax assessment and that should not be and would not be necessary to be transferred, because the arrangement so provides.
I'll start with some general comments and, then, I'll speak specifically to the transfer of information that occurred.
In his answer earlier, Mr. Gallivan told you that, in addition to the correspondence that was exchanged, a certain number of meetings between the CRA and my office were held before the PIA was actually passed on. That is entirely true. We had two or three meetings prior to our correspondence.
Treasury Board policy on PIAs does not state that the commissioner's office has to have given its approval or input before a new program can come into effect. I think the CRA acted in accordance with the policy in effect, in doing what it did. We did meet a number of times and we did correspond in August, one month before the information was transferred. Three months after our correspondence, we provided our comments. All of that is acceptable under the Treasury Board policy.
Generally speaking, is that the best way to proceed? No, it's not ideal for departments to be able to adopt and implement new programs before receiving a formal opinion on the privacy implications from the commissioner's office. But that's the system we have in place.
I would add that the commissioner's office recommended amendments to the Privacy Act, as the members of this committee are well aware. And one of those recommendations sought to make the obligation to conduct PIAs a statutory requirement, as opposed to a policy one. The idea was to give the process more teeth and, ideally, ensure that the comments of the commissioner's office are taken into account before any new program comes into effect.
I would distinguish between two stages in this information sharing.
Normally, in terms of privacy, the information that a government institution receives should be directly from the individual concerned. Here, there is an intermediary, which is the financial institution, but that is provided for under the arrangement and the agreement. Although an exception to the general rule, it is an exception that is authorized by law. Should information on funds owned by a U.S. person be collected by somebody other than a U.S. person? By law, the answer is yes, it can be collected from a financial institution.
The question that was asked earlier this morning was this: assuming this regime, should the CRA inform the individuals in question that their information has been shared with the IRS? I think there is no reason why not. What we heard is that under access to information provisions, if somebody makes an access request, he or she will be entitled to that information, and that is absolutely true. If that is true, then why not provide a mechanism that provides for more systematic information being given to individuals?
I wanted to come back to automatic disclosure.
We asked the minister and the officials for clarification through a question in the order paper. The only answer we got was that concerned Canadians should already be aware of this because their banks should have informed them. We were told that if people needed more information, they could consult the FAQs on the Canada Revenue Agency website. We were also told that one of the only ways for Canadians to obtain information and have access to their file was by making a request directly to the agency.
We think that Canadians are fully justified in having access to their personal file.
Do you think it would be possible to put in place a mechanism that would automatically inform the people concerned that information about them had been sent to a foreign government? I'm talking about a foreign government because, in a case like this, it's important to know.
Is that possible? Currently, there are 155,000 files, but there might be 200,000 by September 30, 2016. We don't know. Is it reasonable to do that?
I'm certainly not going to dispute that with you, but there could be a better-case scenario rather than always the worst-case scenario in certain circumstances. Either way, Mr. Commissioner, we thank you very much for your time here today and for clarifying this very important issue.
I know that as an MP previously, my office was inundated with many concerns. I was surprised to find out how many U.S. citizens I had living and working in my riding. Some people who had never even worked, as you aptly pointed out, for one minute in the United States were getting tax assessments. It caused a lot of confusion, and there was a lot of frustration on their part.
I'm glad we had some more clarification today at this committee. I thank you for your time, sir.
Colleagues, that ends the part dealing with the motions that brought about this one-day study.
I need a couple of motions to be approved in order for us to continue our studies on the access to information and privacy legislation. I need somebody to move that a proposed budget in the amount of $22,500 for the study of the Access to Information Act be adopted. Could I have somebody move that, please?
Mr. Alexandre Boulerice: I so move.
(Motion agreed to)
The Chair: In the same vein, with the Privacy Act study, we need a motion that a proposed budget in the amount of $22,500 for the study of the Privacy Act be adopted. Could I have somebody move that motion, please?
Mr. Bob Bratina: I so move.
(Motion agreed to)
The Chair: Thank you very much. I appreciate that, colleagues.
I think that takes us to the end of our work for today. I'll just simply advise—
Go ahead, Mr. Smith.
For the edification of members of the committee, I have the schedule before me.
We were going to the end of June. We will likely meet 16 more times, providing we sit until the end of the session, which means we potentially have eight more meetings on access to information and potentially eight more meetings on the Privacy Act.
The committee has given me great flexibility, but sometimes we don't get the right witnesses and we move things around. We still have estimates to do as well. I propose that we do the estimates in the week after we come back from the next break week.
I would propose that on one of the days, the Tuesday, we have the two commissioners come in and we'll go through the estimates with those two commissioners. Then on the Thursday we could bring in the other two commissioners and go through the estimates with those commissioners.
Is everybody okay with that? They are booked for the 3rd and the 10th. Both happen to be Tuesdays.