Canada's financial services sector is preparing to implement yet another tax-information exchange regulatory regime that will become effective in a short 12 months' time. Governments around the world are enlisting financial services firms to help combat offshore tax evasion.
"We're still under a time crunch to be sure," says Andrea Taylor, managing director of the Investment Industry Association of Canada (IIAC) in Toronto. "We'd like to see the final legislation passed on this as soon as possible, perhaps when the House of Commons sits again in the fall, so we can keep things moving."
In April, Department of Finance Canada released draft legislation aimed at implementing the Common Reporting Standard (CRS), which was developed by the Organization for Economic Co-operation and Development in 2014. The draft legislation is out for comment until July 15, 2016.
Beginning in July 2017, Canadian banks and other financial services firms will begin identifying accounts belonging to individuals who are tax residents of foreign countries, and will start reporting that information to the Canada Revenue Agency (CRA). In turn, the CRA will exchange that information with other jurisdictions in 2018.
More than 100 countries have committed to implementing the CRS, including the U.K., Germany, France, Switzerland, Hong Kong and Canada. Each country must pass legislation based on the CRS framework to enact the regulatory regime.
The OECD modelled the CRS on the U.S. Foreign Account Tax Compliance Act (FATCA), a law passed in the U.S. in 2010 that compels global banks to report on their U.S. clients to the U.S. government. Last year, Canadian banks began implementing FATCA under a reciprocal intergovernmental agreement (IGA) between Canada and the U.S. Notably, however, the U.S. government has not signed on to the CRS.
"The CRS is very much the logical 'follow' of FATCA," says Richard Marcovitz, partner in the tax division of PricewaterhouseCoopers LLP in Toronto.
In general, Finance Canada's draft legislation to implement the CRS appears to harmonize its processes and procedures with those already in use to implement FATCA at Canadian firms. That's an important consideration, Taylor says, for matters such as opening a client account.
"Client self-certification is required for both FATCA and the CRS," says Taylor, referring to the process of clients attesting to their possible foreign tax residency status. "Logically, combining those makes sense so you have fewer forms and processes for clients on account openings. If there are differences between the two regimes, that's going to make any sort of streamlining very challenging."
One primary issue identified by the IIAC is that while the IGA between Canada and the U.S. excludes RRSPs, RRIFs and tax-free savings accounts (TFSAs) as accounts that must be reported, there is no such exception for TFSAs in the draft legislation to implement the CRS, which creates a compliance mismatch, Taylor says.
"Not excluding TFSAs doesn't make sense," Taylor argues. "How can [TFSAs] be considered a low risk of tax evasion under FATCA, and not under the CRS? Our hope is that by the time the legislation is tabled, TFSAs will be on that list of excluded accounts."
The IIAC is in communication with Finance Canada on this issue, and will be submitting a formal comment on the draft legislation, Taylor says.
Another issue is that self-certification under the CRS, which is a global regime, may present challenges that weren't as prominent under FATCA.
"For example," Taylor says, "say you have a client who's a tax resident of France. In order to complete the account opening self-certification process validly, [that client] should be providing his or her French tax information number. Will the client know [to provide] that information, or is it something they will have to go back and obtain? That [need] can get quite challenging if there's additional followup for that accountholder in order to complete the opening."
Both the CRS and FATCA, as well as numerous other initiatives that have been introduced related to tax-information collection and exchange, are part of a larger global push to combat offshore tax evasion and aggressive tax planning.
Cash-strapped governments continue to seek additional tax revenue, and the release earlier this year of the so-called Panama Papers, a massive leak of 11.5 million financial documents related to offshore corporations listed by a Panamanian law firm, has only raised the issue's profile among the public.
"A voluntary tax system only works when people believe there is an element of fairness to it," says Rick Robertson, associate professor with the Richard Ivey School of Business at the University of Western Ontario in London, Ont.
With the implementation of FATCA, and now the CRS, the evolving trend, Marcovitz says, has been for governments to "deputize" financial services institutions to assist with identifying potential tax non-compliance, and thus absorb some of the costs of adopting compliance processes.
"Governments are saying to financial services institutions: 'You're really the ones that have the information on what's going on'," Marcovitz says. "'In order [to continue] to operate, you're going to have to perform certain tasks to assist the governments in discharging their functions'."
© 2016 Investment Executive. All rights reserved.