New tax rules could erode financial privacy
Security fears; Global authorities to begin sharing sensitive data
If you have a bank account somewhere overseas, that information will make its way back to the Canada Revenue Agency (CRA) in a couple of years.
In 2018, international tax authorities will begin automatically sharing financial information under the terms of the OECD’s common reporting standard (CRS).
The objective is to curb international tax evasion, but the cost is an erosion of personal privacy.
“CRS is an indication of how small the world has become and how difficult it is to keep your private information private,” says Roy Berg, director of U.S. tax law with Moodys Gartner Tax Law LLP in Calgary.
The OECD approved the new global standard in July 2014. By October of that year, more than 50 countries, including Canada, signed a commitment to implement it. To date, more than 60 countries have signed on. Canada has promised to adopt the standard starting July 1, 2017 with the first exchange of financial account information scheduled for September 2018.
Under the new standard, foreign tax authorities will provide information to the CRA about financial accounts in their jurisdictions held by Canadian residents. The CRA will reciprocate by providing the same information about accounts in Canada held by residents of foreign jurisdictions. To make this happen, financial institutions in the countries that have adopted the new standard will be required to report non-residents’ bank account information back to the taxpayer’s home jurisdiction.
It’s pretty much the global version of the U.S. Foreign Account Tax Compliance Act (FATCA), a bold piece of legislation the U.S. passed back in 2010. “The reporting obligations and mechanics of exchanging this information are based largely on the architecture of FATCA,” Berg says. For FATCA to happen, Canada entered into an Intergovernmental Agreement (IGA) with the U.S. and adopted legislation in 2014 that allows Canadian banks to hand the names and financial information of U.S. depositors to the CRA, which will then pass it over to the U.S. Internal Revenue Service (IRS).
The program is controversial. Canada’s participation in this system is the subject of an ongoing federal lawsuit in Canada.
Meanwhile, financial institutions and tax professionals in Canada are awaiting similar draft legislation that will pave the way for the CRS and the automatic exchange of financial information between international tax jurisdictions. The plan is for Canada to enter into reciprocal CRS agreements with the more than 60 countries that have so far committed to the new standard. Where the CRS differs from FATCA is the trigger (residency vs. citizenship) and the definition of entities subject to the reporting standard.
“Under FATCA, you are trying to get information about U.S. citizens. Under the OECD model you are trying to get information about residents in a given jurisdiction,” explains Bill Corcoran, a tax partner in the New York office of Osler, Hoskin Harcourt LLP.
The test to determine who is a resident for tax purposes can differ from country to country. That adds complexity and ambiguity to the mix. For example, Canadian banks will need to determine if any of their depositors are residents of the U.K. so they can turn that information over to the CRA, which will then turn it over to the U.K. tax authority, Her Majesty’s Revenue and Customs (HMRC). U.K. banks will provide the same information for residents of Canada to the HMRC, which will then send it the CRA. This process will have to be repeated for each of the more than 60 jurisdictions participating in the CRS system.
When it comes to defining the products and entities subject to the CRS and what is exempt, there is work to be done.
“In the Canada-U.S. IGA, for example, there are annexes that provide more detail about who is exempt and whether the rules can be relaxed,” Corcoran says. “Some of that has not yet found its way into what the OECD is proposing.”
Also unknown at this point is what sanctions a financial institution might face for noncompliance.
Perhaps the biggest distinction between the CRS and FATCA is the fact that the U.S. Treasury Department has an important tool to encourage compliance: a 30-percent withholding tax on U.S. source income for financial institutions that don’t comply. “It has been the primary factor in how successful the implementation of FATCA has been throughout the international financial community,” Corcoran says. “The CRS does not have the same teeth behind it.”
Regardless of the distinctions, for Berg personal privacy and security are the biggest issues that arise out of the reporting systems mandated by both the FATCA and CRS. “Lots of personal financial data will be exchanged over the Internet. That is a big, tempting target for cyber-criminals and state-sponsored cyber-criminals. No one’s talking about the security of the data.”
COURT DECISION COULD AFFECT ELECTION
The first exchange of information under the U.S. Foreign Account Tax Compliance Act (FATCA) is scheduled to happen next month – unless a legal challenge of the domestic legislation enabling FATCA puts a stop to it.
The plaintiffs, two dual Canadian-U.S. citizens, claim that the legislation contravenes the U.S.-Canada Treaty, and that the treaty prohibits the exchange of information required by FATCA. The Federal Court of Canada has committed to issuing its decision in the case before Sept. 15, just a few weeks before Canadians elect a new federal government.
“If the courts hold for the plaintiff, the planned implementation of CRS is also in jeopardy because it is modelled on FATCA,” says Roy Berg, director of U.S. tax law with Moodys Gartner Tax Law LLP in Calgary.
CRS, or the common reporting standard, is a proposed tax information exchange system that would swap financial data between more than 60 countries. CRS is a global version of the system that has been set up to exchange information between Canada and the U.S. under FATCA.
Oral arguments took place Aug. 4 and 5 in Vancouver. The court said there was an agreement between the parties that Canada would not provide information before Sept. 15. The judge said he would seek to issue a ruling before the information exchange begins.
The plaintiffs, Gwen Deegan, a graphic designer from Toronto, and Ginny Hillis, a retired lawyer from Windsor, are seeking to permanently prevent the minister of national revenue from disclosing to the U.S. government the private banking information of Americans who are also Canadian citizens or residents. Their argument is that the legislation compelling the minister to do so is outside the scope of the governing tax treaty between Canada and the U.S. “This is big stuff and it’s right around the corner,” Berg says. “And in light of the federal election, the decision may have electoral consequences.”
