The April 21, 2015 Federal budget released by the Conservative Government includes updates on Canada’s involvement in the BEPS project and how Canada intends to fulfill its obligations to implement an automatic exchange of tax information with the G-20. Notably (with the exception of the common reporting standard discussed below), for the first time in a number of years, the 2015 Federal Budget does not contain proposed anti-avoidance legislation aimed at international tax matters.
In the 2015 budget papers, the Government said that the input received from Canadian stakeholders on the BEPS project of the OECD/G20 has helped shape Canada’s ongoing participation in discussions. It looks forward to the conclusion of the project and to discussions within the international community on the implementation of recommendations. The government emphasised that it will seek to balance tax integrity and fairness with the competitiveness of Canada’s tax system. “Taxes are one of the main factors that drive investment decisions and the Government is committed to maintaining Canada’s advantage as an attractive destination for business investment.”
The Government’s expressed approach to BEPS issues seems to reflect a gradual softening of the attitude taken by the Department of Finance in recent years. For example, in mid-2013 the Department released a consultation paper on possible measures to combat treaty shopping. The product of this consultation was a proposed treaty shopping rule, released in the 2014 Federal Budget, which appeared to ignore many of the concerns raised by professional organizations and advisory firms during the consultation process. Issues with the proposed rule included its inconsistency with existing treaties, its broad and uncertain language, and the absence of transitional relief for existing foreign investors in Canada. The proposed rule would also put Canadian companies in the uncomfortable position of determining whether their foreign investors meet a series of complicated tests for treaty relief from withholding tax. Before long, the Canadian media reported that the proposed rule was having a chilling effect on inbound foreign investment. 1 In August 2014, the Government shelved the proposed Treaty Shopping Rule, saying that it would await further work by the OECD/G-20 in relation to the BEPS initiative.
In its 2015 Budget, the Government seems to recognise that certain BEPS proposals, if rashly implemented, could negatively impact foreign investment into and by Canadian companies. It is too soon to say what its final line on the subject will be.
Automatic Exchange of Information Process
The 2015 Budget papers also provided an update on Canada’s commitment to fulfil its obligations towards a multinational automatic exchange of tax information. The G-20 leaders agreed in November 2014 that a system for the automatic exchange of tax information would be implemented by 2017 or 2018. The stated purpose of the exchange of information is to promote compliance and combat tax evasion. Under the new standard, foreign tax authorities will provide information to the Canada Revenue Agency (“CRA”) about financial accounts in their jurisdictions held by Canadian residents, and the CRA will provide reciprocal information regarding Canadian accounts held by foreigners.
According to the 2015 Budget papers, the Canadian Government proposes to implement a common reporting standard on July 1, 2017, with a first exchange of information to occur in 2018. Financial institutions will be required to implement due diligence procedures to identify accounts held by non-residents and report certain information relating to these accounts to the CRA. However, they will not be required to report accounts held by Canadian residents with foreign citizenship.
The Budget papers state that “the standard includes safeguards to protect taxpayer confidentiality and ensure exchanged information is used only by tax authorities and only for tax purposes.” As of the July 1, 2017 implementation date, financial institutions will be expected to have procedures in place to identify accounts held by non-residents of Canada and to report the information to the CRA.
In the last year or two, Canadian financial institutions have been forced to incur enormous costs to comply with Foreign Account Tax Compliance Act (FATCA) reporting in accordance with the Inter-Governmental Agreement (“IGA”) between Canada and the United States. FATCA forces financial institutions to identify US account-holders to avoid punitive withholding taxes. Under the IGA, Canadian financial institutions are required to report US citizen account-holders to the CRA, which turns the information over to the Internal Revenue Service in the US. The new systems and training required to comply with FATCA have cost Canadian banks an estimated one billion Canadian dollars. 2
One hopes that the financial institutions’ new FATCA systems will be robust enough to enable them to meet their additional obligations under the G-20 common reporting standard. Some may have foreseen new requirements on the horizon as early as May 2014, with the first adoption by the OECD of the concept of an automatic information exchange system. Even so, it would be impossible to determine the exact format that such reporting would take in any particular country, and additional costs to adapt financial institutions’ existing systems seem likely.