Good afternoon. My name is Darren Hannah and I am the Acting Vice-President of Policy and Operations with the Canadian Bankers Association (CBA). I am very pleased to be here today at the Committee’s invitation to discuss Bill C-31, and in particular Part V, the Canada-U.S. Enhanced Tax Information Exchange Agreement Implementation Act, which contains provisions to enact the intergovernmental agreement with the United States.

The CBA works on behalf of 60 domestic banks, foreign bank subsidiaries and foreign bank branches operating in Canada and their 275,000 employees.

The CBA strongly supports the government’s decision to enter into the intergovernmental tax information sharing arrangement with the U.S. because it relieves Canadians of the burden they would face otherwise due to the U.S. Foreign Account Tax Compliance Act (FATCA). As you know, FATCA is legislation that was passed in the United States in 2010 and is intended to detect U.S. persons who are evading U.S. tax using financial accounts held outside the U.S. Under FATCA, non-U.S. financial institutions would be required to report relevant information to the U.S. tax authorities about financial accounts held by identified U.S. persons.

The CBA has been very clear on FATCA from the beginning. While we understand that the U.S. government is attempting to address tax evasion, we have opposed how they are going about it with FATCA. Canada is not a tax haven and Americans do not move here to evade taxation. We actively opposed FATCA publicly with appearances before and submissions to U.S government authorities.

Unfortunately and despite worldwide efforts by the CBA and others, U.S. officials have no intention of repealing FATCA and simply ignoring FATCA is not an option. Non-compliance would mean that both the financial institution and every customer of that financial institution, both in Canada and around the world, would face a 30 per cent withholding tax on any U.S.-source income and the sale of any U.S.-source investments, and potentially withholding tax on Canadian source income due to so-called “foreign pass-through payments” provisions.

This means that any bank customer or retiree that has U.S. mutual funds, stocks or bonds would have billions of dollars of income lost to the withholding tax, even if they had no other ties to the U.S.

For financial institutions, non-compliance would effectively mean they would no longer be able to do business in the U.S. capital markets or with any institutions that do business in the U.S. capital markets – which is effectively every major financial institution in the world.

However, the real problem facing U.S. citizens living abroad is not taxpayer information sharing, but rather the structure of the U.S. tax system. The U.S. is the only country in the world that taxes on the basis of citizenship rather than residency. If the U.S. switched to a residency-based tax system then the information of U.S. persons living abroad would not need to be shared with U.S tax authorities.

To ensure that Canadians did not face the substantial negative consequences that could have come with FATCA, on February 5, 2014, the Canadian government announced that it had entered into an intergovernmental agreement (IGA) with the U.S. government under the existing CanadaU.S. Tax Convention. The requirements of the IGA are reflected in proposed changes to the Income Tax Act in Canada under Bill C-31, and financial institutions in Canada will be required to comply with the changes under Canadian law.

The decision of the Government of Canada to enter into an intergovernmental agreement mirrors that taken by governments in most other developed countries. Governments around the world have decided that developing bilateral intergovernmental agreements with the U.S. is the best way to ensure that the domestic rights of their citizens are respected while still sharing relevant taxpayer information bilaterally. To date, 30 countries have IGAs with the U.S., including the United Kingdom, France, Germany, Spain, Italy and Australia; and a further 30 have reached agreements in principle with the U.S. including Sweden, New Zealand, Brazil, and India.

We have agreed with the federal government that entering into an intergovernmental agreement is the best approach under the circumstances. We recognize and support the efforts that the Canadian government has made.

Under the IGA, financial institutions in Canada will report relevant information on accounts of U.S. persons to the Canada Revenue Agency (CRA) rather than directly to the U.S. Internal Revenue Service (IRS). The CRA will then exchange the information with the IRS through the provisions in the existing Canada-U.S. Tax Convention. The 30 per cent FATCA withholding tax will no longer apply to retail clients of Canadian financial institutions.

In accordance with the IGA requirements, financial institutions in Canada will begin applying their due diligence procedures starting in July 2014. Information reporting by financial institutions to the CRA and the exchange of information will begin in 2015

The IGA requirements will be part of Canadian tax law and all financial institutions will have to abide by these Canadian laws. Some categories of financial institutions have reduced requirements, such as small deposit-taking institutions and those that only serve local clients or only issue credit cards. Very small deposit-taking institutions with assets of less than $175 million may be exempt from reporting.

So what does this mean for bank customers in Canada? The vast majority of Canadian bank customers are not U.S. persons and for them, the IGA will have no impact. Under the IGA, banks will review their current customer information. If there is no information indicating that an individual may be a U.S. person, then they will not have to do anything.

If a customer has an existing account and there is an indication that they may be a U.S. person, or if they are opening a new account, their financial institution may ask them to provide additional information or documentation to demonstrate that they are not a U.S. person.

However, if they choose not to provide this additional documentation upon request, the financial institution may be required by Canadian law to report the account information to the CRA.

Under the IGA and Canadian banking law, proof of citizenship is not required to open a bank account. For the vast majority of Canadians they can open an account with financial institutions as they always have. However, if there is some indication in a new or existing account that they might be a U.S. person, then their financial institution may ask them to self-certify that they are or are not a U.S. person for tax purposes.

While the intergovernmental agreement will place an additional regulatory burden on Canadian banks, it is simply one part of the new global reality. The G20 has stated publicly that the best method of addressing tax evasion internationally is through the expanded use of tax information sharing and they have asked the OECD to develop “a new single global standard for automatic exchange of information.”

In conclusion, as I’ve said, FATCA is here to stay and ignoring it is not an option. We fully support the government’s work in putting in place an intergovernmental agreement. I look forward to your questions. Thank you.