Canada and the exchange of tax information

Developed jointly by the Council of Europe and the OECD in 1988, this international agreement provides for all possible forms of administrative co-operation between States in the establishment and collection of taxes. Unless the signatory countries have reservations, the Convention applies to all direct and indirect taxes, except for customs duties which are covered by other international instruments.

The multilateral convention entered into force on 1 April 1995 when it was ratified by Denmark, Finland, Norway, Sweden and the United States. The Convention was amended by the 2010 Protocol in accordance with the OECD’s international standard on information exchange for tax matters, and its signature was open to all jurisdictions^[3].

Canada, which had signed the original convention in 2004, ratified the amended convention on November 21, 2013, and it entered into force in 2014^[4].To date, 147 jurisdictions are parties to the amended Convention; it is in force in 139 countries or jurisdictions^[5].

This multilateral agreement consolidates the standard for exchange of information on request and provides a framework for the development of an automatic exchange standard. Briefly, it contains mechanisms for the exchange of tax information on request, as well as spontaneous and automatic exchanges. Article 6 of the multilateral convention allows the competent authorities of the parties to the Convention to mutually agree on the procedures to be followed in the context of automatic exchange of information for tax matters^[6]. The Convention also specifies the provisions common to various forms of assistance, including the information to be provided by the requesting state, the response to the request for assistance, and the limits of the obligation to provide assistance. There are some differences between the original and amended Convention, notably the suppression of the article on the possibility of declining a request for assistance.

Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information

In 2013, following the implementation of the Foreign Account Tax Compliance Act (FATCA), which established the automatic exchange of information between the United States and several countries, including major European countries and Canada, the OECD began its work to develop a common reporting standard for the automatic exchange of financial account information^[7]. In 2014, more than 50 jurisdictions signed the Multilateral Competent Authority Agreement, an international framework agreement permitting the automatic exchange of information in accordance with the OECD’s common reporting standard^[8].

This agreement is based on Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. It specifies the details of the information to be exchanged, as well as the time and matter of exchanges. To summarize, financial institutions are responsible for reporting details of financial assets they hold on behalf of taxpayers who originate from states exchanging information with the jurisdiction in which they are located^[9]. The information must be reported to the tax authorities of the latter jurisdiction. Tax administrations then exchange this information within nine months of the end of the calendar year to which it relates^[10]. Although the agreement is multilateral, exchanges between two signatories are activated following a notification process that requires, among other things, that each country has passed the necessary national legislation to implement the standard for automatic exchange of tax information, as well as a list of jurisdictions with which automatic exchange, reciprocal or not, is intended^[11].

As of today, 120 jurisdictions, including Canada, have signed this multilateral agreement. The first exchanges took place in 2017 or 2018, depending on the country^[12]. As of October 2022, more than 4900 bilateral automatic exchange relationships had been activated between jurisdictions committed to implementing the common reporting standard^[13]. In the case of Canada, 68 bilateral relations and 23 non-reciprocal automatic exchange relationships have been activated to date under this agreement. The automatic exchange of information with the United States under FATCA has also been effective since 1 January 2015.

Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports

In the context of the BEPS project launched with the G20 in 2013 to combat international profit shifting and tax base erosion, the OECD recommended the implementation of Country-by-Country Reporting, a standardized form to be completed by multinational enterprises with a total consolidated revenue of at least EUR 750 million^[14]. Among other things, its implementation was expected to improve the analysis of international profit shifting by providing relevant data to tax administrations^[15]. The form includes information on total taxes paid, profits, sales, assets and employees by jurisdiction, for each of the subsidiaries of a multinational, and is submitted annually to the tax authority of the jurisdiction of tax residence of the ultimate parent entity. The exchange of reports allows countries to have a more comprehensive picture of the activities of multinationals operating on their territory and help tackle tax base erosion generated by the international transfer of profits.

Against that background, the OECD developed the Multilateral Competent Authority Agreement on the Automatic Exchange of Country-by-Country Reports. It is largely based on the Multilateral Agreement on the Automatic Exchange of Financial Account Information and is also based on article 6 of the Multilateral Convention on Mutual Assistance. For exchanges to be effective between two signatories, each competent authority must have completed the notification process, which requires, inter alia, the establishment of the appropriate domestic legislation and a list of jurisdictions with which automatic exchange, reciprocal or not, is intended^[16].

Canada is one of the 98 signatories of this multilateral agreement^[17], and the first exchanges of information between signatories began in June 2018^[18] .As of October 2022, the OECD identified more than 3300 active bilateral automatic exchange links between states that had committed to exchange country-by-country reports^[19]. Canada has 72 activated exchange relationships, including 56 bilateral relationships and 16 non-reciprocal relations to Canada.

Bilateral tax treaties and tax information exchange agreements govern the exchange of information upon request between Canada and 119 states. Also, since the Convention on Mutual Administrative Assistance in Tax Matters entered into force, Canada can exchange information upon request with other parties to the multilateral convention, therefore providing an on-request exchange mechanism for 36 additional jurisdictions as of July 11, 2023^[20].

Bilateral Tax Treaties

Bilateral tax treaties aim to avoid double taxation and prevent tax evasion with respect to taxes on income and on capital. All conventions signed by Canada are generally based on the OECD’s model convention, which dates to 1958^[21]. The OECD’s model convention contains a specific provision for the exchange of information on request between signatories on a bilateral basis (Article 26). Briefly, this provision does not mean that tax administrations have to gather information they could not obtain otherwise because of their domestic legislation or to provide information disclosing any trade, industry or professional secret.

Canada’s bilateral tax treaties include Article 26 allowing the exchange of information between tax authorities. Since the initial publication of the OECD’s model convention, Canada has signed bilateral treaties with 96 countries^[22]. Of the conventions signed, 94 are currently in force, half of which were signed between 1995 and 2004.

In practice, for Canada, bilateral tax treaties allow for the exchange of information on request, to the extent that it is reasonable to expect that such information will be relevant to the application of tax provisions. This information is mainly for income tax purposes, however, for most tax treaties, the exchange of information could also be possible for other types of taxes than those specifically covered by the convention.

In general, the wording of the last paragraphs of article 26 shows some variations across conventions, mainly to reflect refinements in their interpretation over time. These variations in wording do not necessarily imply different applications of the provisions governing the exchange of information. In the case of treaties that have been amended or signed in the last two decades, article 26 is generally similar from one treaty to another, with a few differences. For example, some agreements further restrict the use of information exchanged in public hearings or court proceedings.

Tax Information Exchange Agreements (AERF)

The TIEA is a bilateral treaty whose main objective is to provide a mechanism for obtaining tax information upon request. Signatories of TIEAs with Canada are countries with which Canada does not have a bilateral tax convention; most are jurisdictions without a tax system or with low tax regimes. The OECD developed a model bilateral agreement in 2002^[23]. Between 2009 and 2017, Canada signed 25^[24] such agreements with countries considered tax havens, primarily to counter tax evasion; 24 agreements are in force to date in 26 jurisdictions^[25]. Under the Income Tax Act, as it is the case for bilateral tax treaties, Canadian businesses can repatriate the profits of their subsidiaries located in signatory states in the form of dividends, without being further taxed in Canada^[26].

The exchange generally applies only for income tax purposes, but sometimes extends to all taxes (for example, in the case of the agreement with the Cook Islands). The agreement specifies the obligations of the requesting party to provide specific information to support the request, as well as those of the other party, which are to take all measures to respond to the request, unless it would give rise to disproportionate difficulties.