Canada and the exchange of tax information

Double Tax Conventions: Emphasis on the EOIR standard

Double tax conventions are intended to avoid international double taxation and to prevent tax evasion with respect to taxes on income and capital. Canada’s double tax conventions are generally designed after the OECD’s model convention, which dates back to 1963^[1]. It includes the Article 26 concerning the exchange of tax information on a bilateral basis. This article governs the exchange of information on request between the contracting States. In brief, it does not require tax administrations to obtain information that they could not access according to their domestic laws, or to provide information disclosing any trade, industry or professional secret.

The treaties currently in force in Canada include Article 26 concerning the exchange of information between tax authorities. Since the initial publication of the OECD’s model convention, Canada has signed double tax conventions with 96 countries^[2]. Ninety-three of these treaties are currently in force, half having been signed between 1995 and 2004.

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

In general, the wording of the last paragraphs of Article 26 varies slightly across double tax conventions, mainly reflecting refinements in their interpretation over time. However, these variations in the wording do not necessarily result in different implications of the provisions governing the exchange of information. In the case of the agreements that have been modified or signed over the past two decades, the Article 26 is generally similar from one country to another, with some exceptions, especially regarding the use of the exchanged information, for example through public hearings or proceedings.

The interactive figure Canada’s Current Double Tax Conventions shows the countries with which Canada can exchange information on request under the current tax treaties, as well as the jurisdictions that signed a previous convention with Canada^[3]. The countries are grouped by year of signature.

Convention on Mutual Administrative Assistance in Tax Matters: Consolidating the EOIR standard and providing a framework for the development of the AEOI standard

Developed jointly by the Council of Europe and the OECD in 1988, this multilateral Convention provides 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 taxes, including sales taxes but excluding customs duties, covered by other international instruments (Article 2 of the Convention).

The agreement came into force on April 1, 1995, when five countries ratified the Convention (Denmark, Finland, Norway, Sweden and United States). Although it was signed by Canada in 2004, the Convention was never in force in the country. The agreement was amended by the 2010 Protocol in accordance with the OECD’s international standard on EOIR^[4]. Canada ratified the amended Convention on November 21, 2013; it entered into force in 2014.

The agreement contains mechanisms for the exchange of tax information on request, as well as spontaneous and automatic exchanges. The article on the automatic exchange of tax information states: “With respect to categories of cases and in accordance with procedures which they shall determine by mutual agreement, two or more Parties shall automatically exchange the information referred to in Article 4.”^[5] However, no such agreement is currently in force between Canada and any other signatory. The Convention also specifies the provisions common to various forms of assistance, including the information to be provided by the applicant State, the response to the request for assistance and the limits to the obligation to provide assistance. There are some differences between the original and amended Conventions, notably the suppression of the article concerning the possibility of declining a request for assistance.

In addition to information exchange, the Parties to the Multilateral Convention may benefit from assistance in tax recovery and service of documents. However, pursuant to its reservations, Canada is not obligated to provide assistance to another country for tax collection or service of documents^[6].

Thus, since 2014, Canada can share information on request with the other signatories for which the Convention entered into force, to the extent that such information is foreseeable relevant to the application of tax provisions.

To date, 135 jurisdictions are part of the amended Convention; it is in force (or will be by the beginning of 2020) in 120 countries^[7]. The interactive figure Convention on Mutual Administrative Assistance in Tax Matters shows the signatories to the Convention, as well as the dates of signature and entry into force for each country.

Tax Information Exchange Agreements (TIEAs) : Implementing the EOIR standard with no or low-tax countries

A TIEA is a mechanism to obtain tax information from countries that have not signed a Double Tax Convention with Canada; most are jurisdictions without a tax system. The OECD has developed a model agreement on exchange of information in tax matters in 2002^[8].

Since 2009, Canada has signed 25 TIEAs^[9] with countries often considered to be tax havens, mainly in order to counter tax evasion. Twenty-four agreements are in force today^[10].

This mechanism is usually only for income tax purposes, but sometimes applies to all taxes (for example, in the case of the agreement with the Cook Islands). It governs the exchange of information upon request and specifies the obligations of the applicant State (i.e. the information to provide to support the request), as well as those of the requested Party, which are to take all measures to respond to the request unless it would give rise to disproportionate difficulties. While most agreements define fairly precisely the procedure governing the response of the requested authority (confirmation of receipt, delays, information to be given in case of refusal or difficulties), it is relatively vague in the case of 8 TIEAs.

The interactive figure Tax Information Exchange Agreements shows the States who have signed a TIEA with Canada and indicates the year of signature and the level of detail of the procedure governing the requested authority’s response.

Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information: Consolidating the AEOI standard

In 2013, in the wake of the implementation of FATCA, putting automatic exchange of tax information in place between the United States and several countries (including the major European countries and Canada), the OECD began to develop a common reporting standard (CRS) for the automatic exchange of financial account information^[11]. In 2014, more than fifty jurisdictions signed the Multilateral Agreement between Competent Authorities (CRS MCAA), an international framework agreement permitting the automatic exchange of tax information under the common reporting standard^[12].

The agreement is based on Article 6 of the multilateral Convention on Administrative Assistance in Tax Matters, which “requires the Competent Authorities of the Parties to the Convention to mutually agree on the scope of the automatic exchange of information and the procedure to be complied with.”^[13] The CRS MCAA specifies the details of the information to be exchanged, and the time and matter of exchanges. To summarize, financial institutions are responsible to report details of financial assets they hold on behalf of taxpayers from jurisdictions that exchange information with the jurisdiction in which they are located^[14]. The information must be reported to the tax authorities of the latter jurisdiction. Tax administrations then exchange this information in the nine months following the end of the calendar year to which it relates^[15]. Although the agreement is multilateral, exchanges between two signatories are only effective after a notification process which requires that each country have legislation in place to implement the standard, as well as a list of jurisdictions with which the automatic exchange, reciprocal or not, is intended^[16].

As of today, 107 jurisdictions, including Canada, have signed the CRS MCAA. The first automatic exchanges were planned in September 2017^[17].

The interactive figure Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information shows the countries that signed the agreement, the dates of signature and entry into force, as well as the state of the required legislation^[18].

Multilateral Competent Authority Agreement on Automatic Exchange of Country-by-Country Reports: Consolidating the AEOI standard

In the context of the BEPS (Base Erosion and Profit Shifting) Action Plan, the OECD recommended the implementation of Country-by-Country Reports (CbCR), standardized forms to be filled out by multinational groups with consolidated total revenue of EUR 750 million or more^[19]. According to the OECD, the implementation of CbCR should improve the data available to analyse and monitor the scale and economic effects of BEPS practices^[20]. This report will contain information on taxes paid, revenues, profits, sales, assets and number of employees per country, for each subsidiary of a multinational. It will be submitted annually to the tax authority of the jurisdiction of tax residence of the ultimate parent entity. The sharing of CbCR between jurisdictions will allow 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 Automatic Exchange of Country-by-Country Reports (CbC MCAA). Largely inspired by the CRS MCAA, it is based on Article 6 of the Multilateral Convention on Mutual Assistance^[21]; for exchanges to be effective between two signatories, each competent authority must have completed the notification process, which requires, among others, the implementation of appropriate domestic legislation and a list of jurisdictions with which the automatic exchange of CbCR, reciprocal or not, is expected^[22].

Canada is one of 83 signatories to the CBC MCAA^[23]. According to the CRA, the first exchanges of information with other jurisdictions were expected in June 2018^[24].

The interactive figure Multilateral Competent Authority Agreement on Automatic Exchange of Country-by-Country Reports shows the signatories to the agreement.

Canada and effective automatic exchanges of tax information

Since October 2016, many countries have completed the notification process required by the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. As of April 5th 2018, over 2700 bilateral exchange relationships have been activated between jurisdictions committed to a 2017 or 2018 timeline^[25]. In the case of Canada, as of December 9th 2019, 63 bilateral automatic exchange relationship with other jurisdictions had been activated under this agreement^[26], as well as 51 under the Multilateral Competent Authority Agreement on Automatic Exchange of Country-by-Country Reports^[27]. Automatic exchange of information with the United States under FATCA is effective since January 1, 2015.

The interactive figure Evolution of automatic exchange of tax information for Canada shows the automatic exchanges in effect between Canada and the other signatories of the CRS and CBC Multilateral Competent Authority Agreements. It will be updated periodically to reflect the evolution of the situation.

Overview

The interactive figure Mechanisms for the exchange of tax information available to Canada summarizes all international tax agreements to this effect involving Canada.