Yesterday, the CBC reported that the CRA has transferred more than 1.6 million Canadian banking records to the United States Internal Revenue Service (“IRS”) since an information sharing agreement was entered into between the two countries in 2014. The information related to 150,000 Canadian bank accounts in 2014, 300,000 accounts in 2015, and 600,000 accounts in each of 2016 and 2017.
The Intergovernmental Agreement for the Enhanced Exchange of Tax Information under the Canada-U.S. Tax Convention, which has been implemented by Canadian legislation, provides lengthy and detailed rules with respect to the information that the government of Canada is required to transfer to the U.S. The agreement generally requires Canada to automatically transfer information to the U.S. in each year regarding Canadian bank accounts with “U.S. indicia”, unless the Canadian financial institution has obtained a self-certification and supporting evidence establishing that the account holder is not a U.S. citizen or resident for tax purposes. The U.S. indicia include:
- identification of the account holder as a U.S. citizen or resident;
- unambiguous indication of a U.S. place of birth.;
- a current U.S. address or telephone number;
- standing instructions to transfer funds to the U.S.;
- a power of attorney or signing authority granted to a person with a U.S. address; and
- an “in-care-of” or “hold mail” address that is the sole address the financial institution has on file.
The information to be transferred to the U.S. by the CRA in each year includes, among other details:
- names and addresses of account holders;
- account numbers;
- account balances or values; and
- the amount of interest credited to the account.
The policy justification for the release of this private information to the U.S. is to assist in combatting tax evasion by persons holding foreign accounts.
The agreement similarly requires the U.S. to provide information to Canada. However, the CRA has not disclosed how many records it has received from the U.S. under the agreement.
The transfer of information is made without notice to Canadian account holders either prior to or subsequent to the transfer. However, the CRA has stated that if requested by a taxpayer, the CRA will confirm whether information pertaining to that individual or entity has been provided to the U.S. The CRA has not stated that it will disclose to the taxpayer precisely what information was transferred.
Once information has been transferred to the United States, a Canadian taxpayer may be left with little remedy, even if he or she learns that the transfer occurred and even if the transfer is demonstrably non-compliant with the legislation. Therefore, taxpayers are left to trust and hope that financial institutions and the CRA are operating in complete compliance with the rules.
Section 241 of the Income Tax Act protects taxpayer information in the hands of the CRA from disclosure outside of the CRA in some circumstances. However, the exceptions to the protection have become more and more numerous over the years. The transfer of information pertaining to 600,000 Canadian bank accounts to a single country in a single year demonstrates just how porous this privacy protection is.
The Canadian legislation that permits the automatic transfer of financial information to the U.S. under the agreement discussed above is currently subject to a constitutional challenge before the Federal Court of Canada. Guidance from a trial court, and perhaps even an appellate court, is important to ensure that intergovernmental agreements for the sharing of financial information do not sacrifice privacy in a manner that fails to protect constitutional rights.