Published: November 5, 2024
Introduction: CRA Has the Ability to Exchange Tax-related Information with Foreign Taxing Authorities, Subject to Bi-lateral Tax Treaties And Tax Information Exchange Agreements
The trend of digitizing tax-related information provides taxing authorities around the world an invaluable opportunity to exchange information. Bilateral tax treaties generally include tax-information-exchange provisions that allow the countries to exchange information as necessary for various purposes. For example, Article 24 of the Convention Between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland (the “Canada-UK Treaty”) stipulates that the Canada Revenue Agency and HM Revenue & Customs can exchange “such information (being information which is at their disposal under their respective taxation laws in the normal course of administration as is necessary for the carrying out of the provisions of [the Canada-UK Treaty] or for the prevention of fraud or for the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of this Convention.”
The information-exchange provision in the Canada-UK Treaty is relatively simple, compared to the provisions included in the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital (the “Canada-US Treaty”). Canada and the United States of America also entered into the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act (the “Canada-US Enhanced TIEA Act”), in addition to the Canada-US Treaty, due to close economic ties and the intertwined economies and the similarities between the two domestic tax systems. The goal is to enable increased cooperation and engagement between the two taxing authorities, the Canada Revenue Agency and the Internal Revenue Service.
As of October 30, 2024, 24 countries without tax treaties with Canada opted to have a Tax Information Exchange Agreement (TIEA) with Canada. Typically, TIEAs are entered into by high-tax countries with low- or no-tax countries with which these countries would not otherwise have a tax treaty, allowing the countries to exchange information on the same basis as the tax information-exchange provisions of bilateral tax treaties. Panama, for example, entered into the Agreement Between Canada and The Republic of Panama for Tax Cooperation and the Exchange of Information Relating to Taxes (the “Canada-Panama Agreement”), which has been in force since December 6, 2013. Pursuant to the Canada-Panama Agreement, the taxing authorities of the two countries, upon request, can exchange information that is “foreseeably relevant to the administration and enforcement of the domestic laws” concerning all taxes imposed or administered by Canada and Panama, subject to specific limitations in the Canada-Panama Agreement.
Tax Information-Exchange Provisions In Bilateral Tax Treaties: Different Bilateral Tax Treaties Can Have Different Tax Information-Exchange Provisions.
A bilateral tax treaty allocates taxing rights, provides mechanisms to resolve tax-related issues, and defines commonly used terms in tax systems for the two countries that entered into such an agreement. Tax treaties, inevitably, have to include provisions that govern the sharing of information between the treaty countries. The tax information-exchange provisions included in the bilateral tax treaties can therefore be quite different, depending on how closely the two countries work together. Nevertheless, tax-information-exchange provisions generally follow Article 26 of the OECD Model Tax Convention on Income and on Capital:
- The competent authorities of the contracting states shall exchange such information as is foreseeably relevant for carrying out the provisions of the tax treaty or to the administration/enforcement of the domestic laws concerning taxes, so long as the taxation thereunder is not contrary to the tax treaty.
- Any information received shall be treated as secret in the same manner as information obtained under the domestic laws of the countries and shall be disclosed only to persons or authorities concerned with the tax matters. Such persons or authorities can only use the information for its intended purposes stipulated in the tax treaty unless otherwise permitted.
- The provisions do not impose obligations on any countries to carry out administrative measures with the law and administrative practice of other countries, to supply information which is not legally obtainable, or to supply information which would disclose any trade, business, industrial, commercial, or professional secret or trade process, or information, the disclosure of which would be contrary to public policy or public order.
Tax treaties can contain different information-exchange provisions or be subject to additional information-exchange agreements, deviating from the templated language in the OECD model. The Canada-US Enhanced TIEA Act imposes extra due diligence and reporting obligations on financial institutions to verify, certify, or clarify their clients’ tax status.
The scope of the Canada-US Enhanced TIEA Act has extended much beyond what is envisioned by Article 26 of the OECD model. A less extreme example of expanding the scope of information exchange can be found in the Exchange of Notes Concerning the Automatic Exchange of Information between Canada and Switzerland – 2017. While many tax treaties require the contracting states to make a request for any information to be exchanged, Canada and Switzerland, since 2017, have implemented automatic exchange of financial account information in tax matters on a reciprocal basis. Although the two countries did not commit to exchange information on an automatic or a spontaneous basis, the Convention between Canada and Switzerland For the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital provided the basis for Canada and Switzerland to implement the automatic exchange of information.
A Tax Information Exchange Agreement Bridges Gaps In Tax Information Between Countries Without Bilateral Tax Treaties
A Tax Information Exchange Agreement (TIEA) is a formal agreement between two countries that facilitates the exchange of information pertinent to tax matters. Unlike a bilateral tax treaty, a TIEA is naturally narrow in scope, focusing primarily, if not solely, on the exchange of information related to administration and enforcement of domestic tax laws.
In other words, the primary goal of TIEA is to allow taxing authorities to obtain information and to attempt to close loopholes related to tax matters. The effectiveness of TIEAs is often questioned due to limitations and challenges associated with the implementation and enforcement of TIEAs. As TIEAs are often entered into between a developed country and a developing country, the developing country likely has insufficient resources and limited capacity to assist with the request for information. And when the reverse occurs, confidentiality and privacy concerns often arise.
Restrictions On Exchange Of Information: Protecting Exchanged Information Through Bilateral Tax Treaties And Tax Information Exchange Agreements
In an era where taxing authorities exchange information on a regular basis, it is important to understand the restrictions imposed on the taxing authorities regarding the obtained information. The sensitive nature of tax information warrants strict restrictions on its use and disclosure. As such, bilateral tax treaties and TIEAs tend to share a similar rule: the obtained information is not permitted to be disclosed to parties that are not authorized to access such information, even if the party is a court or an administrative tribunal.
These confidentiality obligations are especially significant given the increasing volume of information exchanged globally. However, it is unfortunate that the CRA does not seem to have a concrete and effective policy for protecting taxpayer’s information even after repeated cyberattacks on the CRA. The CRA has even admitted that it vastly underreported cyberattacks against Canadian taxpayers to the Parliament. Yet, the CRA has yet to take any meaningful steps to resolve the confidentiality and privacy issues.
Pro Tips – Be Cautious About The Information You Share With The CRA
A Canadian tax resident is often asked to disclose certain information to the CRA in relation to his or her tax matters, whether it is for filing an income tax return, during a tax audit, or as part of a voluntary disclosure application. However, not all information requested by the CRA may be directly related to the tax matters that are being examined. The CRA, nevertheless, will be able to use the information obtained to conduct further investigations. In addition, if a taxpayer has dealings outside of Canada, in a country that either has a bilateral tax treaty with Canada or a tax information-exchange agreement with Canada, the CRA may provide the provided information to that country. Therefore, taxpayers must be cautious about sharing information with the CRA.
If the CRA requests information from you and you have concerns regarding the information to be provided, you should engage with one of our expert Canadian tax lawyers. Our expert Canadian tax lawyers can provide legal advice and assist you with understanding your rights as a taxpayer, your reporting obligations, and communication with the CRA.
FAQ
Can The CRA Provide My Information To the Taxing Authority Of Another Country?
Generally speaking, if a foreign country has a tax treaty or a tax-information-exchange agreement with Canada, the foreign country may be able to obtain your information from the CRA. The requested information must meet certain legal requirements, including but not limited to demonstrating that the information is necessary for administration and enforcement of domestic tax laws. The CRA, however, cannot disclose tax-related information to parties unrelated to the administration and enforcement of domestic tax laws, even if such party is a court or an administrative tribunal of the foreign country.
What Information Can The CRA Share With the Taxing Authority Of Another Country?
The CRA can only share information with the taxing authority of another country that is permitted in the applicable bilateral tax treaty or tax-information-exchange agreement. In general, only information related to administration and enforcement of domestic tax law or related to the implementation of the applicable treaty/agreement can be requested and shared. Some countries have special arrangements with the CRA that permit the automatic exchange of information. For example, financial institutions in Canada and the United States of America are required to verify the tax status of their clients and share the information with the taxing authorities.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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