Canada
This report analyses the implementation of the AEOI Standard in Canada with respect to the requirements of the AEOI Terms of Reference. It assesses both the legal frameworks put in place to implement the AEOI Standard and the effectiveness of the implementation of the AEOI Standard in practice.
The methodology used for the peer reviews and that therefore underpins this report is outlined in Chapter 2.
Overall findings
AEOI legal framework
Canada’s legal framework implementing the AEOI Standard is in place but needs improvement in order to be fully consistent with the requirements of the AEOI Terms of Reference. While Canada’s international legal framework to exchange the information with all of Canada’s Interested Appropriate Partners (CR2) is consistent with the requirements, its domestic legislative framework requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (CR1) has deficiencies significant to the proper functioning of elements of the AEOI Standard. More specifically, Canada’s legislative framework does not incorporate the definition of Investment Entity in line with the requirements and provides for a jurisdiction-specific Non-Reporting Financial Institution that does not meet the requirements.
Overall determination on the legal framework: In Place But Needs Improvement
Effectiveness of AEOI in practice
Canada’s implementation of the AEOI Standard is on track with respect to the requirements of the AEOI Terms of Reference to ensure the effectiveness of the AEOI Standard in practice. This includes ensuring Reporting Financial Institutions correctly conduct the due diligence and reporting procedures (CR1) and exchanging the information in an effective and timely manner (CR2). Canada is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
Overall rating in relation to the effectiveness in practice: On Track
General context
Canada commenced exchanges under the AEOI Standard in 2018.
In order to provide for Reporting Financial Institutions to collect and report the information to be exchanged, Canada:
Under this framework Reporting Financial Institutions were required to commence the due diligence procedures in relation to New Accounts from 1 July 2017. With respect to Preexisting Accounts, Reporting Financial Institutions were required to complete due diligence procedures on High Value Individual Accounts by 31 December 2018 and on Lower Value Individual Accounts and Entity Accounts by 31 December 2019.
Following the initial Global Forum peer review, Canada amended its legislative framework to address issues identified, effective from 10 July 2020.
With respect to the exchange of information under the AEOI Standard, Canada:
is a Party to the Convention on Mutual Administrative Assistance in Tax Matters and activated the associated CRS Multilateral Competent Authority Agreement in time for exchanges in 2018; and
put in place two bilateral agreements.1
Table 1 sets out the number of Financial Institutions in Canada that reported information on Financial Accounts in 2021 as defined in the AEOI Standard (essentially because they maintained Financial Accounts for Account Holders, or that were related to Controlling Persons, resident in a Reportable Jurisdiction). It also sets out the number of Financial Accounts that they reported in 2021. In this regard, it should be noted that Canada requires the reporting of Financial Accounts held by all non-residents and some accounts may be required to be reported more than once (e.g. jointly held accounts or accounts with multiple related Controlling Persons), which is reflected in the figures below. These figures provide key contextual information to the development and implementation of Canada’s administrative compliance strategy, which is analysed in the subsequent sections of this report.
Table 2 sets out the number of exchange partners to which information was sent successfully by Canada in the past few years (including where the necessary frameworks were in place, containing an obligation on Reporting Financial Institutions to report information, but no relevant Reportable Accounts were identified). These figures provide key contextual information in relation to Canada’s exchanges in practice, which is also analysed in subsequent sections of this report.
In order to provide for the effective implementation of the AEOI Standard, in Canada:
the Canada Revenue Agency (the CRA, the tax authority) has the responsibility to ensure the effective implementation of the due diligence and reporting obligations by Reporting Financial Institutions and for exchanging the information with Canada’s exchange partners;
technical solutions necessary to receive and validate the information reported by Reporting Financial Institutions were put in place via “Web Forms applications or CRA Internet file transfer (XML)”; and
the Common Transmission System (CTS) is used for the exchange of the information, along with the associated file preparation and encryption requirements.
It should be noted that the review of Canada’s legal frameworks implementing the AEOI Standard concluded with the determination that Canada’s domestic legal framework is In Place But Needs Improvement and its international legal framework is In Place. This has been taken into account when reviewing the effectiveness of Canada’s implementation of the AEOI Standard in practice and where particular identified gaps in Canada’s legal frameworks directly impact its implementation in practice, these are mentioned below.
Findings and conclusions on the legal frameworks
The detailed findings and conclusions on the AEOI legal frameworks for Canada are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Domestic legal framework: Jurisdictions should have a domestic legislative framework in place that requires all Reporting Financial Institutions to conduct the due diligence and reporting procedures in the CRS, and that provides for the effective implementation of the CRS as set out therein.
Determination: In Place But Needs Improvement
Canada’s domestic legislative framework is in place and contains most of the key aspects of the CRS and its Commentary requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures, but it needs improvement in relation to the scope of Reporting Financial Institutions required to report information (SR 1.1). More specifically, Canada’s legislative framework does not incorporate the definition of Investment Entity in line with the requirements, and provides for a jurisdiction-specific Non-Reporting Financial Institution that does not meet the requirements.
SR 1.1 Jurisdictions should define the scope of Reporting Financial Institutions consistently with the CRS.
Canada has defined the scope of Reporting Financial Institutions in its domestic legislative framework in a manner that is largely consistent with the CRS and its Commentary. However, deficiencies have been identified. More specifically, Canada’s legislative framework does not fully incorporate the definition of Investment Entity in line with the requirements. In addition, Canada’s legislative framework provides for a jurisdiction-specific Non-Reporting Financial Institution that does not meet the requirements. The definition of Reporting Financial Institutions, including the provision of Non-Reporting Financial Institutions, is material to the proper functioning of the AEOI Standard.
Canada should amend its domestic legislative framework to ensure that its definition of Investment Entity includes all relevant Entities, not only those promoting or representing themselves to the public as an investment vehicle.
Canada should amend its domestic legislative framework to remove Labour Sponsored Venture Capital Corporations (LSVCCs) from its jurisdiction-specific list of Non-Reporting Financial Institutions as they do not meet the requirements, including not being established to provide benefits upon retirement, disability or death and not having limits on the contributions as required.
SR 1.2 Jurisdictions should define the scope of Financial Accounts and Reportable Accounts consistently with the CRS and incorporate the due diligence procedures to identify them.
Canada has defined the scope of the Financial Accounts that are required to be reported in its domestic legislative framework and incorporated the due diligence procedures that must be applied to identify them in accordance with the CRS and its Commentary.
SR 1.3 Jurisdictions should incorporate the reporting requirements contained in Section I of the CRS into their domestic legislative framework.
Canada has incorporated the reporting requirements in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.4 Jurisdictions should have a legislative framework in place that allows for the enforcement of the requirements of the CRS in practice.
Canada has a legislative framework in place to enforce the requirements in accordance with the CRS and its Commentary.
CR2 International legal framework: Jurisdictions should have exchange relationships in effect with all Interested Appropriate Partners as committed to and that provide for the exchange of information in accordance with the Model CAA.
Canada’s international legal framework to exchange the information is in place, is consistent with the Model CAA and its Commentary and provides for exchange with all of Canada’s Interested Appropriate Partners (i.e. all jurisdictions that are interested in receiving information from Canada and that meet the required standard in relation to confidentiality and data safeguards) (SRs 2.1 – 2.3).
SR 2.1 Jurisdictions should have exchange agreements in effect with all Interested Appropriate Partners that permit the automatic exchange of CRS information.
Canada has exchange agreements that permit the automatic exchange of CRS information in effect with all its Interested Appropriate Partners.
SR 2.2 Such an exchange agreement should be put in place without undue delay, following the receipt of an expression of interest from an Interested Appropriate Partner.
Canada put in place its exchange agreements without undue delay.
SR 2.3 Jurisdictions should ensure that the exchange agreements in effect provide for the exchange of information in accordance with the requirements of the Model CAA.
Canada’s exchange agreements provide for the exchange of information in accordance with the requirements of the Model CAA.
Assessed jurisdiction’s comments on the assessment of its legal frameworks
Canada would like to reiterate its commitment to the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) in promoting and monitoring the effective implementation of the international standards of transparency and exchange of information for tax purposes. Canada would also like to express its appreciation for the work of the Assessment Panel, the Global Forum Secretariat and the Automatic Exchange of Information (AEOI) Peer Review Group (APRG) for their work on the review of the implementation of the AEOI legal frameworks.
Canada takes its commitment to the AEOI Standard very seriously, and is making every effort to implement it in a timely and effective manner, in terms of both its legislative framework and in practice.
Regarding the recommendation concerning investment entities, Canada does not agree with the recommendation. Canada believes that its legislative framework is consistent with the AEOI Standard regarding the definition of investment entities. More specifically, Canada believes that the review process did not sufficiently take into account the last part of the definition of investment entities that says the definition of the term “Investment Entity” shall be interpreted in a manner consistent with similar language set forth in the definition of “financial institution” in the Financial Action Task Force Recommendations.
Further, Canada is concerned that treating closely-held professionally-managed entities that hold passive assets as investment entities, where the “account holders” are the same as the people responsible for conducting due diligence and reporting on non-resident account holders, risks weakening the integrity of the AEOI Standard. It is generally a better approach to treat such an entity as a passive Non-Financial Entity, so that the custodial institution where the entity holds its assets is responsible for due diligence and reporting.
Regarding the recommendation concerning LSVCCs, Canada believes that the unique features of LSVCCs mean that they present a low risk of being used by non-residents to evade taxes or hide assets. Nonetheless, Canada understands the reasons for the recommendation and will consider how to proceed.
Findings and conclusions in relation to effectiveness in practice
The detailed findings and conclusions in relation to effectiveness in practice of AEOI for Canada are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Effectiveness in practice: Jurisdictions should ensure that in practice Reporting Financial Institutions correctly implement the due diligence and reporting procedures, which includes a requirement for jurisdictions to have in place an administrative framework to ensure the effective implementation of the CRS.
Canada’s implementation of the AEOI Standard is on track with respect to ensuring that Reporting Financial Institutions are correctly conducting the due diligence and reporting procedures and are therefore reporting complete and accurate information. This includes ensuring effectiveness in a domestic context, such as through having an effective administrative compliance framework and related procedures (SR 1.5), and collaborating with exchange partners to ensure effectiveness (SR 1.6). Canada is encouraged to continue its implementation process to ensure its ongoing effectiveness.
SR 1.5 Jurisdictions should ensure that in practice Reporting Financial Institutions identify the Financial Accounts they maintain, identify the Reportable Accounts among those Financial Accounts, as well as their Account Holders, and where relevant Controlling Persons, by correctly conducting the due diligence procedures and collect and report the required information with respect to each Reportable Account. This includes having in place:
an effective administrative compliance framework to ensure the effective implementation of, and compliance with, the CRS. This framework should:
be based on a strategy that facilitates compliance by Reporting Financial Institutions and which is informed by a risk assessment in respect of the effective implementation of the CRS that takes into account relevant information sources (including third party sources);
include procedures to ensure that Financial Institutions correctly apply the definitions of Reporting Financial Institutions and Non-Reporting Financial Institutions;
include procedures to periodically verify Reporting Financial Institutions’ compliance, conducted by authorities that have adequate powers with respect to the reviewed Reporting Financial Institutions, with procedures to access the records they maintain; and
effective procedures to ensure that Financial Institutions, persons or intermediaries do not circumvent the due diligence and reporting procedures;
effective enforcement mechanisms to address non-compliance by Reporting Financial Institutions;
strong measures to ensure that valid self-certifications are always obtained for New Accounts;
effective procedures to ensure that each, or each type of, jurisdiction-specific Non-Reporting Financial Institution and Excluded Account continue to present a low risk of being used to evade tax; and
effective procedures to follow up with a Reporting Financial Institution when undocumented accounts are reported in order to establish the reasons why such information is being reported.
In order to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, Canada implemented most of the requirements in accordance with expectations. However, some issues were identified. The key findings were as follows:
Canada has in place an overarching strategy, the “FI Compliance Strategy”, to ensure compliance with the AEOI Standard, developed after conducting a risk assessment that took into account a range of relevant information sources, such as information from financial regulators, industry associations and feedback from exchange partners. Canada intends to keep its compliance strategy and risk assessment under review to ensure its effectiveness on an ongoing basis.
Canada has worked to understand its population of Financial Institutions, utilising various relevant information sources, such as lists of regulated entities from the financial regulators, e.g. Financial Institutions regulated by the Office of the Superintendent of Financial Institutions (OSFI); lists of entities registered with the Canada Revenue Agency that identified themselves as Financial Institutions based on the North American Industry Classification System (NAICS) codes; and the Foreign Financial Institution list for FATCA purposes. Canada is taking action to ensure that Reporting Financial Institutions are classifying themselves correctly under its domestic rules and reporting information as required. Canada intends to keep its understanding of its Financial Institutions population up to date on a routine basis. It is noted that Canada’s activities will be limited with respect to non-regulated Financial Institutions due to the issues identified during the assessment of Canada’s legal framework implementing the AEOI Standard.
The institution responsible for implementing Canada’s compliance strategy appears to have the necessary powers and resources to discharge its functions. With respect to resourcing, Canada has assigned eight full time staff to monitor and ensure compliance by Reporting Financial Institutions, which have access to IT systems and tools to conduct risk assessments, and has plans to hire eight additional staff as regional auditors for compliance activities including onsite audits.
It appears that Canada effectively enforces the requirements, including through the inspection of records of Reporting Financial Institutions and the application of dissuasive penalties and sanctions to non-compliance. Canada is ready to take effective action to address circumvention of the requirements if such circumvention is detected, to ensure self-certifications are obtained as required and to follow up on undocumented accounts. However, there does not appear to be a formalised plan or activity undertaken to ensure that Reporting Financial Institutions correctly apply the requirements of the AEOI Standard where these requirements are only included in Canada’s non-binding guidance. It is noted that Canada intends to conduct further such activities in the near future.
Canada will keep its jurisdiction-specific lists of Non-reporting Financial Institutions and Excluded Accounts under review to ensure they continue to present a low-risk of being used for tax evasion purposes. Canada has one category of Non-Reporting Financial Institutions that has been recommended to be removed from its jurisdiction-specific list of Non-Reporting Financial Institutions.
Table 3 provides a summary of the specific activities undertaken, or that are planned to be undertaken, in relation to each of the key parts of the framework described above.
With respect to the Financial Account information collected and sent by Canada, the presence of the key data points of the Tax Identification Numbers and dates of birth appeared to be in line with most other jurisdictions. However, information reported by Canada showed a higher number of undocumented accounts reported by its Reporting Financial Institutions, when compared to other jurisdictions, which should only occur when it is not possible for the Reporting Financial Institutions to identify whether the accounts are held by Reportable Persons. Follow-up discussions confirmed that Canada is aware of these issues and is taking steps to address them.
Three exchange partners highlighted issues with respect to the information received, such as errors in the account information. Follow-up discussions confirmed that Canada is aware of these issues and is seeking to improve the situation. More generally, many of the exchange partners that received a significant number of records from Canada indicated that they achieved a success rate when matching the information received from Canada with their taxpayer database that was broadly equivalent to, or better than, what they usually achieve.
Based on these findings it was concluded that, overall, Canada is meeting expectations in ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, including by having in place the required administrative compliance framework and related procedures. It was also noted that there is room for improvement with respect to the monitoring of the application to provisions contained only in non-binding guidance to ensure they are effectively applied in practice. Canada is therefore encouraged to continue its implementation process accordingly, including by addressing the recommendations made.
Canada should monitor the application of the provisions contained only in non-binding guidance to ensure they are applied effectively in practice.
Canada should continue to implement and expand its activities to verify and ensure that Reporting Financial Institutions are correctly conducting their due diligence and reporting obligations.
SR 1.6 Jurisdictions should collaborate on compliance and enforcement. This requires jurisdictions to:
use all appropriate measures available under the jurisdiction’s domestic law to address errors or non-compliance notified to the jurisdiction by an exchange partner; and
have in place effective procedures to notify an exchange partner of errors that may have led to incomplete or incorrect information reporting or non-compliance with the due diligence or reporting procedures by a Reporting Financial Institution in the jurisdiction of the exchange partner.
In order to collaborate on compliance and enforcement, Canada has in place effective procedures to implement all of the requirements in relation to issues notified to them (i.e. under Section 4 of the MCAA or equivalent) in accordance with expectations. In particular, Canada received a notification from one partner and successfully processed it in a timely manner, resolving the issue raised. It also appears that Canada will notify its partners effectively of errors or suspected non-compliance it identifies when utilising the information received.
Based on these findings it was concluded that Canada is fully meeting expectations in relation to collaborating with its exchange partners to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures. Canada is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
CR2 Effectiveness in practice: Jurisdictions should exchange the information effectively in practice, in a timely manner, including by sorting, preparing, validating and transmitting it in accordance with the AEOI Standard.
Canada’s implementation of the AEOI Standard is on track with respect to exchanging the information effectively in practice, including in relation to sorting, preparing and validating the information (SR 2.4), correctly transmitting the information in a timely manner (SRs 2.5 – 2.8) and providing corrections, amendments or additions to the information (SR 2.9). Canada is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.4 Jurisdictions should sort, prepare and validate the information in accordance with the CRS XML Schema and the associated requirements in the CRS XML Schema User Guide and the File Error and Correction-related validations in the Status Message User Guide (i.e. the 50000 and 80000 range).
Feedback from Canada’s exchange partners did not raise any specific concerns with respect to their ability to process the information received from Canada and therefore with respect to Canada’s implementation of these requirements. More generally, one of Canada’s exchange partners reported rejection of more than 25%, but no more than 50%, of the files received due to technical requirements not being met. This is a relatively low amount when compared with other jurisdictions.
Based on these findings it was concluded that Canada is fully meeting expectations in relation to sorting, preparing and validating the information. Canada is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.5 Jurisdictions should agree and use, with each exchange partner, transmission methods that meet appropriate minimum standards to ensure the confidentiality and integrity of the data throughout the transmission, including its encryption to a minimum secure standard.
In order to put in place an agreed transmission method that meets appropriate minimum standards in confidentiality, integrity of the data and encryption for use with each of its exchange partners, Canada linked to the CTS.
Based on these findings it was concluded that Canada is fully meeting expectations in relation to agreeing and using appropriate transmission methods with each of its partners. Canada is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.6 Jurisdictions should carry out all exchanges annually within nine months of the end of the calendar year to which the information relates.
One exchange partner highlighted delays in the sending of information by Canada, and stated that the information has still not been received. It was noted that Canada has still not yet sent some of the information due to be exchanged in 2021, as well as information that was due to be exchanged in prior years in some cases.
Based on these findings it was concluded that, overall, Canada is meeting expectations in relation to exchanging information in a timely manner. It was also noted that there is room for improvement with respect to the timeliness of the exchanges. Canada is encouraged to continue to ensure the ongoing effectiveness of its implementation, including in relation to the area highlighted.
Canada should ensure that it sends information to all of its exchange partners in a timely manner.
SR 2.7 Jurisdictions should send the information in accordance with the agreed transmission methods and encryption standards.
Feedback from Canada’s exchange partners did not raise any concerns with respect to Canada’s use of the agreed transmission methods and therefore with Canada’s implementation of this requirement.
Based on these findings it was concluded that Canada is fully meeting expectations in relation to sending the information in accordance with the agreed transmission methods and encryption standards. Canada is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.8 Jurisdictions should have the systems in place to receive information and, once it has been received, should send a status message to the sending jurisdictions in accordance with the CRS Status Message XML Schema and the related User Guide.
Five exchange partners highlighted delays in the sending of status messages by Canada, representing 5% of its partners. This represents a relatively high proportion of partners. Canada has still not yet sent some of the status messages due to be sent in 2021, as well as some that were due to be sent in prior years.
Based on these findings it was concluded that, overall, Canada is meeting expectations in relation to the receipt of the information. It was also noted that there is room for improvement with respect to timeliness of sending status messages. Canada is encouraged to continue to ensure the ongoing effectiveness of its implementation, including in relation to the area highlighted.
Canada should ensure it sends Status Messages to all of its exchange partners in a timely manner.
SR 2.9 Jurisdictions should respond to a notification from an exchange partner as referred to in Section 4 of the Model CAA (which may include Status Messages) in accordance with the timelines set out in the Commentary to Section 4 of the Model CAA. In all other cases, jurisdictions should send corrected, amended or additional information received from a Reporting Financial Institution as soon as possible after it has been received.
Canada appears ready to respond to notifications and to provide corrected, amended or additional information in a timely manner and no such concerns were raised by Canada’s exchange partners and therefore with respect to Canada’s implementation of these requirements.
Based on these findings it was concluded that Canada appears to be fully meeting expectations in relation to responding to notifications from exchange partners and the sending of corrected, amended or additional information. Canada is encouraged to continue to ensure the ongoing effectiveness of its implementation.
Assessed jurisdiction’s comments on the assessment of effectiveness in practice
Canada would like to reiterate its commitment to the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) in promoting and monitoring the effective implementation of the international standards for transparency and exchange of information for tax purposes.
We also want to express our appreciation for the work of the Assessment Panel, the Global Forum Secretariat and the Automatic Exchange of Information (AEOI) Peer Review Group (APRG) for their work on the review of the implementation of the international Standard for Automatic Exchange of Financial Account Information in Tax Matters.
Canada’s overall rating of “On Track” for its effective implementation of the AEOI Standard in practice reflects the efforts and commitment of the entire team during the past couple of challenging years due to the COVID-19 Pandemic.
The constructive recommendations of the Global Forum will help focus our efforts and further improve our implementation of the standard and the quality of the data exchanged.
Note
← 1. With Hong Kong (China) and Singapore. Canada has also activated a relationship under the CRS MCAA with Singapore.