18 September 1989 Income Tax Severed Letter RCT-0081

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Attached hereto is a discussion note for item VI on the agenda for the October meeting.

We hope that you will find this to be of some assistance in appreciating our concerns in this area.

Practical Aspects of Exchange' of Information

Canada has tax conventions in effect with 46 countries, and each of those conventions contains provisions for the exchange of information of varying types. Generally speaking the conventions permit the exchange of information for the purpose of administering domestic taxation laws of the contracting states as defined in the convention, although in one instance that is restricted to the administration of the convention.

The exchange articles of our conventions are broadly worded. Accordingly, there are few impediments to the type of information which may be exchanged or provided even on a purely voluntary basis.

Our conventions do have restrictions which state that the information provision shall not be construed as imposing an obligation:

• (a) To carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State:
• (b) To supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; or
• (c) 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 (order public).

These restrictions have not proved to be a significant barrier to obtaining information to service requests that have been made to us.

In responding to a request under a tax convention, we use the powers available to us in the same manner as we would were the matter to be one arising in the course of administering the Canadian Income Tax Act. bile there can be some delays in obtaining information, we do not believe that these have been material delays, and every effort is made to direct our resources to obtaining the information. Recognition is given to our obligations under the convention and our domestic activities are not permitted precedence in this regard.

Type of Information

The information which we exchange under our tax conventions can be broken into three categories:

• (1) specific requests (2) automatic exchanges (3) spontaneous exchanges #P The preceding comments apply largely to the first category of specific requests, which involve one party identifying a taxpayer on whom information is required.

Automatic exchanges of information involve the exchange of information of a routine nature, largely related to payments made to non-residents. Interest, dividends, royalties and similar payments are covered by this category. We have arrangements with several countries which gives rise to special problems.

Spontaneous exchanges are those which involve the provision of information to other countries which in the opinion of the sending state may be of some value to the receiving state in relation to its taxpayers.

Problems

One of the principal problems which we encounter in the exchange of information is the delay which often occurs in some countries in obtaining information.

We appreciate that difficulties can be encountered which may delay or render impossible the provision of the information. However, it is important that the requesting state know whether there are difficulties and where urgency is indicated, that there be a response forthcoming as quickly as possible, even it it is only an acknowledgement. This problem is raised because in our dealings with one country we experience not only long delays but an unwillingness to respond to letters or telexes.

There is the question of divulging information to the person who may be the subject of the request for information. We attempt to protect the very fact that a request may have been made, observing the rule in the article in the convention that information should be treated as secret. In matters of audit, the concern is less, but where a criminal tax investigation is under way, there are circumstances where it is important to protect the knowledge of even the existence of the investigation. This can be dealt with in some circumstances by more explicit communication, but not where the domestic law of the receiving state may require notification.

In one case we have a restriction that information may be provided only for the purposes of the convention. In most cases where we require information, if not all, we are concerned with an issue which is directly related to domestic law. Any matter which may Involve the assessment of tax will have the domestic legislation Involved. The utilization of information solely for the purpose of the convention would be limited. This and the previous comment highlight what are problems of law as opposed to administration.

In providing routine information there is often a volume of paper evidencing transactions, such as interest dividends or similar items flowing to identified persons. Two problems exist in this area, the completeness of information and the timeliness of it. To be useful we should be able to identify clearly the recipient. Sometimes this is not done. To be useful the information should be forwarded as soon as reasonably possible after the conclusion of the taxation year. if the information becomes too old it may not be possible to use it.

Quality of information

There are two aspects to quality: the value of the information and the physical quality of the information.

Canada uses the same powers in obtaining information for treaty partners as it would use for itself. We do not require a Canadian tax interest, although we do expect that the request from the treaty partner will clearly identify a tax interest on its part. if the information can be found it will be provided to the other party. Unfortunately, not all states seem to be in the same position. This gives rise to the question whether other states can reasonably expect to improve the ability to provide more and better information. In terms of the physical quality of information, we need only ask that countries ensure that the best and most readable copy be provided.

We do acknowledge that the powers of investigation vary from country to country. Our laws permit us to access information. In the hands of taxpayers and third parties, and we can require production with penalties applying where there is a failure to produce. In some circumstances there is an inequality in the relationship, because of varying abilities to respond.

Summary

Host problems in the area of exchange of information can be resolved by better communication. We regard our obligations under the conventions to be serious and attempt to work within the shortest possible time limits. We also use our powers under our legislation to obtain the information. While we realize that most countries attempt to respond, it is frustrating to have one country ignore our letters and telexes.

Domestic legislation can and does impose some obligations on other revenue authorities which may interfere with the free exchanges, or in some instances the authority may not exist to obtain the degree of information required. These difficulties, in many instances, may be insurmountable because the correction would involve legislative changes which may not be achievable. Restrictions in our domestic legislation are overidden by the tax convention. We would hope that some paramountcy could be given to the conventions.