Introduction: The CRA Can Share Tax Information with Foreign Authorities Under Bilateral Tax Treaties and Tax Information Exchange Agreements

The digitization of tax-related information offers tax authorities worldwide a powerful tool for exchanging data. Many bilateral tax treaties include provisions for the exchange of tax information, enabling countries to share data for various purposes. For instance, 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”) allows the Canada Revenue Agency and HM Revenue & Customs to exchange information. This includes data available under their respective tax laws, necessary for implementing statutory provisions, preventing fraud, or enforcing laws against tax avoidance related to the taxes covered by the treaty.

The information exchange provision in the Canada-UK Treaty is relatively straightforward compared to the more detailed provisions in the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital (the “Canada-US Treaty“). In addition to this treaty, Canada and the U.S. have also enacted the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act (the “Canada-US Enhanced TIEA Act”) to strengthen cooperation between their tax authorities—the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS). This enhanced framework reflects the countries’ close economic ties and the similarities between their tax systems.

As of October 30, 2024, Canada has entered into Tax Information Exchange Agreements (TIEAs) with 24 countries that do not have tax treaties with Canada. TIEAs are typically established between high-tax jurisdictions and low- or no-tax countries with which they lack a comprehensive tax treaty. These agreements facilitate the exchange of tax information similar to the provisions found in bilateral tax treaties. For example, Panama and Canada signed the Agreement Between Canada and the Republic of Panama for Tax Cooperation and the Exchange of Information Relating to Taxes (the “Canada-Panama Agreement”), in effect since December 6, 2013. Under this agreement, the tax authorities of both countries can, upon request, share information “foreseeably relevant to the administration and enforcement of domestic tax laws,” subject to certain limitations outlined in the agreement.

Tax Information Exchange in Bilateral Treaties: Provisions Vary Across Different Agreements

A bilateral tax treaty outlines the allocation of taxing rights, establishes mechanisms for resolving tax-related disputes, and defines commonly used terms within the tax systems of the two participating countries. These treaties typically include provisions for the exchange of tax information between the countries. The specifics of these tax information exchange provisions can vary depending on the level of cooperation between the two nations. However, most tax treaties adhere to the framework set out in Article 26 of the OECD Model Tax Convention on Income and on Capital for tax information exchange.

• The competent authorities of the contracting states shall exchange information that is reasonably relevant for implementing the provisions of the tax treaty or for the administration and enforcement of domestic tax laws, provided that such information does not conflict with the tax treaty.
• Any information exchanged will be treated as confidential, in the same way as information obtained under each country’s domestic laws, and will only be disclosed to individuals or authorities involved in tax matters. This information may only be used for the purposes outlined in the tax treaty, unless permitted otherwise.
• The provisions do not require countries to take actions that would be inconsistent with their own laws or administrative practices, nor do they obligate countries to provide information that is not legally obtainable or that would reveal trade secrets, industrial processes, or any information whose disclosure would violate public policy or public order.

Tax treaties may include unique information-exchange provisions or be supplemented by additional agreements, deviating from the standard language found in the OECD model. The Canada-US Enhanced TIEA Act, for example, imposes additional due diligence and reporting requirements on financial institutions, obliging them to verify, certify, or clarify the tax status of their clients.

The scope of the Canada-US Enhanced TIEA Act goes well beyond the provisions outlined in Article 26 of the OECD model. A less extreme example of expanding information exchange can be seen in the 2017 Exchange of Notes Concerning the Automatic Exchange of Information between Canada and Switzerland. Unlike many tax treaties, which require a formal request for information to be exchanged, Canada and Switzerland have implemented a reciprocal, automatic exchange of financial account information for tax purposes since 2017. While the two countries did not commit to automatic or spontaneous exchanges under the Convention between Canada and Switzerland for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, this agreement provided the foundation for the automatic exchange of information.

A Tax Information Exchange Agreement Addresses the Information Gaps Between Countries Without Bilateral Tax Treaties

A Tax Information Exchange Agreement (TIEA) is a formal arrangement between two countries designed to facilitate the exchange of information relevant to tax matters. In contrast to a bilateral tax treaty, a TIEA is typically more limited in scope, focusing primarily, if not exclusively, on the exchange of information necessary for the administration and enforcement of each country’s domestic tax laws.

In other words, the main objective of a TIEA is to enable tax authorities to access information and address potential tax loopholes. However, the effectiveness of TIEAs is frequently debated due to various limitations and challenges in their implementation and enforcement. TIEAs are often established between developed and developing countries, and the developing country may lack the necessary resources or capacity to support information requests effectively. On the other hand, when the situation is reversed, concerns related to confidentiality and privacy often arise.

Restrictions on Information Exchange: How Bilateral Tax Treaties and Tax Information Exchange Agreements Protect Exchanged Information

In today’s environment, where tax authorities frequently exchange information, it is crucial to understand the limitations placed on the use of that information. Due to the sensitive nature of tax-related information, strict controls are imposed on its disclosure and use. Consequently, both bilateral tax treaties and TIEAs generally include a similar rule: information obtained cannot be shared with unauthorized parties, including courts or administrative tribunals, unless specifically permitted.

These confidentiality obligations are becoming even more critical as the volume of information exchanged globally continues to rise. Unfortunately, the CRA appears to lack a comprehensive and effective policy for safeguarding taxpayers’ information, despite numerous cyberattacks targeting the CRA systems. The CRA has even acknowledged that it significantly underreported cyberattacks involving Canadian taxpayers to Parliament. However, it has yet to implement meaningful measures to address the ongoing confidentiality and privacy concerns.

Tax Pro Tips – Exercise Caution When Sharing Information with the CRA

A Canadian tax resident is frequently required to disclose certain information to the CRA for various purposes, such as filing an income tax return, during a tax audit, or as part of a voluntary disclosure application. However, not all of the information requested by the CRA may be directly related to the specific tax matters under review. Despite this, the CRA can use the information gathered to conduct further investigations. Moreover, if a taxpayer has international dealings with a country that has a bilateral tax treaty or tax information exchange agreement with Canada, the CRA may share the information with that country. As a result, taxpayers must exercise caution when providing information to the CRA.

If the CRA requests information from you and you have concerns about what to disclose, it’s important to consult with one of our experienced Canadian tax lawyers. We can provide expert legal advice, help you understand your rights as a taxpayer, clarify your reporting obligations, and guide you through the process of communicating with the CRA.

Frequently Asked Questions (FAQs)

Can the CRA Share My Information with the Tax Authorities of Another Country?

In general, if a foreign country has a tax treaty or tax-information-exchange agreement with Canada, it may request and obtain your information from the CRA. However, the information must meet specific legal criteria, such as being necessary for the administration and enforcement of the foreign country’s domestic tax laws. The CRA is prohibited from disclosing tax-related information to any unrelated parties, including foreign courts or administrative tribunals, unless they are directly involved in enforcing domestic tax laws.

What Information Can the CRA Disclose to Foreign Tax Authorities?

The CRA can only share information with the tax authorities of another country as allowed by the relevant bilateral tax treaty or tax-information-exchange agreement. Typically, this information is limited to what is necessary for the administration and enforcement of domestic tax laws or to fulfill the terms of the applicable treaty or agreement. Some countries have specific arrangements with the CRA that allow for the automatic exchange of information. For example, financial institutions in Canada and the United States are required to verify their clients’ tax status and share this information with the respective tax 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 articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.

Image by xb100 via freepik