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Joint Letter to Honourable J. Flaherty - Impact of Proposed EU Financial Transaction Tax on Canada


Release Date: 04/03/2013
Staff Reference: Peggy McFarland

April 3, 2013

The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance
Department of Finance L’Esplanade Laurier,
East Tower 140 O’Connor Street
Ottawa, ON K1A 0G5

Dear Minister Flaherty:

Re: Impact of Proposed EU Financial Transaction Tax on Canada

We are writing on behalf of the members of the Investment Industry Association of Canada (IIAC), the Investment Funds Institute of Canada (IFIC), the Canadian Bankers Association (CBA), and the Canadian Life and Health Insurance Association (CLHIA) to thank you for your efforts to prevent the adoption of financial transaction taxes. We hope that you will continue to express your strong opposition to financial transaction taxes, and in particular, the European Commission’s (EC) proposed financial transaction tax (FTT), which is scheduled to be implemented as of January 1, 2014.

Given Canada’s opposition to an FTT, reinforced by many strong objections from other jurisdictions, we were disappointed to see the EC’s FTT proposal of February 14, 2013. We are deeply concerned by the broad extraterritorial reach of the FTT. As proposed, it would tax Canadians investing in certain European securities even if transacted on North American financial markets (the “issuance principle”) and it would also tax transactions in Canadian-issued securities where a party to the transaction is established in an FTT jurisdiction (the “residence principle”). As a result, Canadians with little or no connection to the EU country imposing the FTT will experience diminished returns on their affected investments, and Canadian financial institutions and their clients will have to bear the costs associated with collecting and remitting the tax to European governments, while possibly taking on liability in that regard. There will be an outflow of tax revenue from Canadian financial institutions and Canadian investors to jurisdictions in the EU, with no net benefit (tax or otherwise) to Canada.

As you have noted, we are also concerned that an FTT would adversely distort the flow of capital in global markets. Studies have shown that FTTs contribute to fragmented and inefficient capital markets, impair their depth and liquidity, lower returns for investors and increase the cost of capital for issuers while doing little to curb undesirable financial market activities.1 Along with our international counterparts, we are writing to the EU to express our concerns with the proposed FTT.

We greatly appreciate and support your stated opposition to an FTT, and hope that Canada will continue to raise opposition to such a tax at future meetings of international leaders, including the meeting of G20 Finance Ministers scheduled for April 18-19 in Washington D.C. We would like to reiterate our strong view that regional FTTs should not be extended on a global basis, and should not be applied on an extraterritorial basis, due to the hazards imposed on interconnected capital markets.

We would be pleased to speak with you further about this issue. We would also be pleased to provide your officials with any further information they may require to better understand the negative impacts such a tax would have on Canadian investors and the Canadian financial sector.

Yours sincerely,

(Original signed by)

Terry Campbell, President, Canadian Bankers Association
Frank Swedlove, President, Canadian Life and Health Insurance Association
Joanne De Laurentiis, President & CEO, Investment Institute of Canada
Ian Russell, President & CEO, Investment Industry Association of Canada

cc. Jean Boivin, Associate Deputy Minister and G7/G20 & FSB Deputy for Canada

1 An overview of the debate around FTTs can be found in Taxing Financial Transactions: Issues and Evidence, IMF Working Paper/11/54, Thornton Matheson, 2011. (http://www.imf.org/external/pubs/ft/wp/2011/wp1154.pdf ) Also see Financial Sector Taxation: The IMF’s report to the G20 and Background Materials, Stijn, Keen and Pazarbasioglu 2010.