"To be clear, the agreement will not impose any new or higher taxes, and CRA will not assist ... in collection of U.S. tax penalties," junior finance minister Kevin Sorenson said Wednesday in the House of Commons.
But it's still unclear whether the changes will cost banks tens of millions of dollars in administrative fees.
Canadian banks say they support the Canadian government's efforts to broker a deal, but still oppose how the U.S. is approaching the problem of tax evasion.
"Canada is not a tax haven and Americans do not move here to evade taxation," the Canadian Bankers Association said in a statement.
The U.S. Foreign Account Tax Compliance Act, which takes effect in July, would have compelled Canadian banks to report information about anyone considered to be a U.S. resident or citizen, including dual citizens, directly to the U.S. Internal Revenue Service.
The new arrangement means Canadian banks would report "relevant" information on accounts held by U.S. residents or citizens to the Canada Revenue Agency, which would share it with the IRS under existing tax-treaty rules — making it consistent with domestic privacy laws, said senior government officials.
The IRS will also provide more information on certain accounts of Canadian residents in U.S. financial institutions, they said.
The deal narrows the scope of information that banks would be required to collect and avoids the U.S. imposing a 30 per cent withholding tax that would be imposed on U.S. source income if the bank didn't comply with the law, officials said.
For example, if a Canadian bank has a customer with a U.S. connection — such as a telephone number — and won't provide more information to establish U.S. residence when asked, then the bank would simply give whatever information it has to CRA, which would in turn pass it along to the IRS, officials said. If IRS wants more information, it could invoke an existing tax treaty and ask CRA to investigate further.
The agreement won't impose any U.S. taxes or penalties on American citizens or residents holding accounts in Canada, and CRA won't collect the unpaid U.S. taxes of a Canadian citizen or dual citizen if the person was a Canadian citizen at the time that tax liability arose, they said.
There were other concessions, officials said. Canadian financial institutions won't have to report on accounts smaller than $50,000. Most federal registered accounts, such as registered retirement savings plans, pension plans and tax-free savings accounts, are also excluded.
Local banks with 98 per cent or more of their account value with Canadian residents, as well as small financial institutions with assets totalling less than $175 million — such as credit unions, are exempt as well, officials said.
Some banks may ask for the information when a new client opens an account, while others may not seek that information until an account passes the $50,000 benchmark, they said.
Although financial institutions will have to start collecting the information in July, officials said the CRA isn't expected to start sharing the information with the IRS until 2015.
Draft legislation to implement the agreement will be released for public comment soon, officials said. Following consultations, the governing Conservatives will introduce a bill.
The Canadian Bankers Association said it will review the legislation and the CRA guidelines that will spell out how banks and other financial institutions will implement the agreement.
It said it supports the government's efforts to broker a deal, saying the "alternative would potentially expose Canadians to punitive U.S. withholding taxes on income from their investments, including retirement income, of 30 per cent."
The new agreement "should avoid that and ensure that the domestic rights of Canadians are respected while still sharing relevant taxpayer information bilaterally," the association said.
G20 leaders have shown support for common action against tax evasion and avoidance by helping to automatically exchange tax information rather by doing it only on request.