Canada: Final FATCA Regulations Provide Some Relief

Final regulations under FATCA were released on January 18, 2013. The final regulations contain a number of taxpayer favorable changes from the proposed regulations released in February of last year. They narrow the categories of foreign financial entities (“FFIs”) who will be required to enter into agreements with the IRS to monitor and report on their US account holders, expand and clarify exemptions for foreign governments and foreign pension plans, expand grandfathered instruments and provide other important guidance. Major changes to prior guidance include:

  • Relief for private trusts and holding companies. Private trusts and personal holding companies are exempted from treatment as FFIs as long as they are not managed by another FFI, such as a professional investment manager or trust company FFI (see below). Where such an entity is professionally managed, it will be treated as an FFI. But an entity that functions or holds itself out to customers as a collective investment vehicle, mutual fund, private equity fund or similar mainstream investment vehicle established with an investment strategy of investing, reinvesting or trading in financial assets is treated as an FFI even if it is not managed by another FFI. Unlike the final regulations, the proposed regulations treated all investment entities as FFIs and broadly defined an investment entity to include any entity engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, swaps or interests in such financial assets.

  • Additional relief for professionally managed trusts and personal holding companies. The final regulations make it much more likely that a professionally managed personal holding company or trust could qualify as an “owner certified deemed compliant FFI” and avoid the need to enter into an FFI Agreement with the IRS. Under the proposed regulations, in order for an entity to qualify as an owner certified deemed compliant FFI the entity was prohibited from having any debt outstanding in excess of $50,000. The final regulations eliminate that prohibition and instead require that the entity provide its withholding agent (which would typically be the professional investment manager or trust company) with information on any US holders of its debt obligations (as well as its equity).

  • Foreign investment advisors and fund managers are now treated as FFIs. The final regulations expand the definition of an “investment entity” that is treated as an FFI to include one that provides financial services to customers, such as individual or collective portfolio management or otherwise, investing, administering, or managing funds or money on behalf of other persons, regardless of whether the entity itself holds any financial assets.

  • Expanded exemption for foreign pension plans. Under the final regulations, a payment made to a qualifying retirement fund is treated as being made to an exempt beneficial owner regardless of whether the pension fund is the beneficial owner of the payment under local law. As under the proposed regulations, a retirement fund that qualifies for benefits under a US treaty (or would qualify if it derived US source income) is treated as an exempt beneficial owner. Thus, Canadian retirement funds should qualify as exempt beneficial owners. Exemption of non-treaty-country retirement funds was also clarified.

  • Exception for foreign governments, their political subdivisions and controlled entities. The final regulations expressly exempt these entities, using definitions taken from Internal Revenue Code section 892 (exemption for foreign governments).

  • Commercial activities exception. The final FATCA regulations carve out certain commercial activities conducted by otherwise exempt beneficial owners. The carveout applies to payments on obligations held in connection with a commercial financial activity of a type engaged in by an insurance company, custodial institution or depository institution.

  • Expanded grandfathering of existing obligations. The FATCA withholding requirements generally apply to US source FDAP payments made after December 31, 2013, and to payments of gross proceeds on US positions that give rise to US source interest or dividends made after December 31, 2016. The final regulations provided grandfather relief for obligations outstanding before January 1, 2014. Further grandfathering is provided for: (i) dividend equivalent payments subject to section 871(m) where the payments are made on an instrument that is executed on or before the date that is six months after the date on which final regulations are issued subjecting such obligations to the provisions of section 871(m); (ii) foreign passthrough payments made on an obligation that was issued on or before the date that is six months after the date on which final regulations are issued subjecting such obligations to FATCA withholding; and (iii) payments made with respect to collateral posted on a grandfathered obligation.

  • FATCA Registration Portal. FFIs entering into a FFI agreement with the IRS will use an online portal to register. The portal should be operating by July 15, 2013. By registering through the portal, the FFI can obtain a “global intermediary identification number (“GIIN”) that it can use to certify to withholding agents that it is a participating FFI. FFIs located in a country that has entered into a FATCA intergovernmental agreement (“IGA”) with the US may also use the online portal to obtain a GIIN and to be listed as a registered deemed compliant FFI before the IGA has been fully ratified in the FFI’s country of residence. The last date on which an FFI can register to ensure its inclusion on the December 2013 list (and avoid being subject to withholding beginning January, 2014) is October 15, 2013. The IRS is also discussing the possibility that other governments with which the IRS has entered into an IGA may use the IRS FATCA portal to manage their own internal reporting requirements.

The Canadian Department of Finance announced last November that negotiations are being held between Canada and the United States on a FATCA IGA and it is widely expected that one will be completed this year. That agreement should effectively exempt Canadian FFIs from having to enter into FFI agreements with the IRS, though the agreement would provide for Canada to impose information reporting obligations on Canadian FFIs. Canadian FFIs should still anticipate the need to register on the FATCA registration portal by October 15, 2013, in order to obtain a GIIN and be added to the list of registered deemed compliant FFIs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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