Canada: Report On Legislative Proposals Relating To Canada – United States Enhanced Tax Information Exchange Agreement

Last Updated: March 12 2014
Article by Roy Berg, Paul Barba and Kim G.C. Moody

Moodys Gartner Tax Law LLP is pleased to provide you with this written submission on certain aspects of the draft legislative proposal entitled Legislative Proposals Relating to Canada – United States Enhanced Tax Information Exchange Agreement ("Draft Legislation"). We welcome the opportunity to discuss this report ("Report")1 with you in person at your convenience.

We commend the Department of Finance (the "Department" or the "Department's Office") in concluding the intergovernmental agreement ("IGA")2 with the U.S. Government and issuing the Draft Legislation. But for the Department's endeavours in this regard, the U.S.'s Foreign Account Tax Compliance Act ("FATCA")3 would have applied unilaterally and required Canadian Financial Institutions to face the dilemma of complying with Canadian law (and suffering the consequences under FATCA) or complying with FATCA (and suffering the consequences under Canadian law). The Department's office faced a daunting task and we wish to recognize its dedication and effort.

While the Department's efforts are laudable, the Draft Legislation requires refinement in numerous respects. Perhaps most importantly, the Draft Legislation defines the term "financial institution" more narrowly than any other signatory to an intergovernmental agreement, which may preclude the IGA from entering into force, and if not will create problems for Canadian entities that we discuss in further detail below. In this Report we discuss suggested clarifications and modifications to the Draft Legislation that will bring it closer to achieving its intended purpose and mitigating these problems.

The IGA, FATCA, the U.S. Treasury Regulations, and the Draft Legislation are replete with terms that sometimes overlapping and contradict one another. In an effort to bring clarity to the discussion of these terms, capitalized and italicized terms in this Report refer to defined terms in the IGA. All other terms are defined as indicated.4

SUMMARY OF RECOMMENDATIONS

  1. General Recommendation

    We recognize the Department has requested comments on only the Draft Legislation and we have limited our recommendations accordingly. However, the U.S. Department of Treasury has shown willingness to enter into memoranda of understanding with several jurisdictions to clarify matters relating to domestic law.5 Except as noted below, our specific recommendations could be addressed in legislation, guidance notes, or in a memorandum of understanding with the U.S. Department of Treasury. In light of this fact we make the following two general recommendations:

    1. FATCA will go into effect on July 1, 2014 and, we are concerned the Draft Legislation will not become final before that date. The Netherlands and Norway both entered into memoranda of understanding with the U.S. Treasury Department to effectively extend the implementation date until their implementing legislation is adopted as domestic law.Accordingly, we recommend the Department seek similar dispensation. In Notice 2013-43,6 the Internal Revenue Service ("IRS") has agreed to relax the compliance requirements for financial institutions in jurisdictions that have executed intergovernmental agreements but that have not yet been brought into force. Given the significance of the issues identified below we believe that the Department may not be entitled to rely on that notice and should, instead, seek the memorandum of understanding referenced above.
    2. If the Department disagrees with the specific recommendations discussed below we recommend it address and resolve these issues with the U.S. Department of Treasury in a memorandum of understanding as noted below.
  2. Specific Recommendations

    As discussed in further detail in Part B of this Report, our specific recommendations are as follows:

    1. The Draft Legislation narrows the definition of Financial Institution beyond that which is provided in the IGA, the Regulations, and intergovernmental agreements with other jurisdictions. The result will be confusion and uncertainty in the marketplace that will result in unnecessary withholding on certain Canadian Financial Institutions, which will require them to seek a refund of from the IRS. We therefore recommend: Draft subsection 263(2) should be amended to remove the language that limits the definition of Financial Institution to the enumerated entities:
      (g) The term "Financial Institution" means any Entity that is a Custodial Institution, a Depository Institution, an Investment Entity or a Specified Insurance Company, [including]: . . . .
      Alternate Recommendation 1(a): In light of the risks discussed below, if the Department is determined to narrowly define Financial Institution as set forth in the Draft Legislation, it should confirm its interpretation with the U.S. in a memorandum of understanding.
    2. Under the IGA, Canada has the right to more favourable terms granted to other signatories to intergovernmental agreements (which are typically more favourable than the terms set forth in the Regulations), yet the Draft Legislation contains several references to the Regulations only. Assuming recommendation 1 or 1(a) is accepted we therefore recommend: References to the Regulations should include reference to the IGA in the event the IGA provides more favourable terms.
    3. Under the IGA, Trusteed Tax Free Savings Accounts ("TFSAs")7 are excluded from the definition of Financial Account yet are Reporting Canadian Financial Institutions because they are neither described in Articles XVIII(3) nor XXI(3) of the Canada – U.S. Tax Convention (the "Treaty").8 Assuming recommendation 1 or 1(a) is accepted, we therefore recommend: Draft subsection 263(1) should include any entity or product referenced in Annex II, § IV; specifically:
      "non-reporting Canadian Financial institution" means any Canadian financial institution or other entity resident in Canada that (a) is described in any of paragraphs C, D, and G to J of section III of Annex II to the agreement [or in section IV of Annex II to the agreement]; . . . .
      Alternate Recommendation 3(a): Since TFSAs are the functional equivalent of Roth IRAs and Roth IRAs are referenced in Article XVIII(3) of the Treaty, the Department should seek to enter into a memorandum of understanding with the U.S. Department of Treasury to include TFSAs within the definition of Exempt Beneficial Owner ("EBO") under Annex II, § II(C).
    4. Similar to TFSAs, Trusteed Registered Education Retirement Funds ("RESPs")9 are excluded from the definition of Financial Account yet are Reporting Canadian Financial Institutions because they are neither EBOs nor Deemed-Compliant Financial Institutions. Assuming recommendation 1 or 1(a) is accepted we therefore recommend: Draft subsection 263(1) should include any entity or product referenced in Annex II, § IV; specifically:
      "non-reporting Canadian Financial institution" means any Canadian financial institution or other entity resident in Canada that (a) is described in any of paragraphs C, D, and G to J of section III of Annex II to the agreement [or in section IV of Annex II to the agreement]; . . . .
      Alternate Recommendation 4(a): While RESPs are not similar to the definitions of Retirement Funds or Exempt Organizations under the Treaty, there is little risk of non-compliance associated with these accounts and, accordingly, the Departments Office should seek to execute a memorandum of understanding with the U.S. to include RESPs within the definition of Deemed-Compliant Financial Institutions under Annex II, § III.

DISCUSSION OF SPECIFIC RECOMMENDATIONS

  1. Draft Subsection 263(2) Defines "financial institution" in a Manner that is More Narrow than the IGA any other Intergovernmental Agreement, or the Treasury Regulations
    1. General Comments Draft subsection 263(2) eviscerates the definition of Financial Institution found in the IGA and other intergovernmental agreements because only listed entities will be classified as such. This narrow definition of Financial Institution would exclude numerous Canadian entities, including all private Canadian trusts and private Canadian holding companies. Ultimately, this restrictive definition will result in confusion for those Canadian entities that have cross-border affairs and are classified as a Nonfinancial Foreign Entity under Canadian law, but as a Financial Institution under the Regulations or other intergovernmental agreements. The result would be unnecessary withholding for private Canadian trusts and holding companies that have financial accounts with non-Canadian Financial Institutions. It is unclear whether the U.S. Congress intended to classify trusts as financial institutions subject to FATCA when the statute was enacted in 2010. The term "trust" is mentioned only six times in the statute and never in the context of a financial institution. The Regulations, however, are replete with references to trusts and, in fact, two examples set forth in the Regulations specifically conclude that a trust is a financial institution.10 As discussed in further detail below, the U.K.'s guidance notes clearly contemplate that certain trusts will be classified as Financial Institutions.
    2. Consequences of Limiting the definition of Financial Institution FATCA belongs to a unique body of law, the enforcement of which does not rely on the action of any sovereign but rather on rational economic decisions made by market participants. Generally speaking, under FATCA before one party ("Payor") transfers funds to another party ("Payee"), the Payor must ascertain the status of the Payee and either transfer the entire amount, or transfer 70 percent and withhold 30 percent and remit that amount to the IRS. If the Payor does not withhold when it should have done so, it is personally liable for that non-withheld amount.11 Thus, if a Payor is uncertain of the status of a Payee (because, for example, Canada has unique entity classifications as it does under the Draft Legislation), the rational Payor will withhold because to do otherwise would expose it to liability for the non-withheld amount. The U.S. may not view the legislation as a valid implantation of the IGA under Article 10.1 thereby precluding the IGA for entering into force. The result would be that Canadians would be subject to the (more stringent) default rules under the I.R.C. and the Regulations (where there is no exception for the accounts in Annex II, § IV, such as RESPs and TFSAs). Canadian Financial Institutions would then be faced with the dilemma of choosing between following Canadian domestic law or following the default rules under the I.R.C. and the Regulations. Alternatively, if the Draft Legislation, when passed into law, is valid and the IGA is entered into force, the U.S. would likely invoke Article 8 and request a consultation to resolve the differences. If the Draft Legislation is passed into law and not subsequently modified the result would be a definition of Financial Institution that is different in Canada, the U.S., and other jurisdictions. The result would be undesirable for cross-border investors, which could lead to unnecessary compliance burdens, excess withholdings, and unnecessary costs associated with obtaining refunds of the excess withholdings. When both the Payor and Payee are residents in Canada, there is little chance for confusion or unnecessary withholding.12 However, when the Payor and Payee are residents of different jurisdictions, a Payor making a rational economic decision will withhold and remit to the IRS. The Payee will then be left in the unenviable position of applying directly to IRS for a refund of the excess withholding.
    3. Definition of Financial Institution Under the IGA Would Include Private Canadian Trusts and Canadian Holding Companies13 Article 1.1(g) defines the term "Financial Institution" to include Custodial Institutions, Depository Institutions, Investment Entities, and Specified Insurance Companies. Only the definition of Investment Entity is relevant in the context of private Canadian trusts and holding companies, so we will not discuss the other three types contained in the definition. Article 1.1(j) provides:
      The term "Investment Entity" means any Entity that conducts as a business (or is managed by an entity that conducts as a business) one or more of the following activities or operations for or on behalf of a customer:
      1. trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;
      2. individual and collective portfolio management; or
      3. otherwise investing, administering, or managing funds or money on behalf of other persons.

      This subparagraph 1(j) shall be interpreted in a manner consistent with the similar language set forth in the definition of "financial institution" in the Financial Action Task Force Recommendations.

      As an initial matter, if we ignore the reference to the Financial Action Task Force Recommendations ("FATF")14 (addressed below), a careful reading of the language leads us to conclude that a private Canadian trust or holding company will be classified as an Investment Entity (and therefore as a Financial Institution) if:

      5) Either (a) the trust or holding company has a professional trustee or (b) the assets of the trust are managed by a professional manager, and

      6) The professional trustee or manager is not a flesh-and-blood person.15

      In the context of private Canadian trusts, this conclusion is consistent with the guidance notes issued by the U.K. and Ireland, which are the only two countries that have issued guidance notes.

      Section 2.36 of the U.K. guidance notes states:

      A Trust will be an Investment Entity and therefore a Financial Institution where the Trust or Trustee engages another Financial Institution to manage the Trust or Financial Assets on its behalf.

      Chapter 2(2)(C) of the Irish guidance notes states:

      A trust will be an investment entity where the trust or trustee engages another Financial Institution to manage the trust or financial assets on its behalf. The fact that a trust holds a Financial Account (e.g. a Depository Account) with a Financial Institution does not mean that the trust is a Financial Institution in itself provided the Financial Institution does not participate in the management of the trust of Financial Assets.16

      Recall that the definition of Investment Entity directs us to the FATF Recommendations for interpretation of the term. Since FATF does not include private trusts or holding companies within its definition of Financial Institution one could conclude that private Canadian trusts and holding companies should be excluded from the definition of Investment Entity, however, we believe this conclusion would be erroneous.

      Close examination of the FATF definition of "financial institution"17 reveals it to be overly broad, directly conflicting with other provisions of the IGA, and inconsistent with defined terms found within the IGA. For these reasons, the reference to FATF does little to advance a clear understanding of the term Financial Institution and should not be relied upon, particularly as support for a more restrictive interpretation of the term Investment Entity.

      First, the FATF definition includes numerous types of entities that would not be defined as Investment Entities under the IGA, but other types of Financial Institutions (i.e., Depository Institutions, Custodial Institutions, and Specified Insurance Companies). Thus, interpreting Investment Entity consistently with FATF would result in classifying virtually every type of banking entity as an Investment Entity, which would render useless the other definitions of Financial Institution found in the IGA.

      Second, the term Entity is defined in Article 1.1(gg) as "a legal person or a legal arrangement such as a trust."18 The term "legal person" is not defined in the IGA or the Regulations, but since the term "natural person" is used elsewhere in Article 1,19 it is reasonable to conclude that an Investment Entity cannot be a flesh-and-blood person.20 Contrary to the IGA, FATF Recommendations provide that a Financial Entity may be "any natural or legal person" and is thus not limited to flesh-and-blood persons.21 With these inconsistencies, it is difficult to obtain meaningful clarification of this term Investment Entity by reference to FATF.

      Furthermore, FATF is mentioned only in the definition of Investment Entity, and does not otherwise modify the definition of Financial Institution.22 Thus, the FATF reference should not be used to support a more restrictive interpretation of Financial Institution under Canadian law.

    4. Definition of "financial institution" Under Draft Subsection 263(2) Excludes Private Canadian Trusts and Holding Companies Draft subsection 263(2) adopts the definition of Financial Institution found in Article 1.1(g) but restricts the entities subject to the definition to those specifically enumerated, as follows:
      (g) The term "Financial Institution" means any Entity that is a Custodial Institution, a Depository Institution, an Investment Entity or a Specified Insurance Company, and that is . . . .
      The Draft Legislation then provides an exclusive list of 11 types of entities that could be classified as financial institutions under the Act.23 The list of entities does not include private Canadian trusts or holding companies that, per the analysis above, would otherwise be included as a Financial Institution under the IGA. Since the Draft Legislation defines the term more narrowly than the IGA, one might conclude that the Draft Legislation is ultra vires the intent of the IGA. There are, however, three important elements to consider before reaching that conclusion. First, Article 1.2 provides that any term not defined under the IGA shall, unless modified by the Competent Authorities, be determined under local law. Since the term Financial Institution is already defined in the IGA, however, this provision does not preclude the ultra vires conclusion. Second, notwithstanding the definitions found in the IGA, Article 4.7 provides that Canada may elect to use the definitions found in the Regulations provided such use does not frustrate the purposes of the IGA. Since the restrictive definition found in draft subsection 263(2) is not found in the Regulations, this provision does not preclude the ultra vires conclusion. Third, Article 7.1 grants Canada the benefit of any more favourable terms afforded in similar intergovernmental agreements. Since, as of the date of this letter, there have been no intergovernmental agreements that contain similarly restrictive definitions this provision does not preclude the ultra vires conclusion.
    5. Punctuation Error in Draft Subsection 263(2) The Department has acknowledged that there is a punctuation error in draft subsection 263(2) that substantively changes the meaning of the Draft Legislation. We address the error in this Report to clarify the Department's intent and to prevent other practitioners from following an erroneous path. Draft subsection 263(2) currently provides:
      (2) For the purposes of this Part, "Canadian financial institution" and "reporting Canadian financial institution" each have the meaning that would be assigned by the [IGA], and the definition "non-reporting Canadian financial institution" in subsection (1) has the meaning that would be assigned by that subsection if the definition "Financial Institution" in subparagraph 1g) of Article 1 of the [IGA] were read as follows: . . . .
      As written, the last clause modifies only the definition of "non-reporting Canadian financial institution." The definitions outlined in the preceding clause arguably should not be limited by the latter. Upon consultation with the Department, however, we understand that it did not intend this result, but intended to narrow the IGA's definition of all Financial Institutions under the Draft Legislation. This intention is expressly confirmed by the Explanatory Notes to the Draft Legislation, which provide that the restriction in draft subsection 263(2)'s last clause applies to all definitions immediately preceding it.24 Accordingly, the Department confirmed to us that the Draft Legislation is missing a comma and should read as follows:
      (2) For the purposes of this Part, "Canadian financial institution" and "reporting Canadian financial institution" each have the meaning that would be assigned by the [IGA], and the definition "non-reporting Canadian financial institution" in subsection (1) has the meaning that would be assigned by that subsection[,] if the definition "Financial Institution" in subparagraph 1g) of Article 1 of the [IGA] were read as follows: . . . .

      Recommendation 1 Draft subsection 263(2) should be amended to remove the language that limits the definition of Financial Institution to the enumerated entities:
      (g) The term "Financial Institution" means any Entity that is a Custodial Institution, a Depository Institution, an Investment Entity or a Specified Insurance Company, [including]: . . . .

      Alternate Recommendation 1(a) In light of the risks of causing confusion in the marketplace, if the Department's Office is determined to narrowly define Financial Institution as set forth in the Draft Legislation, it should confirm its interpretation with the U.S. in a memorandum of understanding.
  2. Draft Legislation References to Regulations Draft paragraphs 263(1)(c) and 263(1)(d) refer to the Regulations for the definitions of "exempt beneficial owner" and "deemed-compliant FFI," respectively. Article 7.1, however, provides that Canada shall be granted the benefit of any more favourable terms under a signed IGA similar to the Canadian IGA afforded to a Partner Jurisdiction. In light of the fact that the IGA is new on the world stage and will continue to evolve, references to defined terms in the Draft Legislation should also refer to the IGA to afford Canadians the most favourable legal environment within which to operate.

    Recommendation 2 References to the Regulations should also refer to the IGA in the event the IGA provides more favourable terms.
  3. TFSAs Should be Classified as Deemed-Compliant Financial Institutions (and Therefore non-Reporting Financial Institutions) Assuming the Department changes its definition of Financial Institution as recommend above, the following addresses problems with the manner in which TFSA's are treated under the IGA and Draft Legislation. TFSAs25 are classified as a non-Reporting Canadian Financial Institution, these accounts are left in the incongruous position of being classified as both a Reporting Canadian Financial Institution and yet excluded from the definition of a Financial Account. The accounts and products listed in Annex II, § IV are excluded from the definition of "Account" under the IGA because they indicate low compliance risk and are already subject to the mutual exchange of information requirements of the Treaty. Further, such accounts and products are classified as Non-Reporting Canadian Financial Institutions26 because they are either Exempt Beneficial Owners27 or Deemed-Compliant Financial Institutions.28 On the face of the Treaty reference, however, TFSAs are not eligible for this classification. Article XXI(3) of the Treaty references exempt organizations, of which TFSAs are clearly not one. Nonetheless, Article XVIII(3)(b) of the Treaty specifically references Roth IRAs, and TFSAs are the functional equivalents of Roth IRAs. Article XVIII(3)(b) was added to the Treaty in the 5th Protocol, which was signed on September 21, 2007.29 TFSAs became part of the Act in 2009 and therefore could not have been included in the definition set forth in the Treaty. Furthermore, Annex II, § II(C)(1) contemplates that there are retirement funds that are not specifically included in the definition set forth in Article XVIII(3) of the Treaty should, nevertheless, be included in the definition. In light of the foregoing, TFSAs should be included in the definition of EBO; however, considering the confusion that may result if Canada unilaterally includes these entities as EBOs in the Draft Legislation the Department's Office should consider whether these issues are more appropriately addressed in a memorandum of understanding with the U.S. Recommendation 3 Draft subsection 263(1) should include any entity or product referenced in Annex II, § IV; specifically:
    "non-reporting Canadian Financial institution" means any Canadian financial institution or other entity resident in Canada that (a) is described in any of paragraphs C, D, and G to J of section III of Annex II to the agreement [or in section IV of Annex II to the agreement]; . . . .
    Alternate Recommendation 3(a) Since TFSAs are the functional equivalent of Roth IRAs, and Roth IRAs are referenced in Article XVIII(3) of the Treaty the Department's Office should seek to enter into a memorandum of understanding with the U.S. to include TFSAs within the definition of EBO under Annex II, § II(C).
  4. RESPs Should be Classified as Deemed-Compliant Financial Institutions (and Therefore as non-Reporting Financial Institutions) Assuming the Department changes its definition of Financial Institution as recommend above, the following addresses problems with the manner in which RESPs are treated under the IGA and Draft Legislation. Like TFSAs, RESPs are treated as foreign trusts under U.S. tax law.30 The treatment of RESPs is more problematic, however, since RESPs are clearly not EBOs under Article XVIII(3) of the Treaty. Accordingly, RESPs will be non-Reporting Canadian Financial Institutions only if they are a Deemed-Complaint Financial Institution. Annex II, § III provides that Entities described in Article XXI(3) of the Treaty are Deemed-Compliant Foreign Financial Institutions, which does not include RESPs. Thus, unless there are changes affected in a memorandum of understanding or the Draft Legislation, RESPs will find themselves in the same incongruous position as TFSAs: excluded from the definition of Financial Account yet a Reporting Canadian Financial Institution. Interestingly, Mexico, and Australia have accounts or products that are in similar position. Mexico has a type of account commonly referred to as an AFORE,31 that is a self-directed fund through which the taxpayer may directly invest his or her social security contributions. AFOREs are passive foreign investment companies under § 1297 and therefore likely Financial Institutions under the U.S. – Mexico intergovernmental agreement.32 Just like RESPs in Canada, AFOREs are also removed from the definition of Financial Account in Annex II, § III(c)(i) of the U.S. – Mexico intergovernmental agreement. The same should be true for Australian superannuation accounts, which are defined as foreign trusts under U.S. tax law and likely Financial Institutions per FATCA and the intergovernmental agreement.33 Australian superannuation accounts will likely be treated the same as Mexican AFOREs under the future U.S. – Australian intergovernmental agreement, which has been agreed to in principal.34 If Mexican AFOREs and Australian superannuation accounts are not excluded either as EBOs or Deemed-Compliant Financial Institutions for FATCA purposes, they will occupy the same unenviable and incongruous position of being classified as both a Financial Institution and a non-account.35

    Recommendation 4 Draft subsection 263(1) should include any entity or product referenced in Annex II, § IV; specifically:
    "non-reporting Canadian Financial institution" means any Canadian financial institution or other entity resident in Canada that (a) is described in any of paragraphs C, D, and G to J of section III of Annex II to the agreement [or in section IV of Annex II to the agreement]; . . . .

    Alternate Recommendation 4(a) While RESPs are not similar to either the definition of Retirement Funds or Exempt Organizations under the Treaty, there is little risk of non-compliance associated with these accounts and, accordingly, the Department's Office should seek to execute a memorandum of understanding with the U.S. to include RESPs within the definition of Deemed-Compliant Financial Institutions under Annex II, § III(I).

Footnotes

1. The principal authors of this Report are Roy Berg and Paul Barba. Significant contributions were made by Kim G C Moody. Mr. Berg is admitted to practice in California and Washington and is a Student-at-Law in Canada.
2. Agreement Between the Government of the United States of America and the Government of Canada to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital, U.S. – Can., Feb. 5, 2014, available at http://www.fin.gc.ca/treaties-conventions/pdf/FATCA-eng.pdf.
3. Foreign Account Tax Compliance Act of 2010, 26 U.S.C. §§ 1471-1474 (2010).
4. Unless otherwise indicated, references to subsections and paragraphs are to provisions of the Income Tax Act (Canada) (the "Act"). Unless otherwise noted, references to a "§" herein are to sections of the United States Internal Revenue Code of 1986, as amended ("I.R.C."). References to a "Treas. Reg. §" are to sections of the U.S. Treasury Regulations ("Regulations") published under Title 26 of the Code of Federal Regulations, as amended. Unless otherwise noted, all references to an "Article" herein are to an article of the IGA and all references to an "Annex" are to the appropriate annex of the IGA.
5. Memorandum of Understanding Regarding the Agreement Between the United States of America and the Kingdom of the Netherlands to Improve International Tax Compliance and to Implement FATCA, U.S.-Neth., Dec. 18, 2013, available at http://www.rijksoverheid.nl/ministeries/fin/nieuws/2013/12/18/weekers-sluit-overeenkomst-met-vs-tegen-belastingontwijking-en-zwart-sparen.html; Amendments to the FATCA Agreement Between Switzerland and the United States in Accordance with the Exchange of Notes, U.S. – Switz., June 7, 2013, available at http://www.news.admin.ch/NSBSubscriber/message/attachments/32201.pdf; Memorandum of Understanding Agreement Between the Government of the Kingdom of Norway and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA, U.S. – Nor., Apr. 15, 2013, available at http://www.regjeringen.no/pages/38298020/mou.pdf; Memorandum of Understanding Regarding the Agreement Between the Government of the United States of America and the Government of the Kingdom of Denmark to Improve International Tax Compliance and to Implement FATCA, U.S. – Den., Nov. 15, 2012, available at http://www.skm.dk/media/11688/mou.pdf.
6. I.R.S. Notice 2013-43, 2013-31 I.R.B. 113 (July 12, 2013).
7. As defined under subsection 248(1) in conjunction with subsection 146.2(5) of the Act.
8. Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, Sept. 26, 1980, U.S. – Can., T.I.A.S. 11087.
9. As defined under subsection 248(1) in conjunction with subsection 146.1(1) of the Act.
10. Treas. Reg. § 1.1471-5(e)(4)(v), Examples 5 and 6 (2014).
11. § 1471(a).
12. Note, however, that the Regulations contemplate that certain non-U.S. sourced payments may be resourced to the U.S. on a look-through basis. The rules and definitions surrounding these "foreign passthrough payments" have not been finalized and will not go into effect prior to January 1, 2017. Treas. Reg. § 1.1471-4(b)(4) (2014).
13. For purposes of this Report we assume that a Canadian holding company is a privately held Canadian corporation that owns only marketable securities, which are managed by a Professional Manager who is not a flesh-and-blood person.
14. The FATF is an independent inter-governmental body that develops and promotes policies to protect the global financial system. According to the FATF, its Recommendations on International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation are recognized as the global standard. FATF, Who we are, http://www.fatf-gafi.org/pages/aboutus/ (last visited Mar. 1, 2014).
15. For a complete analysis of this issue, please see Roy A. Berg, In FATCA-Land a Canadian Trust is a Bank, Feb. 10, 2014, http://www.moodysgartner.com/in-fatca-land-a-canadian-trust-is-a-bank/ (last visited Mar. 1, 2014). Also note that Peter A. Cotorceanu has written an excellent expository trilogy on FATCA, trusts, and underlying companies. Peter A. Cotorceanu, FATCA and Offshore Trusts: The First Nibble, 139 Tax Notes 409 (Apr. 22, 2013); Peter A. Cotorceanu, FATCA and Offshore Trusts: a Second Bite of the Elephant, 140 Tax Notes 1007 (Sept. 2, 2013); Peter A. Cotorceanu, FATCA and Underlying Companies: Pin the Tail on the Elephant, 142 Tax Notes 957 (Mar. 3, 2014).
16. Irish Revenue, guidance Notes on the Implementation of FATCA in Ireland, Chapter 2(2)(C), Jan. 17, 2014.
17. Specifically, FATF provides the following:
Financial institutions means any natural or legal person who conducts as a business one or more of the following activities or operations for or on behalf of a customer:
1. Acceptance of deposits and other repayable funds from the public.
2. Lending
3. Financial leasing
4. Money or value transfer services
5. Issuing and managing means of payment (e.g. credit and debit cards, cheques, traveller's cheques, money orders and bankers' drafts, electronic money).
6. Financial guarantees and commitments.
7. Trading in:
(a) money market instruments (cheques, bills, certificates of deposit, derivatives etc.);
(b) foreign exchange;
(c) exchange, interest rate and index instruments;
(d) transferable securities;
(e) commodity futures trading.
8. Participation in securities issues and the provision of financial services related to such issues.
9. Individual and collective portfolio management.
10. Safekeeping and administration of cash or liquid securities on behalf of other persons.
11. Otherwise investing, administering or managing funds or money on behalf of other persons.
12. Underwriting and placement of life insurance and other investment related insurance.
13. Money and currency changing.
FATF, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: FATF Recommendations, Feb. 2012, available at http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf (last visited Mar. 1, 2014) (citations omitted) [hereinafter FATF Recommendations].
18. The Regulations define "entity" as "any person other than an individual." Treas. Reg. § 1.1471-1(b)(39) (2014).
19. Article 1.1(v), (mm).
20. Nor will a trust constitute an Investment Entity under the parenthetical in Article 1.1(j) if it is "managed by" a flesh-and-blood person. Note, however, that "entity" is not capitalized in such parenthetical, making it unclear whether that term refers to the defined term "Entity" (with a big E) and whether a trust must be managed by someone other than a flesh-and-blood person to constitute an "Investment Entity."
21. FATF Recommendations, supra note 17.
22. Article 1.1(g)-(k).
23. The exclusive list is as follows:
g) The term "Financial Institution" means any Entity that is a Custodial Institution, a Depository Institution, an Investment Entity or a Specified Insurance Company, and that is
(1) an authorized foreign bank within the meaning of section 2 of the Bank Act in respect of its business in Canada, or a bank to which that Act applies;
(2) a cooperative credit society, a savings and credit union or a caisse populaire regulated by a provincial Act;
(3) an association regulated by the Cooperative Credit Associations Act;
(4) a central cooperative credit society, as defined in section 2 of the Cooperative Credit Associations Act, or a credit union central or a federation of credit unions or caisses populaires that is regulated by a provincial Act other than one enacted by the legislature of Quebec;
(5) a financial services cooperative regulated by An Act respecting financial services cooperatives, R.S.Q., c. C-67.3, or An Act respecting the Mouvement Desjardins, S.Q. 2000, c. 77;
(6) a life company or a foreign life company to which the Insurance Companies Act applies or a life insurance company regulated by a provincial Act;
(7) a company to which the Trust and Loan Companies Act applies;
(8) a trust company regulated by a provincial Act;
(9) a loan company regulated by a provincial Act;
(10) a person or an entity authorized under provincial legislation to engage in the business of dealing in securities or any other financial instruments, or to provide portfolio management or investment advising services; or
(11) a department or an agent of Her Majesty in right of Canada or of a province that is engaged in the business of accepting deposit liabilities.
24. Explanatory Notes – Canada-United States Enhanced Tax Information Exchange Agreement, Definitions, p.3, Feb. 5, 2014, available at http://www.fin.gc.ca/drleg-apl/2014/can-us-eu-0214-eng.asp.
25. Under U.S. tax law, trusteed TFSAs and trusteed RESPs are treated as foreign trusts. Rev. Proc. 2002-23, 2002-1 C.B. 744 (superseded Rev. Proc. 89-45, 1989-2 C.B. 596).
26. Article 1.1(q).
27. Annex II, § II.
28. Annex II, § III.
29. Protocol Amending the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital, U.S.-Can., Article 13(1), Sept. 21, 2007.
30. Rev. Proc. 2002-23, supra note 25.
31. The type of account is the Administadora para Fondos Para Retiro ("AFORE").
32. Agreement Between the Department of the Treasury of the United States of America and the Ministry of Finance and Public Credit of the United Mexican States to Improve International Tax Compliance Including with Respect to FATCA, U.S.-Mex., Nov. 19, 2012, available at http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Agreement-Mexico-11-19-2012.pdf [hereinafter U.S.- Mexico intergovernmental agreement].
33. I.R.S. Priv. Ltr. Rul. 200807003 (Feb. 15, 2008).
34. Amy S. Elliott, Australia and U.S. to Sign FATCA Agreement, 2014 T.N.T. 36-7 (Feb. 24, 2014).
35. See Marie Sapirie, The PFIC Reporting Problem for Foreign Retirements, 140 Tax Notes 1166 (Sept. 16, 2013).

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

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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Authors
Roy Berg
Paul Barba
Kim G.C. Moody
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