On February 5, 2014 Canada and the U.S. executed a model 1
intergovernmental agreement ("IGA"), which relieved
Canadian financial institutions from many of the onerous
obligations under FATCA. On the same day, the Canadian Department
of Finance issued draft legislation required under Canadian law to
implement the IGA and requested comments on the draft legislation
before March 10, 2014.
As we addressed in our report to the Department of Finance (click here), our primary concern with the
draft legislation is that it eviscerates the definition of
"Financial Institution" contained in: a) the IGA; b)
Treasury Regulations; c) intergovernmental agreements executed by
other jurisdictions; and d) guidance notes issued by the U.K., and
The consequence of this narrowed definition is that many
Canadian entities that would be classified as Financial
Institutions by other jurisdictions would not be classified as such
in Canada (e.g., private trusts and private holding
This result is problematic for several reasons:
The U.S. Department of the Treasury could conclude that the
legislation (if it becomes final) has failed to validly implement
the IGA, which would subject Canadian entities to the full force
and effect of FATCA.
If the legislation does bring into force the IGA (which is
unlikely) a Canadian entity that is not classified as Financial
Institutions (e.g., private trust or private holding company) under
domestic law but would be classified as a Financial Institution
under the Treasury Regulations or other intergovernmental
agreements will likely face unnecessary withholdings and the
concomitant obligations to seek a refund directly from the
Inconsistent definitions of Financial Institution amongst
jurisdictions that have executed intergovernmental agreements will
cause increased compliance costs and uncertainty in the
marketplace. The U.K. realized this risk early on and has taken the
lead in developing its domestic legislation to provide a model
framework for the consistent application of definitions and
resulting entity classification.
The comments we have submitted to the Department of Finance
provide greater analysis of these and other issues with the draft
legislation. We are hopeful that the Department of Finance will
consider our comments and takes appropriate action.
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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