On February 5, 2014, the Canadian government announced that it has signed an intergovernmental agreement ("IGA") with the U.S. regarding the U.S. Foreign Account Tax Compliance Act ("FATCA").1 Under the terms of FATCA, Canadian financial institutions would be required to report directly to the U.S. Internal Revenue Service ("IRS") information regarding accounts held by U.S. taxpayers starting on July 1, 2014, the date on which the IGA is proposed to become effective. On that date, without the IGA, obligations to comply with FATCA would have been unilaterally and automatically imposed on Canadian financial institutions and their clients. Draft legislation to implement the IGA has been released for public comment by March 10, 2014.2
FATCA has raised a number of significant concerns, including the potential violation of Canada's privacy laws and the treatment of dual citizens of Canada and the U.S. The IGA reached by Canada and the U.S. modifies the application of FATCA with regard to Canada in a number of ways:
- Canadian financial institutions will report relevant information on accounts held by persons liable to income tax in the U.S., including U.S. citizens, U.S. green card holders (whether living inside or outside the U.S.) and U.S. residents to the Canada Revenue Agency ("CRA") instead of the IRS starting in July 2014. The IGA requires every reporting Canadian financial institution that maintains a U.S. reportable account at any time during a calendar year and after June 29, 2014 to file an information return with the Minister of National Revenue before May 2 of the next year.3
- The CRA will then exchange the information with the IRS through existing provisions and safeguards set out in the Canada-U.S. tax treaty starting in 2015.
- Certain accounts will be exempt from FATCA (this means that financial institutions in Canada will not be required to report them to the CRA): registered retirement savings plans, registered retirement income funds, pooled and other registered pension plans, tax-free savings accounts, registered education savings plans, deferred profit sharing plans, and registered disability savings plans.
- Smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt from FATCA.
- The 30% FATCA withholding tax will not apply to clients of Canadian financial institutions, and will apply to a Canadian financial institution itself only if the financial institution is in significant and long-term non-compliance with its obligations under FATCA.
- The IGA also includes documentation requirements; every reporting Canadian financial institution is to maintain adequate records, including self- certifications and records of documentary evidence.
- The IGA includes an anti-avoidance rule, which provides that where a person enters into an arrangement or engages in a practice with the primary purpose of avoiding an obligation, the person is subject to the obligation as if the person had not performed the practice or arrangement.
The Department of Finance has emphasized that the IGA is strictly an information sharing agreement and does not involve the imposition by the U.S. of any new or higher taxes. It also noted that while the Canada-U.S. tax treaty allows a country to collect taxes imposed by the other country, the treaty does not apply to penalties under laws that impose only a reporting requirement. For example, the CRA has confirmed that it will not assist in the collection of U.S. penalties associated with the Report on Foreign Bank and Financial Accounts (FBAR), which is a non-tax form required by the U.S. Treasury under the U.S. Bank Secrecy Act that requires the person filing the form to provide details of assets held at non-U.S. financial institutions. The CRA also confirmed that it will not collect the U.S. tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose (regardless of whether the individual was also a U.S. citizen at that time).
In addition to releasing draft legislation implementing the IGA for public comment, the CRA intends to issue guidance to financial institutions on complying with the IGA, and will also provide information to taxpayers about the IGA on its website. The IGA and legislative proposals can be viewed on the Department of Finance's website.
Account holders can expect that Canadian financial institutions will request detailed information about their U.S. status. U.S. citizens and green card holders who have not been fully compliant with their U.S. tax reporting obligations may wish to become compliant before information is exchanged under the IGA.
1. Agreement between the Government of Canada and the Government of the United States of America to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital. See the Department of Finance's press release and accompanying documentation at http://www.fin.gc.ca/n14/14-018-eng.asp
2. The Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act implements the IGA.
3. The IGA also requires every reporting Canadian financial institution to file an information return before May 2 of 2016 or 2017, as the case may be, if the institution makes a payment during the immediately preceding calendar year (i.e., 2015 or 2016, respectively) to a non-participating financial institution that is the holder of a financial account maintained by the reporting Canadian financial institution.
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