Tax Alert - Canada Announces Intergovernmental Agreement with the United States over FATCA

February 18, 2014

On February 5, 2014, Finance Minister Jim Flaherty and National Revenue Minister Kerry-Lynne Findlay jointly announced that Canada and the United States had signed an intergovernmental agreement (IGA) relating to the U.S. Foreign Account Tax Compliance Act (FATCA) which will be administered in Canada under the terms of the Canada - U.S. Income Tax Convention ("the Treaty").

In March 2010, the U.S. enacted FATCA. Without an IGA, such as the one announced on February 5, 2014, FATCA would require Canadian banks and other non-U.S. financial institutions to report accounts held by U.S. citizens (including those resident in Canada) and U.S. resident taxpayers  (which we will refer to as “U.S. persons”) to the U.S. Internal Revenue Service (IRS). Failure to comply with FATCA would have affected Canadian financial institutions by imposing sanctions, including special U.S. withholding taxes on payments to them from the U.S.

FATCA raised a number of concerns in Canada for both dual citizens of Canada and the U.S., and Canadian financial institutions. One key concern was that the reporting obligations in respect of accounts in Canada would compel Canadian financial institutions to report information on account holders who are U.S. persons, which is potentially a violation of Canadian privacy laws.

Under the IGA, Canadian financial institutions will now be required to report relevant information with respect to accounts held by U.S. persons to the CRA, rather than to the IRS.  The CRA will exchange the information with the IRS through the existing provisions and safeguards of the Treaty. According to the government announcement, this will ensure that the collection and use of the information is consistent with Canadian privacy law. Provided that the terms of the IGA are followed, the withholding tax penalties of FATCA should not apply.

In addition, many Canadian financial accounts will be exempt from FATCA reporting to the CRA, including:

  • Registered Retirement Savings Plans (RRSPs),
  • Registered Retirement Income Funds (RRIFs),
  • Registered Education Savings Plans (RESPs),
  • Registered Disability Savings Plans (RDSPs),
  • Tax Free Savings Accounts (TFSAs),
  • Registered Pension Plans (RPPs),
  • Pooled Registered Pension Plans (PRPPs),
  • AgriInvest accounts,
  • Eligible Funeral Arrangements, and
  • certain escrow accounts.

Certain smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will have special rules that apply to them as “deemed compliant Foreign Financial Institutions”.  Provided that they meet the specified criteria, they will be exempt from reporting.

Canadian financial institutions and Canadian entities that are deposit-taking or investment businesses need to be familiar with the details that form part of the IGA, in order to determine their status under the IGA.  This in turn will define their reporting obligations. They will need to ensure that their systems capture the information that will be required to be reported. For example, it has generally been uncommon for Canadian financial institutions to know whether their customers are U.S. citizens (or are otherwise U.S. taxpayers); however, it will be essential to know this information in order to comply with the new reporting rules.

Canadian financial institutions and other reporting entities will be required to collect and report a wide variety of information, including the following with respect to 2014:

  • the name and identifying number of the reporting Canadian financial institution;
  • the name, address, and U.S. taxpayer identification number of each account holder who is a U.S. person (as defined in the IGA);
  • the account number; and
  • the account balance or value as of the end of the reporting period (or the date an account was closed).

In 2015, the following additional information will need to be collected and reported in addition to the information above:

  • where the account is a custodial account,  the total gross amount of interest, dividends, and other income generated with respect to the assets held in the account, that was paid or credited to the account during the reporting period;
  • where the account is a depository account, the total gross amount of interest paid or credited to the account during the reporting period; and
  • where the account is not a custodial or a depository account, the total gross amount paid or credited to the account holder with respect to the account during the reporting period.

In 2016 and subsequent years, in addition to the information set out for 2015 reporting, for custodial accounts where the Canadian financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the U.S. person who is the account holder, it will be necessary to report the total gross proceeds from the sale or redemption of property paid or credited to the account during the reporting period.

FATCA, as governed by the IGA agreement, sets out complex requirements for Canadian banks and other reporting non-U.S. financial institutions regarding reporting requirements, and the level of detail required to be reported regarding financial accounts held by U.S. persons. The level of scrutiny and review required by these reporting entities also depends on the value of the accounts maintained by U.S. persons. In addition, Canadian reporting entities will need to be registered on the IRS FATCA registration website as compliant foreign financial institutions in order to obtain a Global Intermediary Identification Number (GIIN). The GIIN will allow payments to be made to the Canadian entity without the application of FATCA withholding tax.

The draft Canadian enabling legislation was also introduced on February 5, 2014. This legislation will require an annual information return in prescribed form to be submitted by the particular Canadian bank or other reporting entity. However, the reporting of accounts will include only accounts maintained at the reporting entity after June 29, 2014.  This annual information return will be due before May 2 of each calendar year, starting with the 2014 report, due May 1, 2015. In addition, an annual report will be required for payments made to non-participating financial institutions that hold an account at reporting financial institutions.

In addition, if asked for a U.S. federal taxpayer identifying number by a Canadian financial institution and such number is not provided, the taxpayer can be fined $100.

The government of Canada has been clear that the IGA forms part of an information exchange under the provisions of the Treaty. As such, no new taxes are imposed, and, as part of the terms of the IGA, the U.S. will report information on bank accounts held at U.S. financial institutions by residents of Canada.

Although not directly addressed in the announcement, the FAQs that accompanied this announcement state that the Canadian government respects the sovereign right of the U.S. to use citizenship as a basis for taxation. However, it goes on to say that citizenship-based taxation is a departure from the residence-based approach generally followed by Canada and most of the rest of the world, and this creates unique challenges for U.S. citizens who reside in other countries.  Due to this, the CRA will not assist in the collection of U.S. penalties associated with the Report on Foreign Bank and Financial Accounts (commonly known as the FBAR), which is a information reporting return 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. Furthermore, the CRA will not collect U.S. tax liabilities of a Canadian citizen if the individual was a Canadian citizen at the time the particular liability arose (whether or not the individual was also a U.S. citizen at that time).

As part of this agreement, the U.S. has agreed to share information about financial accounts held at U.S. financial institutions by Canadians with the government of Canada. The agreement does not provide many details about this part of the information exchange, but sets out the intention of the U.S. to exchange information currently being gathered about certain accounts maintained by U.S. financial institutions held by residents of Canada and to establish ways to exchange types of information that are equivalent to that gathered under FATCA. There will be no reporting of Canadian information by the U.S. until 2017.

If you have questions about this agreement as a U.S person living in Canada or as a financial entity, please contact your BDO advisor.

The information in this publication is current as of February 19, 2014.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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