Tax Alert - FATCA and Canadian Credit Unions

April 2015

FATCA and Canadian Credit Unions

​The newly-effective U.S. Foreign Account Tax Compliance Act (FATCA) legislation imposes extensive due diligence and reporting obligations on financial institutions around the world. This law impacts many Canadian financial institutions, including credit unions. It is important to determine the FATCA status of a credit union and to comply with the requirements associated with the applicable status; otherwise, certain payments made to the credit union may be subject to a 30% FATCA withholding tax.

In this Tax Alert, we’ll look at the exceptions to the FATCA provisions that could apply to Canadian credit unions to provide relief from full due diligence and reporting obligations. Where the exceptions do not apply, the credit union will be considered a Reporting Canadian Financial Institutions (RCFI). A previous Tax Alert issued on February 18, 2014, Canada Announces Intergovernmental Agreement with the United States over FATCA, more fully describes the obligations of RCFIs. Please contact your BDO advisor for assistance with compliance if your organization is an RCFI.

Background of FATCA

In its efforts to combat tax evasion, the U.S. government enacted FATCA on March 18, 2010 to help the U.S. Treasury identify U.S. residents and citizens who invest offshore. With this information, the U.S. government will be in a much better position to enhance and enforce compliance with U.S. tax obligations. 

The legislation is far-reaching, and requires foreign financial institutions (FFIs) to disclose their U.S. account holders’ identities and account information to the Internal Revenue Service (IRS). FFIs who do not comply will be subject to a 30% FATCA withholding tax on all interest and dividends from U.S. sources, as well as on gross proceeds from the disposition of U.S. securities.

In general, FATCA defines a financial institution as an entity that is a depository institution, a custodial institution, an investment entity, or specified insurance company. The broad definition of FFI includes such entities as banks, custodians, credit unions, insurance companies, investment funds, pension funds and other employee funds.

Canada – U.S. Intergovernmental Agreement

In 2014, Canada and the U.S. entered into a reciprocal Model I Intergovernmental Agreement, (IGA), which will be administered in Canada under the terms of the Canada–U.S. Income Tax Convention. The IGA modifies certain FATCA requirements for Canadian financial institutions. Under the IGA, Canadian financial institutions are required to report relevant information with respect to accounts held by U.S. persons to the Canada Revenue Agency (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 30% FATCA withholding tax should not apply to Canadian entities.

Canadian legislation enabling the IGA was passed into law in 2014. This legislation requires an annual information return for reportable accounts (as defined in the IGA) in prescribed form to be submitted by reporting Canadian financial institutions to the CRA. This annual information return will be due before May 2 of each calendar year — starting with the 2014 report, due May 1, 2015. 

Types of Financial Institutions

Under the IGA, Canadian financial institutions are divided into two main categories:

  • Reporting Canadian Financial Institutions (RCFIs), and
  • Non-Reporting Canadian Financial Institutions (NRCFIs).

All Canadian Financial Institutions will be RCFIs unless they meet one of the specific exceptions to be a NRCFI. RCFIs are subject to extensive due diligence obligations for identifying and reporting on reportable accounts and on payments to certain non-participating financial institutions as defined in the IGA. In addition, RCFIs must register with the IRS and obtain a Global Intermediary Identification Number (GIIN).

A NRCFI is a Canadian financial institution that meets one of the specific exemptions set out in the IGA or in the FATCA regulations. 

While the IGA imposes an extensive burden on RCFIs, it gives relief from the application of the more onerous FATCA rules to NRCFIs. NRCFIs are not subject to FATCA due diligence obligations for identifying and reporting on reportable accounts and on payments to certain non-participating financial institutions. They are not required to register with the IRS and obtain a GIIN. FATCA compliance for NRCFIs is basically limited to providing the entity's status under FATCA when requested. However, there are a few scenarios in which a NRCFI must report to the CRA, for example, in some cases where a U.S. reportable account is identified. In this case, the financial institution must report the account as a U.S. reportable account. Contact your BDO advisor for further information.

Credit Unions

Generally, Canadian credit unions are considered Canadian Financial Institutions under the IGA. There are however, three general exceptions that may be applicable and that would allow a Canadian credit union to be considered a non-reporting Canadian Financial Institution. If a credit union can meet the requirements of one of these exceptions, its obligations under FACTA will be much less stringent. These three exceptions are:

  1. the Local Bank exception
  2. the Local Client Base exception, and 
  3. the Low Value Account exception.

There is also a specific exception for a Central Cooperative Credit Society (CCCS). However, as a CCSS primarily provides support to, and services for, member credit unions, it will have limited applicability.

1. Local Bank Exception

The Local Bank exception is available if all of the following requirements are met:

  1. The credit union is licensed and regulated under the laws of Canada as a credit union or similar cooperative credit organization that is operated without profit.
  2. No member has a greater than 5% interest in the credit union or Cooperative Credit organization.
  3. The credit union does not have a fixed place of business outside Canada.
  4. The credit union does not solicit customers outside of Canada.
  5. The credit union does not have more than U.S. $175 million in assets on its balance sheet.
  6. Any related entities, taken together, do not have assets exceeding U.S. $500 million collectively; and
  7. Any related entity is incorporated or organized in Canada, and all related entities also meet all of the above requirements.

2. Local Client Base Exception

The Local Client Base exception is available if all of the following requirements are met:

  1. The credit union is licensed and regulated under the laws of Canada.
  2. The credit union does not have a fixed place of business outside of Canada.
  3. The credit union does not solicit customers outside of Canada.
  4. The credit union is required under Canadian law to identify Canadian resident account holders to perform information reporting or is a reporting entity under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and related regulations.
  5. At least 98% of the financial accounts by value provided by the credit union are residents of Canada, and 
  6. The credit union has policies and procedures to identify any financial account held by a specified U.S. person who is not a resident of Canada, and monitors whether it provides accounts to any specified U.S. persons who are not a resident of Canada.

3. Low-Value Accounts Exception

The Low-Value Accounts exception is available if all of the following requirements are met:

  1. The credit union is not an “investment entity”. An Investment entity, as defined in the IGA, primarily conducts as a business (or is managed by an entity that primarily conducts as a business) one or more of the following activities for, or on behalf of, a customer:
a) trading in money market instruments (such as cheques, bills, certificates of deposit, and derivatives), foreign exchange, exchange, interest rate, and index instruments, transferable securities and commodity futures;
b) individual and collective portfolio management; and
c)  otherwise investing, administering or managing funds or money on behalf of other persons.
  1. No account maintained by the credit union has a balance or value in the aggregate exceeding U.S. $50,000, and
  2. The credit union does not have more than U.S. $50 million in assets on its balance sheet as of the end of the preceding accounting year.
  3. Any related entities, taken together, do not have more than U.S. $50 million in total assets on their balance sheets as of the end of the preceding accounting year.

Summary

It is important to review the characteristics of your organization if it is a credit union to determine its status under FATCA. Many smaller and geographically limited Canadian credit unions will be considered to be NRCFIs, provided the credit union can satisfy the requirements of one of the exempt categories described above. Please contact your BDO advisor to confirm the FATCA status of your organization and to discuss your obligations.


The information in this publication is current as of March 31, 2015.

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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