As of July 2014, a new agreement between Canada and the United States will require Canadian financial institutions to implement procedures to share sensitive information about their US clients with the Canada Revenue Agency.
On February 5, 2014, the Canadian government announced it signed a tax information-sharing intergovernmental agreement (IGA) with the United States under the Canada-US Tax Convention. This agreement was reached almost four years after the US government enacted the Foreign Account Tax Compliance Act (FATCA) on March 18, 2010.
FATCA was adopted to combat tax evasion by US taxpayers by providing the IRS with information to promote tax compliance. FATCA requires non-US financial institutions to enter into an agreement with the IRS to report accounts held by US residents and citizens. Failure to comply with FATCA could subject non-US financial institutions or their account holders to sanctions, including special US withholding taxes. Under an IGA, the US and the other jurisdiction may agree on how FATCA may be implemented by financial institutions in that jurisdiction. To date, the US has concluded IGAs with 22 countries and at least 12 other IGAs are being actively negotiated.
The Canadian IGA tailors FATCA provisions to address Canada’s concerns regarding the integrity of its tax system and privacy laws, while taking into account FATCA’s underlying objectives. The IGA is strictly an information-sharing agreement and therefore does not involve the US imposing any new taxes.
Absent the IGA, FATCA would have compelled Canadian financial institutions to report to the IRS information about their clients’ accounts worth more than US$50,000 held by US residents or citizens, including dual citizens. A failure to comply with FATCA would have, in certain cases, required US payers making payments of US-sourced income to the non-compliant financial institution or to its clients to withhold a tax equal to 30 percent of the payment.
Under the IGA, Canadian financial institutions and any Canadian branches of non-resident financial institutions will be required to report information on their US clients’ accounts to the Canada Revenue Agency (CRA) rather than to the IRS, which will ensure that the collection, use and exchange of information is consistent with Canadian privacy laws and the Canada-US Tax Convention. As the IGA is a reciprocal agreement, US financial institutions will also report specific information to the IRS, which will annually exchange that information with the CRA.
Pursuant to the IGA’s provisions, the 30 percent withholding tax would only apply to Canadian financial institutions in significant and long-term non-compliance with their obligations under the agreement and would not be imposed on payments received by their clients. A Canadian financial institution would be considered to be in significant and long-term non-compliance if it has not resolved a non-compliance concern within 18 months of the CRA receiving notice of such non-compliance from the IRS.
Annex II of the IGA also exempts specified entities and financial products from being reviewed and reported on, including the Bank of Canada and most federally registered accounts such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Pooled Registered Pension Plans (PRPPs), Registered Pension Plans (RPPs) Tax-Free Savings Accounts (TFSAs), Registered Disability Savings Plans (RDSPs), Registered Education Savings Plans (RESPs) and Deferred Profit Sharing Plans (DPSPs).
A Canadian financial institution that does not have more than US$50 million in total assets will also be exempt, provided it holds no account of greater value than US$50,000 and it does not qualify as an Investment Entity.
The IGA also confirms the FATCA exemption for credit unions and financial institutions that have no more than US$175 million in total assets, provided they do not have a fixed place of business outside Canada.
Canadian financial institutions will have to identify and file an information return by May 2 of each year in respect of their US Reportable Accounts, Recalcitrant Accounts and Nonparticipating Financial Institutions as defined in the IGA.
Canadian financial institutions should also begin applying due diligence procedures such as electronic and paper record searches on US reportable accounts by July 1, 2014, and are expected to start reporting their information to the CRA in 2015. The due diligence procedures are explained in detail in Annex I of the IGA.
What is next?
The government is expected to introduce legislation at an early opportunity to implement the IGA, as it must be ratified to come into force in Canada.
The first exchange of information between the CRA and the IRS should be in 2015.
According to the Department of Finance Canada, the CRA’s publication of detailed guidance for Canadian financial institutions and their clients is expected in the near future.
The draft of the legislation to implement the agreement will be released for comment shortly.
The agreement can be found on the Department of Finance Canada website.