In this installment of our analysis of the OECD’s Common Reporting Standard (CRS), we address practical considerations for affected Canadian investment funds.  As we previously discussed, the CRS, also known as the Standard for Automatic Exchange of Financial Account Information in Tax Matters, is a coordinated set of global rules that facilitates the automatic exchange of financial account information (AEOI) of non-residents to assist governments in detecting and deterring tax evasion and other non-compliance. 

Under the CRS, a “reporting financial institution” (ReportingFI) must report prescribed information to the tax authority of the jurisdiction in which the Reporting FI is located.  Each year, there will be an AEOI between the tax authorities in other participating CRS jurisdictions. The CRS prescribes the types of reportable persons and financial accounts that are within its ambit, the information that must be disclosed and the due diligence procedures that Reporting FIs are required to follow.

The CRS was implemented effective January 1, 2016, by certain “early adopter” states including ones where investment funds have a significant presence such as Bermuda, the British Virgin Islands, the Cayman Islands and Luxembourg. 

The CRS is expected to be implemented in Canada starting on July 1, 2017 allowing a first exchange of information in 2018.  On February 4, 2016, Canada signed a joint declaration with Switzerland expressing the intent of the two countries to engage in the AEOI in accordance with the CRS.  The Canadian Department of Finance announced that by the implementation date, Canadian financial institutions will be expected to have procedures in place to identify accounts held by non-residents and to report the required information to the Canada Revenue Agency.

Reporting Financial Institutions

Under the CRS, a “financial institution” (FI) is defined to include investment entities.  All FIs other than “non-reporting financial institutions” must report.  The categories of non-reporting FIs under the CRS are few with the result that most public and private investment funds are Reporting FIs and must therefore report.  Certain entities that are not typically considered to be investment funds in Canada that function or hold themselves out as private equity funds, venture capital funds, leveraged buyout funds or similar investment vehicles, are also required to report. 

Similar to the U.S. Foreign Account Tax Compliance Act (FATCA), most investment fund managers and portfolio managers will be FIs that do not hold accounts.  As a result, such entities will have no reporting obligations under the CRS.

Reporting Obligations

FIs must report extensive financial information with respect to reportable accounts including interest, dividends, account balance or value, income from certain insurance products, sales proceeds from financial assets and other income generated from assets held in the account or payments made with respect to the account. In addition, reportable information includes: (a) identification information in relation to the account holder, including name, address, jurisdiction of residence, taxpayer identification number (TIN), and the date and place of birth for individuals and control persons; (b) account information including the account number and the name and identifying number of the FI; and (c) financial information, including the information described above.

All accounts held by “reportable persons” (i.e. “reportable accounts”) must be reported.  A reportable person is generally an individual or an entity that resides in a CRS jurisdiction, subject to certain specific exclusions.  Publicly-traded companies and their affiliates, governmental entities and FIs (which are themselves subject to the CRS) are among those entities that are excluded from being reportable persons.  Reportable accounts include accounts held by individuals and entities (including trusts and foundations) and, under the CRS, there is a requirement to look through passive entities to report the relevant controlling persons.

While the CRS is similar to FATCA, there are some differences.  Notably, the CRS does not contemplate a withholding obligation.  Therefore, no new CRS-specific withholding procedures need to be implemented.  The OECD has provided a complete analysis of the differences between the CRS and FATCA in Part III of the CRS Implementation Handbook.

Due Diligence: Self-Certification

The CRS prescribes the due diligence procedures to be performed by Reporting FIs for the identification of reportable accounts. For these purposes, the procedures distinguish between individual accounts and entity accounts.  They also distinguish between pre-existing accounts and new accounts, on the basis that “it is more difficult and costly for FIs to obtain information from existing account holders rather than requesting such information upon account opening”.  We expect CRS implementing legislation to fix the date for determining which accounts are new or pre-existing (which may be the implementation date).

For all new accounts, the CRS requires a self-certification at the time the account is opened.  For entity accounts, Reporting FIs are required to determine whether the entity is a reportable person and whether it is a passive non-financial entity and, if so, the residency of the entity’s controlling persons. Additional procedures apply to pre-existing accounts.  For pre-existing individual accounts, the CRS requires enhanced due diligence procedures for higher value accounts. If for any pre-existing account the relevant determinations cannot be made on the basis of available information, self-certification is required. 

Consequently, in order to comply with the CRS, Canadian investment funds should ensure that their account opening documentation includes self-certification forms that require account holders to provide the account holder’s residence for tax purposes and all other information required by the CRS. Fund managers should also review constating documents and consider updating tax and personal information disclosures in offering documents and investor representations and covenants in subscription documentation to ensure they address CRS issues and requirements.

To assist with the implementation of CRS, the Business and Industry Advisory Committee to the OECD published template self-certification forms in February 2016 to illustrate how financial institutions may consider requesting customer information from their accountholders. Local regulators such as the Cayman Islands Tax Information Authority, for example, have also developed template self-certification forms for the purposes of CRS compliance. 

Draft legislation implementing the CRS in Canada has not been published yet.  As with any Canadian legislation, the CRS implementing legislation will be subject to interpretation by Canadian judicial bodies and administrative authorities.  As such, there may be some variances between our expectations, as outlined in this post, and what is ultimately adopted in Canada.