Are you an investment dealer or a mutual dealer that has non-resident client accounts?

If yes, please read on.

What you need to know before January 1, 2013

OnJuly 25, 2012, the Canada Revenue Agency (“CRA”) announced changes to its administrative policies effectiveJanuary 1, 2013with respect to the documentation required to establish whether or not a non-resident taxpayer may benefit from a tax treaty negotiated betweenCanadaand another country.

The new policies ofCRAnow require additional information, including the country of residence for tax treaty purposes, the client’s tax identification number of the foreign tax jurisdiction and the type of income subject to withholding.

In response, the fund companies, who are responsible to withhold and remit income tax toCRA, have proposed an indemnity agreement with dealers to be administered by FundSERV (the “Indemnity Agreement”). Pursuant to the Indemnity Agreement, the dealer will be the point of contact with the client and will provide to the fund company the information needed, in accordance withCRApolicies, to determine what amount of income tax to withhold from non-residents, based on the notions of residency and eligibility for tax treaty benefits.  The dealer also agrees to indemnify the fund company in the event the information provided with respect to income tax withholding is inaccurate or insufficient for the purposes ofCRA.

What is the impact of the Indemnity Agreement and how can you protect your firm and its representatives?

In fulfilling its responsibility under the Indemnity Agreement and complying withCRA’s documentation requirements regarding eligibility for tax treaty benefits, a dealer must consider what modifications to its account opening process may be necessary.

The notions of residency and eligibility for tax treaty benefits are complex.  Work must be done to ensure that:

  • Accurate and sufficient information is collected from non-resident clients;
  • Your representatives do not expose themselves and the firm to liability;
  • Your representatives are educated on what they must do; and
  • Clients are aware of their responsibilities in respect of declarations they make regarding their residency status and eligibility for tax treaty benefits.