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William Byrnes (Texas A&M) tax & compliance articles

FATCA USA-Canada IGA Q&A

Posted by William Byrnes on February 7, 2014


The Canadian Department of Finance has addressed various aspects and concerns of its newly signed FATCA intergovernmental agreement (IGA) between Canada and the United States.   The Department stated that Draft legislation to implement the agreement will be released for comment shortly.

Contributing author Jean Richard to the LexisNexis Guide to FATCA Compliance will be providing the 2nd edition purchasers a Canadian chapter update via LexisNexis.  Meanwhile, I excerpt below from the series of questions and answers of Canadian Revenue for the immediate benefit of the Lexis FATCA subscribers.

Reporting and Privacy?

Canadian financial institutions will report information on their U.S. clients directly to the Canada Revenue Agency (CRA), which will ensure that the collection and use of the information is consistent with Canadian privacy laws. In addition, exchanged information will be protected by the provisions of the Canada-U.S. Tax Convention.

Does the IGA respect the privacy rights of Canadians?

FATCA has raised a number of concerns in Canada – among both dual Canada-U.S. citizens and Canadian financial institutions. One key concern was that the reporting requirements would force financial institutions to report accountholder information directly to the IRS, which would raise concerns about consistency with Canadian privacy laws.

Under the IGA, financial institutions in Canada will not report any information directly to the IRS. Rather, relevant information on U.S. residents and U.S. citizens will be reported to the CRA, similar to existing tax reporting by financial institutions to the CRA on their clients. The exchange of tax information between Canada and the U.S., including on an automatic basis, is already a longstanding practice, is authorized under Article XXVII of the Canada-U.S. tax treaty, and includes safeguards with respect to the use of the exchanged information. The information on U.S. accountholders obtained by the CRA will be exchanged with the IRS through these existing provisions, an approach that is consistent with Canadian privacy laws.

Limits on Reporting?

The IGA exempts key Canadian savings vehicles from being reviewed and reported on, including most federally registered accounts such as:

  • Registered Retirement Savings Plans
  • Registered Retirement Income Funds
  • Pooled Registered Pension Plans
  • Registered Pension Plans
  • Tax-Free Savings Accounts
  • Registered Disability Savings Plans
  • Registered Education Savings Plans
  • Deferred Profit Sharing Plans

Smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt.

Reciprocity?

The IGA is reciprocal, meaning that information will flow both ways between the tax administrations of the two countries to assist each in administering its own domestic tax laws. The information exchanged will provide tax authorities with greater information on accounts held by their taxpayers in the other country.

U.S. Tax Filing Obligations?

Since 1913, U.S. persons in Canada, including dual citizens, have been required under U.S. tax law to file an annual U.S. federal income tax return with the U.S. Internal Revenue Service (IRS). In addition, since 1972, these persons have been obliged to file an annual Foreign Bank Account Reporting (FBAR) form with the U.S. Department of the Treasury.

The IRS has a streamlined process to recognize that some U.S. persons living abroad have not filed timely U.S. federal income tax returns or FBAR forms. Information on this process can be found on the IRS website.

I am a U.S. citizen living in Canada and was not aware that the U.S. wants me to file tax returns. Will the IGA mean that I now have to pay U.S. taxes?

The IGA is strictly an information sharing agreement and does not involve the imposition by the U.S. of any new or higher taxes.

Unlike Canada, the U.S. taxes its citizens who reside in other countries on their worldwide income. The U.S. citizenship-based taxation regime has been in place since 1913, and is not altered by the enactment of FATCA, or the signing of any IGAs. For U.S. citizens resident in Canada, their U.S. tax obligations exist independently of their awareness of these obligations.

Canada respects the sovereign right of the U.S. to use citizenship as a basis for taxation. At the same time, citizenship-based taxation is a departure from the residence-based approach generally followed by Canada and most of the rest of the world, and creates unique challenges for U.S. citizens who reside in other countries. U.S. taxation of its non-resident citizens on their worldwide income, when these individuals are also subject to taxation on their worldwide income by their country of residence, can result in significant compliance burden on these individuals, even when they owe no U.S. tax.

What is the Government doing to protect dual citizens living in Canada against claims by the IRS?

While the Canada-U.S. tax treaty contains a provision that allows a country to collect the taxes imposed by the other country, the treaty does not apply to penalties under laws that impose only a reporting requirement. For example, 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 non-tax form 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 the U.S. tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose (whether or not the individual was also a U.S. citizen at that time).

U.S. Taxes and Penalties?

The IGA will not impose any new U.S. taxes or penalties for non-compliance with U.S. tax laws on U.S. persons holding accounts at Canadian financial institutions, or provide for additional assistance in collection beyond that already permitted by the Canada-U.S. Tax Convention. The IGA is strictly an information-sharing agreement.

The IGA also protects Canadians and Canadian financial institutions from the tax withholding provisions in FATCA.

Does the IGA mean that Canada will be enforcing U.S. tax laws?

Legislation to give effect to the provisions of the IGA will be proposed to Parliament in order to ensure that financial institutions can rely on Canadian law when implementing their procedures for complying with the IGA. The CRA, rather than the U.S., will be responsible for administering the IGA. Canadian financial institutions will report information to the CRA.

What are the benefits to Canada of the IGA?

Under the IGA:

  • Canadian financial institutions will not report any information directly to the IRS. Rather, accountholder information on U.S. residents and U.S. citizens will be reported to the Canada Revenue Agency (CRA). The CRA will transfer the information to the IRS under the authority of the existing provisions of, and protected by the confidentiality safeguards under, the Canada-U.S. tax treaty.
  • The 30 percent FATCA withholding tax will not apply to clients of Canadian financial institutions, and can apply to a Canadian financial institution only if the financial institution is in significant and long-term non-compliance with its obligations under the IGA.
  • The FATCA requirement that Canadian financial institutions be required to close accounts or refuse to offer services to clients in certain circumstances will be eliminated.
  • A number of accounts will be exempt from FATCA reporting, including Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Disability Savings Plans, and Tax-Free Savings Accounts.
  • Smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt from reporting.
  • The IRS will provide the CRA with enhanced and increased information on certain accounts of Canadian residents held at U.S. financial institutions.

Will Canada be signing similar agreements with other countries?

The IGA is consistent with the Government’s support for recent G-8 and G-20 commitments to multilateral automatic exchange of information for tax purposes. In September 2013, G-20 Leaders committed to automatic exchange of information as the new global standard and endorsed an OECD proposal to develop a global model for automatic exchange of information. The model being developed is based on due diligence and reporting procedures similar to those in the Canada-U.S. IGA.

Canada is actively participating in the work of the OECD to develop the new multilateral standard.

LexisNexis FATCA Compliance Manual

book coverFifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of FATCA’s application for certain trading partners of the U.S. (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems. The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within new BRIC and European country chapters.

One Response to “FATCA USA-Canada IGA Q&A”

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