Canada has finally signed an intergovernmental agreement with the U.S. over the Foreign Account Tax Compliance Act and is pursuing the approval of Parliament for the deal. This is a significant step because so many citizens and financial services firms have multiple ties to the U.S. and Canada. They also have major unresolved concerns.
The concerns about administrative tasks are justified as the new IGA, which was agreed to on Feb. 5, will translate into significant compliance and operational chores for Canadian financial institutions and their account holders, according to officials from the U.S. Department of Treasury, the Canadian Revenue Agency (CRA) and the Canadian Department of Finance officials. These and related issues about Canada’s sovereignty a la the U.S. will most likely get a hearing among Canadian legislators as the Department of Finance has just issued draft legislation that will need Parliament’s approval.
FATCA represents the U.S. government’s push via the Treasury Department to allow the IRS to begin taxing foreign assets and offshore accounts that have previously gone undeclared. As individuals, banks and countries rush to meet the IRS deadline of July 1 for the start of FATCA compliance, the law’s opponents say it is requiring financial services firms to undergo costly and extensive know your customer due diligence and registration efforts. There is also that pesky 30 percent withholding tax if those covered by the law fail to meet its obligations.
In an attempt to allay fears, Department of Finance officials say that financial institutions in Canada will not report any information directly to the IRS. “Rather, relevant information on accounts held by U.S. residents and U.S. citizens (including U.S. citizens who are residents or citizens of Canada) will be reported to the Canada Revenue Agency,” according to a statement. “The CRA will then exchange the information with the IRS through the existing provisions and safeguards of the Canada-U.S. Tax Convention. This is consistent with Canada’s privacy laws.”
Conversely, the Internal Revenue Service will send the CRA “enhanced and increased information on certain accounts of Canadian residents held at U.S. financial institutions,” officials say.
The IGA does offer exemptions and relief such as those for registered retirement savings plans, registered retirement income funds, registered disability savings plans, and tax-free savings accounts, say Canadian government officials. “Smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt,” officials say.
The 30 percent FATCA withholding tax does not apply to clients of Canadian financial institutions, according to Department of Finance officials. However, the tax will be levied against Canadian financial institutions if they are “in significant and long-term non-compliance with its obligations under the agreement.”
While firms and individuals that must meet FATCA obligations may not care, Department of Finance officials add that the IGA is consistent with Canada’s support for G-8 and G-20 commitments to target tax evasion globally and to improve tax fairness.
Despite the recently inked agreement, FATCA in Canada may not be a done deal.
In the pre-amble to the 47-page IGA, Canadian officials acknowledge that the U.S. and Canada will be working together for a long stretch toward “achieving common reporting and due diligence standards for financial institutions.” Both sides will also have to sort out “provisions limiting the use of the information exchanged under the convention.”
The pre-amble also points to the contentious matter of Canadian financial institutions not being able “to comply with certain aspects of FATCA due to domestic legal impediments.”
I suspect the final details about FATCA compliance, privacy and sovereignty issues, and impacts upon the Canadian tax system will be top of mind for banks, government ministers, politicians and citizens of Canada.
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