FATCA (Foreign Account Tax Compliance Act) Informational Page
FATCA, the U.S.-Canada IGA and Trusts
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FATCA: How to Achieve a Practical Understanding Without Getting Lost in the Weeds
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Canada – U.S. Intergovernmental Agreement on FATCA
On February 5, 2014, Canada and the United States released the Agreement Between the Government of the United States of America and the Government of Canada to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital. This document is the intergovernmental agreement between the United States and Canada (“IGA”) through which the Foreign Account Tax Compliance Act (“FATCA”) will be initiated. FATCA is moving forward and the response must be immediate.
What is FATCA?
FATCA collects information regarding U.S. persons and their foreign accounts from foreign financial institutions. FATCA is a compliance program designed to elicit identification of U.S. persons who are depositors with foreign banks, account holders at foreign investment advisory firms, and any other U.S. person who receives payments of interest, dividends, and other types of fixed, determinable, annual, or periodic payments(“FDAP Income”), including income from sales of assets that produce such payments. With limited exceptions, financial institutions involved in the chain of entities through which these payments move from payor to the ultimate account holder are required to report the identity of the account holder to the IRS by name, address, and U.S. taxpayer identification number. Those financial institutions are also required to provide the account number, the name and identifying number of the Reporting Canadian Financial Institution with custody of the account, the account balance or value, the gross amount of FDAP, interest and other income generated by the assets held in the account or credited to the account, and the proceeds from the sale or redemption of property paid or credited to the account during the reporting period (IGA, Article 2, subparagraph 2(a)).
The incentive of foreign financial institutions (“FFI”) to register with the Internal Revenue Service, collect information on their account holders, and report that information to the Internal Revenue Service (through the Canada Revenue Authority) is the threat of 30% withholding (with no treaty relief) on U.S. source income of the financial institution (whether received directly from the United States or through one or more intermediate financial institutions).
There are four misconceptions regarding FATCA which create a false sense of security. The first misconception is that FATCA compliance can be avoided by not investing in the United States. This is incorrect. Every financial institution that invests in any other financial institution that invests directly or indirectly in the United States will have to comply with FATCA regardless of how many other institutional layers are involved. The second misconception is that FATCA only applies to institutions with U.S. depositors and account holders. This also is incorrect. Even institutions without U.S. depositors or account holders will have to certify to the financial institutions with which those institutions invest that none of their depositors or account holders are U.S. persons. Those institutions are also required to undertake FATCA-determined due diligence to make this certification. The third misconception is that FATCA compliance is limited to banks, brokerage firms, and insurance companies. This is incorrect. The definition of a foreign financial institution under FATCA extends to many trusts, family offices, hedge funds, private equity funds, treasury centers, and holding companies. The fourth misconception is that FATCA only requires disclosure of persons who are depositors and account holders. FATCA disclosure will reach settlors of trusts, beneficiaries, owners of cash value life insurance policies, and investors in a wide variety of financial entities who under FATCA principles will all be regarded as depositors and account holders.
What Must Be Done?
Immediately, any non-U.S. entity characterized by the IGA as a Reporting Canadian Financial Institution must register at the website established by the Internal Revenue Service before July 1, 2014. In actuality, registration should be complete by April 25, 2014 in order that the registering financial institution will appear on the first list of participating foreign financial institutions to be published by the Internal Revenue Service on June 2, 2014. It is expected that the Internal Revenue Service will update this list quarterly. On registration, the Reporting Canadian Financial Institution will receive a Global Intermediary Identification Number (“GIIN”). In order to avoid domestic enforcement described in subparagraph 2(a) of Article 4 of the IGA and eventual 30% withholding, the financial institution must provide its GIIN to the payor of U.S. source income and the payor must then confirm that the financial institution’s GIIN on the Service’s foreign financial institution (“FFI”) list. Consequently, Reporting Canadian Financial Institutions who do not register in time to appear on the first IRS FFI list may be unfairly regarded as non-compliant even though registered with the IRS prior to July 1, 2014.
Registration is just the beginning of the Reporting Canadian Financial Institution’s responsibilities. Those responsibilities include collection of information required by the IGA regarding depositors and account holders (whether those depositors and account holders are individuals, operating businesses, or other financial institutions) and reporting information regarding U.S. depositors and account holders to CRA (which will in turn provide the collected information to the Internal Revenue Service). Even entities that escape characterization as Reporting Canadian Financial Institutions must in many cases collect information regarding their depositors and account holders.
We can be helpful. We have invested considerable time and energy in reading the FATCA legislation, studying the final regulations issued by the United States Department of Treasury which implement FATCA, and reviewing the IGA. We welcome opportunities to present what we have learned to groups of your colleagues and your clients.