Finally—IGA Provides Relief From FATCA For Some Financial Institutions, Says Grant Thornton LLP
TORONTO--(BUSINESS WIRE)--The long-anticipated Foreign Account Tax Compliance Act (FATCA) United States – Canada Intergovernmental agreement (IGA) was released on February 5, 2014.
“And just as we anticipated, the IGA has provided an exemption from FATCA reporting for certain accounts”
And as Dan Lundenberg, National Leader, US Tax Services, Grant Thornton LLP notes “this is great for Canadian financial institutions, as they now have the final guidance on how FATCA will apply to them. However, those expecting a blanket exemption for Canadian institutions will be disappointed. FATCA will apply to Canadian financial institutions in a similar way to UK financial institutions. The big mystery is why this agreement took so long to finalize.” FATCA is a 2010 US law aimed at foreign financial institutions (FFIs) and other financial intermediaries to prevent tax evasion by US citizens and residents through the use of offshore accounts. When put into effect starting on July 1, 2014, FATCA will require many FFIs to catalogue their US account holders and report information about their accounts annually. Canadian FIs will do so through new reporting to the CRA.
FATCA IGA highlights for Canadian financial institutions
Canadian financial institutions (FIs) that are not exempt from FATCA will not be required to enter into an agreement with the Internal Revenue Service (IRS). However, non-exempt Canadian FIs are still required to register on the IRS FATCA portal and receive a Global Intermediary Identification Number (GIIN).
“And just as we anticipated, the IGA has provided an exemption from FATCA reporting for certain accounts,” Lundenberg continues. These accounts include
- Registered Retirement Savings Plans (RRSPs),
- Registered Retirement Income Funds (RRIFs),
- Pooled Registered Pension Plans (PRPPs),
- Registered Pension Plans (RPPs),
- Tax-Free Savings Accounts (TFSAs),
- Registered Disability Savings Plans (RDSPs),
- Registered Education Savings Plans (RESPs),
- Deferred Profit Sharing Plans (DPSPs),
- eligible funeral arrangements,
- certain escrow accounts, and
- an account maintained in Canada and excluded from the definition of financial account under an agreement between the United States and another partner jurisdiction to facilitate the implementation of FATCA.
In addition, the following Canadian FIs will be considered non-reporting Canadian financial institutions that will be treated as deemed-compliant FFIs:
- a financial institution with a local client base,
- a local bank,
- a financial institution with only low-value accounts,
- a sponsored investment entity and controlled foreign corporation,
- a sponsored, closely-held investment vehicle,
- a restricted fund,
- a labour-sponsored venture capital corporation,
- any central cooperative credit society whose accounts are maintained for member financial institutions,
- any entity described in Article XXI (Exempt Organizations) of the Canada-US income tax treaty, and
- an investment entity established in Canada that is regulated as a collective investment vehicle (subject to certain conditions).
One of the most important pieces of the IGA is the phased-in reporting of the required information on each US account holder.
- In 2014, Canadian FIs will need to report the name, address, and US Taxpayer Identifying Number (TIN) of each US person that is an account holder.
- In 2015 and 2016, Canadian FIs will need to report the name, address, US TIN, the account balance, gross amount of interest and dividends credited to an account of each US person that is an account holder. Gross proceeds from the sale or redemption of property credited to an account will be required starting in 2016 reporting.
- For 2017 and onwards all the above information will need to be collected and consolidated by Canadian FIs for reporting to the Canada Revenue Agency (CRA).
Next steps for Canadian FIs
Lundenberg indicates that there are now a number of steps that Canadian FIs need to take in order to be compliant with FATCA. These include:
1 FATCA classification: determining classification under FATCA to determine whether registration is required.
2 IRS registration: for those not exempt, register no later than April 25, 2014 on the IRS online portal and obtain a GIIN. This deadline is critical as the IRS will publish its first list of registered FFIs by June 2, 2014 (and will update this list on a monthly basis thereafter).
3 Those who do not register with the IRS by April 25, 2014 will be subject to the 30% FATCA withholding tax. This withholding will start on US source income—such as dividends, interest—paid starting July 1, 2014. US withholding agents will confirm a Canadian FI’s status as being onside with FATCA by reviewing the IRS published list.
4 New client on-boarding procedures must be in put in place for all new accounts opened on or after July 1, 2014. Canadian FIs will need to change their new account procedures to determine the US status of new clients. Canadian FIs can adopt the self-certification/documentary evidence approach in verifying whether the account holder is US citizen or US resident for tax purposes.
As the FATCA implementation is phased in over the next few years, Canadian FIs will need to consider how to report the information on their US account holders, required by the CRA. This reporting will commence in 2015. Canadian FIs will also need to begin a due diligence process on their pre-existing accounts (accounts maintained by the FI as of June 30, 2014) to determine which of their current clients are US persons.
Lundenberg states that although the IGA’s outlined steps are pretty straightforward, time is definitely the biggest constraint. Canadian FIs with reporting obligations must consider how FATCA’s requirements impact their internal systems and should note that they may require sophisticated IT systems or will have to configure their current IT systems to allow for the required information gathering and reporting.
Notes to editors
Dan Lundenberg, National Leader, US Corporate Tax Services, Grant Thornton LLP, is available for interviews.
About Grant Thornton LLP in Canada
Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. We help dynamic organizations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has approximately 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member firms operate in close to 100 countries worldwide.
Follow us on Twitter: @GrantThorntonCA