Canada and the U.S. Reach Agreement on Foreign Account Tax Compliance Act (FATCA)

The Canadian Department of Finance has announced that Canada and the United States have signed an intergovernmental agreement (the Agreement) regarding the U.S. Foreign Account Tax Compliance Act (FATCA).

What is FATCA?

The Foreign Account Tax Compliance Act was signed into law in March of 2010.  FATCA is intended to combat U.S. tax evasion committed by U.S. citizens (and certain other U.S. persons) holding accounts and other financial assets offshore.  FATCA targets both the account holder, and the foreign financial institution (FFI) where the account is held, by imposing significant disclosure requirements on both parties and significant penalties on both parties for failure to comply.  The Agreement, reached February 5^th, 2014, specifically addresses the disclosure requirements of Canadian financial institutions under FATCA which take effect on July 1, 2014.  The FATCA disclosure requirements imposed on the individual account holder have been in place since 2011 and are not modified by the Agreement (see Tax Alert April 19, 2012 entitled “Welcome to America” to understand the impact FATCA has on individual account holder disclosure requirements in the U.S.).

Who is subject to FATCA?

In terms of account holders, “U.S. persons” are subject to FATCA if they own certain foreign (non-U.S.) financial accounts or other offshore assets.  A U.S. person is defined in the Agreement, but generally includes U.S. citizens and U.S. residents.  In limited cases, a non-resident of the U.S., who spends a significant amount of time in the U.S., may be considered a U.S. resident under U.S. tax law and could be subject to FATCA. 

Canadian financial institutions are generally subject to FATCA unless they meet one of the reporting exemptions which include, but are not limited to, most governmental entities, most non-profit organizations and certain small local financial institutions.

In short, FATCA requires that if a U.S. person holds a reportable account with an FFI, specific information about the account holder and the account must be reported to the IRS by the FFI.

What accounts are reportable?

The Agreement sets out specific accounts that are exempt from being reported and they include, but are not limited to, 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) and Deferred Profit Sharing Plans (DPSPs).  That said, this exemption does not provide any relief from any personal income tax reporting or financial account disclosure requirements that the account holder might have in the U.S. in respect of the above-mentioned assets. 

If an account is not an exempt account, it may be a reportable account subject to the provisions of the Agreement.  The Agreement makes a distinction between pre-existing accounts (accounts that existed before July 1, 2014) and new accounts (accounts opened after June 30, 2014) in terms of setting different procedures required by FFIs to review, identify and report the accounts. 

Generally speaking, for pre-existing accounts that do not exceed US$50,000 as of June 30, 2014, FFIs are not required to review, identify or report the accounts.  For pre-existing accounts that exceed US$50,000 but do not exceed US$1,000,000, the FFI is required to undertake specific review procedures to determine if the account holder is a U.S. person.  If there is any indication that the account holder is a U.S. person, the FFI must report the account.  For pre-existing accounts in excess of US$1,000,000, enhanced review procedures are required.

For new accounts, the Agreement provides an exemption from reviewing, identifying and reporting accounts that do not exceed US$50,000 at the end of the reporting period (the calendar year unless the account is closed during the year, in which case it is the last day the account was open).  Accounts that exceed US$50,000 must be reported.

The Agreement sets out specific procedures for determining whether an individual is a U.S. person, which include forcing the FFI to seek this information from the account holder in many situations.

What information is reportable?

The information that must be provided includes the name, address and U.S. taxpayer identification number of the account holder, as well as the account number and account balance at the end of the year for each account.  Among other things, the FFI will also have to report the gross amount of any interest, dividends and other income, as well as the gross proceeds from the sale or redemption of property paid or credited to the account for the year in question.

When will the information be reported?

There are several key dates contained in the Agreement, resulting in a somewhat staggered approach to the reporting requirements.  At a high level, however, the Agreement states that information regarding reportable accounts (and account holders) will be due nine months after the end of the calendar year to which the information relates (September 30, 2015 for 2014, the first reporting year).  Also, for 2014, the Agreement provides an exemption from reporting the income earned in each account and instead only imposes this requirement effective for the 2015 calendar year.  Furthermore, for 2014 and 2015, the Agreement provides an exemption from reporting the proceeds from the sale or redemption of property paid or credited to the account and instead only imposes this requirement effective for the 2016 calendar year.

How is the information reported?

FATCA has raised a number of concerns in Canada, one of which is that the reporting obligations would compel Canadian financial institutions to provide information that would potentially violate Canadian privacy laws.  Under the Agreement, financial institutions in Canada will not be required to report any information directly to the Internal Revenue Service (IRS).  Instead, the reportable information will be provided to the Canada Revenue Agency (CRA) and the CRA will then exchange the information with the IRS through existing provisions of the Canada-U.S. Tax Convention, which is acceptable under Canada’s privacy laws.

It is very important to note that the Agreement does not alter, in any way, the U.S. personal income tax filing requirements and related financial account disclosure requirements of a U.S. citizen living in Canada.  For Canadian residents with U.S. citizenship who diligently file U.S. tax returns and related U.S. information returns annually with the U.S. government, FATCA, and this recent agreement may simply be cause for them to revisit their filing requirements to make sure they are fully compliant.  However, for Canadian residents with U.S. citizenship who have not filed U.S. tax returns in the past and/or have not reported their foreign bank and financial accounts to the U.S. government, then FATCA, and this recent agreement, is yet another reminder of the importance of understanding the filing obligations associated with their U.S. citizenship.  Given the significant attention being devoted by the U.S. government to this issue, it may be a very appropriate time to consider using one of the IRS’s voluntary disclosure initiatives to get caught up.