FATCA — An Update

On February 5, 2014 Canada and the United States signed an Intergovernmental Agreement (IGA) to implement the Foreign Account Tax Compliance Act (FATCA). The IGA is a Model 1 agreement under which "reporting Canadian financial institutions" report the relevant information regarding US reportable accounts (i.e. accounts that are held by a "specified US person" or a "non- U.S. entity" with one or more "controlling persons" that is a specified US person), to the Canada Revenue Agency (CRA), which then provides that information to the Internal Revenue Service (IRS). The IGA is reciprocal so that the United States will provide tax information to Canada regarding Canadian individuals and entities with accounts in the United States.

Legislation to amend the Income Tax Act (Canada) in order to implement the IGA is before Parliament.

Reporting Canadian financial institutions will be required to perform specified due diligence procedures with respect to accounts as at June 30, 2014 in order to identify US Reportable Accounts. The review procedures vary depending on whether the account holder is an individual or an entity, the size of the account and the nature of the account. Where specified "US indicia" are found (which include, for example, identification of the account holder as a US citizen or resident, an "unambiguous indication" of a US place of birth or a current US address or telephone number), the financial institution must follow specified additional procedures to "resolve" such US indicia or treat the account as a US Reportable Account.

For accounts opened after June 30, 2014, a reporting Canadian financial institution must perform specified due diligence procedures to identify whether the account will be a US Reportable Account.

The definition of "financial institution" is broad. It includes a "custodial institution", a "depository institution", a "specified insurance company" and an "investment entity". An "investment entity" is an entity that conducts as a business, for or on behalf of a customer, (1) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading; (2) individual and collective portfolio management; or (3) otherwise investing, administering, or managing funds or money on behalf of other persons. It also includes an entity that is managed by such an entity. A portfolio manager, a mutual fund, a trust managed by a trust company and a securitization trust would all be within the definition.

There are some important exclusions from the definition of "reporting Canadian financial institution" in the IGA including, for example, a registered pension plan (so that such a plan does not have to perform due diligence on plan members).

Reporting Canadian financial institutions must generally register with the IRS on a FATCA Registration Portal in order to obtain a "global intermediary identification number" (GIIN) so that they can identify themselves as such to withholding agents which would otherwise be required to collect a 30% withholding tax on certain US source payments. Withholding will begin on payments made after June 30, 20141 The IRS will publish a list of financial institutions that have obtained GIINs. However, withholding agents are not required to obtain GIINs for reporting Canadian financial institutions before January 1, 2015. In IRS Announcement 2014-17, the IRS stated that it believes it can ensure registering foreign financial institutions that their GIINs will be included on the July 1, 2014 IRS list if their registrations are finalized by June 3, 2014.

There are also important exclusions from the definition of "financial account" in the IGA including RRSPs, RRIFs, RPPs and TFSAs so these accounts do not need to be reviewed by a financial institution.

The enabling legislation to implement the IGA also provides that the due diligence procedures that a reporting Canadian financial institution would otherwise have to perform in respect of "client name accounts" maintained by registered securities dealers and portfolio managers is to be performed by such registered securities dealers and portfolio managers instead.

The CRA is currently preparing Guidance to assist in the interpretation and application of the IGA. A draft was circulated to certain industry participants and comments have been provided. It is expected that, when released, the Guidance will be an "evergreen document".

1 IRS Notice 2014-33 provides that the IRS will not enforce many of the rules in 2014 and 2015 if there is a good-faith effort to achieve compliance with FATCA.