In our previous article “U.S. Tax Law: FATCA & it’s Impact on Canadians and the International Community“, we provided an overview of the US Foreign Account Tax Compliance Act (FATCA) and how the U.S. wanted multinational (non-U.S.) banks, financial institutions, and governments of various countries to comply with this law. The article also covered the potential impact on the many Canadians who spend a significant amount of time in the U.S each year or hold dual citizenship.
Yesterday, on the 5th of February 2014, Jim Flaherty, the Finance Minister, and Kerry-Lynne D. Findlay, the National Revenue Minister, confirmed that Canada and the U.S. have entered into an intergovernmental agreement under the Canada-U.S. Tax Convention (Treaty) to comply with FATCA legislation. This legislations will help the U.S. curb tax evasion carried out through offshore accounts/assets, while complying with certain Canadian terms and conditions.
In our endeavor to keep Canadian & cross border taxpayers informed about the various Canada/U.S. tax laws, AG Tax professionals have summarized below a few key concerns that have been addressed in the final agreement.
Finalized Canada-US Tax Convention on FATCA
- Financial institutions located in Canada will report any information regarding ‘flagged accounts’ (offshore account(s) of a U.S. citizen which is not FATCA compliant) first to the Canada Revenue Agency (CRA). The accounts will not be directly reported to the Internal Revenue Service (IRS). The CRA will then forward the information to the IRS as per the provisions of the Canada-U.S. Tax Convention; thus providing Canadians (accidental Americans i.e. acquired citizenship due to one of the parent being a U.S. citizen even though the individual was born in Canada, etc.) who feel that they have been wrongly targeted the opportunity to appeal to the CRA. This method effectively preserves Canada’s privacy laws, which would otherwise be breached if banks sent customer information directly to foreign government(s) without notifying the customer.
- In return for complying with FATCA, the IRS will disclose information on specific accounts of Canadian residents held at U.S. financial institutions to the CRA.
- There are some accounts that are exempt from being reported under FATCA. These account include Registered Retirement Savings Plans (RRSP), Registered Retirement Income Funds (RRIF), Registered Disability Savings Plans (RDSP), and Tax-Free Savings Accounts (TFSA), RPP’s, RRIF’s, PRPP’s, RESP’s and DPSP’s. Some accounts with credit unions and small financial institutions with assets less than $175 million are also exempt.*
- A penalty of 30% withholding tax on all U.S. income through investment earnings or the sale of U.S. securities flowing into non-compliant banks and financial institutions will not be applicable to clients of Canadian financial institutions, until and unless a Canadian financial institution is held in contempt of major and long-term non-compliance of the FATCA regulations.
Kerry-Lynne D. Findlay (National Revenue Minister) clarified the decision by stating, ”This is strictly a tax information-sharing agreement. This agreement will not impose any U.S. taxes or penalties on U.S. citizens or U.S. residents holding accounts in Canada. The CRA does not collect the U.S. tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose. This includes dual Canada-U.S. citizens. That will not change under this agreement.”
That being said, Canada supports the finalized version of the FATCA agreement as it intends to fight tax evasion and preserve tax fairness with the U.S.. It is consistent with the commitment Canada made in September 2013 with G-20 Leaders (Group of 20 Finance Ministers and Central Bank Governors from 20 major economies: U.S., Canada, U.K., Australia, India, China, South Africa, Mexico, Brazil, Argentina, Japan, South Korea, Indonesia, Russia, Turkey, European Union, Germany, France, Italy and Saudi Arabia) to automatically exchange tax information as a global standard practice to prevent tax evasion through tax haven countries and endorsing a proposal by the Organization for Economic Co-operation and Development (OECD) to develop a global model for this practice by the end of 2015.
Although, qualified accounts (RRSP, RRIF, etc.) have been exempt from the FATCA reporting requirement, it is unclear whether this exemption extends to cover Canadian citizens who have U.S. ties as well. The finalized regulations further increase banks’ expenses of tracking, gathering, and maintaining additional information on some of their clients making the regulation still an unwelcome obligation.
Banks in Canada will soon start gathering detailed information regarding citizenship and residency information of customers, and some clients could potentially face CRA and IRS authorities in the future. It is recommended that if you have any U.S. connection (dual citizenship, family lineage, spend significant time during the year in the U.S.), you should immediately contact a cross-border tax professional with the expertise to guide you in complying with the FATCA regulation in the case it is applicable.
* Please note that financial accounts may have separate U.S. reporting requirements outside/in addition to FATCA obligations.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.