On the Fence about FATCA? Canada and U.S. Sign Intergovernmental Agreement on Foreign Account Tax Compliance Act

Ever since  I caught wind of  the Foreign Account Tax Compliance Act, back in 2010, FATCA has been near the top of my radar.  For those of you who are unaware what FATCA is, The Foreign Account Tax dept of financeCompliance Act (FATCA) requires citizens of the United States (present, past, those with citizenship who do not live there, those who worked there a specific number of day, and those who received “accidental” citizenship through birth), to report their financial assets held outside of the United States to the Internal Revenue Service (IRS).  If providing that information means that the IRS would be taxing you and you have been trying to hide these assets, FATCA requires foreign financial institutions to report your information to the IRS.  The intent of FATCA was to combat offshore tax evasion and to recoup federal tax revenues.   FATCA is a portion of the 2010 Hiring Incentives to Restore Employment (HIRE) Act.

As the tax manager at Computershare Investor Services and the Assistant Vice President of Tax for CitiGroup (CitiFund Services) I got to know FATCA very intimately and at one point or another became the Canadian lead on information dissemination and compliance.  After almost 11-years of interpreting legislation at the Canada Revenue Agency (CRA) deciphering this text came second nature and thus taking the FATCA regulations and translating them into English was not a difficult task, but more something that I had to do in order to teach myself the requirements so I could pass along that knowledge to my employers and to my clients.

The interesting thing about FATCA from a Canadian side was that with over a million “US Persons” here in Canada (probably much more now) I don’t believe the IRS understood that the majority of them were paying taxes in Canada and since the Canadian tax rate is higher than the US rate, there was some hesitation on the Canadian side to provide all this data to the IRS for no net gain.  Other countries rushed to sign intergovernmental agreements with the IRS to meet deadlines which have now been pushed out again as a result of the July 2014 start date for FATCA, but Canada did not.

The Canadian government was hesitant to force Canadian financial institutions to provide the very detailed information on Canadian citizens for fear that they would be double taxed, something the Canada-US Treaty strove to avoid.   In addition, the Canadian side wanted the Canada Revenue Agency included so that information could pass through secure channels and potential breaches of security and privacy could be avoided.  There was even talk that Canada refused to sign an agreement with the IRS, instead forcing the IRS to seek their own tax cheats from their own side of the border.

Then something changed.

The IRS began ramping up their search for US Persons via every mean possible – whether it was checking Facebook accounts to see where people are born, cross-checking it with school records – or by allowing people who had no previous knowledge of FATCA some amnesty when catching up on their delinquent tax returns, but then hammering them on their filing of the Report of Foreign and Financial Assets to the tune of $10,000 per late return – with no maximum.

People became scared, and when scared you have two choices to make.  Either flee or fight.  In this case it’s either comply or pray.

Those who chose to file had to wade through unclear rules and regulations and a lot of unclear information floating around on the Internet.  Is there penalty, is there not?  Will I be charges criminally, or will the IRS understand that I was not aware of my obligations.  Do I have to file 3-years of past-due returns or 10 years?  When are FBAR’s due?  Should this cost me $10,000 or $100,000?

Many questioned the over-reach on the US side while others commented that as an US citizen, the requirements were there and you should have known.

But with all that being said, on February 5th, 2014, Canada and United States announced that they have reach an agreement on Foreign Account Tax Compliance Act (FATCA).

The intergovernmental agreement lays out the details of how the US will be using FATCA to track down the Canadian financial activities of US persons to make sure they are paying required taxes to the IRS.

Under the terms of the agreement Canadian financial institutions will send some of the information they collect on their US clientele to the Canada Revenue Agency and the CRA will transmit the information to the IRS.

The agreement can be read in it’s entirety on the Canadian Department of Finance website.

My take from reading the release is that the Canadian government realized their hands were tied, however they were not going to allow the IRS to demand information which violates Canadian privacy laws and thus allowed the IRS to pursue their legitimate tax-base with the assistance of the CRA much in the same way the CRA and IRS work together to collect tax debts – through information sharing and not the actual collecting of debts for the other country.

Kerry-Lynne D. Findlay, the Minister of National Revenue said; “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.”

Changes to the FATCA legislation under this agreement include, but are not limited to;

  • Certain accounts are exempt from FATCA and will not be reportable, including Registered Retirement Savings Plans (RRSP), Registered Retirement Income Funds (RRIF), Registered Disability Savings Plans (RDSP), Tax-Free Savings Accounts (TFSA), and others yet to be released.
  • Smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt from FATCA compliance.
  • The 30 percent FATCA withholding tax will not apply to clients of Canadian financial institutions, and can apply to a Canadian financial institution only if the financial institution is in significant and long-term non-compliance with its obligations under the agreement.

This intergovernmental agreement is only the beginning.  Recent G-8 and G-20 commitments agreed upon in September 2013, intended to fight tax evasion globally and to improve tax fairness, provide for an automatic exchange of tax information as the new global standard.  This agreement signaled an intention to begin exchanging information automatically on tax matters among G-20 members by the end of 2015.

So like it or not, FATCA is just the beginning of a world-wide crack down on tax evasion.

Still on the fence?

inTAXicating Tax Services works with several Canadian tax-preparation firms who specialize in US taxes, and FATCA compliance.  If you wish to get caught up, please feel free to reach out to us at info@intaxicating.ca.  If, you have further questions and wish to discuss your requirements, you can email, or call us at 416.833.1581.  If you wish to comment, you may do so below.

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Author: Warren Orlans

Welcome to inTAXicating. My name is Warren Orlans and this is my blog. With over 17-years experience in the taxation industry, 11 of them working for the Canada Revenue Agency (CRA), and the rest working in the private sector at large financial institutions responsible for resolving tax issues for corporations and individuals and the Canadian lead for a large US bank on FATCA implementation. My tax career began pretty much out of university at the CRA, in Collections, where I moved up, across, over and up again through their division with stops in Enforcement, Taxpayer Relief (then Fairness), Audit, Directors Liability, Training, Mentoring, GST, GST/HST, Payroll, Corporate Tax, Personal tax, and probably much more. If you have a collections, compliance or audit issue with the CRA, MRQ, IRS or with the CRTC, WSIB or any aspect of those agencies, inTAXicating is the place you need to contact. inTAXicating has entered into a strategic partnership with Goldhar and Associates, to create Goldhar Tax Solutions. This partnership allows my team to include amazing tax lawyers, insolvency practitioners, mortgage brokers, debt counselling experts and much more. When dealing with governments, knowledge is power. We possess strong understanding of government so we know what the next step is before the government does. When you have a collections problem with the CRA, do you hire a graphic artist? No, you get a former collector who trained the staff, and who worked as a resource officer for 5 years. Then you know you are on the right track to resolving your tax problem(s). Others offer suggestions. We offer solutions! tax@goldhar.ca

2 thoughts on “On the Fence about FATCA? Canada and U.S. Sign Intergovernmental Agreement on Foreign Account Tax Compliance Act”

    1. Hello Mr. Smith. Thank you for the comment.

      As per FATCA regulations, the IRS requires that all US Persons are known to them, so if you have any of the 7 indicis that the IRS listed, then the IRS wants the financial institutions to send them the name, address, account / investment identifier plus the amount in there, and withhold 30%. The 30% goes to the CRA for remitting to the IRS (or back to the account holder if they provide documentation to the otherwise, and the other information they collect, goes to the CRA for passing along to the IRS.

      This way the CRA can remove anything the IRS does not need to know about or the Canadian government does not want the IRS to know about, and they send that info to the IRS.

      By sending it to the CRA it is supposed to reduce the chance for a security breach.

      The information going to the CRA, the CRA already knows about because at year end financial institutions issue slips to investors and copies to the CRA.

      Hope this helps!

      Like

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