QI – Qualified Intermediary framework

I am still trying to wrap my head around the whole IRS QI relationship and I have put together a post surrounding the framework of the agreement as I see it.

The QI Relationship

A QI relationship is an agreement with the IRS. Specifically a qualified intermediary (QI) is any foreign intermediary that has entered into a qualified intermediary withholding agreement with the IRS.


Foreign financial institutions and foreign branches of U.S. financial institutions can enter into an agreement with the IRS to be a qualified intermediary. A QI is entitled to certain simplified withholding and reporting rules.


A QI is not required to forward documentation obtained from foreign account holders to the U.S. withholding agent from whom the QI receives a payment of U.S. source income. The QI maintains such documentation at its location and provides the U.S. withholding agent with withholding rate pools. A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding.

A QI is required to provide the U.S. withholding agent with information regarding U.S. persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding.


A QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for IRS reportable payments where the source of the payment is in US dollars. In this situation, the QI is responsible for withholding the tax. A QI assumes this responsibility by submission of a signed W8IMY form to the paying agent. If the W8IMY is not submitted then the withholding agent (in our case the withholding agent is the broker) is responsible for the withholding and would be compelled to withhold. If the source of the payment is in Canadian dollars or any other foreign non-US currency, then the withholding agent would not be obligated to withhold.


Do not send Form W-8IMY to the IRS. Instead, the W8IMY should be submitted to the withholding agent (the broker.) If you do not provide this form, the withholding agent may have to withhold at the 30% rate, backup withholding rate with respect to non effectively connected income, or the 35% rate for net effectively connected taxable income allocable to a foreign partner in a partnership. Generally, a separate Form W-8IMY must be submitted to each withholding agent.


If a change in circumstances makes any information on the Form W-8IMY (or any documentation or a withholding statement associated with the Form W-8IMY) you have submitted incorrect, you must notify the withholding agent or payer within 30 days of the changes in circumstances and you must file a new Form W-8IMY or provide new documentation or a new withholding statement.

You must update the information associated with Form W-8IMY as often as is necessary to enable the withholding agent to withhold at the appropriate rate on each payment and to report such income.


Generally, a Form W-8IMY remains valid until the status of the person whose name is on the certificate is changed in a way relevant to the certificate or circumstances change that make the information on the certificate no longer correct. The indefinite validity period does not extend, however, to any withholding certificates, documentary evidence, or withholding statements associated with the certificate.

How do others view your managerial skills?

If any of the below traits are those that you show as a manager, you might want to consider finding a way to change them right away.  Your gig may be up…

1. Do you show a bias against action?  There are plenty of reasons for you to not want to make an immediate decision, such as, wanting to wait for more information, to plan more options, seek more opinions or do some research.  Real leaders display a consistent bias for action. People who don’t make decisions make mistakes in who they choose to listen to and the course they take to get an answer.  It’s dangerous and shows the rest of your management team you are not qualified for that position.

2. Secrecy: “Don’t let the staff hear,” is something I hear managers say repeatedly. “They won’t understand” is usually the rationale behind this decision.  If you treat employees like children, they will behave that way — which means trouble. If you treat them like adults, they may just respond likewise. Very few matters in business must remain confidential and good managers can identify those easily. The lover of secrecy has trouble being honest and is afraid of letting peers have the information they need, if they choose to use that information to challenge him.  Secrets make companies political, anxious and full of distrust.  (See government).

3.  Over-sensitivity:  I saw this a ton in the government.  Too much.  “I know she’s always late, but if I raise the subject, she’ll be hurt.” An inability to be direct and honest with staff is a critical warning sign. Can your manager see a problem, address it upfront and move on?  If not, these problems won’t get resolved, instead they will grow.  When managers say staff is too sensitive, they are usually describing themselves.  The bad traits of secrecy and over-sensitivity almost always travel together.

4. Do you have a rather fond love of procedure?  Managers who live and die by the rule book have forgotten that rules and processes exist to speed up business, not ritualized it.  A fond love of procedure often masks a the inability to rank key tasks will get missed while thumbing through the book looking to cover your ass.

5.  Do you have a preference for weak candidates?  Have you ever interviewed candidates for a new position and hired the one with the rawest skills because you may have been threatened by the others?  The super-competent manager knows that you must always hire people smarter than yourself.

6.  Are you a micromanager?  Do you get caught up in the details?  Are you the type that has always produced the perfect charts, forecasts and spreadsheets, is always on time, has work completely up-to-date and always volunteer for projects in which you have no core expertise?  This type of behaviour tells others that you are trying to hide the fact that you could not do your real job and you keep close tabs on everything so that if you are called on something you know it right away.  But by hovering over your direct reports you show them you have no trust in them and they know when you do or do not understand something.  It’s a bad situation all around.

7.  Inability to hire former employees:   Have you hired someone who did not attract any candidates from their old company?  That might tell you that your new hire had not mentored anyone who’d want to work with him again.   Every good manager has alumni, eager to join the team again; if they don’t, smell a rat.

8.  Are you unable to meet deadlines?  A deadline is a commitment. The manager who cannot set, and stick to deadlines, cannot honor commitments. Failure to set and meet deadlines also means that no one can ever feel a true sense of trust in this manager and once that level of trust has been eroded, it spells the beginning of the end for the manager.

9.  Addiction to consultants: A common — but expensive — way to put off making decisions is to hire consultants who can recommend several alternatives. While they’re figuring these out, managers don’t have to do anything. And when the consultant’s choices are presented, the ensuing debates can often absorb hours, days, months. Meanwhile, your organization is poorer but it isn’t any smarter. When the consultant leaves, he takes your money and his increased expertise out the door with him.  It is also so much easier to blame the consultant if something goes wrong than to put your own neck on the line by making that decision.

10.   Long hours:  Bad managers tend to work very long hours.  I suspect they think the rest of the business will think they are super-hard workers, dedicated to their roles, but it is probably the single biggest sign of incompetence.  To work effectively, you must prioritize and you must pace yourself.  The manager who boasts of late nights, early mornings and no time off cannot manage himself so you’d better not let him manage anyone else.

IRS and healthcare?!?

The already busy (read: crabby) IRS and it’s agents already try to catch tax cheats and under the proposed health care legislation, they would get another assignment: checking to see whether Americans have health insurance. The legislation would require most Americans to have health insurance and to prove it on their federal tax returns.  Those who don’t would pay a penalty to the IRS.

Good thing that IRS agents get to carry guns, unlike their Canadian counterparts…

That’s one of several key duties the IRS would assume under the bills that have been approved by the House of Representatives and Senate and will be merged by negotiators from both chambers.

The IRS also would distribute as much as $140 billion a year in new government subsidies to help small employers and as many as 19 million lower-income people buy coverage.

In addition, the IRS would collect hundreds of billions of dollars in new fees on employers, drug companies and device makers, according to the non-partisan Congressional Budget Office.

Some critics of the health bill question whether the IRS, which has struggled in recent years with budget problems, staffing shortages and outdated computer systems, will be up to the job of enforcing the mandate and efficiently handling the subsidies.

The CBO estimated the IRS would need $5 billion to $10 billion in the first decade to cover the costs of its expanded role. The IRS’ annual budget is currently $11.5 billion.

Neither the House nor Senate bill includes funding for the IRS, but money could be added by House and Senate negotiators.

The IRS already has trouble meeting its primary duty: collecting taxes. By the IRS’s own estimates, it failed to collect about $290 billion in taxes in 2005, the latest year for which data are available.

In one of the biggest examples of using the tax code to achieve a social goal, Congress shifted much of its effort to help the poor in the 1990s from direct spending to the Earned Income Tax Credit, an IRS-run program that pays rebates to low-income working people to offset taxes.

In 2005, more than 22 million people claimed the credit, resulting in more than $40 billion in payments, a Treasury Department inspector general found last year. The audit found $11.4 billion in improper payments in 2005 — about 28 cents of every dollar paid out.

Under the health care legislation, the IRS would determine who qualifies for the insurance subsidies.  Those subsidies would apply to people with incomes up to four times the federal poverty level, which is $43,320 for an individual and $88,200 for a family of four.  The government would pay insurance companies to help individuals buy policies on the new exchanges.  The exchanges, a central feature in both bills, would be a sort of marketplace where small businesses and individuals who don’t get employer-sponsored coverage could shop for health plans.

To meet the mandate, Americans would have to provide proof of insurance coverage with their annual tax returns. The mandate would begin in 2013 under the House bill; 2014 in the Senate bill.

The penalty in the Senate bill for not having coverage would start in 2014 at $95 or 0.5% of an individual’s income, whichever is greater. It would rise to $750 or 2% of annual income in 2016, up to the cost of the cheapest health plans. The House bill penalty would be up to 2.5% of an individual’s income up to the cost of the average health plan.

In 2007, Massachusetts became the first state to enact a health insurance mandate and lowered the percentage of uninsured residents from 7% to 4%.  State residents there were required to report their health insurance status on a special form they attach to state income tax returns. Insurers provide statements to policyholders confirming coverage and report that data to the state Department of Revenue.

The state tax agency did not get extra staff or money for enforcement and has not had serious difficulties gathering the information, spokesman Robert Bliss said.  In 2008, more than 96% of tax filers provided proof of coverage. Only 1.3% of filers, or about 45,000 residents, were assessed a no-coverage penalty of up to $1,068.  The “vast majority” of Massachusetts residents who pay the penalty are self-reported, Bliss said.

Bliss said the fact that the department had 18 months to get ready for the state’s insurance mandate was “enormously important” in making sure it was ready to handle the assignment. That bodes well for the IRS, which would have three to four years to get ready under the bills.

Under the current versions of the health care bills, the IRS would oversee:

  • Subsidies for low-income people purchasing health insurance through newly created state exchanges.
  • Small-business tax credits to provide insurance to employees,
  • Enforcement of mandate that all U.S. citizens and legal residents have insurance.
  • Penalties on employers for not providing affordable coverage if any of their employees get subsidies under the new insurance exchanges.
  • A tax on insurers that provide high-cost “Cadillac” insurance benefits.
  • Penalties for improper distributions from Health Savings Accounts, which would increase under the legislation.
  • Contributions to Flexible Savings Accounts, which would be limited.
  • New requirements for non-profit hospitals to prove their charitable missions, such as doing a “community needs assessment” once every three years.
  • Taxes on pharmaceutical companies, medical device companies and health insurance providers.

CRA / CCRA / Revenue Canada / Department of National Revenue…

I’m sure you have wondered why in the past 10 years there has been so many names for the Canadian Tax authority.  Besides have to print new business cards and letterhead (and coffee mugs) for everyone, there have been a few reasons for this change.   

The Canada Revenue Agency was previously known as the Canada Customs and Revenue Agency (CCRA) until a federal government reorganization in December 2003 when it was decided to split the organization’s customs and revenue responsibilities into separate organizations.

Since then, Canada Border Services Agency is part of the Public Safety Canada portfolio to handle customs responsibilities.

The CCRA was short-lived, having been created in a November 1999 reorganization of the federal government where it had been known for many years under its statutory name the Department of National Revenue. It was also referred to as Revenue Canada under the Federal Identity Program of the Treasury Board of Canada.

To this day, most Canadians have continued to refer to the agency as “Revenue Canada” through its CCRA and CRA official designation periods.

Taxation of Passive Foreign Investment Company

An interesting aspect of foreign investing is the difference in the treatment of foreign investment companies, mutual funds and unit investment trusts as compared to US based mutual funds.

US vs. Foreign

In the US, generally, a mutual fund is treated in a manner similar to a partnership with respect to the income and the gains of the fund.  The income is passed through to the shareholders in proportion to their holdings and reported to the IRS on a form 1099 by the mutual fund.  A copy of the report is also sent to the shareholder to use to prepare his tax return.

Foreign investment companies or mutual funds are not subject to this kind of reporting and disclosure, nor do they want to be.  In the US, the burden is on the shareholder to determine their share of the income of the investment company.  The tax code refers to any kind of corporate mutual fund or investment company outside the US as a passive foreign investment company (PFIC).

US tax laws were set up to deter US persons from investing in mutual funds outside the US, or using a foreign corporation as an investment fund, where the income or gains of the foreign funds are not subject to current taxation, as are the gains and other income of most domestic mutual funds.  For example, if 11 (or more) US persons own equal shares in a foreign corporation, it will not meet the definition of a controlled foreign corporation  and none of the shareholders would be subject to current tax on the income of the foreign corporation, but if that same corporation is also a PFIC, the shareholders will be subject to severe tax treatment on any distributions from the PFIC unless

  • the PFIC elects to be subject to the SEC and the IRS reporting requirements or unless
  • the shareholder elects to pay tax on the undistributed current income of the PFIC (which requires the co-operation of the PFIC) or unless
  • the PFIC is listed on a national securities exchange and the shareholder elects to pay tax on any increase in the market value of the shares from one year to the next.

As a general rule, a US person would be in far better position to invest directly in the stock of foreign corporations that are not PFICs or to invest in a US mutual fund that invests in foreign stocks or foreign mutual funds. In some cases, a US person may be able to utilize a foreign variable annuity or variable life insurance contract to invest in foreign mutual funds, but the tax treatment will be based on the rules for investments in annuities or life insurance rather than for investments in the underlying stocks or mutual funds.

Tax code sections 1291 through 1297 provide the rules for US persons who invest in (PFIC).   According to the tax code, a PFIC is defined as “ … any foreign corporation if 75 percent or more of its gross income is passive income or if 50 percent or more of its assets are assets that produce or are held to produce passive income”.

There are exceptions for bona fide banks, insurance companies and foreign corporations engaged in the securities business – meaning the active marketing of securities.

A PFIC that had elected to be a “foreign investment company”, before December 31, 1962,  is subject to some older rules, which require that;

  1. the company be registered under the US Investment Company Act of 1940, or
  2. it must be engaged primarily in the business of investing or trading in securities and
  3. 50% or more of the total combined voting power of all classes of stock are held directly or indirectly by U.S. persons.

If the foreign investment company elects to distribute at least 90% of its ordinary income, and the shareholders report net capital gains whether or not distributed, the shareholders are not taxed at ordinary income tax rates on their respective share of the earnings and profits of the foreign investment company when their shares are sold or redeemed.  Basically, this will produce the same tax result as owning shares in a US mutual fund.

For companies that had not made such an election before 1963, if a foreign investment company is registered with the SEC, or if it is more than 50% owned by US persons, any gain realized by the shareholders will be treated as ordinary income unless the corporation elects to be taxed in a manner similar to US mutual funds.

If the PFIC isn’t qualified to be an electing foreign investment company or does not choose to do so, the US shareholder may elect to have the PFIC treated as a “pass through entity” – known as a “qualified electing fund” or QEF. If this election is made by the US shareholder, the shareholder must report as income his or her pro rata share of the earnings and capital gains of the QEF for the taxable year. The investor making this election may also elect to delay payment of the tax on the shareholder’s portion of the undistributed earnings of the QEF, but that deferral will be subject to an interest charge. This election is only allowed if the PFIC complies with the IRS information disclosure requirements which will enable the IRS to determine the PFICs ordinary earnings and capital gains.

If the US beneficiaries of a trust investing in a PFIC expect and agree to be taxed on the trust’s income – even though they do not expect to receive any current distributions from the trust, there should be no disadvantage to electing QEF status for every PFIC in which the trust has invested, and indeed there are enormous disadvantages from failing to do so.  If the PFIC is not a QEF for every year in which it is a PFIC, then the conversion from capital gain to ordinary income and the interest charge rules continue to apply to the extent of the company’s earnings while it was a non-QEF.  In other words, only a so-called “pedigreed” QEF which has been a QEF in every year in which it was a PFIC is excused from the interest charge and character conversion rules.  For this reason, a foreign trust agreement should provide that the trustee may not acquire any equity interest in a foreign company that qualifies as a corporation for U.S. tax purposes (unless that company is engaged in the active conduct of a trade or business) without providing notice to any US beneficiaries and their accountants so that the appropriate election to be a QEF can be made in a timely manner.  Furthermore, the trust agreement should provide that this notification requirement must be made applicable to any investment adviser engaged by the trustee to manage any trust assets.

If a PFIC does not agree to be subject to the jurisdiction of the SEC and does not provide the IRS with the annual information the IRS requires for a QEF election, then the shareholders of the PFIC are subject to;

  1. ordinary income tax on  any current distributions from the PFIC,
  2. distributions and dispositions of fund shares deemed to be from prior years earnings of the PFIC are taxed at the highest rate for ordinary income in each prior year and
  3. an interest charge on the deferred distribution.

Distributions in the first year of a PFIC are treated as ordinary income. Future distributions are also treated as ordinary income to the extent that the distributions are no more than 125% of the average distributions for the previous three (or fewer) years.  Thus, planned distributions can be used to minimize the tax on distributions of accumulated income.

Dispositions of PFIC shares by gift, at death or by other means (such as some redemptions) are treated like distributions but are not eligible for the ordinary income tax treatment described above.

The Taxpayer’s Relief Act of 1997 introduced some changes that are intended to eliminate some conflicting and overlapping provisions of the rules applicable to a controlled foreign corporation (CFC) that is also a PFIC.  Basically, a foreign corporation that would otherwise be a PFIC will not also be subject to the pass-through rules for a CFC for the 10% or greater US Shareholders of the CFC. This change is applicable for tax years after 1997. However, where a PFIC is not a QEF (qualified electing fund), any stock held by a US person who owns 10% or more of the stock is either (1) subject to a current tax and an interest charge on the deferred distributions, or (2) is subject to the rules for a PFIC. In addition, if a CFC shareholder ceases to be a 10% shareholder but remains as a shareholder, the shareholder will immediately be subject to the PFIC rules.

Another “simplification rule” in the 1997 law permits US owners of a stock in a PFIC that is traded on a national securities exchange to make a “mark-to-market” election (IRC section 1256) based on the market value of the PFIC shares at the end of each year. However, any gains recognized by the shareholder will be treated as ordinary income and any losses are limited to gains previously recognized. In addition, the IRS has introduced proposed regulations that will make it very difficult for many foreign mutual funds to qualify for the “mark-to-market” election.

CRA Announces 2010 Automobile Deduction Limits and Expense Benefit Rates for Business

The CRA / Department of Finance has announced automobile expense deduction limits and the prescribed rates for the automobile operating expense benefit that will apply in 2010.  All of the limits and rates in effect in 2009 will continue to apply in 2010.  Specifically:

  • The ceiling on the capital cost of passenger vehicles for capital cost allowance (CCA) purposes will remain at $30,000 (plus applicable federal and provincial sales taxes) for purchases after 2009. This ceiling restricts the cost of a vehicle on which CCA may be claimed for business purposes.
  • The maximum allowable interest deduction for amounts borrowed to purchase an automobile will remain at $300 per month for loans related to vehicles acquired after 2009.
  • The limit on deductible leasing costs will remain at $800 per month (plus applicable federal and provincial sales taxes) for leases entered into after 2009. This limit is one of two restrictions on the deduction of automobile lease payments. A separate restriction prorates deductible lease costs where the value of the vehicle exceeds the capital cost ceiling.
  • The limit on the deduction of tax-exempt allowances paid by employers to employees using their personal vehicle for business purposes for 2010 will remain at 52 cents per kilometre for the first 5,000 kilometres driven and 46 cents for each additional kilometre. For Yukon, the Northwest Territories and Nunavut, the tax-exempt allowance will remain at 56 cents for the first 5,000 kilometres driven and 50 cents for each additional kilometre.
  • The general prescribed rate used to determine the taxable benefit relating to the personal portion of automobile operating expenses paid by employers for 2010 will remain at 24 cents per kilometre. For taxpayers employed principally in selling or leasing automobiles, the prescribed rate will remain at 21 cents per kilometre. The additional benefit of having an employer-provided vehicle available for personal use (i.e., the automobile standby charge) is calculated separately and is also included in the employee’s income.