Earlier this month, the federal government announced that it had reached an agreement with the U.S. to ameliorate the more drastic effects of the Foreign Account Tax Compliance Act (FATCA). The announcement came mere days before the 2014 Federal Budget was released, and was thus, understandably, lost in the fray – especially considering the significance of some of the Budget’s tax measures. As a result, the intergovernmental agreement received relatively little fanfare and most Canadians remain unaware of how it provides the CRA and IRS with a powerful new tool for collecting personal information.
As many will recall, FATCA was enacted by the U.S. government in March 2010 and was designed to curb international tax evasion by requiring disclosure of information relating to offshore accounts maintained by U.S. citizens, corporations, partnerships, or trusts. Individuals have been subject to self-reporting under FATCA for years, and foreign financial institutions (FFIs) will generally be subject to similar obligations as of July 1, 2014. Failure to adhere to FATCA generally results in a punitive 30% withholding tax rate on outbound, U.S.-source payments (and potentially other consequences such as closure of the recipient’s account).
In essence, the intergovernmental agreement provides for the automatic exchange between Canada and the U.S. of certain information relating to accounts maintained by persons subject to tax in the other country. For example, bank accounts maintained by Canadian residents who are also U.S. citizens will generally be subject to the new reporting regime. One issue with the agreement, however, is that instead of FFIs reporting information directly to the IRS, the CRA is now interposed as an intermediary. While some of the consequences associated with FATCA (for example, the punitive withholding tax) have been mitigated, the concern is that now two taxing authorities are to be given personal banking information instead of just one.
Not all financial institutions are subject to the new rules (for example, smaller credit unions are exempt). Certain types of accounts, such as deferred income plans (e.g., RRSPs, RRIFs, TFSAs etc.) will also be exempt from the reporting requirements. However, given the nature of the Canadian banking industry (dominated as it is by the Big Five), most bank accounts will be caught. In addition, the due diligence procedures to which Canadian banks will have to adhere as of June 30, 2014 (likely resulting in detailed account-opening questionnaires) are exceedingly extensive.
The information to be disclosed by Canada to the IRS in respect of Canadian bank accounts maintained by U.S. Persons (as defined in the agreement) includes:
- the name, address, and federal taxpayer identifying number (TIN) of the account holder;
- the account number and year-end balance/value; and
- the total amount paid or credited to the account holder in the year.
Similar information is to be provided by the U.S. government to the CRA in respect of U.S. accounts maintained by Canadian residents. Pre-existing accounts are grandfathered, but rules requiring FFIs to obtain the TINs of each such accountholder are required to be in place by January 1, 2017. This means that Canadian banks will, in relatively short order, need to obtain and disclose to the IRS the SIN of each existing accountholder.
Draft legislation amending the Income Tax Act (Canada) to implement the intergovernmental agreement was released the same day. The legislation proposes to introduce new Part XVIII, which, among other things, requires Canadian financial institutions not exempt from the new reporting regime to file a prescribed form by May 2nd of the following year. Comments on the draft legislation are open until March 10, 2014.
Ultimately, those who should worry most about the new intergovernmental agreement are U.S. citizens living in Canada. The time for them to voluntarily get up to speed with their U.S. tax filing obligations is quickly diminishing, and the new agreement is just a sign of the increasingly pervasive nature of governmental scrutiny.