Foreign Account Tax Compliance Act (FATCA)
In 2010, the Foreign Account Tax Compliance Act (FATCA) came into effect, requiring financial information on U.S. persons to be provided to the IRS by foreign financial institutions.
In early 2014, Canada and the U.S. governments signed an Intergovernmental Agreement that will enforce FATCA. Required information will be provided to the IRS through the Canadian Revenue Agency (CRA).
As a result, all depositors of Peoples Trust Company, will be required to certify if they are either a U.S. citizen or resident.
More information on FATCA can be found at the following:
Frequently Asked Questions regarding the enhanced reporting:
1. What is the purpose of the Canada-U.S. Intergovernmental Agreement?
The Agreement will provide an alternative means of meeting the U.S. objectives under the Foreign Account Tax Compliance Act by relying on existing provisions for information exchange under the Canada-U.S. Tax Treaty. The Agreement requires Canadian financial institutions to identify financial accounts held by U.S. residents and U.S. citizens or by entities that are organized in the U.S. or controlled by certain U.S. persons and to report that information to the CRA. The U.S. will provide Canada with enhanced and increased information on certain accounts of Canadian residents held at U.S. financial institutions.
2. When will the Agreement take effect?
Canadian financial institutions will have to start collecting information about new client accounts in July 2014 and will report information collected in 2014 on their existing and new U.S. account holders to the CRA starting in 2015. From then on, accounts will be reported annually for the prior year.
3. Will my financial data remain confidential?
The information will be exchanged in accordance with the provisions of the Canada-U.S. tax treaty. The treaty contains robust safeguards to make sure that the IRS will treat as confidential the taxpayer information that it receives and that it will use the information solely to administer tax laws.
4. What will each government do with the information it receives?
The information received by the CRA and the IRS will be used primarily for risk assessment purposes and to ensure that taxpayers properly report their income from accounts held in the other country.
The Canada-U.S. tax treaty limits the use of information received through exchanges such that it can only be used for the purposes of the administration of tax laws. Thus, for example, the IRS will be precluded from sharing the information it receives under this Agreement with non-tax authorities. Also, the IRS will not be permitted to use the information it receives under this Agreement to administer non-tax laws such as the U.S. Bank Secrecy Act.
5. Why does the CRA exchange information with other countries?
Exchanging information gives the CRA and other tax authorities information that is relevant for tax administration purposes and that they otherwise don’t have access to because it’s in another jurisdiction. The information helps tax administrators prevent tax evasion and ensure that everyone pays their fair share of taxes.
What the Agreement means for individuals with financial accounts in Canada
1. Will the new reporting requirement change how I interact with my Canadian financial institution?
You might be asked about your tax residency status in connection with your existing accounts (if there is information associated with your account that suggests you may be a U.S. person) or when you open a new account. You might also be asked by your financial institution to provide certain evidence (such as a driver’s licence) to support a claim that you are not a U.S. person if information associated with your account otherwise suggests that you may be a U.S. person. Financial institutions need this information to satisfy their obligations under Canadian law and to determine whether they have certain tax reporting obligations to the CRA.
2. On what form will I have to provide the information?
The CRA has not issued a form for Canadian financial institutions to use. They can decide themselves how to get the information from their account holders. Your financial institution might ask you to fill out a form for this sole purpose or it might have a comprehensive account opening form or document.
3. What types of accounts will be reported?
Canadian financial institutions will have to report accounts which include most bank accounts, mutual funds, brokerage accounts, and custodial accounts, annuity contracts (including segregated fund contracts), and some life insurance policies with a cash value.
An account is not reportable if it falls within an exempt category such as the following government- registered plans:
• registered retirement savings plans
• registered retirement income funds
• pooled registered pension plans
• registered pension plans
• tax-free savings accounts
• registered disability savings plans
• registered education savings plans
• deferred profit-sharing plans
Your financial institution may also not be obliged to identify and report on certain accounts the values of which are below certain thresholds.
4. What if I only spend the winter months in the U.S.?
Many Canadians spend a significant amount of time in the U.S. to attend school, to live during the winter, or for other reasons, but many of them are neither citizens nor residents of the U.S. Under the Agreement, these people could be identified by their financial institution in Canada as potentially being U.S. account holders because of information associated with their account, such as a U.S. address or telephone number. Their financial institution could ask them to provide documents showing that they are not U.S. residents or U.S. citizens.
Special procedures will be developed to streamline this process for such individuals. Further information will be released in the near future.
5. How does my citizenship affect my tax residency?
Canada and virtually all other countries do not tax on the basis of citizenship. The citizenship you hold is generally not relevant in determining your residency for tax purposes. The U.S. tax system is different from most countries in that it treats all U.S. citizens as U.S. residents for tax purposes no matter where in the world they reside. Therefore, if you are a U.S. citizen, you are a resident of the U.S. for tax purposes even if you hold another citizenship or reside in Canada or any other country.
6. Will my financial institution be asking me if I was born in the U.S.?
A financial institution complying with the Agreement will not be required to ask its account holders about their place of birth. If a financial institution, applying the due diligence rules of the Agreement to its accounts, discovers any records connected to the account that have an unambiguous indication of a U.S. place of birth, the financial institution may treat the account as a reportable account or follow up with the account holder to obtain documentation that shows the account holder is not a U.S. resident or U.S. citizen.
7. Am I obliged to provide the information?
Canadian financial institutions have a legal responsibility to know where you reside for tax purposes and they are entitled to ask you for that information. If you refuse to cooperate with your financial institution, it may treat the account as a U.S. reportable account and report your account to the CRA.
8. What type of information will be reported to the U.S.?
Canadian financial institutions will generally have to report the following type of information:
• identifying information about the account holder (name and address)
• account number
• account balance or value at end of the year
• certain amounts paid or credited to the account
9. Do I have to provide my U.S. Taxpayer Identification Number?
Canadian financial institutions have a legal responsibility to ask for your U.S. TIN in connection with certain accounts. If you are a U.S. resident or U.S. citizen, you have to provide your U.S. TIN to your financial institution when asked.
10. I am not a U.S. person, but I have a joint account with a U.S. person. How does the Agreement affect me?
If a Canadian financial institution identifies an account as a reportable account and the account is a joint account, the financial institution will report the full value of the account to the CRA. Identifying information (name, address, Taxpayer Identification Number) associated with joint account holders who are not U.S. persons will not be reported.
11. I am a Canadian resident and I hold accounts in the U.S. How does the Agreement affect me?
If an account held by a Canadian resident is identified as a reportable account by a U.S. financial institution, then the account will be reported on by the financial institution to the IRS, which will transmit the information to the CRA.
12. If I have several financial accounts, how will they be reported?
If you are identified as a U.S. person, your Canadian financial institution will report your accounts individually to the CRA.
13. How do I know whether my Canadian financial institution has to comply with the Agreement and whether my account is subject to review?
Under the Agreement, a number of Canadian financial institutions could be partially or fully exempt from the requirements to undertake due diligence and to report on U.S. account holders. For instance, smaller Canadian deposit-taking institutions, such as credit unions, with assets under $175 million, can be exempt.
A partial exemption is available for a Canadian financial institution if it is not part of a multinational group (i.e., it is not related to any entities organized outside of Canada) and at least 98 percent of its financial accounts are held by Canadian residents. These financial institutions will not be obliged to apply due diligence or report on accounts held by individuals who are Canadian residents.
If you would like to know the status and obligations of a particular financial institution under the Agreement, please contact the financial institution directly.
14. Does my Canadian financial institution have to notify me if information on my accounts is being reported to the CRA?
Canadian financial institutions must be open about their policies and procedures for complying with the Agreement and must be prepared to make this information available to anyone who asks about them. Although there will be no obligation for financial institutions to automatically notify their account holders about reporting to the CRA under the Agreement, financial institutions must, upon request, allow account holders to have access to the personal information that has been reported.
15. What if a Canadian financial institution reports my account in error?
In the unlikely event that a Canadian financial institution reports your account in error, it can send the CRA a notice of correction. If we receive this notice after sharing the original data with the U.S. Internal Revenue Service (IRS), we will ask the IRS to disregard the original, incorrect data.
16. I am a U.S. citizen living in Canada and was not aware that the U.S. wants me to file tax returns. Will the Agreement mean that I now have to pay U.S. tax?
The Agreement is strictly an information-sharing agreement and does not involve any new or higher taxes. Unlike Canada, the U.S. taxes its citizens who reside in other countries on their worldwide income. The U.S. citizenship-based tax regime has been in place for many years and is not altered by the Agreement.
For more information, please refer to the U.S. IRS Instructions for New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers.
17. Does the Agreement require Canadian financial institutions to report to the CRA on any individuals who were told that they relinquished their U.S. citizenship when they became Canadian citizens?
The Agreement does not require Canadian financial institutions to report on any individuals who have relinquished their U.S. citizenship and are not residents of the U.S. Individuals who have relinquished their U.S. citizenship may be asked by their financial institution for documentation to this effect.
What the Agreement means for financial institutions in Canada
1. Under the Agreement, how will financial institutions identify accounts held by U.S. residents and U.S. citizens? What will the financial institutions do with this information?
Canadian financial institutions will be required to identify account holders that are U.S. person, including U.S. residents and U.S. citizens, by following the due diligence procedures of the Agreement. The due diligence procedures vary depending on whether the account holder is an individual or an entity and whether the account was opened on or before, or after, June 30, 2014. In certain circumstances, the due diligence procedures are more intensive for accounts with a value of more than US$1,000,000. There are also a number of exemptions from due diligence available for accounts that have a low value and for certain specified types of accounts, such as federally registered savings products (for example, RRSPs and TFSAs).
Guidance on how Canadian financial institutions will be expected to undertake due diligence will be released in the near future.
Canadian financial institutions will report information on their U.S. account holders to the CRA annually starting in 2015. Canadian financial institutions will also be required to report on account holders that fail to respond to their financial institution when contacted with a request for documentation to clarify whether they are a U.S. resident or U.S. citizen, in a manner similar to the reporting on U.S. account holders.
2. Do all financial institutions have to comply with the Agreement?
The Agreement generally applies to all types of financial institutions, including deposit-taking institutions, custodial institutions, insurance companies, and investment entities. The types of entities in Canada that will meet these criteria will be further detailed in the implementing legislation. Guidance will also be provided in the near future for Canadian financial institutions.
For certain types of financial institutions, exemptions from some or all of the due diligence and reporting obligations under the Agreement will be available. For example, smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million can be exempt from reporting. A partial exemption is available for a Canadian financial institution if it is not part of a multinational group (i.e., it is not related to any entities organized outside of Canada) and at least 98 percent of its financial accounts are held by Canadian residents. These financial institutions will not be obliged to apply due diligence or report on accounts held by individuals who are Canadian residents.
3. How will Canada and the U.S. enforce the reporting of information by their respective financial institutions?
In Canada, the due diligence and reporting requirements imposed on Canadian financial institutions by the Agreement will need to be implemented through new legislation that will be proposed to Parliament in the near future. As the administrator of Canada’s tax laws, the CRA will be responsible for monitoring and enforcing the due diligence and reporting requirements in Canada for Canadian financial institutions under the Agreement.
In the U.S., the IRS will be responsible for enforcing the reporting of the information required under the Agreement by U.S. financial institutions. The U.S. will rely on its existing laws to require U.S. financial institutions to report to the IRS the information that U.S. financial institutions are required to obtain under the Agreement on accounts held by Canadian residents.