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Most Canadian corporations now have an awareness of the US-based law called “FATCA” and are coming to grips with the implications it has for their operations at home and abroad. FATCA, or the Foreign Account Tax Compliance Act as it is officially known, was introduced by the United States Congress in 2010 in an attempt to curb the perceived tide of US taxpayers evading taxes by hiding their assets offshore.
Under FATCA, non-US financial institutions (“Foreign Financial Institutions” or FFIs in FATCA-speak) are required to identify and report to the Internal Revenue Service the names, addresses and taxpayer identification numbers of Americans holding an account with the institution. In order to prevent American taxpayers from hiding behind their holding corporations, FATCA requires FFIs to look behind these and other entities to identify and report US persons who have ownership interests in excess of certain thresholds.
Where the FFI fails to register with the IRS and fulfill its obligations under FATCA, it is subject to a 30-per-cent US withholding tax on certain US source payments. FATCA's aim, however, is not to raise revenues through withholding taxes. Instead, FATCA uses the threat of withholding taxes in order to force the required disclosures.
CANADIAN FATCA
On February 5, Canada incorporated the principles of FATCA into Canadian law by entering into an intergovernmental agreement (IGA) with the US and introducing legislative amendments to the Income Tax Act. These amendments were enacted into law in June.
Because of the IGA, Canadian financial institutions are excused from having to report their US financial account holders directly to the IRS and, instead, are required to report them to the CRA, which will then exchange the information with the IRS. The sanction for non-compliance is generally penalties under the Income Tax Act instead of the punitive 30-per-cent FATCA withholding tax on US source payments. Nevertheless, while the protective cloak offered by the IGA may seem a better alternative to an IRS-enforced FATCA, the IGA has not been without controversy. This summer it spawned a lawsuit challenging the constitutionality of Canada's agreement to share the tax information of its US citizens with the IRS.
FINANCIAL INSTITUTIONS
A fundamental question for an entity dealing with FATCA is whether it qualifies as a financial institution in the first place. This is not as easy a question as it might seem. While the Canadian legislation has substantially narrowed the IGA's definition of “financial institution” to include, more or less, only true financial intermediaries, an entity will be also be a financial institution if it is “authorized under provincial legislation” to carry out certain investment-type activities. Determining whether or not an entity is so authorized is not always easy.
Time is running out, however, for entities to make that determination.
REGISTRATION DEADLINE
As part of its compliance with FATCA, a reporting Canadian financial institution is required to register with the IRS on the FATCA website and obtain what is referred to as a “Global Intermediary Identification Number” or GIIN.
The IRS issues each registering FFI a GIIN so that the FFI may identify itself to other FATCA participants as being FATCA-compliant. Although FATCA registration is voluntary, the failure to register has consequences. An FFI that fails to register and obtain a GIIN may be ostracized by other financial institutions with which it deals and may also be subject to FATCA withholding in certain circumstances.
The IRS publishes a list on its website of registered FFIs, by which FFIs can confirm one another's GIIN. Verification is required for payments made to other FFIs on and after January 1, 2015. In order to ensure they receive a GIIN and are included on the IRS's 2015 list, reporting Canadian financial institutions should have already registered with the IRS.
Despite the apparent simplicity of its purpose, FATCA is an incredibly ambitious and complex regime. For many reporting Canadian financial institutions, especially banks, compliance will be an ongoing and monumental project. With more and more countries entering into IGAs with the US, it appears that FATCA is not going away any time soon.
Grant Russell is Tax Counsel with KPMG Law in Toronto. He can be reached at [email protected].