FATCA Deal Automates Reports to IRS

<b>Banks to report to CRA under amendments, but information shared automatically <br/> <br/>By Julius Melnitzer</b> <br/> <br/>CANADA AND THE UNITED STATES announced in February the signing of an intergovernmental agreement (IGA) that dramatically expands the sharing of tax-related information between the countries. <br/> <br/>“What the IGA means is that the Canada Revenue Agency [CRA] will now exchange financial information about Americans living in Canada with the Internal Revenue Service [IRS],” says Veronika Chang, a foreign legal consultant with Toronto-based tax boutique Morris Kepes Winters LLP. <br/> <br/>In the process, however, the agreement amends the reporting and withholding obligations of Canadian financial institutions under the US <i>Foreign Account Tax Compliance Act</i> (FATCA). ...
FATCA Deal Automates Reports to IRS
Banks to report to CRA under amendments, but information shared automatically

By Julius Melnitzer


CANADA AND THE UNITED STATES announced in February the signing of an intergovernmental agreement (IGA) that dramatically expands the sharing of tax-related information between the countries.

“What the IGA means is that the Canada Revenue Agency [CRA] will now exchange financial information about Americans living in Canada with the Internal Revenue Service [IRS],” says Veronika Chang, a foreign legal consultant with Toronto-based tax boutique Morris Kepes Winters LLP.

In the process, however, the agreement amends the reporting and withholding obligations of Canadian financial institutions under the US Foreign Account Tax Compliance Act (FATCA).
As such, it is a double-edged sword.

“On the one hand, the fact that the legislation requires Canadian institutions to flag their US accounts to the Canada Revenue Agency rather than the Internal Revenue Service removes some pressure from Canadian banks in terms of their privacy obligations under Canadian law,” says Roy Berg, a specialist in US tax law at Calgary-based Moodys Gartner Tax Law LLP. “On the other hand, it changes the landscape for any entities characterized as foreign financial institutions [FFI] by imposing an obligation on them to figure out who their US account holders are.”

Observers say the task is daunting, and all the more so because Canada's draft legislation, which was released simultaneously with the IGA, provides for significant penalties for non-compliance. “Regardless of the method Canadian banks use to identify US account holders, they will be undertaking a monumental project that is ongoing and not time-limited,” she says.

Indeed, Chang suggests that the FATCA project will most likely involve a significant internal restructuring. “The restructuring will be aimed at better aligning an institution's tax function and its operating structure with the aim of improving communication between in-house counsel, the tax department, and the client-relationship department and its managers,” she says.

In-house counsel will have to start by familiarizing themselves with the IGA's 47 pages as well as the more than 500 pages that constitute the US Treasury's regulations under FATCA. “These regulations are extremely complex and generally lacking in guidance,” Chang says. “They're almost impossible to get through.”

The draft legislation hasn't been favourably received. “What's proposed is kind of a mess,” Berg says. “Fortunately, the Parliamentary Joint Committee on Taxation is putting together a paper to fix it.”

But even if it's fixed, a constitutional challenge may be looming. Peter Hogg, a leading constitutional law scholar and a scholar-in-residence at Blake, Cassels & Graydon LLP, has warned that the implementing legislation may violate the Charter of Rights and Freedoms.

However that may be, the IGA will take effect when Canada notifies the US that it has completed its internal obligations under the agreement. In the meantime, the US will deem the IGA to be in effect, making Canadian financial institutions immediately eligible to register on FATCA's website as deemed-compliant FFIs.