On Monday, February 10, 2014, we posted US Signed 22 FATCA Agreements – Unimpeded By Republicans!, where we discussed that the Treasury Department announced February 5, 2014 Canada and Hungary to implement the Foreign Account Tax Compliance Act, or FATCA, in an effort to discourage offshore tax evasion.
The agreement is of the Model I type under which Canadian banks will report the affairs of their American clients to the Canada Revenue Agency (CRA). The CRA will then forward the information annually to the United States Internal Revenue Service.
This arrangement is similar to that adopted by the five main European countries early in 2012. It also includes reciprocal information exchange provisions under which United States banks will have to report their Canadian clients’ doings to the CRA.
Many Canadian-resident individuals, corporate entities and trusts qualify as US persons for taxation purposes, and are thus subject to FATCA’s reporting requirements. Estimates indicate that one million US citizens live in Canada, and in the 2011 National Household Survey more than a quarter of a million Canadians identified themselves as immigrants from the US. This makes it especially difficult for Canadian financial institutions to identify their American clients, as required by FATCA.
However, it has taken a considerable time for Ottawa to agree to implement the act. The Ottawa government now claims to have obtained significant concessions when negotiating the new inter-governmental agreement, which is officially designated part of the existing Canada-US Tax convention, including:
1. The FATCA withholding tax (a 30 per cent deduction from US-sourced income) will not apply to clients of Canadian financial institutions.
• It will only be imposed on Canadian financial institutions that are in ‘significant and long-term non-compliance’ with their obligations under the agreement.
• Canadian institutions that are compliant will not be subject to withholding, and they will not be required to close the accounts of ‘delinquent’ US taxpayers.
2. Several exemptions from FATCA reporting have also been negotiated. These include:
• Registered retirement savings plans and income funds, registered disability savings plans and tax-free savings accounts. Previously, the IRS did not recognize these savings vehicles, instead taxing them as offshore trusts.
• Smaller savings institutions, such as credit unions, with assets of less than CAD175 million will also be FATCA-exempt.
• Pension plans are included as exempt beneficial owners. The Investment Funds Institute of Canada said the concessions obtained by Ottawa will ‘benefit the millions of Canadians who hold mutual funds in these types of plans’.
Ottawa has been careful to portray the new agreement as merely a Tax Information Sharing Deal, and not an imposition of US law on Canada.
‘This agreement will not impose any US taxes or penalties on US citizens or US residents holding accounts in Canada’, said national Revenue Minister Kerry-Lynne Findlay.
The CRA will not collect US taxes from Canadian citizens, even dual Canada-US citizens, she said.However, non-exempt Canadian financial institutions, including some trusts, will still have to register with the US tax authorities, in order to obtain an ID number that they will use for reporting to the CRA.
In accordance with Circular 230 Disclosure
5 comments on “Canada Limits Model I FATCA Agreement”
Exemption for FATCA reporting — greater clarity is needed! Some Canadian Members of Parliament are telling their constituents that the Government of Canada has “negotiated“ a good deal — THEY HAVE NOTHING TO WORRY ABOUT. I wonder if that is dangerous talk.
Can you clarify regarding “registered retirement savings plans and income funds, registered disability savings plans and tax-free savings accounts (and I presume registered education savings plans?). Previously, the IRS did not recognize these savings vehicles, instead taxing them as offshore trusts — many US Persons in Canada are confused.
– Can, then, Canadian mutual funds be held in these accounts and not considered PFICs?
– Must these accounts be reported on FBAR and 8938?
– If 8938 is the “FATCA form”, why would these have to be reported on that form (if this is so)?
– No passive income earned in these accounts will need to be reported by US Persons — or will there have to be another annual IRS form like the 8891 to “exempt” these each year?
– The 3520 and 3520A forms will no longer be required for these accounts?
“Ottawa has been careful to portray the new agreement as merely a Tax Information Sharing Deal, and not an imposition of US law on Canada.” Of course this is an imposition of US law in Canada, otherwise why would any Canadian bank be wasting money on identify the national origin of every account holder over $50.000? It is illegal to discriminate on the basis of national origin and Canadian banks do not, and cannot, ask for place of birth when opening an account.
“It also includes reciprocal information exchange provisions under which United States banks will have to report their Canadian clients’ doings to the CRA.”
These so called reciprocal treaties have not been ratified through the U.S. Senate, so are not legally binding treaties and the US currently is under no obligation to report anything. With residence based taxation Canada already receives the information ir needs from the US under the existing tax treaty. It is the the US who needs these IGA’s to override privacy and other national legislation in other countries.
FATCA is such an atrocious piece of foreign legislation that some people have launched the first step of a possible constitutional challenge. http://site345738.webydo.com/
“2. Several exemptions from FATCA reporting have also been negotiated. These include:
• Registered retirement savings plans and income funds, registered disability savings plans and tax-free savings accounts. Previously, the IRS did not recognize these savings vehicles, instead taxing them as offshore trusts.”
Of course that’s wrong. An IGA doesn’t change a single thing in the US tax code. If it did, there would have to be exceptions everywhere! All the IGA does is exempt the BANKS from having to REPORT those accounts. As far as INDIVIDUALS are concerned, they have been and remain FULLY TAXABLE.
Under the code you are correct, but under the treaty Canadians can elect to treat them a qualified deferred compensation under the treaty. (See FAQ 54 & 55 reproduced below) _______________________________________________________________________
FAQ 54. I have a Canadian registered retirement savings plan (RRSP), registered retirement income fund (RRIF), or other similar Canadian plan. I did not make a timely election pursuant to Article XVIII(7) of the U.S. – Canada income tax treaty to defer U.S. income tax on income earned by the RRSP or RRIF that has not been distributed, but I would now like to make an election. What should I do?
The answer depends upon whether you are participating in the OVDP announced by the IRS on January 9, 2012, the 2011 OVDI, or the 2009 OVDP. Taxpayers who are participating in the OVDP announced by the IRS on January 9, 2012, should provide the following information (see FAQ 7):
A statement requesting an extension of time to make an election to defer income tax Forms 8891 for each of the tax years and type of plan covered under the voluntary disclosure
A dated statement signed by the taxpayer under penalties of perjury describing: 1) Events that led to the failure to make the election, 2) Events that led to the discovery of the failure and 3) If the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities. Taxpayers who are participating in the 2011 OVDI should wait until they are contacted by an examiner about their case.
54.1 If my election is granted, will the RRSP or RRIF balance be included in the offshore penalty base?
No.
We’re not talking about RRSP’s and RRIF’s, which are addressed in the US/Canada Tax Convention.
The following OTHER registered plans will be exempt from reporting:
Tax Free Savings Accounts (TFSAs)
Registered Disability Savings Plans (RDSPs)
Registered Pension Plans (RPPs)
Pooled Registered Pension Plans (PRPPs)
Registered Education Savings Plans (RESPs)
AgriInvest Accounts
Deferred Profit-Sharing Plans
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