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Does Uncle Sam Want You? – An Update on the U.S. Foreign Account Tax Compliance Act (“FATCA”)

Many of you have no doubt heard a lot about FATCA in the press and elsewhere (for example, our June 3, 2013 blog post “What is ‘FATCA’ and What Impact Does it Have for You?”). This legislation is complex, and the questions that come to mind are: what is the purpose of FATCA, and how, if at all, will it affect the average person? The aim of FATCA is to target offshore tax evasion by U.S. citizens by requiring financial institutions worldwide to report certain information about assets held by certain individuals and other entities with U.S. connections. At the end of the day, it will affect primarily Canadian individuals with U.S. connections and Canadian financial institutions, but will also result in many of us having to sign more forms to even open a simple bank account, as Uncle Sam has a very long arm.

The Canada-U.S. Intergovernmental Agreement (“IGA”)

FATCA is a U.S. domestic law which imposes obligations directly on financial institutions and certain other entities. It is enforced by an onerous 30% withholding tax on certain U.S.-source payments if a financial institution does not report. The role of intergovernmental agreements is generally to ease a jurisdiction’s compliance with FATCA. Canada and the United States signed an IGA which modifies the provisions of FATCA as they apply to Canadian entities but also expands the scope of Canada-U.S. tax information exchange. Canadian legislation to implement and ratify the IGA is now in force effective June 19, 2014.

Under the IGA, Canadian financial institutions will generally be allowed to report information about accounts held by persons with certain ties to the U.S. directly to the Canada Revenue Agency (“CRA”), rather than to the Internal Revenue Service (“IRS”). By complying with the IGA, Canadian financial institutions can avoid a 30% withholding requirement which otherwise applies on payments to them from U.S. sources.

It is anticipated that the IGA will have little impact on many Canadian residents. Starting July 1, 2014, when you open a new Canadian bank account, you will be asked additional questions to identify whether the account is a U.S. reportable account. Where there are U.S. connections, such as citizenship or residential address, additional forms may need to be completed. Between 2014 and 2016, Canadian banks will identify existing U.S. reportable accounts. Beginning in 2015, Canadian banks will report information such as bank balances and income in the account about U.S. reportable accounts to the CRA, which will be automatically reported to the IRS.

Effect of the IGA on Canadian Personal Trusts and Trustees

Unfortunately, the IGA fails to clarify the treatment of Canadian trusts. An overview of how trusts may be viewed under FATCA is set out in our June 3, 2013 blog post. Where a trust has assets and beneficiaries in various jurisdictions, the issue may arise of which jurisdiction’s IGA, if one exists, applies to it. As well, to the extent that the Canadian legislation implementing the IGA may not address certain Canadian personal trusts they may be classified as financial institutions under FATCA. Such trusts could remain subject to reporting requirements directly to the IRS under FATCA if the trustees wish to avoid withholding on certain U.S.-source payments to the trust.

Because every trust is considered an entity under FATCA, it is incumbent on trustees of Canadian trusts to consider the trust’s status for FATCA purposes. Even where a trust appears to have no U.S. beneficiaries or U.S. situs assets, it may be necessary to share this information with financial institutions that the trustees deal with on behalf of the trust. With obligations under FATCA in effect July 1, 2014, trustees who have not yet done so should consider their status and obligations and seek professional advice if necessary.

For the average person, FATCA and the IGA mean more information will need to be given to financial institutions. Although concerns about privacy were raised in the early Canadian discussions about FATCA, since the enactment of the IGA and the domestic legislation implementing it, Canadian banks appear confident that they can gather the required information while complying with local privacy laws. In the end, FATCA and the IGA provide another form of the increased information exchange and additional compliance seen in recent years, both in Canada and internationally, which affects all of us and shows no sign of slowing down.

We look forward to our next post on the topic of globalization and its impact on planning for the future security of your family.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.