The following information is for clients of Canadian financial institutions to help them understand how the Foreign Account Tax Compliance Act (FATCA) and the Canada-U.S. intergovernmental agreement (IGA) might affect them.
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is legislation passed in the United States in 2010. FATCA is intended to detect "U.S. persons" who are evading U.S. tax using financial accounts held outside of the United States. Under FATCA, non-U.S. financial institutions are required to report relevant information to the U.S. tax authorities, the Internal Revenue Service (IRS), about financial accounts held by identified U.S. persons. If a non-U.S. financial institution does not comply with FATCA, the IRS can impose a 30 per cent withholding tax on U.S. source payments paid to the financial institution or its clients.
What is the intergovernmental agreement (IGA)?
On February 5, 2014, the Canadian government announced that it had entered into an intergovernmental agreement with the U.S. government under the existing Canada-U.S. Tax Convention. The requirements of the IGA are reflected in the Income Tax Act so financial institutions in Canada do not have to follow FATCA requirements.
Under the IGA, financial institutions in Canada now report relevant information on accounts of U.S. persons to the Canada Revenue Agency (CRA) rather than directly to the IRS. The CRA will then exchange the information with the IRS through the provisions in the existing Canada-U.S. Tax Convention. The 30 per cent FATCA withholding tax no longer applies to retail clients of Canadian financial institutions. The CRA has issued detailed technical guidance for financial institutions to follow to help them meet their reporting obligations under the IGA. Under these requirements, customers of Canadian financial institutions may be asked to certify or clarify their U.S. tax status.
In accordance with the IGA requirements, financial institutions in Canada began applying their due diligence procedures starting July 1, 2014. Information reporting by financial institutions to the CRA and the exchange of information began on July 1, 2015.
More information on the IGA can be found on the federal Department of Finance and CRA websites at these links:
What is a U.S. person?
According to U.S. tax law, you may be considered a U.S. person if you are:
- A citizen of the U.S. (including an individual born in the U.S. but resident in Canada or another country, who has not renounced U.S. citizenship);
- A lawful resident of the U.S. (including a U.S. green card holder)
- A person residing in the U.S.
You may also be considered a U.S. person if you spend a considerable amount of time in the U.S. on a yearly basis. If you are unsure if this affects you, contact your tax advisor.
U.S. corporations, estates and trusts may also be considered U.S. persons.
U.S. persons generally have an obligation to file annual tax returns and other information with the U.S. government. For more information about these U.S. tax obligations, visit the IRS website at the following link or speak to your tax advisor.
How do banks determine which accounts have to be reported to the CRA?
Under the IGA, banks are required to review new and existing client accounts to look for any indication that an individual may be considered a U.S. person. Indicators that someone may be a U.S. person include U.S. identification used to open an account or a U.S. address associated with the account. Your financial institution may ask you to self-certify that you are not a U.S. person by providing additional documentation. Depending on the situation, if this additional documentation is not provided, your financial institution may be required to send your account information to the CRA which may share it with the IRS.
For more information on financial institution requirements under the IGA, visit the CRA website:
I am not a U.S. person
I am not a U.S. person. What does the IGA mean for me?
The majority of Canadians are not U.S. persons and for them, the IGA has no impact. If you have an existing account and there is an indication that you may be a U.S. person, or if you are opening a new account, your financial institution may ask you to provide additional information or documentation to demonstrate that you are not a U.S. person.
However, if you choose not to provide this additional documentation upon request, your financial institution will be required by Canadian law to report your account information to the CRA.
Do I have to provide my passport to open a bank account?
No. Under the IGA and Canadian banking law, proof of citizenship is not required to open a bank account. The vast majority of Canadians can open an account with financial institutions as they always have. However, if there is some indication in a new or existing account that you might be a U.S. person, then your financial institution may ask you to self-certify that you are or are not a U.S. person for tax purposes.
What about people that already have a bank account? What do they have to do?
In most cases, nothing. Under the IGA, banks are required to review their current customer information. If there is no information indicating that an individual may be a U.S. person, then those customers do not have to do anything.
I am a U.S. person
I am a U.S. person. What does the IGA mean for me?
If you are a U.S. person, your financial institution is required to share information about the account and the account holder to the CRA. Information that could be transmitted includes name and address and certain financial information about the account.
Find out more about how U.S. persons may be affected by the IGA on the CRA website:
Does the IGA apply to businesses or just individuals?
If you are opening a business account or you have an existing business account, your financial institution has to identify certain account holders that are U.S. entities or certain non-U.S. entities in which U.S. residents or U.S. citizens have an interest. Financial institutions may rely on information that they already have or that is publicly available, or they may ask their clients to provide a certification to declare whether the client is a U.S. person under U.S. tax law. You may also be asked to identify the type of business in which you are engaged because there are different requirements for different types of businesses.
More information on this can be found on the IRS website:
The CRA also has information about how the IGA may affect U.S. entities in Canada:
Do U.S. account holders face discrimination or the possibility of having their accounts closed?
No. The FATCA requirement that Canadian financial institutions close accounts or refuse to offer services to U.S. persons in certain circumstances has been eliminated under the IGA.
What types of financial accounts are subject to reporting under the IGA?
Financial institutions in Canada are required to report on most types of financial accounts held by U.S. persons, including bank, mutual fund, brokerage and custodial accounts, annuity contracts and some life insurance policies that have an investment or savings component.
Do financial institutions have to disclose information about registered plans?
The following registered plans are exempt from reporting:
- Registered Retirement Savings Plans (RRSPs)
- Tax Free Savings Accounts (TFSAs)
- Registered Disability Savings Plans (RDSPs)
- Registered Pension Plans (RPPs)
- Registered Retirement Income Funds (RRIFs)
- Pooled Registered Pension Plans (PRPPs)
- Registered Education Savings Plans (RESPs)
- AgriInvest Accounts
- Deferred Profit-Sharing Plans (DPSPs)
Note that this does not affect a U.S. person’s obligation to report income earned in any of these plans on their U.S. tax return where required.
What new tax obligations does the IGA put on U.S. persons?
None. The IGA is a tax information sharing agreement only; it does not change the U.S. tax obligations of U.S persons. The U.S. and Eritrea are the only countries in the world that tax on the basis of citizenship rather than residency. Most other countries, including Canada, tax based on residency rather than citizenship. But the U.S. tax system treats all citizens as U.S. residents for tax purposes no matter where they live, and requires them to file taxes with the U.S. government. Usually they are given credit for the taxes paid in their country of residency, so many U.S. persons living in Canada end up paying no U.S. tax at all, but they are still required to file U.S. tax returns every year. U.S. persons should consult their tax advisor to determine what their U.S. tax filing obligations are.
Are all financial institutions in Canada required to comply with the IGA?
The IGA requirements are part of Canadian tax law and all financial institutions, including banks, credit unions, brokerage firms, insurance companies and mutual fund companies, have to abide by these Canadian laws. Some categories of financial institutions have reduced requirements, such as small deposit-taking institutions and those that only serve local clients or only issue credit cards. Very small deposit-taking institutions with assets of less than $175 million are exempt from reporting.
Do banks in Canada support the IGA?
We understand that the U.S. government is attempting to reduce tax evasion, but we have publicly opposed FATCA as the wrong way to go about it. However, as the U.S. government has no intention of repealing FATCA, the CBA believes that entering into the IGA was the best approach under the circumstances.
Why do governments have to share information about citizens at all?
Tax information sharing is nothing new and it is part of a new global reality. The G20 has stated publicly that the best method of addressing tax evasion internationally is through the expanded use of tax information sharing. At the request of the G20 the Organisation for Economic Co-operation and Development (OECD) has developed “a new single global standard for automatic exchange of information.” The Common Reporting Standard (CRS) was released in February of 2014 Canada has committed to begin exchanging information with other countries in September 2018. It is expected that the Canadian government will be drafting implementing legislation and related CRS guidance in 2015.
Canada and the U.S. already have a tax information sharing arrangement in place where Canadian tax authorities provide information to U.S. tax authorities on U.S. residents earning income in Canada, and vice versa. The IGA extends this to also include U.S. taxpayers who are residents of Canada.
The above information is intended to provide general guidance only, and is not an exhaustive analysis of all provisions of the IGA. The above information should not be construed as legal or financial advice. We recommend you seek the advice of your financial or tax advisor to better understand how the IGA impacts you or your business. The above information is current as of July 2015.