Passed in 2010, the Foreign Account Tax Compliance Act (FATCA) is by far the boldest step by the US Internal Revenue Services, IRS, to crack down on tax evasion by “US Persons” based abroad and running offshore accounts. The main entities that will be affected by the new massive tax reporting law are the foreign financial institutions that will be required to literally spy on certain accounts of US persons that meet certain thresholds such as a minimum balance of $50,000 or face a brutal 30% withholding tax on their US income sources. Due to the privacy and the diplomatic concerns arising from the roll out of the law, the implementation of the FATCA has been postponed several times and is now scheduled for 1 July 2014.
New IRS Tax law and Canadians
The main targets of the law will be the US persons some withholdable income sources from the US and the gross proceeds that arise from the sale of any US property and yield some interest or dividends. Given the deep ties that many Canadians have with the US, the new law is expected to have a direct impact on many Canadian citizens. Apart from the privacy concerns, other secondary effects of the new law will be an increase in bank charges as banks are forced to spend more to comply with FATCA.
Who are US persons?
The term US persons, under the United States tax laws refers to any US citizen living anywhere in the world or a green card holder. The term is also used to refer to a permanent resident of the US. So any Canadian holding a dual US-Canadian citizenship is a US person and will be impacted by the FATCA provisions. Individuals who have spent a large amount of time in the US are also considered US persons. Others include estates, trusts, US corporations and partnerships.
How does FATCA affect Canadians?
Due to the close ties between Canada and the US and the fact that many Canadians are considered US persons, FATCA will affect many Canadians very directly. The close diplomatic ties between the two countries also means Canadian financial institutions and other financial custodial services will readily comply with the Canada FATCA implementation. The US is a massive economy and given the scale of the cross-border trade between the two countries, almost all Canadian banks have a massive stake in the US economy and would not risk jeopardizing this relationship through non-compliance with the FATCA provisions.
Because Canadian citizens born of US parents automatically get the US citizenship and are practically considered US persons, the dragnet gets even wider to include many more people.
As a result on the potential increase in costs of the compliance to the FATCA law, even those Canadians who are not US persons will feel the effect of the law. A huge “FATCA Compliance Industry” of tax experts and consultants is emerging to help the foreign financial institutions and other custodial services comply with the new law. Because this is a very costly procedure, the FFIs will pass on the extra costs to their clients.
The Canadian banks will go through their client records to determine who amongst them are US persons. There six indicia of US status that the Canadian banks will use as they scour for accounts to report to the IRS. These include US citizenship, a US birthplace, a residence or correspondence address in the US, standing instructions directing the transfer of funds to a US-maintained account or a regular directions that are sent from a US address, “hold mail” or ‘’in care of’ addresses and attorney or signatory authority that has been given to a person who has a US address. These indicia do not automatically subject you to FATCA provisions but they put a red flag on your account which will now get closer scrutiny from the IRS.
In addition, Canadian clients opening new accounts may be asked if they are US persons. Failure to answer the question may make your account “reportable” to IRS or increase scrutiny.
Zero Options for Canadian Financial Institutions
The issue of the Foreign Accounts Tax Compliance Act and Canadians concerns about their privacy and the “extra-territorial” nature of the law has been a trending one but the Canadian banks have no choice but to comply and report their clients within the FATCA orbit to the IRS. There are severe penalties for both the individual clients and the FFIs for non-compliance. Since the enactment of the FATCA, the Canadian Banking Association has been advising its members on compliance while raising concerns to the government authorities. But under an inter-governmental agreement signed between US and Canada, the banks will pass the information required under FATCA to the Canadian Revenue authority which will then pass it on to the IRS. While this does not alter anything about the law, it addresses some of the misgivings Canadian bankers might have about dealing directly with the IRS.
What are the next steps?
For foreign financial institutions, the next steps must involve preparation for FATCA compliance which must be done with urgency. The FFIs will have to carry out a due diligence procedure on their accounts. The due diligence under the Notice 2011-34 which targets offshore accounts holding over $500,000 must be carried out within one year upon FFI agreement. There are many institutional changes that the financial institutions must put place to ensure smooth compliance with the Foreign Account Tax Compliance Act in Canada.
Where to get more information on FATCA for Canadians
The best place where you can get information on how FATCA will impact you is your bank. Numerous Canadian banks are already publishing detailed information on FATCA and intend to comply unless there are any changes to the law that may exempt them from compliance. Consumers can also get more information from the Canadian Banking Association. Other sources of information on Foreign Account Tax Compliance Act and Canadians’ obligations under the new law include professional tax advisers and experts.