Canadian entities that will be treated as Foreign Financial Institutions must now consider their potential requirement to register with the U.S. Internal Revenue Service (IRS) under the U.S. Foreign Account Tax Compliance Act (FATCA) now that an intergovernmental agreement (IGA) between Canada and the U.S. was signed on February 5, 2014.
Not only Canadian financial institutions, but certain other non-U.S. entities must comply with new information gathering and reporting requirements that generally take effect July 1, 2014 under FATCA. These rules include registering as participating foreign financial institutions with the IRS, among other things.
Finance also released a 42-page package of draft legislation to implement the agreement. This legislation provides further guidance to Canadian entities on how to implement the IGA, including timelines and penalties for non-compliance. The closing date for comments to Finance is March 10, 2014.
FATCA is a U.S. law designed to combat tax evasion by U.S. citizens and residents through the use of offshore accounts and investments. This law focuses on reporting by financial institutions and investment entities in Canada and other countries to the IRS about financial accounts and substantial financial interests held by U.S. taxpayers.
Without the IGA, a 30% withholding on Canadians’ U.S. source income would have been used as a penalty to compel Canadian businesses to provide the information the IRS requires about U.S. account holders and U.S. owners.
For details about FATCA implications for Canadian multinationals that are not FIs, see KPMG’s TaxNewsFlash-Canada 2013-29, “Canadian Multinationals — Take Action to Avoid FATCA Penalties [PDF 63Kb]”.
Highlights of the Canada-U.S. IGA
The IGA is intended to streamline FATCA compliance for Canadians. Highlights of measures in the IGA are as follows:
Registration with the IRS
Canadian FIs that have a reporting obligation will register through an online portal managed by the IRS to obtain a Global Intermediary Identification Number for reporting purposes. The CRA does not intend to set up its own registration system. Under the IGA, Canadian FIs will report to CRA and not the IRS.
Treatment of registered accounts
Registered accounts including Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Registered Pension Plans (RPPs), Registered Education Savings Plans (RESPs), Registered Disability Savings Plans (RDSPs), Tax-Free Savings Accounts (TFSAs) and Deferred Profit Sharing Plans (DPSPs) will be exempt from due diligence and reporting. As such, these accounts will not have to be examined under due diligence requirements to determine whether the account holder is a U.S. person or reported to any government agency.
Employee Profit Sharing Plans (EPSPs) and Retirement Compensation Arrangements (RCAs) do not appear to be exempt.
Treatment of pension plans
Pension plans are included as exempt beneficial owners in the IGA. Pooled vehicles owned by pension plans will also be treated as exempt beneficial owners. .
Under the IGA there is an intention to provide relief for smaller financial institutions including credit unions.
Relief from U.S. FATCA withholding
Under the IGA, Canadian FIs that comply with the IGA will not be subject to U.S. FATCA withholding on payments that it receives.
New customer on-boarding and self certification
Canadian FIs must ensure on-boarding procedures comply with the IGA on all new accounts opened on or after July 1, 2014. Canadian FFIs must generally use a self-certification approach outlined in the IGA. Self-certification requires that the individual or entity to answer questions about whether they are a U.S. person for tax purposes.
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We can help
KPMG Canada’s experienced, multidisciplinary team of tax and advisory professionals can help your multinational Canadian company meet its FATCA requirements. We provide FATCA advice to a wide range of financial services and general business organizations and can assist you in determining the FATCA categories for entities in your organization. To discuss any aspect of FATCA, please contact your KPMG adviser.
Information is current to February 5, 2014. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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