August 15, 2013
If your Canadian multinational
company has U.S. source income, including inter-company payments from a U.S.
subsidiary, it must provide information required by the recently introduced
U.S. Foreign Account Tax Compliance Act (FATCA). Even if non-U.S. companies
in your corporate group do not have U.S. source income, you will need to
determine their status under FATCA.
Failure to comply may result in
a 30% U.S. withholding “penalty” on your U.S. source income. Because this
withholding is a penalty rather than a tax, it cannot be reduced by a tax
treaty nor is it eligible for a foreign tax credit on your Canadian tax
return. You may also face trouble dealing with banks and other financial
institutions in Canada and other countries, whose FATCA compliance
requirements include gathering certain information from their clients.
The FATCA withholding rules and
information gathering requirements for Canadian banks and other non-U.S.
financial institutions take effect June 30, 2014. Canadian companies should
take action now to ensure they will be ready to provide the necessary
information to non-U.S. financial institutions, tax authorities and payors
of their U.S. source income.
Canada is expected to enter into
an intergovernmental agreement (IGA) with the U.S. that would require
Canadians to report FATCA information to the CRA rather than the IRS, among
other things. Although the details of the anticipated Canada-U.S. IGA are
not yet available, the broad form of FATCA will remain.
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. The withholding on Canadians’
U.S. source income is used as a penalty to compel Canadian businesses to
provide the information the IRS requires about U.S. account holders and U.S.
is a U.S.-based initiative, it has been embraced by many countries around
the world, which are incorporating the principles of FATCA and its
requirements into their own laws by entering into IGAs with the U.S. These
countries include the U.K., Germany, Japan, Ireland, Mexico and Norway.
companies that are not normally considered financial institutions or
investment entities may still be considered “foreign financial institutions”
under FATCA and may have reporting requirements to avoid the 30% withholding
penalty on their U.S. source income and to maintain relationships with
Canadian and other non-U.S. banks.
companies may be exempt from the reporting requirements because the risk
that they may be used for tax evasion is considered low. Nonetheless, these
“low risk” entities will still need to certify their FATCA-exempt status to
their financial institutions and payors of their U.S. source income, if they
have any. The exemptions include, for example, non-financial entities
operating “active businesses”, “publicly traded” entities and “charitable
organizations”. The exemption rules are complex and have specific
definitions — companies may fall into one of many different exempt
categories or none.
payors and Canadian and other non-U.S. financial institutions are required
to ask for such documentation in mid-2014, Canadian companies may want to
prepare now before the withholding rules take effect.
your companies’ FATCA status
Canadian multinational companies
will have to determine the status of all the members of their corporate
group under FATCA.
Making this determination will
require that all Canadian entities first categorize each member in their
organization as either a foreign financial institution (FFI) or a
non-financial foreign entity (NFFE). Those categorized as FFIs may face
additional reporting obligations. The definition of FFI is broad and may
unexpectedly include certain investment vehicles, investment managers,
holding companies, finance companies, insurance captives and start-ups
without significant active income.
A Canadian entity that is not a
financial institution is considered a non-financial foreign entity (NFFE).
An NFFE may be considered a “passive” NFFE, depending on the amount of its
passive income and assets. The IRS is particularly interested in passive
NFFEs with substantial U.S. ownership. As such, passive NFFEs would have to
meet disclosure requirements regarding their owners to comply with FATCA.
for Canadian multinationals
Most entities within a
non-financial multinational company will be classified as NFFEs. However,
the definition of an FFI is broad and it is not uncommon for non-financial
multinational groups to have “accidental” FFIs in their structure (e.g.,
certain Canadian entities that serve as a treasury centre or certain captive
insurance companies). The key implications of classification as an FFI or an
NFFE are as follows.
An entity that is an FFI generally is required to register and enter into an
agreement with the tax authorities to become a “participating FFI”. An FFI
agreement generally requires the participating Canadian FFI to collect and
provide to the tax authorities certain information about some of its
stakeholders. Publicly available information may be used for this purpose,
such as Schedule 13Gs for stock traded on the New York Stock Exchange. To
meet these requirements, it may be necessary for the Canadian participating
FFI to establish new procedures and controls.
It is important to note that a
Canadian FFI generally is treated as a participating FFI only if all of the
FFIs in its affiliated group properly and timely enter into an FFI agreement
with the tax authorities.
An entity that is an NFFE generally is required to determine its
classification under the many NFFE categories. The Canadian NFFE will be
required to certify such classification to its U.S. withholding agents by
June 30, 2014 to avoid the 30% percent U.S. withholding penalty on U.S.
Further, financial institutions
with which an NFFE does business (e.g., Canadian banks) may require an NFFE
to certify its FATCA classification.
A Canadian NFFE that does not qualify for a specific NFFE exception will be a
passive NFFE and will be required to report its “substantial U.S. owners”.
The Canada-U.S. IGA is expected to provide details on what will constitute a
substantial U.S. owner.
This reporting obligation may
require the passive NFFE to implement new information collection procedures
and controls before June 30, 2014.
organization may want to consider taking the following actions:
Perform a targeted review of the
enterprises’ organizational chart to identify any Canadian or other non-U.S.
“accidental” FFIs in the corporate group before the April 25, 2014 FFI
Key entities to be reviewed include, for
example, treasury centres, captive insurance companies, holding companies,
and other entities the substantial part of the business of which is
investing in “financial assets” on behalf of others (including securities,
futures or forward contracts, partnership interests or commodities).
Each FFI that receives U.S. source
payments or receives payments from a non-U.S. banking institution should
register to be a participating FFI before April 25, 2014 to avoid 30% U.S.
withholding on such payments. As noted above, a Canadian FFI generally may
be treated as a participating FFI only if all of the FFIs in its affiliated
group enter into an FFI agreement with the IRS.
Each participating FFI generally would be
required to collect and report information regarding its U.S. stakeholders.
The first report is due March 15, 2015.
Analyze the application of the NFFE rules
to determine whether the Canadian enterprise is a passive NFFE that would be
required to provide information on its substantial U.S. owners by June 30,
If the Canadian enterprise is a passive
NFFE, it should establish procedures and controls in order to report its
substantial U.S. owners. It would be required to provide its U.S.
withholding agents and possibly other FFIs with this information by June 30,
Perform a targeted review of the Canadian
enterprise’s organizational chart to update its internal withholding
documentation by June 30, 2014.
Analyze the NFFE classification of any
non-U.S. entities that receive U.S. source payments (e.g., dividends or
interest) from U.S. entities within the group. Provide forms to the
affiliated payors certifying such classification by June 30, 2014.
Analyze payments made by any U.S. entities
and determine which entities, if any, make payments subject to FATCA
withholding to external parties. Request updated withholding documentation
from such external parties.
Analyze the NFFE classification of all
other entities. Be prepared to certify such classification when requested
(e.g., from an unrelated U.S. withholding agent or a non-U.S. banking
institution in which the enterprise holds an account). U.S. withholding
agents may request documentation starting before June 30, 2014.
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.
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Information is current to August 14, 2013. The information contained in this
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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