Key action steps required by Canadian funds for FATCA compliance
FATCA classifies non-U.S. entities under two broad categories—foreign financial institutions (FFIs) and non-foreign financial entities (NFFEs). The definition of an FFI is broad and captures most funds. A fund (and certain non-U.S. entities in its affiliated group) may be classified as FFIs, and other non-U.S. entities may be classified as NFFEs.
Each FFI will generally be required to register with the IRS by 25 April 2014, and satisfy other requirements depending on the country where it is organized.
The following are recommended key action steps for Canadian funds:
- Review the fund's organizational chart to identify all FFIs in the affiliated group before the registration deadline.
- Register each FFI with the IRS before the deadline.
- Determine the rules governing each FFI depending on where the entity is organized.
- Review the fund's organizational chart to identify the NFFE classification of the entities in its structure and update its withholding documentation.
- Analyze payments made by the fund's US entities and determine which entities make FATCA withholdable payments to unrelated non-US parties. Request updated withholding documentation
Read a 2014 report [PDF 96 KB] prepared by the KPMG member firm in Canada: Key action steps required by Canadian funds for FATCA compliance
FATCA application to Canadian private equity
FATCA is due to affect the majority of Canadian private equity funds regardless of whether they have U.S. investments, with potential financial penalties for failure to comply.
When FATCA was originally announced, the extent of its application was unclear for many funds. Since then, certain governments have signed intergovernmental agreements (IGAs) with the IRS, and more are due to enter into such agreements. While the United States-Canada IGA and Canada’s implementing legislation have yet to be published, with the promulgation of final regulations in the United States, the application of FATCA is now clearer. Broadly, all funds controlled and managed in Canada will be mandated to comply regardless of their investment or investor base.
Read a 2014 report [PDF 1.17 MB] prepared by the KPMG member firm in Canada: FATCA application to Canadian private equity
FATCA - Challenges and insights for pension funds
FATCA imposes material U.S. tax documentation, reporting, and withholding requirements on foreign (non-US) financial institutions—including foreign pension funds. If mismanaged, FATCA can have a severe, negative effect on a pension fund’s investment returns.
Given that FATCA withholding can apply as early as 1 July 2014, foreign pension funds need to determine now whether they qualify for a FATCA exemption. Further, pension funds must understand the risk of including non-FATCA compliant investments in their portfolios.
Read a 2014 report [PDF 813 KB] prepared by the KPMG member firm in Canada: FATCA - Challenges and insights for pension funds