Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement 20 July 2020

4.9 Passive income ... will generally include income from the mere holding of property, such as:

• dividends;
• interest;
• income equivalent to interest;
• rents and royalties, other than rents and royalties derived in the active conduct of a business conducted, at least in part, by employees of the NFFE;
• annuities;
• the excess of gains over losses from the sale or exchange of financial assets that gives rise to the passive income described previously;
• the excess of gains over losses from transactions (including futures, forwards, options, and similar transactions) in any financial assets;
• the excess of foreign currency gains over foreign currency losses;
• net income from swaps; and
• amounts received under cash value insurance contracts.

1.6 A Canadian financial institution that is in compliance with Part XVIII will not be subject to any U.S. withholding tax on U.S. source income and gross proceeds (both on its own investments and those held on behalf of its customers) under section 1471 of the U.S. Internal Revenue Code… .

9.15 Due diligence must be carried out by obtaining a self-certification that allows the financial institution to determine whether the account holder is a U.S. resident or a U.S. citizen. A financial institution must also confirm the reasonableness of the self-certification based on information it obtains in connection with the opening of the account, including any documentation obtained for the AML/KYC Procedures.

9.16 It is expected that financial institutions will have account opening processes that facilitates the collection of a self-certification at the time of the account opening. However, financial institutions are not expected to carry out an independent legal analysis of relevant tax laws to confirm the reasonableness of a self-certification.

9.17 If there is an unambiguous indication that an account holder was born in the U.S. but the individual declares in a self-certification that he or she is not a U.S. resident or a U.S. citizen, the certification can be confirmed as reasonable if the financial institution receives the documentation that is relevant to cure the indicia as if the account had been a preexisting account ...

9.18 In the case of U.S. indicia other than a U.S. place of birth appearing when an account is opened (except when the account holder is known to be a U.S. resident or a U.S. citizen), the documentation required for the AML/KYC Procedures that is of non-U.S. issue is normally expected to position a financial institution to confirm the reasonableness of a self-certification of non-U.S. status.

9.19 If the self-certification establishes that the account holder is a U.S. resident or a U.S. citizen, the financial institution must treat the account as a U.S. reportable account and the self-certification must include the account holder’s Canadian and U.S. TINs, unless the account holder has applied for a TIN within 15 days or 90 days, as the case may be, after a request by the financial institution.

9.20 If a self-certification is not provided by the account holder, the financial institution must treat the account as a U.S. reportable account.

9.21 The implementation of the Agreement in no way requires or encourages financial institutions to refuse to open an account or to otherwise deny service.

9.22 The guidance provided in paragraphs 8.76 to 8.83 applies equally to self-certifications for new accounts except that the requirement to report a U.S. TIN applies from the outset.

Real estate entities not investment entities

3.20 An entity that primarily conducts as a business investing, administering, or managing non-debt, direct interests in real or immovable property ... on behalf of other persons, such as a type of real estate investment trust, will not be an investment entity.

CFIs must be LFIs

3.29 Two conditions must be met for an entity to be a Canadian financial institution under Part XVIII—the entity must be a Canadian financial institution under the Agreement and it must be a “listed financial institution” for the purposes of Part XVIII.

3.30 ... If the control and management of a partnership’s business takes place in Canada, the partnership is considered resident in Canada ... .

3.33 Entity classification elections (known as “check the box” elections) made to the IRS are irrelevant for determining whether an entity is a Canadian financial institution. ...

4.15 No Canadian financial institution is an NPFI [and] ... no other financial institution is known to be classified as an NPFI by virtue of significant non-compliance with an intergovernmental agreement. ...

3.46 ... [M]ost of the deemed-compliant FFI categories described in the U.S. Treasury Regulations will be of limited interest to Canadian financial institutions because of the equivalent categories that are provided for in section III of Annex II of the Agreement.

3.34 ... An entity can be sure that it does not have reporting obligations under Part XVIII if it is not described in paragraphs (a) to (m) of the definition of the term “listed financial institution” as it appears in subsection 263(1)... .

3.38 ...

Example C

Peter establishes a Canadian resident trust as a vehicle to hold financial assets for family estate planning purposes in Canada. The trust is settled with capital provided by Peter and it is not represented or promoted to the public. The trust is not described in the definition of the term "listed financial institution" in subsection 263(1) of the ITA and is not a Canadian financial institution with due diligence and reporting obligations under Part XVIII. ...

Nominee-name/client-name

5.3 When investment fund units are sold through dealers, they can be issued in the name of the beneficial owner (client-name) or recorded in the name of the dealer (nominee-name).

Funds not responsible re nominee names

5.4 If a dealer holds legal title to units of an investment fund on behalf of a client (the ultimate investor), the dealer maintains the account of the client, and the dealer is an account holder of the fund. In this circumstance, the issuance of the fund units in nominee-name separates the ultimate investors from the fund in the sense of not creating an account holder relationship between the two. Therefore, the fund has to understand only the status of the dealer that is its direct account holder. It can determine the dealer’s status by verifying the dealer has a GIIN (by referring to the IRS FFI list). The fund has no obligation to ascertain information or perform reporting in connection with the ultimate investors.

Mutual fund dealers whose clients invest with other FIs

6.2 … Subsection 263(3) of the ITA makes clear that a financial account includes a client-name account maintained by a person or entity that is authorized under provincial law to engage in the business of dealing in securities or any other financial instrument or to provide portfolio management or investment advising services.

RRSPs and other excluded accounts

6.5 [C[ertain accounts are excluded… . For example, accounts… held by, an RRSP, a RRIF, or a tax-free savings account (TFSA) are not treated as financial accounts (and are not subject to any reporting) under the Agreement (see paragraph 6.6 for the list of excluded accounts).

Execution of trading instructions does not create financial account

6.4 When a financial institution is acting as a broker and simply executing trading instructions, or is receiving and transmitting such instructions to another person, the financial institution is not required to treat the facilities established for the purposes of executing a trading instruction, or of receiving and transmitting such instructions, as a financial account under Part XVIII (for example, so-called delivery versus payment (DVP) accounts benefit from this understanding). The financial institution acting as custodian will be responsible for performing due diligence procedures and reporting where necessary.

6.18 In Canada, an entity designated under federal legislation to provide centralized facilities for the clearing, settlement and deposit of securities, commonly referred to as a CSD, will not be treated as maintaining financial accounts. ...

ETFs

6.43 If an investment dealer or other financial institution intermediates the purchase for a client of a unit in an exchange traded fund or a closed-end fund (…"ETF"…), that regularly trades on an established securities market and the unit is registered in nominee-name on the books of the ETF, the ETF would not be considered to maintain a financial account. If, however, a purchase results in a unit being first registered in client-name on the books of an ETF on or after July 1, 2014, the ETF would be considered to maintain a financial account held by the unit holder (but only in respect of the 2016 reporting year and subsequent years). Since an ETF will have outcomes similar to a traditional mutual fund beginning in 2016 in connection with units held in client-name, the guidance on coordination between funds and the fund dealers set out in paragraphs 5.7 to 5.15 may be of interest.

"Regularly traded"

6.46 The definition of "financial account" treats equity or debt interests in a financial institution as a financial account unless the interest is ‘regularly traded on an established securities market'. An interest is considered ‘regularly traded' if there is a meaningful volume of trading on an ongoing basis. (see paragraph 4.18)

Partnership accounts

6.51 When a financial account is held in the name of the partnership, it will be the partnership that is the account holder rather than the partners in the partnership.

Estate accounts

6.52 When an estate is listed as the holder of a financial account, it is to be treated as the account holder, rather than any beneficiary or other person.

9.10 An individual may have a preexisting or new account (hereinafter referred to as the “original account”). The individual may subsequently open a new account (hereinafter referred to in this paragraph as the “new account”), with the same financial institution (or another financial institution within the same jurisdiction if the financial institution and the first-mentioned institution are sponsored by the same sponsoring entity). In such a case, there is no need to re-document the account holder as long as:

• the appropriate due diligence requirements have been carried out, or are in the process of being carried out, for the original account;
• the opening of the new account does not require the provision of new, additional or amended client information;
• with respect to an account subject to AML/KYC Procedures, the financial institution is permitted to satisfy those procedures for the new account by relying on the procedures performed in connection with the original account; and
• when a threshold has been applied in connection with the preexisting individual account, the financial institution’s computerized systems are able to link the new account to the original account held by the account holder and allow the account balances or values to be aggregated.

Example

An individual holds a preexisting individual account with a balance that was US$35,000 on June 30, 2014. The individual opens a new account at the same financial institution and the new account does not require the provision of new, additional or amended customer information. The financial institution applies the US$50,000 threshold and is able to link the new account to the original account. The new account can be treated as a continuation of the original account and can continue to be treated as exempt until such time as the aggregate balance or value of the accounts exceeds US$1,000,000.

Self-certification

7.17 Under Part XVIII, Canadian financial institutions are required to obtain self-certifications to establish whether an account holder is a specified U.S. person or to clarify the status of particular entities. …

7.18 Self-certification forms have been developed by the CRA to assist financial institutions in establishing the status of account holders under Part XVIII and Part XIX. ...

Reliance on self-certification

7.23A self-certification or documentary evidence cannot be relied upon if a financial institution knows or has reason to know that it is incorrect or unreliable.

Must take into account AML information

7.24 In assessing whether reliance can be placed on a self-certification, a financial institution must consider other information that it has obtained concerning the account holder in connection with the account opening, including any documentation obtained for purposes of the AML/KYC Procedures and any information that an account holder voluntarily provides to it.

Client-name accounts included

5.9 An investment fund unit held in client-name will be a financial account maintained by the fund for the purposes of Part XVIII even if that unit is also contained in an account of a dealer. ...

Dealer due diligence responsibility

5.10 In view of the current compliance practices between dealers and fund managers for client-name accounts, subsection 265(8) of the ITA and paragraph 5.13 are generally expected to apply in respect of such accounts. The CRA expects dealers to perform the due diligence and account classification and funds to perform the reporting, unless a fund is advised by a dealer that the dealer will take responsibility for its own reporting.

Dealer can also report

5.14 Rather than communicate its determination of the account holder’s status, a dealer can choose to perform the reporting obligations in respect of a unit. In that case, the dealer has to file any required Part XVIII Information Return with the CRA in respect of the unit and inform the fund in writing that the dealer is doing this. The fund can rely on this written notification and is not required to take additional steps in this regard unless the fund reasonably concludes that the dealer has not complied with its reporting obligations. ...

Example showing dealer responsibility for nominee-name accounts and dealer/fund duty division re client-name accounts

5.15 … Example – Identification and reporting on an interest in a fund

Two U.S. residents, Investor A and Investor B, seek to invest in Mutual Fund ABC (referred to in this example as the "Fund"). Investor A invests in the Fund through Dealer I. Dealer I acquires units in the Fund in the client-name of Investor A. Investor B invests in the Fund through Dealer II and acquires units in the Fund in nominee-name on behalf of Investor B. Dealer I, Dealer II, and the Fund are reporting Canadian financial institutions.

Dealer I and Dealer II have as account holders Investor A and Investor B, respectively, and both have Part XVIII responsibilities in connection with the financial accounts they maintain. This is the case irrespective of whether the fund units are held in client-name or in nominee-name.

The Fund maintains a financial account for each of Investor A and Dealer II by virtue of the fund units they hold. The Fund has Part XVIII responsibilities in respect of its account holders that are Investor A and Dealer II. If, in respect of Investor A, Dealer I communicates its determination of Investor A’s status to the Fund, Dealer I is not required to file with the CRA a separate Part XVIII Information Return to report Investor A’s interest in the Fund.

In respect of Investor B, the Fund has to understand whether Dealer II is a financial institution. The Fund can do this by verifying that the dealer has a GIIN (by referring to the IRS FFI list).

Scope of collective investment vehicle concept

3.20 An entity that primarily conducts as a business investing, administering, or managing non-debt, direct interests in real or immovable property (even if managed by another investment entity) on behalf of other persons, such as type of real estate investment trust, will not be an investment entity.

3.21 The Agreement provides that the term "investment entity" must be interpreted in a manner consistent with the definition of "financial institution" in the FATF Recommendations. Part XVIII takes this into account by ensuring that an entity will not be considered to be a Canadian financial institution unless it is included in the definition of the term "listed financial institution" in subsection 263(1) of the ITA.

NCRFIs that qualify on the basis of a local ('Canadian) client base

Financial institution with a local client base

3.61 An NRCFI includes a financial institution that qualifies as a local FFI described in section 1.1471-5(f)(1)(i)(A) of the U.S. Treasury Regulations if subparagraphs A(1) to (3) of section III of Annex II of the Agreement are applied instead of the relevant provisions in those Regulations. Therefore, all of the criteria listed below must be met for a financial institution to be a financial institution with a local client base under paragraph A of section III of Annex II of the Agreement.

3.62 The criteria are:

1. The financial institution must be licensed and regulated under the laws of Canada (or the laws of a province or territory in Canada).
2. The financial institution must have no fixed place of business outside of Canada. For this purpose, a fixed place of business does not include a location that is not advertised to the public and from which the financial institution performs solely administrative support functions.
3. The financial institution must not solicit customers outside of Canada. For this purpose, a financial institution will not be considered to have solicited customers outside of Canada merely because it operates a website, provided that the website does not specifically indicate that the financial institution provides accounts or services to non-residents of Canada.

   A financial institution will also not be considered to have solicited customers outside of Canada if it advertises in print media or on a radio or television station and the advertisement is distributed or aired outside of Canada, as long as the advertisement does not specifically indicate that the financial institution provides accounts or services to non-residents of Canada.

   The issuance or distribution of a prospectus will not, in and of itself, amount to soliciting customers. Likewise, the publication of reports and other documents to satisfy regulatory requirements will not amount to soliciting customers outside of Canada.

4. The financial institution is required under Canadian law to identify Canadian resident account holders to perform information reporting (or tax withholding) or is a reporting entity under the PCMLTFA and related regulations.
5. At least 98% of the financial accounts by value provided by the financial institution must be held by residents of Canada (whether or not they are U.S. persons). A financial institution can determine the value of all such accounts using any reasonable means, such as book value or fair market value.

   Any account treated as an “exempt product” can be treated as a financial account for the purpose of determining whether the 98% test is satisfied.

   For the purpose of applying paragraph 3.62, a financial institution can treat an account as being held by a resident of Canada if the residence address associated with the account is in Canada.

   A financial institution will need to assess whether it meets this criteria annually. The measurement can be taken at any point of the preceding calendar year for it to apply to the following year, as long as the measurement date remains the same from year to year.

6. On or before July 1, 2014 (or the date it represents itself as a deemed-compliant financial institution), the financial institution must have policies and procedures, consistent with those described in Annex I of the Agreement, to prevent the financial institution from providing a financial account to an NPFI and to monitor whether it provides accounts to any:
   
   • specified U.S. person who is not a resident of Canada (including a U.S. person who was a resident of Canada when the account was opened but subsequently ceases to be a Canadian resident); or
   • passive NFFE with controlling persons who are U.S. persons and who are not residents of Canada.

If any such account is discovered, the financial institution must report the account as would be required if the financial institution were a reporting Canadian financial institution or it must close the account.

The financial institution is expected to follow the applicable requirements of the FATCA registration website and electronically file a Part XVIII Information Return with the CRA.

7. With respect to each preexisting account held by an individual who is not a resident of Canada or by an entity, the financial institution reviews those accounts according to the procedures in Annex I of the Agreement applicable to preexisting accounts to identify any financial account held by a specified U.S. person who is not a resident of Canada, by a passive NFFE with controlling persons who are U.S. residents or U.S. citizens who are not residents of Canada, or by a nonparticipating financial institution. When such accounts are identified, the financial institution must report those accounts as would be required if it were a reporting Canadian financial institution (and follow the applicable requirements of the IRS FATCA registration website) or it must close the account.
8. In the case of a financial institution that is a member of an expanded affiliated group, each financial institution in the group (other than a U.S. financial institution) is incorporated or organized in Canada and meets the requirements set out in paragraph A of section III of Annex II of the Agreement (with the exception of a retirement plan classified as an exempt beneficial owner, or a non-reporting Canadian financial institution referred to in section III of Annex II of the Agreement so long as its business is not the same as the first-mentioned financial institution).

   An investment entity will not be considered a member of an expanded affiliated group as a result of contributing seed capital (that is, an initial investment that is intended as a temporary investment) by a member of the group if all of the following conditions are met:

   • The member of the group that provides the seed capital is in the business of providing seed capital to investment entities that it intends to sell to unrelated investors.
   • The investment entity is created in the course of its business.
   • Any equity interest in excess of 50% of the total value of stock of the investment entity is intended to be held for no more than three years from the date of acquisition.
   • In the case of an equity interest that has been held for over three years, its value is less than 50% of the total value of the stock of the investment entity.