Matias Milet, "FATCA and Canadian Investment Entities," Journal of International Taxation, March 2015, p. 29.
Breadth of Canadian IGA definition of "Investment Entity" (p. 33)
So long as an entity is managed by an asset manager or other institution that conducts any of the activities listed in the above definition [in the Canada-U.S. inter-governmental agreement ("IGA") of "Investment Entity"], it will be an "Investment Entity." Thus, for example, an environmental remediation trust or a family trust managed by an entity the business of which includes, administering or managing funds on behalf of other persons would seem to be an Investment Entity under the Canada IGA….
Narrower scope of para. (k) of the definition of "listed financial institution" in ITA, s. 263(1) (pp. 33-4)
For such an entity to be a "listed financial institution" it must, among other things, be managed by a "listed financial institution" described in paragraph (j), which refers to an entity that is "authorized under provincial legislation to engage in the business of dealing in securities or any other financial instruments, or to provide portfolio management, investment advising, fund administration, or fund management, service."
…[P]aragraph (k) contains a requirement, which is not in the Canada IGA, that the entity be "represented or promoted to the public" as some sort of investment vehicle….
…[T]he CRA Guidance indicates that trusts that do not seek external capital, (such as those used to hold family investable assets) would not satisfy the requirement of being promoted or represented to the public…
Potential exclusion of non-listed debt funds (p. 34)
The further requirement in paragraph (k) that the investment vehicle be "similar" to those types of investment funds listed (e.g., mutual funds, exchange-traded funds (ETFs), and private equity funds) raises questions as to which types of investment entities are sufficiently similar to be "listed financial institutions" under the ITA. The listed categories of investment entities in paragraph (k) provide investors with a return on an equity investment that varies based on the performance of underlying holdings of the vehicle. When an entity issues only debt to investors, who do not participate in the upside of the entity's underlying financial assets, there may be questions as to whether there is the requisite similarity to the listed types of investment vehicles.
Authorized sub-advisor to a non-authorized fund manager (p. 35)
…[W]ould a portfolio manager, subadvisor, or administrator that has a contractual relationship with the "primary" fund manager be considered to be managing the entity in determining if paragraph, (k) is satisfied? That is somewhat unclear, although the inclusion of portfolio management, investment advising and fund administration in paragraph (j) suggests that the concept of entity management in paragraph (k) is a broad one.
Meaning of being an "authorized" fund manager (p. 35)
Another interpretive issue concerning the investment vehicle manager stems from the requirement that the manager be "authorized" under provincial legislation to engage in the enumerated activities….
[A]s a securities law matter, the general industry position of Canadian general partners of private equity fund limited partnerships that are actively involved in the management of portfolio companies is that they are generally not engaged in activities requiring registration, so they are neither registered as fund managers (or otherwise) nor purporting to be acting under a registration exemption. It seems that if the law of a particular province "contemplates" that an entity can act as a general partner of a limited partnership, and permits the entity to do what is required to manage a limited partnership engaged in investment activities without requiring registration under provincial law the CRA would at least take the view that a general partner of a private equity fund limited partnership acting in that province has the requisite provincial law authorization to make the partnership a "listed financial institution" under the ITA.
Differing approaches to reporting of (hybrid) entities which are (IGA) investment entities but not (ITA) listed financial institutions (p. 36)
That the CRA would declare a Hybrid Canadian FI to be an NFFE [non-financial foreign entity], while such an entity seemingly remains a financial institution under Chapter 4, puts the entity in a difficult place in terms of compliance….
[E]ven if the ITA might be read as not treating the entity as a Canadian financial institution subject to reporting obligations, one approach that some entities are adopting is to (1) register on the IRS portal as a reporting Model 1 FFI [foreign financial institution with government information exchange IGA]; (2) fully comply with the due diligence and reporting obligations imposed under the ITA and Canada IGA on reporting Canadian financial institutions; [fn 30: If the Hybrid Canadian F1 in fact does not technically qualify as a "listed financial institution" under Part XVIII of the ITA, its decision to engage in FATCA reporting may put it in a position where it is contravening the domestic privacy laws that Part XVIII was meant to override but without the protection of acting in compliance with Part XVIII] and (3) state on Forms W-8 that the entity is a reporting Model 1 FFI. A variant of this approach would be for an entity to take steps (1) and (3) but not (2), that is, to treat itself as a Reporting Canadian Financial Institution without in fact doing any reporting. A Hybrid Canadian FI adopting the latter approach may seek to rely on language in Article 4(1) of the Canada IGA stating that even if a Reporting Canadian Financial Institution does not in fact comply with basic reporting obligations that the Canada IGA attaches to that status, the entity will not be subject to FATCA withholding unless and until the IRS affirmatively declares the entity to be a Nonparticipating Financial Institution.
Yet another position being adopted with respect to Hybrid Canadian FIs is that the instructions to Form W-8BEN (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)) can be read as indicating that the IRS wants foreign entities to determine their Chapter 4 status based on their local country implementing legislation, arguably even when the resulting classification may be inconsistent with the classification under the FATCA Regulations….
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.
Would Canco, which is a Canadian-based business that provides payment processing services to payors such as peer-to-peer money transfer services and payroll-like bulk payment services and which maintains non-interest bearing pooled bank accounts owned by it for the benefit of its customers, qualify as a “Canadian Financial Institution” as defined under s. 263(2)? CRA responded:
In accordance with subparagraph l(l) of Article 1 of the [Canada-US Intergovernmental Agreement], a CFI means “(1) any Financial Institution that is resident in Canada, but excluding any branch of such Financial Institution that is located outside Canada, and (2) any branch of a Financial Institution that is not resident in Canada, if such branch is located in Canada”. In accordance with subparagraph 1(g) of Article 1 of the IGA, the term “Financial Institution” includes a “Depository Institution”. In accordance with subparagraph 1(i) of Article 1 of the IGA, a “Depository Institution” is any entity “that accepts deposits in the ordinary course of banking or similar business.” Paragraph 3.7 of the [CRA Part XVIII] Guidance provides clarifying language…stating…:
Facilitating money transfers by instructing agents to transmit funds (without financing the transactions) is not seen as the acceptance of a deposit and an entity will not be considered to be engaged in banking or similar business or a depository institution because of this activity alone.
Whether or not a particular entity which carries on a MSB would be considered a Depository Institution as defined in subparagraph 1(i) of Article 1 of the IGA is a question of fact and beyond the scope of this request.
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)... .
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. ...
Kristen A. Parillo, "Canada's FATCA Guidance: Too Much Discretion Used?", Tax Notes International, July 14, 2014, p. 73
Canadian decision to exclude private trusts (p. 74)
Private trusts' exclusion from the listed financial institutions is made clear in Example C of the guidance notes… .
At this point, it's not clear whether the Canadian government's decision to exclude private trusts should be viewed as simply an example of a sovereign nation's right to implement an international agreement as it sees fit, or whether it sets a bad precedent and could inspire other IGA partners to depart significantly from FATCA's intent when developing their local legislation.
Private trust exclusion contrary to U.S. understanding (p. 74)
Peter A. Cotorceanu, a U.S. tax lawyer and head of product management for trusts and foundations at UBS in Zurich, said one could argue that Canada's position on trusts is defensible. ''If you read the IGA as written, I agree with them that trusts are not actually financial institutions,'' he said. ''However, it's clear that that's not the understanding of the IRS when they wrote the regulations, and it wouldn't have been the understanding of Treasury when they wrote the IGAs.''
Inconsistency with other jurisidictions (p. 74)
[I]n their submissions to the Canadian government, stakeholders had argued that leaving the narrowed definition in place would result in inconsistent definitions of financial institution among IGA jurisdictions, which they said would be undesirable for cross-border investors and could lead to unnecessary compliance burdens, excess withholdings, and unnecessary costs associated with obtaining refunds of the excess withholdings.
''For family trusts that are structured in Canada and only hold Canadian investments, I don't think it's going to be that problematic,'' [Carlene] Allen [of KPMG] said. ''But it's going to be tricky when you have family trusts that receive foreign-source income.'
Less onerous tratment as nonfinancial foreign entity (pp. 75-6)
Canada's decision to narrow the definition of financial institution could also lead to fairness concerns, Cotorceanu said. ''You have all of these offshore trust jurisdictions like the British Virgin Islands, Bermuda, Bahamas, Cayman Islands, the crown dependencies, and so on,'' he said. ''If their trusts are all [treated as] FFIs, they have due diligence obligations, new account opening procedures, all sorts of detailed requirements as compared to an NFFE, which has no explicit due diligence requirements and no new account opening procedures. The only obligation of an NFFE is to find U.S. controlling persons and then disclose them upstream to the withholding agent….
Potential for U.S. to seek reversal (p. 76)
John L. Harrington of Dentons noted that…IGAs do provide a mechanism for Treasury and the partner jurisdiction to consult on appropriate measures to address ''difficulties in implementation'' of the agreement, Harrington said. ''So there is a means, but no guarantee, that the United States can prevail on a country to adopt a different interpretation''…
A Finance official indicated that, in the course of the negotiations of the IGA with the U.S., the US tax authorities were informed of the Canadian government’s position that personal trusts used for estate planning purposes and not seeking to raise external capital are excluded from the FATCA reporting requirements for Canadian financial institutions. Finance considers that the Canadian legislation in this regard is compatible with the "financial institution" definition in the IGA.
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. ...
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.
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)
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.
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.