Article 4
Section 1
Administrative Policy
Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement 20 July 2020
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… .
Section 2
Administrative Policy
Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement 20 July 2020
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.
Articles
Henry Chong, "Canada and FATCA", Tax Management International Journal, 2014, p. 527.
No direct reporting to IRS means no breach of privacy laws (p. 536)
The FATCA Regulations recognize that there will be differences between the U.S. domestic law and the Model IGA definitions of "Financial Institution." In the case of such differences, Reg. §1.1471-5(d) provides that in determining whether an entity is an FFI that would otherwise be subject to FATCA reporting under the U.S. domestic law, where the entity is resident in a country that has entered into a Model 1 IGA or a Model 2 IGA, the entity is an FFI under FATCA and the FATCA Regulations only if the entity is treated as a Financial Institution under such Model IGA. As a result, it appears that an entity in an IGA jurisdiction is an FFI subject to FATCA-like reporting . in that jurisdiction only if it is a financial institution under the applicable IGA, regardless of whether the entity would be considered an FFI under U S domestic law….
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Treaties - Canada-US Enhanced Tax Information Agreement Implementation Act [FATCA IGA] - Article 5 - Section 2 | 686 |
Candice M. Turner, "Answers to Practical FATCA Questions for Canadian Financial Institutions", Tax Management International Journal, Vol. 43, No. 8, August 8, 2014, p. 484.
Potential requirement to withhold re a recalcitrant account holder (p. 485)
...FATCA generally requires an FFI to withhold 30% on payments from the FFI to "recalcitrant account holders." [fn 6: §1471(b)(1)(D).] A "recalcitrant account holder" is defined as any account holder which: (1) fails to comply with reasonable requests for the information required by the FFI for the FFI to determine if the account holder is a U.S. person; or (2) fails to provide a waiver of any foreign law that would prevent the FFI from the required reporting. [fn 7: §1471(c)(6).] Subparagraph 2of Article 4 of the IGA provides that Reporting Canadian Financial Institutions are not required to withhold tax with respect to an account held by a recalcitrant account holder or to close such account, if the required information under subparagraph 2(a) of Article 2 of the IGA is received. One of the most critical pieces of information to be received from the account holder is the U.S. TIN….
Ability to open account for recalcitrant holder who fails to provide certification (p. 485)
[A]lthough the issue is not entirely clear, a Reporting Canadian Financial Institution should be able to open an account for a recalcitrant account holder who fails to provide a self-certification or a U.S. TIN. If the Reporting Canadian Financial Institution has not obtained the U.S. TIN, then withholding tax I would be imposed on U.S.-source withholdable payments.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 264 - Paragraph 264(1)(c) | 149 |
Article 5
Section 2
Articles
Alison Bennett, "Treasury OK with Canadian Stance on Listed Financial Institutions Under FATCA", Daily Tax Report (BNA), October 7, 2014.
U.S. Treasury accepts Canadian exclusion of personal investment companies and trusts from FATCA regime
The U S. is willing to accept Canada's recent guidance that only "listed financial institutions" would be considered investment entities subject to the Foreign Account Tax Compliance Act under an intergovernmental agreement… .
"We… are okay with this interpretation in the context of the Canadian IGA," Brett York, an attorney adviser in the Treasury Office of International Tax Counsel, said Oct. 6.
Canada's guidance means that most personal investment companies and trusts won't be considered financial institutions required to report U.S.-owned accounts to the Internal Revenue Service under FATCA and thus won't face a 30 percent withholding tax.
Meshing with "investment entity" per Canada's Financial Action Task Force
"York said under the wording of the Canadian IGA, the definition of "investment entity" is to be interpreted in manner consistent with the definition of "financial institution" in the recommendations of Canada's Financial Action Task Force.
The task force provides that "financial institutions" include any natural or legal person who conducts, as a business, one or more of a list of activities or operations for, or on behalf of, a customer. That list includes portfolio management and investment activities, York said.
Henry Chong, "Canada and FATCA", Tax Management International Journal, 2014, p. 527.
Exclusion of private trusts from Financial Institutions in ITA s. 263(2) (p. 537)
[S]ection 263(2) of the Act provides that the definition of Financial Institution in §l(g) of the Canada IGA is to be read to only include Financial Institutions as defined under the Canada IGA that are specifically listed in §263 of the Act…. investment vehicles such as private trusts that do not hold themselves out to the public as investment funds would not appear to be included as Financial Institutions or RCFIs under the expanded definition of that term under the Act but could be RCFIs under the Canada IGA and FFIs under FATCA. …
[I]nvestment vehicles such as private trusts that do not hold themselves out to the public as investment funds would not appear to be included as Financial Institutions or RCFIs under the expanded definition of that term under the Act but could be RCFIs under the Canada FGA and FFIs under FATCA.
No exclusion of such private trusts from FATCA (pp. 537-8)
[T]here is no FATCA provision that will exclude a Canadian entity that is not treated as a Financial Institution under Canadian domestic law from being an FFI under FATCA where the entity is a Financial Institution under the Canada IGA….
Potential breach of FATCA obligations (p. 538)
[O]n its face, the difference appears to produce the rather odd result that an entity that is a Canadian Financial Institution under the Canada IGA but that is not a listed Financial Institution under the Act will likely be in default in its obligations as an RCFI under the Canada IGA without being in breach of any obligations under Part XVIII of the Act….The United States would then have the right under Article 5 to notify Canada of such non-compliance and require Canada to apply domestic enforcement and penalty measures, but because such non-listed Financial Institutions would not appear to be in breach of any Canadian reporting requirements, it is unclear whether such measures would apply. At some point, a non-listed Financial Institution's failure to comply with the reporting requirements under the Canada IGA would result in Article 5(2)(b) of the agreement applying, which would result in such institution's being treated as a nonparticipating FFI under U.S. domestic law and subject to FATCA withholding in the same manner as any other nonparticipating FFI under U.S. domestic law. As a practical matter, the non-listed Financial Institution could be subject to FATCA withholding tax even before such default if it does not register with the IRS and obtain a GIIN.
Voluntary opting in? (p. 538)
It is unclear whether a non-listed Financial Institution could avoid this result by voluntarily opting into the Canadian domestic reporting regime. While Article 4(7) of the Canada IGA allows Canada to use, and to permit a Canadian Financial Institution to use, a definition in the FATCA Regulations in lieu of the definition in the Canada IGA where such use does not frustrate the purposes of the Canada IGA, that provision does not appear to cover the use of a definition in the FATCA Regulations or the Canada IGA in lieu of the definition under Canadian domestic law. As well, Part XVIII of the Act does not appear to provide for voluntary compliance. It is also unclear whether, such voluntary compliance outside the framework of the Canadian reporting regime .would avoid the Canadian privacy and other legal concerns that arose in the case of direct compliance with FATCA and which the IGAs were intended to deal with. What seems clear is that the approach taken by Canada could defeat, at least in part, the underlying rationale for the IGA that a Canadian FFI will be able to satisfy the FATCA requirements by complying with Canadian domestic reporting requirements. Instead the Canadian approach leaves at least some Canadian financial entities that are FFIs under the. FATCA Regulations but not RCFIs under Part XVIII of the Act exposed to direct compliance with FATCA and the same conflicts of law and other legal issues related thereto even where they are in compliance (or at least not in breach) under the Canadian reporting requirements.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Treaties - Canada-US Enhanced Tax Information Agreement Implementation Act [FATCA IGA] - Article 4 - Section 2 | 160 |
Section 1
1(j) Investment Entity
Administrative Policy
Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement 20 July 2020
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.
1(l) Canadian Financial Institution
Administrative Policy
Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement 20 July 2020
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. ...
1(r) Nonparticipating Financial Institution
Administrative Policy
Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement 20 July 2020
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. ...
Annex 1
Section III
Paragraph A
Administrative Policy
20 August 2018 External T.I. 2018-0759081E5 - Canada-U.S. Enhanced TIEA
ITA s. 264(1)(b), when read in conjunction paragraph A of Section III of the Annex of the IGA, effectively provides that a Canadian financial institution may designate a financial account to not be a U.S. reportable account for a calendar year if the account is a New Individual Account unless the account balance exceeds $50,000 at the end of “any” calendar year. CRA confirmed that this means that once the $50,000 threshold is exceeded at any year end, “it remains reportable regardless of its balance in subsequent years, and thus may no longer be designated pursuant to paragraph 264(1)(b).”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 264 - Paragraph 264(1)(b) | account must be reported once it closes over $50,000 | 266 |
Section IV
Paragraph A
Administrative Policy
Candice M. Turner, "Answers to Practical FATCA Questions for Canadian Financial Institutions", Tax Management International Journal, Vol. 43, No. 8, August 8, 2014, p. 484.
Opening of 2nd account by holder of pre-existing account (p. 486)
The use of the Treasury Regulation definition of "preexisting obligation" is not specifically addressed, in the IGA, the implementing legislation, or the official explanatory notes to the implementing legislation (the "explanatory notes"). However, the CRA Guidance provides that where a holder of a pre-existing individual account opens a new account with the same financial institution, there is no need to re-document the account so long as the due diligence requirements have been or are in the process of being carried out and, where a threshold has been applied in connection with the pre-existing account, the financial institution's computerized systems are able to link the new account to the pre-existing account. [fn 10: Reg. §1.1471-1(b)(98)(ii).] In effect, this would incorporate the expanded definition in the Treasury Regulations without the requirement that the two, accounts be treated as "consolidated obligations."…
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Treaties - Canada-US Enhanced Tax Information Agreement Implementation Act [FATCA IGA] - Annex 1 - Section VI - Paragraph C | 157 |
Section VI
Paragraph C
Administrative Policy
Candice M. Turner, "Answers to Practical FATCA Questions for Canadian Financial Institutions", Tax Management International Journal, Vol. 43, No. 8, August 8, 2014, p. 484.
Exclusion of closed accounts from aggregation requirements (p. 486)
The IGA also requires reporting of accounts closed during the year. [fn 13: IGA Article 2(2)(1)(4).] The IGA does not, however, address how accounts closed during the year are to be treated for purposes of the due diligence rules. The CRA Guidance also does not address this issue. Given that the IGA seems to require looking at the account balances that could potentially be aggregated at one moment in time, it is reasonable to conclude that closed accounts should not be aggregated for purposes of the due diligence rules. Indeed, if the value of the closed account immediately prior to closure were aggregated with values of other accounts at a later date, funds moved from the closed account to a new account could be subject to double counting. Thus, although no clear authority has addressed this point, closed accounts should likely not be taken into account in applying the aggregation rules.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Treaties - Canada-US Enhanced Tax Information Agreement Implementation Act [FATCA IGA] - Annex 1 - Section IV - Paragraph A | 149 |
Subparagraph B(4)
Administrative Policy
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.
Annex 2
Section III
Paragraph A
Administrative Policy
Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement 20 July 2020
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:
- The financial institution must be licensed and regulated under the laws of Canada (or the laws of a province or territory in Canada).
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.