What Canadians Need To Know About the U.S. Foreign Account Tax Compliance Act
In March 2010, the U.S. enacted the Foreign Account Tax Compliance Act (FATCA). FATCA requires non-U.S. financial institutions to report to the U.S. Internal Revenue Service (IRS) accounts held by U.S. taxpayers. Failure to comply with FATCA could subject a financial institution or its account holders to certain sanctions including special U.S. withholding taxes on payments from the U.S.
The U.S. taxes people based on citizenship instead of residency and the U.S. is now looking for tax cheats. Despite the fact that this initiative places significant administrative costs on Canadian banks, experts claim that no bank the world-over will be spared of this tax information reporting requirement.
Without an additional intergovernmental agreement in place between Canada and the U.S. under the longstanding Canada-U.S. Tax Convention, obligations to comply completely with FATCA would have been imposed on Canadian financial institutions as of July 1, 2014.
Key Changes Under U.S. FATCA
So, what major changes does the additional agreement bring forward in the face of the U.S. FATCA?
- Financial institutions in Canada will not report any information to the IRS directly; relevant information on accounts held by U.S. residents and citizens (including U.S. citizens who are residents or citizens of Canada) will be reported to the Canada Revenue Agency in order to remain consistent with Canada’s privacy laws.
- The IRS will also provide the CRA with more detailed information on certain U.S.-held accounts of Canadian residents.
- A 30% U.S. withholding tax will not apply to clients of Canadian financial institutions, but can potentially apply to a financial institution that is in significant, long-term non-compliance of FACTA.
Exemptions Under FATCA
The good news is that there are significant exemptions to all of this cross-border information reporting because of the additional intergovernmental agreement:
- Certain accounts are exempt from FATCA and are not reportable, including registered savings accounts like RRSPs, RRIFs, RESPs, Registered Pension Plans, Registered Disability Savings Plans and TFSAs. (Note: this agreement is information sharing only – it does not affect a U.S. person’s obligation to report income earned in any of these plans on their U.S. tax returns!)
- Smaller deposit institutions with assets of less than $175M will also be exempt from the information reporting obligations.
Implications for Canadians
What does this mean for you? Although FATCA is an American Act, but there are high-level geopolitical efforts to exchange tax information between many nations in order to combat global tax evasion and encourage tax fairness. In 2013, G20 leaders committed to the automatic exchange of tax information as a new global standard and endorsed an OECD proposal to develop a global model. The G20 have also signaled an intention to begin exchanging information amongst themselves by the end of 2015 – as you can see, the reach of tax information sharing is set to spread across the globe, and quickly!
If you have foreign accounts or income that you are not reporting to the appropriate tax authorities, especially if you are a U.S. resident or a U.S. citizen who is also a resident of Canada, the information reporting may happen without your involvement. People who have a connection to the U.S. will likely have their information disclosed automatically to the CRA.
Canada’s tax system is an honor system. Consider the increase in tax-sharing information as additional reporting as a taxpayer to Canadian authorities and to authorities abroad. Failure to report completely can garner significant fines for the taxpayer and the professional advisor. Claim of ignorance or lack of sophistication will not suffice to reverse the fines. Consult with your Vancouver Chartered Accountants to find out more about how they can help you.
Our Chartered Accountants in Vancouver BC
Mew and Company is an independent firm of Professional Chartered Accountants, located in Downtown Vancouver B.C.
If you have any questions about FATCA or would like to know more about how we can help you, contact us.
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