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FATCA in Canada: The restriction on the class of entities subject to FATCA

Friday, 09 January 2015   (0 Comments)
Posted by: Authors: Roy Berg and Paul Barba
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Authors: Roy Berg and Paul Barba (Moodys Gartner Tax Law LLP)


This article provides an introduction to the Foreign Account Tax Compliance Act (FATCA) for Canadians and analyzes Canada's implementing legislation regarding FATCA. The implementing legislation uniquely classifies entities subject to FATCA, in that it departs from the classification in the US Treasury regulations, the Canada-US intergovernmental agreement regarding FATCA (the Canadian IGA), and the implementing legislation adopted or proposed by other jurisdictions with signed IGAs with the United States. Thus positioned, the implementing legislation places Canada either in the vanguard of legislative drafting regarding FATCA or as discrepant with both the United States and these other jurisdictions. This article analyzes Canada's position and rationale for its restrictive classification of entities subject to FATCA under the implementing legislation, and concludes that the legislation is likely discrepant in its interpretation.

FATCA is problematic for all parties involved, in both the private and the public sectors. Unfortunately, Canada's implementing legislation appears to exacerbate the situation. The legislation restricts the Canadian IGA's definition of "financial institution" to an exclusive list of 13 types of entities. Whether Canada's restriction on that term is proper remains to be seen. The implementing legislation classifies all personal Canadian trusts, or family trusts and other private trusts that are Canadian residents, as entities exempt from the Canadian IGA's requirements, while these trusts would be classified as entities subject to the Canadian IGA under the Treasury regulations, the IGA itself, and the implementing legislation of other jurisdictions with signed IGAs. Consequently, Canada has obscured the application of FATCA through the Canadian IGA and may have unilaterally overridden an international agreement. Specifically, the legislation could cause over withholding on certain payments to Canadian entities properly subject to FATCA under the Canadian IGA— particularly personal Canadian trusts—or may prevent the Canadian IGA from entering into force. Over withholding would increase FATCA's burden on the affected Canadian entities by requiring them to recover the otherwise unnecessary withholding taxes from the withholding agent or, most likely, the Internal Revenue Service.

Of course, negotiations between the US Department of the Treasury and the Canadian Department of Finance regarding FATCA occurred behind closed doors, and it is uncertain what the parties discussed, the nature of any possible debate, and the tacit agreements that may have been reached. Accordingly, we do not opine on the correctness of the Canadian implementing legislation, but instead simply analyze the relevant law in the hope that our analysis will serve as a framework for the evolution of foreign implementing legislation regarding FATCA in Canada and beyond.

Specifically, this article analyzes (1) FATCA generally and the Canadian IGA in particular; (2) why some personal Canadian trusts should be classified as entities subject to FATCA under the Canadian IGA as investment entities, custodial institutions, or both, and why the Financial Action Task Force reference in the definition of an investment entity does not alter this classification; (3) the implementing legislation under the Canadian IGA, particularly its unique classification of personal Canadian trusts as entities exempt from the Canadian IGA, and a history of the legislation; and (4) the potential consequences of restricting the class of entities subject to FATCA under the Canadian IGA, including over withholding and invalidation of the IGA.

FATCA in Canada: The Restriction on the Class of Entities Subject to FATCA

Originally published in Canadian Tax Journal 2014, Volume 62, Issue Number 3

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