Canada-US Enhanced Tax Information Agreement Implementation Act [FATCA IGA]

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….

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.

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.

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.