Canada’s draft legislation undermines FATCA agreement with U.S.
A prominent tax lawyer says that proposed federal legislation relieving Canadian financial institutions from onerous obligations under the U.S. Foreign Account Tax Compliance Act “eviscerates” an intergovernmental agreement signed between Canada and the U.S. earlier this month.
“The U.S. Treasury Department may view the legislation, if passed in its current form, as an invalid implementation of the IGA and may therefore not afford Canadian financial institutions the benefit of the Agreement,” says Roy Berg, Director, U.S. Tax Law at Calgary’s Moodys Gartner Tax Law LLP.
FATCA is intended to combat offshore tax evasion. The legislation generally requires foreign financial institutions to report the financial activities of their American clients to the Internal Revenue Service and withhold funds in appropriate circumstances. The IGA allows Canadian institutions to report to the Canada Revenue Agency instead. This aligns the reporting obligations of financial institutions under U.S. and Canadian law.
Simultaneously with the signing of the IGA, the Canadian Department of Finance issued draft legislation to implement it, inviting comments until March 10, 2014. Close scrutiny of the draft, however, shows that the proposed Canadian definition of ‘financial institution’ is considerably narrower than the definition contained in the IGA, in the US Treasury regulations, in intergovernmental agreements executed by other jurisdictions, and in guidance notes issued by the UK and Ireland.
“The result is that many entities that would be classified as ‘financial institutions’, such as private trusts and private holding companies, would not be so classified in Canada,” Mr. Berg says.
If the legislation isn’t changed to broaden the Canadian definition, the U.S. could regard it as an invalid implementation of the IGA.
”This would force Canadian institutions to face the dilemma of complying with Canadian law and suffering the consequences under FATCA, or complying with FATCA and suffering the consequences under Canadian law,” Mr. Berg says.
As well, Canadian institutions not classified as financial institutions under Canadian law but so classified under U.S. law would likely face unnecessary withholding rules for which they would have to seek a refund directly from the Internal Revenue Service.
Finally, inconsistent definitions among jurisdictions that have executed IGAs with the U.S. will cause increased compliance costs and uncertainty in the marketplace.
“The U.K. realized this risk early on and has taken the lead in developing its domestic legislation to avoid this result,” Mr. Berg says.
Credit: Financial Post