Canada-U.S. tax agreement raises some concerns

CALGARY – A Calgary-based United States tax expert has recommended to the federal government that Canada follow the lead of other countries and include certain Canadian trusts within the definition of organizations subject to reporting under the recent Intergovernmental Agreement between the Canada and the U.S.

“This would eliminate the problem of every Canadian trust and every Canadian estate that have non-Canadian accounts being subject to additional withholding of distributions back to Canada,” said Roy Berg, director of U.S. Tax Law with Moodys Gartner Tax Law in Calgary.

The IGA was signed in February under the long-standing Canada-U.S. Tax Convention. The federal government said that the U.S. enacted in March 2010 the Foreign Account Tax Compliance Act which would require non-U.S. financial institutions to report to the U.S. Internal Revenue Service 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 to them from the U.S., said Canada’s Department of Finance at the time.

“FATCA has raised a number of concerns in Canada — among both dual Canada-U.S. citizens and Canadian financial institutions. One key concern was that the reporting obligations in respect of accounts in Canada would compel Canadian financial institutions to report information on account holders who are U.S. residents and U.S. citizens (including U.S. citizens who are residents or citizens of Canada) directly to the IRS, thus potentially violating Canadian privacy laws,” said the federal government.

“Without an agreement in place, obligations to comply with FATCA would have been unilaterally and automatically imposed on Canadian financial institutions and their clients as of July 1, 2014.”

Berg recently testified before the House of Commons Standing Committee on Finance in Ottawa on the FATCA legislation. Earlier this year, the firm also submitted extensive analysis of the legislation to the federal government.

“FATCA the way it works, it doesn’t require the IRS to enforce it. What enforces it is just the market. If Canada hadn’t entered into this intergovernmental agreement then the banks would have been subject to the full nasty force of FATCA. Instead, they’re in a better position having entered into this IGA,” he said.

But during the recent standing committee hearing, Berg said the legislation requires refinement, particularly in the manner that financial institutions are defined.

The federal government introduced legislative proposals in Parliament on March 28 to implement the IGA.

The bill has passed second reading in the House of Commons and has been referred to the House of Commons Standing Committee on Finance.