The Canada Revenue Agency’s (“CRA”) final guidance regarding the application of the Canada-U.S. intergovernmental agreement (“IGA”) was released in late June on the heels of legislative passage to implement the agreement. The IGA entered into force on June 27. The guidance departs from agreements entered into with other countries, most notably with respect to the definition of a “financial institution.” CRA has chosen to exclude private trusts from the definition of listed financial institutions, which is the basis for determining whether an entity is considered a financial institution for purposes of the U.S. FATCA rules.
FATCA is a U.S. law designed to combat tax evasion by U.S. citizens and residents through the use of foreign accounts and investments. The law requires non-U.S. financial institutions and certain other non-financial foreign entities to register with the U.S. Treasury. Entities that are not compliant may suffer a 30% U.S. withholding tax on payments made to them from U.S. payors. The definition of a foreign financial institution is broad and generally includes private equity funds. Foreign partner governments may enter into agreements (the IGA) with the U.S. to cooperate in the identification and reporting of U.S. account holders. The IGA entered into with Canada would require all Canadian financial institutions to register separately with the IRS.
The U.S. Treasury and IRS have stated that while IGA implementation is up to the local country, it is their intention to strive for consistency across jurisdictions in order to achieve fairness in rule application. Some practitioners feel the Canada departure is especially unfair to offshore trust jurisdictions like the Cayman Islands, British Virgin Islands, Bermuda and the Bahamas, since most investment in these jurisdictions are in the form of trusts and are subject to the reporting obligations that are not imposed on Canadian trust entities. These jurisdictions feel they lack Canada’s political leverage to make changes and do not want to shed any further negative light on their country.
The U.S. certainly hopes this bit of discretion by Canada does not cause subsequently entered IGAs to become more lenient and waiver from the original intent of the FATCA legislation. The issue surrounding enforcement is certainly a concern for the IRS going forward now that the deadline for registration and the first wave of new U.S. withholding rules have passed.
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