(Disponible en français : Mise à jour – L’accord intergouvernemental Canada–États Unis et l’échange de renseignements fiscaux)
The Foreign Account Tax Compliance Act (FATCA) became U.S. law in 2010. It aims to prevent American taxpayers from using foreign bank accounts to evade taxes.
Since 1 July 2014, FATCA has required foreign financial institutions to report information to the U.S. Internal Revenue Service about accounts held by persons and businesses that may be required to pay taxes in the United States.
Intergovernmental information exchange agreement
Canada and the United States signed an intergovernmental information exchange agreement in relation to FATCA on 5 February 2014.The first Canadian federal budget bill in 2014 implemented the intergovernmental agreement and made consequential amendments to the Income Tax Act.
Foreign financial institutions that do not comply with FATCA’s requirements may be subject to a 30% withholding tax on payments received from a U.S. source. However, under the terms of the intergovernmental agreement, this tax does not apply to Canadian financial institutions that are required to report information.
The intergovernmental agreement is based on exchange-of-information provisions in the Canada–U.S. tax treaty. It allows Canadian financial institutions to report U.S. taxpayers’ information to the Canada Revenue Agency for transmittal to the Internal Revenue Service. This information is subject to the protection measures and limits on the use of tax information contained in the tax treaty.
Among other things, the intergovernmental agreement specifies the types of Canadian financial institutions that must meet requirements, the nature of those requirements, the individuals and types of accounts that are subject to reporting, and future actions regarding information exchange agreements between countries.
Canadian financial institutions affected
The provisions of the intergovernmental agreement and amendments to the Income Tax Act impose certain requirements on “Canadian financial institutions.”
This term comprises Canadian financial institutions that are federally or provincially/territorially regulated, securities dealers, clearing houses, any government department or agent that accepts deposit liabilities, and certain investment vehicles, such as mutual funds.
Reporting requirements are either reduced or eliminated for Canadian financial institutions that have assets of less than US$175 million, that have only a local client base or that provide only limited financial services.
Requirements for Canadian financial institutions
Canadian financial institutions are required to undertake certain due diligence procedures in identifying U.S. taxpayers’ accounts. The procedures vary with the type and value of the account, and include searches of electronic databases and paper records.
By 2 May of each year, Canadian financial institutions are required to file electronically – with the Canada Revenue Agency – an information return in relation to each U.S. taxpayer’s account. These filings started in 2015.
According to the Internal Revenue Service, Canadian financial institutions must report the account holder’s name and address, the account number, the account’s balance or value, and the account holder’s U.S. taxpayer identification number, if available.
Canadian financial institutions must maintain records pertaining to their compliance with their filing obligations for at least six years. Digital records must be retained in a readable format.
The Canada Revenue Agency has published guidance for Canadian financial institutions to assist them in meeting their reporting obligations.
Individuals whose information will be reported
Canadian financial institutions must report on accounts that are held by a “U.S. person.”
In relation to individuals living in Canada, U.S. persons are U.S. citizens, people holding dual Canadian-U.S. citizenship, U.S. green card holders and, in some circumstances, individuals who have spent 183 days or more during a three-year period in the United States.
The account information of Canadians who have a joint account with a U.S. person must also be reported.
Account information to be reported
Canadian financial institutions must provide information on reportable financial accounts. These accounts include bank, mutual fund, brokerage and custodial accounts, annuity contracts, and life insurance policies with an investment or savings component.
Under the intergovernmental agreement, no reporting is required in relation to the following accounts:
- registered retirement savings plans;
- registered disability savings plans;
- registered pension plans;
- registered retirement income funds;
- pooled registered pension plans;
- registered education savings plans;
- deferred profit-sharing plans;
- Tax‑Free Savings Accounts; and
- AgriInvest accounts.
Court challenge to the intergovernmental agreement
On 11 August 2014, Virginia Hillis and Gwendolyn Louise Deegan filed a lawsuit against the Attorney General of Canada. They were born in the United States and have resided in Canada since the age of five.
They claimed that the intergovernmental agreement and the amendments to the Income Tax Act are unconstitutional because the federal government lacks jurisdiction under the Constitution Act, 1867 to enact these measures. Moreover, they believed that the intergovernmental agreement and the Income Tax Act amendments breach several sections of the Canadian Charter of Rights and Freedoms. The federal government argued that the disclosure of information to the Internal Revenue Agency is consistent with the Canada–U.S. tax treaty.
In September 2015, the Federal Court of Canada dismissed the lawsuit and refused to grant an injunction that would have prevented the Canada Revenue Agency from disclosing account information to the Internal Revenue Agency. However, the court said that the plaintiffs could pursue a constitutional challenge in relation to the intergovernmental agreement; so far, they have not done so.
Other international information exchange agreements
To date, 113 jurisdictions have signed intergovernmental agreements, or have reached agreements in principle, with the United States in relation to FATCA.
In July 2014, the Organisation for Economic Co-operation and Development released its model for the automatic exchange of financial account information.
The model requires jurisdictions to obtain information from their financial institutions and to exchange this information automatically with other jurisdictions annually. Under the model, reporting requirements are based on a taxpayer’s residency, rather than his or her citizenship.
As of December 2016, at least 50 jurisdictions have signed more than 1,300 bilateral agreements in relation to the automatic exchange of financial account information. To date, in addition to FATCA, Canada has signed bilateral agreements with Singapore and with Switzerland.
- Canadian Bankers Association. FATCA and the Canada–U.S. Intergovernmental Agreement (IGA): Information for Clients, 17 August 2016.
- Organisation for Economic Co-operation and Development. Standard for Automatic Exchange of Financial Account Information, July 2014.
- Standing Senate Committee on National Finance. Report on the Subject-Matter of Bill C‑31, An Act to Implement Certain Provisions of the Budget Tabled in Parliament on February 11, 2014 and Other Measures, Tenth Report, 2nd Session, 41st Parliament, May 2014.
Authors: Raphaëlle Deraspe and Adriane Yong, Library of Parliament