After lengthy negotiations, Canada and the United States have signed an intergovernmental agreement under the longstanding Canada-U.S. Tax Convention.
Without an agreement in place, obligations to comply with Foreign Account Tax Compliance Act (FATCA) would have been unilaterally and automatically imposed on Canadian financial institutions and their clients as of July 1, 2014.
“Canada engaged in lengthy negotiations with the U.S. government to address our concerns, and, as a result, significant exemptions and other relief were obtained,” says Finance Minister Jim Flaherty.
Under the agreement, financial institutions in Canada will not report any information directly to the Internal Revenue Service (IRS). Rather, relevant information on accounts held by U.S. residents and U.S. citizens (including U.S. citizens who are residents or citizens of Canada) will be reported to the Canada Revenue Agency (CRA). The CRA will then exchange the information with the IRS through the existing provisions and safeguards of the Canada-U.S. Tax Convention. This is consistent with Canada’s privacy laws.
Significant exemptions and relief have also been obtained. For instance, certain accounts are exempt from FATCA and will not be reportable. These include RRSPs, tax-free savings accounts, registered retirement income funds, registered disability savings plans and others. In addition, smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt.
The 30% FATCA withholding tax will not apply to clients of Canadian financial institutions and can apply to a Canadian financial institution only if the financial institution is in significant and long-term non-compliance with its obligations under the agreement.
FATCA would require non-U.S. financial institutions to report to the IRS 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.
Draft legislation to implement the agreement will be released for comment shortly on the Department of Finance website.
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