THE CANADIAN FINANCIAL services sector is being challenged to implement not one, but two new international tax-related information-sharing regulatory regimes. The moves are a result of financial services firms being compelled by governments around the world to assist in fighting offshore tax evasion.
Earlier this year, Canadian banks and other financial services firms began reporting on certain of their American clients to the U.S. government, via the Canada Revenue Agency (CRA), as part of an intergovernmental agreement (IGA) signed by the two countries to implement the U.S. Foreign Account Tax Compliance Act (FATCA), a law passed in the U.S. in 2010. Full implementation of the IGA is scheduled for May 2017.
At the same time, financial services firms were preparing themselves for the arrival of the Common Reporting Standard (CRS), a global tax information-sharing agreement modelled on FATCA, but developed under the direction of the Paris-based Organization for Economic Co-operation and Development (OECD). Some 60 tax jurisdictions, including Canada, have signed on to the CRS, which will see these countries exchange tax information about each other's citizens on an annual and automatic basis. In Canada, the implementation of the CRS is set for July 2017, with actual reporting scheduled to begin in May 2018.
Establishing and managing the procedures and systems to meet the reporting deadlines associated with the IGA alone, to which Canada and the U.S. signed on in 2014, has been time-consuming and difficult, says Andrea Taylor, managing director of the Investment Industry Association of Canada (IIAC) in Toronto. The eventual arrival of the CRS will only make financial services firms' compliance burden heavier.
"[The CRS] is an additional layer that's being placed on top of what's already a complex process [for IGA compliance]," she says.
In general, Taylor says, the Canadian financial services sector has been successful in meeting its compliance obligations by the deadlines set under the IGA. "Given the time constraints, [the process] has gone as smoothly as it could have," says Taylor, who adds that a great deal of work between the sector and the CRA to iron out details has helped to make the compliance process easier.
However, firms still have had their hands full in dealing with various technical issues, as well as having a number of "client-facing" challenges involved with trying to obtain information from clients regarding their possible U.S. citizenship.
For example, clients who are given self-certification forms to prove that they aren't American taxpayers don't always return them, perhaps because they don't understand why they're being asked to do so or because they wish to remain in the shadows regarding their U.S. citizenship.
"Firms are sort of caught between a rock and a hard place," says Hugh Chasmar, tax partner with Deloitte Touche Tohmatsu Ltd. in Toronto. "They want to be able to comply, and so the tendency would be to report someone [to the CRA] who hasn't responded. On the other hand, [firms] don't want to report [because] it's not good from a customer-service perspective to report somebody to the U.S. Internal Revenue Service [(IRS)via the IGA] or to one of these other countries [via the CRS] who may not really be a tax resident of one of those other countries."
The hope is that whatever compliance requirements arise out of the CRS regime in Canada will be designed to work well with existing systems that firms established for complying with the IGA. That will make firms' CRS reporting obligations easier and mitigate difficulties for clients. This year's federal budget confirmed the Canadian government's commitment to the CRS and that legislation to enact compliance would be drafted.
"We need to be working with the Canadian government and the CRA to understand what the requirements will be," Taylor says. "[The CRS] is being pushed down from the international level, and the OECD wants some basic guidelines for [all countries]. But there are some choices each country can make [regarding how to implement CRS obligations], and we need to know what the choices are for Canada."
The IGA procedures and systems that Canadian firms have established for identifying clients who are American citizens can be adapted to identify clients who are tax residents of other foreign countries for the purposes of complying with the CRS. However, the difficulty might come in setting up systems for reporting that information.
"I think what firms have to come to grips with, and what they don't really know the magnitude of, is what's involved in the [CRS] reporting aspect and the related systems implications," Chasmar says. "It's one thing to build your systems to accommodate getting information down to the IRS through the CRA [under the IGA], but now to add X number of countries to that collection of data, and sending and compiling of that data to send to the CRA [under the CRS] - that's where [firms] are going to have the challenges over the next couple of years."
Whatever the challenges are for financial services firms, the onus under both the IGA and the CRS remains on clients to provide information regarding their tax residency in countries other than Canada. Firms simply have to make sure they are fulfilling their compliance requirements, says Richard Marcovitz, partner in the tax division of PricewaterhouseCoopers LLP in Toronto.
"[For firms], it's a due-diligence process," he says. "If they do their due diligence properly, it doesn't matter if [the information] is right or wrong."
In Canada, there has been a great deal of controversy and negative reactions from American citizens about FATCA, many of whom believe it to be an example of overreaching on the part of the U.S. government. In September, the Federal Court of Canada (FCC) denied a legal challenge to the IGA brought by two Canada/U.S. dual citizens. The FCC, however, did leave open the question of the IGA's constitutionality.
If the FCC had found in favour of the plaintiffs, Canadian firms still would have had to comply with FATCA, but in its raw, more punitive form rather than under the IGA. The IIAC, for one, welcomes the FCC's decision, saying that it provided "certainty around current procedures."
Remind your clients that the IGA is a compliance regime, and does not represent a new tax on American citizens living in Canada, says Marcovitz.
The U.S.'s goal under FATCA is to establish whether one of its citizens has a reportable account with a Canadian financial services institution. If your clients are meeting their U.S. tax filing obligations - under the tax treaty, double taxation typically is avoided - there should be no further consequences for your clients.
"What FATCA is there to ferret out," says Marcovitz, "is somebody who has acquired his money illegally and has never paid taxes on it."
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