usinessman pole vaulting over a huge tax problem

The Canada Revenue Agency (CRA) has published updated guidance on two tax information–sharing agreements designed to thwart offshore tax evasion and aggressive tax avoidance.

The guidance, which pertains to the U.S. Foreign Account Tax Compliance Act (FATCA) and the OECD’s Common Reporting Standard (CRS), provides Canadian financial institutions and advisors with compliance information on their reporting obligations.

The guidance is also directed at clients who may be asked to certify or clarify their tax residence status in respect of existing or new accounts at Canadians banks and investment firms.

Under the agreement implementing FATCA, the CRA exchanges tax information annually with the Internal Revenue Service (IRS) on U.S. taxpayers who have accounts held at Canadian financial institutions. Under the CRS, the CRA exchanges the tax information of accountholders with tax connections to countries outside the U.S.

Adrian Walrath, director with the Investment Industry Association of Canada in Toronto, says that while the guidance documents primarily address updates of a technical nature, a few highlights have emerged:

  • Under the updated CRS guidance, the CRA indicated that Canadian financial institutions need to adjust their procedures to reflect the results of the OECD’s efforts to clamp down on citizenship and residence by investment (CBI/RBI) schemes, which may be used by individuals to hide assets offshore.

“Firms may need to ask additional questions of clients if [clients] identify certain countries on their self-certifications to make sure […] they are not using that country to avoid providing information about another country,” Walrath said.

  • Under both sets of guidance, a financial institution that fails to obtain a self-certification from an accountholder when required on or after Jan. 1, 2021, may face a penalty of up to $2,500 for each such failure.

“While that penalty was always in the Income Tax Act, it was not previously referenced in either guidance in this way,” Walrath said. “The section also notes that it will be applied on new accounts from Jan. 1, 2021, going forward where a self-certification is required to be collected. The penalty is also per regime, so it could be $5,000 per account.”

  • Under both sets of guidance, financial institutions that are unable to obtain a self-certification on the first day of an account opening must attempt to obtain and validate a self-certification as soon as feasible, and at least within a period of 90 days.

“The guidance [for both regimes] is now more restrictive in terms of when an account can be opened without first having a self-certification,” Walrath said. “This could impact some financial institutions’ account-opening processes.”

On Jan. 1 of this year, a three-year grace period, offered by the IRS, that allowed financial firms outside the U.S. to submit U.S. reportable accounts to the IRS without an accountholder’s associated U.S. Social Security number or Taxpayer Identification Number came to an end.