CANADA’S FINANCIAL SERVICES industry is readying itself to deal with impending U.S. tax legislation targeting American clients of foreign banks, even as the Canadian industry lobbies the U.S. government to make changes to the proposed law and asks for more time to put systems in place.
“It’s a big process,” says James Carman, senior policy advisor for taxation with the Toronto-based Investment Funds Institute of Canada (IFIC). “Imagine trying to bring in, basically, a new tax-compliance regime to determine whether there are U.S. clients throughout your whole customer base. Just that, in itself, is a heck of a lot of work.”
In February, the U.S. government released draft legislation relating to the Foreign Account Tax Compliance Act (FATCA), which is aimed at helping the U.S. government identify American taxpayers who have accounts with foreign financial institutions (FFIs). Under FATCA, FFIs must reach an agreement with the U.S. authorities to provide the names and other details of all American clients with accounts larger than US$50,000 in aggregate. Firms that fail to do so will be assessed a 30% withholding tax on U.S.-source income or the proceeds from the sale of U.S. property.
FATCA, first introduced in 2010, is part of a broader initiative by the U.S. government to prevent offshore tax evasion by American taxpayers and to help boost tax revenue. Since then, foreign governments and firms around the globe have raised concerns about FATCA and the compliance burden it imposes.
Although U.S. authorities have taken steps to provide relief, and continue discussions with stakeholders, FFIs still face a daunting operational challenge. The effective date of the legislation is Jan. 1, 2013, and FFIs are required to reach an agreement to begin reporting on their American accountholders by July 1, 2013.
“There are a lot of unknowns that we’re working with here,” says Andrea Taylor, director with the Toronto-based Investment Industry Association of Canada (IIAC).
Things are made more complicated by the fact FFIs don’t have a clear idea of the scope of the final regulations. Canadian insurers, for example, did not get real guidance on how FATCA would affect them until the release of the draft legislation in February, says Peggy McFarland, director of corporate taxation with the Toronto-based Canadian Life and Health Insurance Association Inc. (CLHIA).
“At this point, life and health insurance companies can only make practical and realistic assumptions as to what the final requirements will be,” McFarland says. “But planning is well underway to meet the July 1, 2013, deadline.”
In a joint submission made in April, IFIC, the IIAC, the CLHIA and the Toronto-based Canadian Bankers Association (CBA) asked the U.S. authorities to consider changes to FATCA that would make the legislation less complex and a less onerous compliance burden for FFIs, including giving FFIs more forgiving deadlines. The Canadian associations also reiterated their preference to see Canada and the U.S. reach some form of intergovernmental agreement as a preferable means to achieve the goals of FATCA.
As Darren Hannah, director of banking operations with the CBA, said at a public hearing held by the U.S. authorities in Washington, D.C., in May: “FATCA is, at its heart, an information-sharing arrangement and, therefore, is best addressed on a state-to-state basis building on the tax information-sharing mechanisms that are already in place.”
Earlier this year, the U.S. announced that it had come to an agreement with five European countries – Britain, France, Germany, Italy, and Spain – to work toward a government-to-government arrangement to implement FATCA. That agreement would see information exchanged on a reciprocal basis, with firms needing to report only to their domestic tax authority and not to the foreign government directly.
The U.S. government has said that it is open to establishing intergovernmental agreements with other countries. Behind the scenes, the Canadian government has been communicating with the U.S. on the subject of FATCA.
“The framework that the U.S. has developed with certain European countries appears to demonstrate an interest in greater joint government collaboration to address concerns,” says Jack Aubry, a spokesman with the federal Department of Finance in Ottawa. “We continue to work with our U.S. counterparts toward an approach acceptable to both countries that will minimize the red-tape burden, minimize conflicts with privacy and other laws, and improve collaboration between governments.”
In the meantime, Canadian financial services industry associations continue to hope the U.S. authorities will accept their many recommendations for changes to FATCA, including that registered accounts – such as RRSPs, RRIFs and tax-free savings accounts – be excluded from treatment as a financial account as defined under FATCA.
“They aren’t vehicles for tax evasion,” Carman says. “But the way the regulations are currently drafted, they would not be exempt.”
The associations also are recommending that the U.S. authorities make changes to FATCA regarding ongoing documentation of accounts. As it now stands, accounts would have to be re-documented every three years, regardless of whether there had been any indication of a change in the status of the accountholder.
“It would be a logistical nightmare,” Taylor says. “What we’re recommending is the regulations be changed to require ‘redocumentation’ only when there’s been a change on the file. This is in line with what investment dealers are doing already.”IE
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