The Investment Funds Institute of Canada (IFIC) has responded to a request for submissions by the US Department of Treasury and Internal Revenue Service (IRS) regarding the proposed regulations relating to the Foreign Account Tax Compliance Act (FATCA).
Under FATCA, foreign financial institutions will be required to report directly to the IRS information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest.
Drafting rules with international implications is extremely complex and can result in unintended consequences that range from conflicts of law to increased costs to investors. IFIC believes that an intergovernmental agreement or comparable bilateral tax information sharing agreement would be the best way to address the potential issues that may arise in the Canadian jurisdiction based on the current wording of the draft regulations.
“An intergovernmental agreement would provide US tax authorities with the information they require without placing an undue burden on Canadian investors and financial institutions,” says IFIC President and CEO Joanne De Laurentiis. “We believe an agreement may be able to accomplish something that the final FATCA regulations may not.”
If an intergovernmental agreement is not reached, IFIC urges the U.S. authorities to achieve a more effective means of applying FATCA in Canada by amending the draft regulations in a number of ways, including:
To allow Canadian government-registered retirement and savings accounts to qualify for an exclusion from treatment as a ‘financial account’ under FATCA. This would eliminate the requirement of Canadian financial institutions to search their records for any current account holders of registered accounts for U.S. indicators. In addition, financial institutions would not be required to ask clients opening new registered accounts to fill out or provide documentation demonstrating that they are not U.S. persons.
To give foreign financial institutions at least 18 months to complete FATCA implementation. This would provide time for financial institutions to complete their compliance responsibilities under FATCA, especially around the issue of searching for, identifying, documenting and reporting U.S. persons to the IRS.
To extend the $50,000 exception for new individual depository accounts to all types of new financial accounts. It is IFIC’s understanding that the IRS intended to take this approach in the draft regulations but the proposed wording is not clear.
To require re-documentation of accounts only when there is a material change in the account-holder’s status that could impact the client’s status as a potential U.S. person. The way the draft regulations are currently written, clients would need to be re-documented approximately every three years or sooner, even if there was no material change in their status. This provision would not be cost effective or a good use of compliance resources.
IFIC has commented previously on FATCA and has been working with the US Treasury and the IRS on these issues. For this submission, IFIC has collaborated with the Canadian Bankers Association (CBA), the Canadian Life and Health Insurance Association (CLHIA) and the Investment Industry Association of Canada (IIAC).
