A new agreement between Canada and the U.S., announced Wednesday, exempts key accounts from a new U.S. tax law set to come into effect globally on July 1.
Canadian advisors won't be pulling out their hair over FATCA - a U.S. tax law that could have cost Canadian banks $100 million a pop - as, under a new agreement announced by the federal government Wednesday - a number of accounts, including RRSPs and TSFAs, are exempt from the reporting process.
The Foreign Account Tax Compliance Act (FATCA) - enacted in March 2010 - raised concern in Canada as, under the new law, Canadian financial insitutions may have been compelled to report information on account holders who are U.S. residents and U.S. citizens directly to the IRS, potentially violating Canadian privacy laws.
Costs incurred were estimated at upwards of $100 million per bank, while U.S.-Canada citizens could be nailed for unexpected back taxes. Those who failed to comply would be subjected to sanctions including the withholding of taxes on U.S. payments. Without an agreement, FATCA obligations would have come into affect on July 1, 2014
Under the longstanding Canada-U.S. Tax Convention, financial institutions will not report any information directly to the IRS. Instead, relevant information on accounts held by U.S. residents and citizens (including those who are Canadian residents or citizens) will be reported to the Canada Revenue Agency (CRA) and exchanged with the IRS, adhering to existing provisions and safeguards and the privacy act. (continued.)
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The IRS will provide the CRA with information on certain accounts of Canadian residents held at U.S. financial institutions, according to the Department of Finance. The 30 percent 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.
Accounts exempted from FATCA include Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Disability Savings Plans, Tax-Free Savings Accounts and smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million
IIAC released a statement in response to the annoucement. "This agreement will greatly reduce the burden of compliance for financial institutions and the risk of unintended consequences to Canadians by requirements imposed under the Foreign Account Tax Compliance Act (FATCA), enacted by the U.S. in 2010," the statement said. "FATCA alone would have required Canadian financial institutions to close client accounts; could have imposed U.S. tax withholding and penalties on persons with no connection to the United States; and could have included in its scope Canadian investment vehicles which are at a low risk for tax evasion use, such as registered savings accounts ... and tax-free savings accounts (TFSAs). The agreement between Canada and the U.S. exempts these accounts from the scope of FATCA and provides a more reasonable and fair approach to addressing the important issue of crossborder tax compliance."
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