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FATCA News; Canada American Agreement On FATCA

Posted by: Zaher Fallahi
Posted On: Feb 15, 2014

On February 5, 2014, Canada and the United States signed an Intergovernmental Agreement (IGA) after a prolonged negotiation regarding a 2010 American Tax Law known as Foreign Account Tax compliance Act (FATCA), under which the Canadian financial institutions will be required to report their US accountholders information to the US effective July 1, 2014. As of now, a total of 22 counties around the world have signed IGAs with the US.

What is FATCA? Congress enacted FATCA in 2010 as a way to identify U.S. citizens using foreign accounts to evade their U.S. tax responsibilities.  FATCA requires U.S. financial institutions to withhold 30% of payments made to Foreign Financial Institutions (FFIs) that do not agree to identify and report information on U.S. account holders. FATCA is a compliance mechanism rather than an enforcement act such as “Report of Foreign Bank & Financial Accounts” (also known as FBAR).  Unlike FBAR that certain financial information is reported to the US Treasury Department Financial Crimes Enforcement Network (FinCEN) on form 114 (must be filed electronically effective July 1, 2013), the FATCA information is reported on Form 8938 (specified foreign financial assets) and is attached to the regular tax return Form 1040.

If you are required to file Form 8938, here are some of the assets to be included:

Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer. And, to the extent held for investment and not held in a financial account, you must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person.  Some examples of these assets are:

Stock or securities issued by a foreign corporation;  a note, bond or debenture issued by a foreign person;  an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty;  an option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer;  a partnership interest in a foreign partnership; an interest in a foreign retirement plan or deferred compensation plan; an interest in a foreign estate; any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.

The Canadian-Americans and other US persons subject to this law have expressed concerns that implementation of FATCA and its reporting mandate by Canadian financial instructions may violate the Canadian privacy laws.  Similar concerns have been raised regarding the Swiss and other countries IGAs. To dispel this concern, Mr.  Jim Flaherty, Canadian Minister of Finance has stated to the effect that:

Under the agreement, Canadian financial institutions will not report directly to the IRS, but the information will be reported to Canada Revenue Agency (CRA). The CRA will then exchange the information with the IRS through the existing provisions and safeguards of the Canada-U.S. Tax Convention. This is consistent with Canada’s privacy laws. The IRS will provide the CRA with enhanced and increased information on certain accounts of Canadian residents held at U.S. financial institutions.

Under this IGA, small institutions such as credit unions with assets less than $175 million, Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Disability Savings Plans, Tax-Free Savings Accounts, and others are exempted from FATCA requirements.

There are speculations that a comparable agreement may be reached among members of the G-20 nations by the end of 2015.

The author, Zaher Fallahi is a Tax Attorney and a Certified Public Accountant (CPA), and advises the US and international clients with filing the US taxes and the US persons living abroad, Foreign Account Tax Compliance Act (FATCA), disclosure of undeclared Foreign Bank & Financial Accounts (FBAR), Offshore Voluntary Disclosure Program (OVDP) and the IRS representation. He may be reached at (310) 719-1040 (Los Angeles) or (714) 546-4272 (Orange County), or e-mail: [email protected].