CRA may ignore FATCA rules

A leaked document appears to reveal the Department of Finance and CRA may deviate from a tax deal struck with the U.S.

Leaked by the Isaac Brock Society yesterday, the document purportedly presents the agency’s interpretation of draft legislation which, if passed, would give force to the Intergovernmental Agreement (IGA) on FATCA signed between Canada and the U.S. on February 5.

Read: FATCA deal finalized

Advisor.ca has contacted CRA but has not been able to confirm the document’s authenticity. (See below for update)

The guidance appears to confirm concerns the draft legislation is materially inconsistent with the IGA (and FATCA) on the issue of the status of trusts holding U.S.-based accounts.

IGA classifies these trusts as financial institutions that must meet FATCA requirements. The draft legislation—and CRA’s supposed interpretation of it—appears to suggest trusts are not financial institutions, and therefore aren’t required to report.

Read: FATCA squeezes American clients

This could mean trouble for trusts, says Roy Berg, director of U.S. Tax Law at Moodys Gartner Tax Law LLP in Calgary. In a letter to the Department of Finance on the draft legislation, Berg and his colleagues say the following (emphasis ours):

1. The U.S. Department of the Treasury could conclude that the legislation (if it becomes final) has failed to validly implement the IGA, which would subject Canadian entities to the full force of FATCA.

2. If the legislation does bring into force the IGA (which is unlikely) a Canadian entity that is not classified as a Financial Institution (e.g., private trust or private holding company) under domestic law, but would be classified as a Financial Institution under the Treasury Regulations or other intergovernmental agreements, will likely face unnecessary withholdings and [would have to] seek a refund directly from the IRS.

3. Inconsistent definitions of Financial Institution amongst jurisdictions that have executed intergovernmental agreements will cause increased compliance costs and uncertainty in the marketplace.

Berg says it’s irrelevant whether the Canadian client is also a U.S. person or citizen. If the trust has an account with, say, Bank of America, it’s caught up in what appears to be a disagreement between Canadian and U.S. authorities.

Credit Union Central of Canada also hosted the purported CRA document on its website; it has since been removed.

Read: U.S. probe into Swiss accounts reads like spy thriller

UPDATE:

In response to Advisor.ca’s request for a statement on the guidance note’s authenticity, a CRA spokesperson said the following:

“While we have not reviewed the documents in the links provided in their entirety, they appear to be a copy of DRAFT CRA Guidance being developed for the Enhanced Financial Account Information Reporting – Part XVIII of the Income Tax Act.

“The CRA will be responsible for administering the legislation (currently in draft form) that will implement the IGA with the U.S. and is making the necessary preparations to do so. As part of these preparations, the CRA is developing guidance to assist financial institutions with their obligations under the draft legislation.

“In developing the guidance, the CRA is consulting with Canadian financial institutions, and is asking for their comments on a draft version. It is common practice for the CRA to undertake consultations in this manner.

“The draft guidance is subject to change and should not be considered final.

“The CRA has released information to assist individuals and entities that hold accounts at Canadian financial institutions and who may have questions about the agreement and how it works. The information is available on the CRAs website at http://www.cra-arc.gc.ca/tx/nnrsdnts/nhncdrprtng/menu-eng.html.”