FATCA adds to KYC burden for advisors

Do your clients have ties to the U.S.? If you don’t know, find out — quickly.

FATCA, the Foreign Account Tax Compliance Act, comes into effect January 1, 2014. The act imposes a 30% withholding tax on certain payments made to foreign financial institutions and non-financial foreign entities that refuse to identify U.S. account holders and investors.

Read:

• Does your client have U.S. tax risk?
• U.S. tax rule fuels frustration

To avoid the withholding, firms must document and share information about their U.S. account holders, an expensive and time-consuming process.

Jillian Nicolson, a partner with Ernst & Young LLP, says it’s difficult for fund companies to pass those costs to clients via higher MERs — so advisors will have to shoulder the compliance burden.

“Fees are already fixed for unitholders and it’s difficult to change them,” she said at an Alternative Investment Management Association workshop yesterday in Toronto. “So [FATCA compliance] will be an administrative cost that is difficult to recover.” And firms will try to “leverage existing KYC and AML (anti-money-laundering) processes and procedures.”

That means advisors will be tasked with finding out clients’ U.S. statuses — and could be held liable if they collect incomplete info, even if the institution is ultimately responsible for FATCA reporting.

Read: Tax cheats beware

To facilitate that information gathering, Mark Damelin, president of CommonWealth Fund Services, says his firm has added a FATCA section to its client intake forms. The classification portion now asks for the client’s country of birth, U.S. tax number, and W9 and W8BEN form dates.

Read: Offshore tax evasion in Treasury, IRS crosshairs

With only six months until FATCA comes into effect, Canada’s agreement has not been finalized. Nicolson says the Canadian government is unable to disclose the contents until Cabinet ratifies it, so it’s likely to be the end of the year before we get FATCA guidance from CRA.

The IRS FATCA portal is set to open July 15, 2013 for FFI registration.

Read: A look at U.S. tax exposure

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.