FATCA: What’s happened and what’s to come

On July 1, 2014, the Foreign Account Tax Compliance Act (FATCA) came into force. The goal: prevent millions of U.S. taxpayers, and the global financial institutions that serve them, from evading U.S. tax on income and assets held outside U.S.

An estimated seven million Americans live or work abroad, with about 1 million in Canada. Most, if not all, have bank, investment, retirement and insurance-related products with companies and advisors outside the U.S. American taxpayers must file annual tax returns on worldwide income and disclose their interests in accounts or other foreign entities outside of U.S.

Read: Pros and cons of dropping U.S. citizenship

Under FATCA, non-U.S. financial institutions have to report certain information to IRS about U.S. persons’ financial accounts. Failure to do so results in a 30% withholding tax on U.S.-source income to the financial institution or its clients.

More than 80 countries, including Canada, have FATCA-related agreements with the United States government. About 77,000 Foreign Financial Institutions (FFIs) have signed on with IRS.

Most FFIs provide the required information directly to the IRS. Under Canada’s Inter-Governmental Agreement (IGA) with the U.S., Canadian FFIs instead provide the information to CRA, which in turn provides it to the IRS.

Canadian FFIs must disclose bank, mutual fund, brokerage and custodial accounts, annuity contracts and some life insurance policies that have an investment or savings component.

Registered plans (RRSPs, RRIFs, RDSPs, RPPs and RESPs) and TFSAs are excluded from the reporting requirement.

The last year

Advisors have likely seen their firms make FATCA-driven changes to the process of on-boarding new clients. Most Canadian FFIs have provided enhanced education and training around FATCA.

Read: Don’t fall for FATCA scams, warns IRS

Many Canadian FFIs have sent out so-called FATCA letters to educate existing clients and confirm they are indeed U.S. persons for FATCA reporting purposes. Brokerage and insurance company applications have been changed to get advisors to determine whether new clients are U.S. persons under FATCA.

Completing one of two IRS forms has become part of the on-boarding process.

• U.S. persons (generally, U.S. citizens or green card holders). They have to complete IRS Form W-9 Request for Taxpayer Identification Number and Certification to confirm their U.S. Social Security Number.
• Non-U.S. persons. Complete IRS Form W-8BEN Certificate of Beneficial Owner for United States Tax Withholding. The form confirms non-U.S.-person status and is used for reporting withholding obligations on U.S.-source income.

Although both are IRS forms, they stay with the Canadian FFI and will help it determine whether FATCA reporting’s required along with U.S. federal withholding tax and other reporting obligations.

I am not personally aware of any Canadian FFI turning away U.S. persons or closing their accounts. But a recent New York Times article titled “An American Tax Nightmare” documents examples of unfavourable treatment of U.S. persons by FFIs in Europe and elsewhere.

In one case, a couple lost their mortgage with a Swiss bank because the wife was American. Another example: An American working for a French multinational in Brazil was denied a promotion because it would have given him signing authority on the company’s bank accounts. As a result, all the company’s transactions would have had to have been disclosed to the IRS. (Read more here.)

What’s next?

A Thomson Reuters poll in the U.K. found 55% of 300 FFIs surveyed expect to exceed their FATCA-implementation budgets. The IRS has suffered significant budget cuts in recent years, so it’ll be interesting to see how effective its FATCA enforcement will be.

Another interesting development is a lawsuit filed by a few Canadian citizens against the Canadian Attorney General suggesting the Canada-U.S. IGA violates provisions of the Canadian Charter of Rights.

Read: Tips for being FATCA compliant

There’s also talk, given Congress is controlled by the GOP, that if the next president is Republican, we may see FATCA and Obama’s health care law repealed.

Lastly, we may eventually see FATCA applied on a global scale in what’s being dubbed GATCA. The OECD’s promoting it with the aim of curbing tax evasion through automatic exchange of information between FFIs across the globe.

CRA reporting timetable for Canadian FFIs

2014
Regarding	Information to be reported to the CRA before May 2, 2015
Each specified US person, either:	• Address
• holding a US reportable account; or	• US Tax Identification Number (TIN)
• who is a controlling person of a passive NFFE that holds a US reportable account	• Canadian Tax Identification Number
	• Account number or functional equivalent
	• Account balance or value

2015
All information listed for 2014, plus:
Regarding	Information to be reported to the CRA before May 2, 2016
Custodial accounts	Total gross amount of:
	• interest;
	• dividends; or
	• other income
Depository accounts	Total gross amount of interest paid or credited to the account during the year.
Other accounts	Total gross amount paid or credited to account holder with respect to the account, including aggregate amount of redemption payments made to account holder, during the year.

2016
All information listed for 2015, plus:
Regarding	Information to be reported to the CRA before May 2, 2017
Custodial accounts	Total gross proceeds from sale or redemption of property paid or credited to the account during the year.

2017 and onwards

All of the information listed in 2016 is to be reported to the CRA before May 2 of the following calendar year.

Click here for other important deadlines.

Terry F. Ritchie, EA, RFP, TEP is director of Cross-Border Wealth Services at Cardinal Point Capital and is an Enrolled Agent with the U.S. Internal Revenue Service.