IFIC seeks changes to FATCA

The Investment Funds Institute of Canada has asked the U.S. Department of Treasury and Internal Revenue Service for changes to the proposed Foreign Account Tax Compliance Act (FATCA).

Under the current draft of FATCA, foreign financial institutions will be required to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Read: U.S. extends its tax reach

IFIC points out that passing laws that impose rules upon foreign organizations can be fraught with unintended consequences, ranging from conflicts of law to increased costs to investors. The organization suggests that the U.S. strike an intergovernmental agreement with Ottawa to avoid conflict between Canadian and American law.

Read: Tax cheats beware

“An intergovernmental agreement would provide U.S. tax authorities with the information they require without placing an undue burden on Canadian investors and financial institutions,” said IFIC president and CEO Joanne De Laurentiis. “We believe an agreement may be able to accomplish something that the final FATCA regulations may not.”

Failing that, IFIC urges U.S. lawmakers to amend the draft regulations in a number of ways, including:

– To allow Canadian government-registered retirement and savings accounts to qualify for an exclusion from treatment as a ‘financial account’ under FATCA. This would eliminate the requirement of Canadian financial institutions to search their records for any current account holders of registered accounts for U.S. indicators. In addition, financial institutions would not be required to ask clients opening new registered accounts to fill out or provide documentation demonstrating that they are not U.S. persons.

– To give foreign financial institutions at least 18 months to complete FATCA implementation. This would provide time for financial institutions to complete their compliance responsibilities under FATCA, especially around the issue of searching for, identifying, documenting and reporting U.S. persons to the IRS.

– To extend the $50,000 exception for new individual depository accounts to all types of new financial accounts. It is IFIC’s understanding that the IRS intended to take this approach in the draft regulations but the proposed wording is not clear.

– To require re-documentation of accounts only when there is a material change in the account-holder’s status that could impact the client’s status as a potential U.S. person. The way the draft regulations are currently written, clients would need to be re-documented approximately every three years or sooner, even if there was no material change in their status. This provision would not be cost effective or a good use of compliance resources.

IFIC has commented previously on FATCA and has been working with the U.S. Treasury and the IRS on these issues. For this submission, IFIC has collaborated with the Canadian Bankers Association (CBA), the Canadian Life and Health Insurance Association (CLHIA) and the Investment Industry Association of Canada (IIAC).

The FATCA regulations are expected to be finalized later this year.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.