FACTA:  Financial Info Sharing Deadline is September 30

As of today millions of taxpayers’ financial information will be shared between US and Canada under FACTA.  Financial advisors, institutions and account holders all face increased reporting and due diligence requirements and, as a result, advisors are reminded to review their clients’ citizenship status to ensure that proper records are in fact available to the reporting financial institution.

Enacted in 2010, the Foreign Account Tax Compliance Act (FATCA) was implemented by the USA requiring all foreign financial institutions to report to the IRS information about financial accounts held by US taxpayers and by foreign entities in which US taxpayers hold a “substantial ownership interest.”  Since that time financial institutions have been updating their files to help ensure they had all the information required in order to comply.

Canada entered into an Intergovernmental Agreement (IGA) with the USA under a Model 1 reporting system which requires Canada Revenue Agency to collect the information and transmit the information to the IRS within 9 months of the year-end. Conversely, the US Government will transfer the same information to CRA on Canadian taxpayers with financial holdings in the USA.

Financial institutions in sixty-six countries around the world – including Canada - will have “pushed the button” by today, September 30, commencing the electronic transfer of financial information of millions of US citizens for the 2014 year.  Ultimately, this information will be forwarded to the Internal Revenue Service (IRS).  The following information is being reported for the 2014 year:

• Name, address and US Tax Identification Number (TIN) of;
  • each specified US person that is an account holder, and/or identified as a controlling person of any non US entity,
  • Name, address and TIN of any non US entity controlled by a specified US person.
• The account number or equivalent identification,
• The name and identifying number of the reporting Canadian Financial Institution,
• The account balance or value, including cash value insurance contracts or annuity contracts surrender values, as of the end of the calendar year, or the value immediately before the account was closed.

A specified “US Person” includes citizens or residents of the USA, private corporations and partnerships as well as estates and certain trusts.  A “Specified US Person” excludes publicly traded corporations, financial institutions, and organizations exempt from taxation under s501(a) of the US Internal Revenue Code.

Reporting Classifications of Financial Instruments. Depending of the type of financial instrument being reported, different classifications apply.  In general the reporting is broken into two distinct classifications and three levels of reporting.  All reporting requirements are in aggregate and USD:
Financial Holdings:

• Under $50,001 – In general, no reporting required
• $50,000 to $1 million – considered “Lower Value Accounts” and reporting required
• Over $1 million – considered “High Value Accounts” and requires enhanced review procedures on the part of the Canadian Financial Institution to identify Specified US Persons.

Cash Value Insurance and Annuity Contracts

• Under $250,001 – In general, no reporting required
• $250,000 - $1 million - considered “Lower Value Accounts” and reporting required
• Over $1 million - considered “High Value Accounts” and requires enhanced review procedures on the part of the Canadian Financial Institution to identify Specified US Persons.

Due Diligence.  While mainly the responsibility of the financial institution, it is also the responsibility of the Relationship Manager, Financial Advisor or Custodian of the account(s) to identify clients affected.  Advisors are also subject to “direct inquiry for actual knowledge” as to whether the Relationship Manager has actual knowledge that the account holder is a Specified US Person.

In other words, individual financial advisors through their financial institution, must disclose whether a specific account is in fact a US Specified Person and it is incumbent upon them to ask their clients for the required new information.  Financial advisors, institutions and account holders all face increased reporting and due diligence requirements in this regard and, as a result, advisors are reminded to review their clients’ citizenship and residency status to ensure that proper records are in fact available to the reporting financial institution.

Tax Professionals will also feel the impact of FATCA as the financial holdings of Canadian residents in the USA will be forwarded to CRA.  This will no doubt result in numerous re-assessments regarding unreported world income.

Alan Rowell, MFA, DFA-Tax Services Specialist is a Knowledge Bureau Faculty Member who has recently worked on the updating of the corporate files in EverGreen Explanatory Notes.

Resources: 

http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Agreement-Canada-2-5-2014.pdf
http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx#ModelAgreements