Navigating the Effects of FATCA and CRS Converging for Americans in Canada

Foreign banks, brokers, and other “foreign financial institutions” in 133 countries across the planet (including those in Canada) have agreed to determine if any of their clients are U.S. citizens or residents ^[1], and to report, via their own governments, certain financial account information about those individuals to the IRS.   Under a completely separate, unrelated, international arrangement, the tax authorities of over 100 countries across the globe have agreed to share among themselves, information on the financial accounts that exist in financial institutions within their countries.

Thus, for example, a U.S. citizen living in Canada has the prospect of the following happening automatically, and annually:

• Canadian financial account information being sent to the IRS, (via a so-called IGA described below),
• US. financial account information being sent to the Canada Revenue Agency, (via the so-called IGA), and
• Certain other worldwide financial account information being sent to the Canada Revenue Agency from a third country, (via the so-called CRS described below).

1. FATCA AND IGAs

The U.S. enacted legislation known as the Foreign Account Tax Compliance Act (FATCA) which requires foreign banks, brokers, and other foreign financial institutions such as investment entities, and certain insurance companies^{[ 2]} (collectively “FFIs”), to  determine if their account holders are U.S. persons and, if so, to report information about the account directly  to the IRS.^[3]

The banks, brokers etc., have an incentive to comply because otherwise a 30% U.S. withholding tax must be withheld on most payments of U.S source interest, dividends, and certain other U.S. source income payments remitted to them.^[4] However, many countries’ laws place restrictions on the dissemination of private customer information to third parties.  Accordingly, as an alternative, in the majority of cases the IRS has instead concluded agreements with the governments of the foreign countries.  These agreements, referred to as intergovernmental agreements, or IGAs, require the FFIs of the relevant country to determine if its clients are U.S. persons, and then report certain financial account information on those U.S. persons to their own government.  Those foreign governments have agreed, in turn, to pass that financial account information on to the IRS.

The comments below focus only on the IGA between Canada and the United States, which is known as the U.S Treasury’s Model 1 IGA.  The comments only summarize how it applies to U.S. citizen and resident individuals, even though the full IAG also applies to entities.

What Information of Yours is Reported to the IRS?

Very generally, simplistically, and subject to numerous exceptions as explained herein,^[5] the following information about your account is required to be transmitted annually to the IRS by the Canadian government, if you are a U.S. citizen or resident.^[6]

• Your name, address and U.S. social security number,
• The name of the financial institution, and your account number, and the balance or value,
• In the case of Custodial Accounts, the gross amount of interest, dividends and other amounts credited to the account,
• In the case of Deposit Accounts, the gross interest credited, and
• Certain income received from the financial institution itself.

Many accounts are exempt reporting, including TFSAS, RESPs, RRSPs, and other Canadian pension accounts.^[7]

How Does Your Foreign Bank, Broker, or other FFI Find You?

The Canadian bank, broker, or other FFI must determine which, if any, of its accounts are owned by U.S. citizens or residents.^[8] The investigative action required by the FFI depends on whether the account was opened on or after July 1, 2014 (so-called “new” accounts), or whether it was in existence on June 30, 2014 (so-called “pre-existing” or “original” accounts).

New Individual Accounts (Accounts opened After June 30, 2014)

For financial accounts opened after June 30, 2014, the bank, broker,  or other FFI must obtain a “self- certification” from you, to determine whether you are a U.S. resident or U.S. citizen.^[9] The FFI must confirm the reasonableness of your self-certification, based on the information obtained in connection with opening the account, including any documentation collected under the institution’s anti-money laundering” (AML) and “know your client” (KYC) procedures. If a change in circumstances causes the FFI to know, or have reason to know, that your self- certification has become incorrect or unreliable, the FFI must request a new self-certification. ^[10] If your account was opened after June 30, 2014, and it was a depository account or cash value insurance account, it is not required to be reported in any year the balance or value does not exceed US $50,000.^[11]

Special rules apply if you open a new account (after June 30, 2014) where you had an applicable account in existence on June 30, 2014.^[12] Generally, there is no requirement for new documentation by the FFI for such an account, if appropriate due diligence was carried out on the account which you had on June 30, 2014. (See Pre-Existing/Original Accounts below).

The self-certification must indicate:

• Whether you are a U.S. resident/U.S. citizen, and
• The country or countries where you reside for tax purposes. ^[13] (Thus, for example, the accounts of U.S. citizens with a Canadian account and who reside in neither Canada nor the U.S., are also subject to reporting to the IRS).

Pre-Existing/Original Accounts (Individual Accounts in Existence on June 30, 2014)

A. Accounts Not Exceeding US $50,000 on June 30, 2014

Generally, the Canadian bank, broker, or other Canadian FFI was not required to review or report accounts that did not exceed US $50,000 on June 30, 2014. (US $250,000 for certain cash value insurance and annuity products).^[14] However, if any account did not exceed the foregoing threshold on June 30, 2014, but becomes a “High Value Account” (see below) on the last day of any subsequent calendar year, the bank, broker, etc., is required to complete “Enhanced Review Procedures”,  to determine if the account owner is  a U.S. citizen or resident.^[15] (See Enhanced Review Procedures below).

B. Accounts Exceeding US $50,000, but not Exceeding US $1,000,000, on June 30, 2014.  (“Lower Value Accounts”)

Electronic Search Required

For accounts that exceeded US $50,000, (and insurance or annuity accounts that exceeded $250,000), but did not exceed US  $1 million at June 30, 2014, the bank, broker, etc., was required to review electronically searchable data that it maintains for each account, to uncover any of the following ”U.S. indicia”, which may indicate the owner was a U.S. citizen or resident.^[16]

• Identification of the account holder as a U.S. citizen or resident,
• Unambiguous indication of a U.S. place of birth,
• Current U.S. mailing or residence address (including a U.S. post office box),
• Current U.S. telephone number,
• Standing instructions to transfer funds to an account in the U.S.,
• Currently effective power of attorney, or signatory authority, is granted to a person with a U.S. address, and
• In certain cases, an “in-care-of” or “hold mail” address is the sole address the bank, broker, etc. has on file. However, in the case of a Lower Value Account, an “in-care-of” address outside the U.S., or “hold mail” address, will not be treated as U.S indicia.^[17]

If none of the indicia was discovered, no further action is required by the FFI, until a change in the account results in one or more U.S. indicia becomes present, or the account becomes a “High Value Account”.  (See below). On the other hand, the IGA describes situations where no reporting is required even if one or more of the above indicia is present.^[18]

1. Accounts Exceeding US $1 Million on June 30, 2014, December 31, 2015, or Any Subsequent Year  (“High Value Accounts”)

Enhanced Review Procedures

In cases where the balance or value of a pre-existing account exceeded US $1 million on June 30, 2014, or December 31, 2015, or any subsequent year, the bank, broker etc., must perform the following:

1. An electronic search as described above,
2. A paper record search,^[19] and
3. A relationship manager inquiry.^[20]

2. OECD COMMON REPORTING STANDARD (CRS)

Almost at the same time the U.S. Congress enacted FATCA, the Organization for Economic Cooperation and Development (OECD), based in Switzerland, issued its first version of what is referred to as the Common Reporting Standard (CRS).  CRS (known formally as the Automatic Exchange of Information), is a global standard for the exchange of information on the financial accounts of financial institutions.  Its content is patterned after the U.S. FATCA Model 1 IGA described above.  In effect, CRS is becoming a worldwide version of FATCA reporting, and hence has been informally referred to as ”GATCA”.  In Canada, guidance has been provided under Part XIX of the Income Tax Act.  The U.S is not a participant in CRS.

CRS involves a model agreement which participating jurisdictions use to draft and conclude an agreement individually among themselves, either unilaterally or multilaterally, in order to exchange financial account tax information between, or among, themselves.

The agreement focuses on the country of tax residency of each account holder, rather than on the account holder’s citizenship.   CRS requires the governments of participating jurisdictions to ensure the financial institutions resident in their jurisdictions implement due-diligence procedures on their  institution’s account holders, to identify the country of tax residency of the account holder.  The institutions must then set up reporting procedures to automatically transmit certain required financial information annually to their own local country government.  The local country government then transfers the information to the government of the country of residence of the account holder. CRS does not have the same enforcement mechanism as FATCA (i.e. the threat of a withholding tax for noncompliant performance). Instead, each country participating in CRS must establish an audit, and penalty system, to ensure compliance.

As of February 2024, there were over 4,900 bilateral exchange relationships activated with respect to more than 100 jurisdictions committed to the CRS.  Interestingly, many low-tax, and tax-free jurisdictions, such as the Bahamas, British Virgin Islands, and Cayman Islands, have become participants.

Conclusion

In conclusion, the global financial landscape has witnessed a significant transformation with the implementation of two crucial initiatives: the Foreign Account Tax Compliance Act (FATCA) and the Organization for Economic Cooperation and Development’s Common Reporting Standard (CRS). The collaboration between foreign banks, brokers, and financial institutions across 133 countries, including the United States and Canada, underscores a commitment to transparency and the exchange of financial information. The adoption of Intergovernmental Agreements (IGAs) has facilitated the seamless reporting of U.S. citizens’ and residents’ financial accounts, ensuring compliance with FATCA. Simultaneously, the CRS, often referred to as “GATCA,” has emerged as a global standard for the automatic exchange of financial information among over 100 jurisdictions. The evolution of these frameworks signifies a paradigm shift in international tax cooperation, ushering in an era of enhanced due diligence, reporting procedures, and accountability. As the global community continues to navigate these regulatory landscapes, individuals and financial institutions alike must adapt to the evolving norms of cross-border financial transparency.

How AbitOs Can Help

AbitOs specializes in the unique tax needs of high net-worth individuals with international lifestyles Canadian, LATAM, and other non-US entities doing business in the U.S., as well as U.S. entities doing business in those countries and across the globe. The AbitOs team is available to help evaluate and make necessary adjustments. Feel free to reach out to me or another professional on our team to learn more.

^[1] Pursuant to IRC 7701(b)(1), an individual is a resident of the U.S. if the individual possesses a green card, meets the substantial presence test and fails to timely file a valid Form 8840, or elects to be U.S. resident (if qualified to elect)
^[2]IRC 1471(d)(5)
^[3] IRC 1471(b)
^[4] IRC 1471(a)
^[5] There are many excluded or exempt Canadian accounts, including, but not limited to, RRSPs, RRIFs, PRPPs, RPPs, TFSAs, RESPs, etc.,  see U.S./Canada IGA, Annex I, IV. See also U.S./Canada IGA, Annex I, III.
^[6] U.S./Canada IGA, Article 2. 1
^[7] There are many excluded or exempt Canadian accounts, including, but not limited to, RRSPs, RRIFs, PRPPs, RPPs, TFSAs, RESPs, etc., see U.S./Canada IGA, Annex I, IV. See also  U.S./Canada IGA, Annex I, III.
^[8] U.S./Canada IGA, Article 2. 1, and Part IX of the Canadian Income Tax Act
^[9] U.S./Canada IGA, Annex I, III. B. 1
^[10] U.S./Canada IGA, Annex I, III. B. 3
^[11] U.S./Canada IGA, Annex I, III. A
^[12] Part XVIII, Chapter 9.10 of the Canadian Income Tax Act
^[13] Part XVIII, Chapter 9.35 of the Canadian Income Tax Act
^[14] U.S./Canada IGA, Annex I, II. A
^[15] U.S./Canada IGA, Annex I, II. E. 2
^[16] U.S./Canada IGA, Annex I, II. B. 1
^[17]U.S./Canada IGA, Annex I, II. B. 1(g)
^[18] U.S./Canada IGA, Annex I, II. B. 4
^[19] See U.S./Canada IGA, Annex I, II. D. 2.  (Not required if database contains sufficient information – see U.S./Canada IGA, Annex I, II. D. 3)
^[20] See U.S./Canada IGA, Annex I, II. D. 4