Canada and US sign FATCA tax deal where banks to share information with IRS

Ottawa and Washington have reached a compromise over how to apply a U.S. law targeting would-be American tax dodgers living in Canada.  Canada has signed an agreement with the U.S. on the automatic sharing of bank information between the two countries as part of efforts to battle tax evasion.

On February 5, 2014, the Canadian government announced that it has signed an intergovernmental agreement (“IGA”) with the US regarding the US Foreign Account Tax Compliance Act (“FATCA”).  FATCA requires U.S. financial institutions to impose a 30 percent withholding tax on payments made to foreign banks and other financial entities that don’t agree to identify and provide information on U.S. account holders. Under the new agreement, Canadian financial institutions will not report any information directly to the Internal Revenue Service. Instead, data would be collected by the Canadian Revenue Agency, which would in turn exchange information with the U.S.

Under the terms of FATCA, Canadian financial institutions would be required to report directly to the US Internal Revenue Service information regarding accounts held by US taxpayers starting on July 1, 2014, the date on which the IGA is proposed to become effective. On that date, without the IGA, obligations to comply with FATCA would have been unilaterally and automatically imposed on Canadian financial institutions and their clients. Draft legislation to implement the agreement has been released for public comment by March 10, 2014.

The U.S. has signed similar intergovernmental agreements, with a number of countries including Germany and France as a July 1 deadline approaches for banks to begin collecting information.

It is estimated that at least 1 million U.S. citizens (and numerous green card holders) reside in Canada, although there is no data available on how many would be affected by the new agreement.  Banks will start collecting information in July and the Canada Revenue Service will begin reporting to the IRS in 2015. The agreement will not require changes to Canadian laws, but will need Parliament’s approval.

Our firm expects thousands of US citizens to come forward to voluntarily disclose unreported accounts to become compliant.

Further details can be found on the following Department of Finance links:
Information Exchange Agreement Signed Between Canada and the United States  http://www.fin.gc.ca/treaties-conventions/notices/fatca-eng.asp