Prominent Canadian tax experts warn Canada’s FATCA implementing legislation could raise the ire of our neighbours to the south.
In a comment letter on draft legislation implementing Canada’s Intergovernmental Agreement (IGA) with the U.S., Moodys Gartner Tax Law LLP argues the law’s out of step with U.S. expectations concerning certain personal trusts; specifically, those administered by registered trust companies or financial institutions (such as an investment advisory firm).
The draft excludes these trusts from the definition of Financial Institutions (FIs). Leaked CRA guidance notes do the same.
“[They] make it clear CRA and Finance intended to drastically depart from the definitions found in the IGA and FATCA,” says Roy Berg, director of U.S. Tax Law at Moodys. Leaving trusts out means they would be exempt from FI reporting requirements.
KPMG’s comment letter similarly argues the draft “defines [Financial Institution] more narrowly than the IGA” and as a result “effectively excludes Canadian personal trusts.”
Consistent with the draft, tabled legislation (Bill C-31) leaves out personal trusts.
Yet the U.K. and Ireland classify trusts as FIs, in line with Uncle Sam’s expectations.
KPMG’s comment letter concludes: “[B]ased on a textual reading of the [Canada-U.S.] IGA and a review of Intergovernmental Agreements concluded with other jurisdictions, it appears the intent of the IGA is to bring Canadian trusts within its definition of Financial Institution.”
But a Department of Finance official told Advisor.ca, “The Government believes that the proposed approach in Bill C-31 is consistent with the definition of ‘financial institution’ in the IGA.”
Finance argues the legislation’s definition of Investment Entity aligns with Financial Action Task Force (FATF) recommendations. (FATF describes itself as an “inter-governmental body developing and promoting policies to combat money laundering and terrorist financing.”)
Moodys’ comment letter acknowledges this argument, but says it’s erroneous. The letter suggests the FATF definition of financial institution “directly conflict[s] with other provisions of the IGA, and [is] inconsistent with defined terms found within the IGA.”
KPMG’s letter adds: “The FATF definition…includes numerous types of entities that would not be defined as Investment Entities under the IGA and may therefore not be a strong basis upon which to support a restrictive interpretation of the term Canadian financial institution.”
The government’s approach has won broad industry praise. The Finance official’s statement to Advisor.ca included quoted feedback from the Canadian Bankers Association, Canadian Life and Health Insurance Association, Investment Industry Association of Canada, and Investment Funds Institute of Canada.
“We would like to reiterate the industry’s collective support for limiting these definitions for the purposes of the Canada-U.S. agreement,” the statement says, adding that including personal trusts “would have been administratively unworkable and extremely costly and time consuming for FIs,” not to mention “confusing for clients.”
But Berg says Canadians with personal trusts could be in for a rude awakening if the U.S. concludes Finance’s definition of FIs departs from the intention of the IGA.
The reason is that banks in the U.S. and countries with IGAs (such as the U.K. and Ireland) will see Canadian trusts as FIs, no matter what laws Ottawa passes. That can mean they’ll withhold 30% of investment returns, resulting in a burdensome requirement for the trust to apply to the IRS to get that money back.