The Conservative government has tabled legislation to implement key elements of this year’s budget. But it contains more than tax credits.

Buried within is a revised version of draft legislation implementing the Intergovernmental Agreement (IGA) with the U.S. on FATCA. A Department of Finance press release makes no mention of this part of the bill.

Roy Berg, director of U.S. Tax Law at Moodys Gartner Tax Law LLP in Calgary, says there’s one key difference between the tabled version and the draft.

The draft had a provision making it a criminal offence if financial institutions failed to meet reporting obligations. That provision’s been clipped.

The move deepens concerns Canada’s approach to FATCA may spark a dispute with the U.S. over personal trusts.

Read: CRA may ignore FATCA trust rules

Say your client has a trust for estate-planning reasons. She’s a citizen of Canada only, and isn’t considered a U.S. person for tax purposes. If a registered trust company is the trustee, or if a financial advisory firm manages the trust’s assets, Berg says that trust is considered a financial institution by FATCA and the IGA.

But the draft and tabled legislation designed to give force to the IGA excludes personal trusts from the definition of financial institutions. Leaked CRA guidance notes do the same. “[They] make it clear CRA and Finance intended to carve out trusts from the definition,” says Berg.

A KPMG submission to the Department of Finance on the draft legislation reaches the same conclusion, noting the draft “defines [Financial Institution] more narrowly than the IGA” and as a result “effectively excludes Canadian personal trusts.”

What’s this mean for clients?

Berg paints an unpleasant picture. Say your client’s trust contains a securities account with a U.S. investment firm. When it’s time to send the trust dividends the firm will ask about the account holder’s status. Your client may insist the trust doesn’t qualify as a financial institution; after all, our laws say so.

Read: FATCA squeezes American clients

But the U.S. firm will likely reach a different conclusion. It will say, citing FATCA and the IGA, the trust is a financial institution. That means one of two things.

If the trust has a Global Intermediary Identification Number (GIIN), the firm will consider it a fully compliant Foreign Financial Institution (FFI). As a result, the trust will receive the dividends in full.

If the trust doesn’t have a GIIN, the U.S. firm withholds 30% and passes it to the IRS. Berg says the same will happen with securities accounts based in the U.K., Ireland and other countries that have IGAs with the U.S. Their IGAs and guidance notes label trusts as FFIs.

“If you don’t have a GIIN, they’ll say, ‘Go talk to Uncle Sam—he’s got your money.’ No GIIN, no juice,” says Berg.

The trust will eventually get that 30% back, but clients will have to apply to the IRS for a refund. That takes time and costs money.

So why not just get a GIIN and avoid trouble?

This is where it gets murky, says Berg. “From the Canadian perspective [a personal trust] is not doing things right if [it] gets a GIIN. Under Canadian law [its] not a financial institution so [it] doesn’t have to register as one.

“We don’t know yet what Finance would say about a Canadian personal trust getting a GIIN. [Canadian law] doesn’t give you the ability to opt into this other classification. It’s says, ‘If you fit into one of these boxes, you’re a financial institution; if you don’t, you’re not.

“So, if [a personal trust] gets a GIIN it would be placing itself into a box that Canadian laws say it doesn’t belong in.”

Berg adds he’s not aware of any negative consequences should a personal trust get a GIIN. “I don’t see any stated penalty for wrongly opting in. Maybe there wouldn’t be [one].” It remains unclear.

Some may take pride in what appears to be a case of Canada standing up to its more powerful neighbour. “There’s a perception among Canadians that this is a good thing,” says Berg. “IRS is trying to force [FATCA] down our throats and people are glad CRA and Finance are standing up to them. That is absolutely wrong.”

FATCA is self-executing. Neither the IRS nor the Department of Treasury enforce it.

“Who does? The banks. In that sense it’s like a sales tax, where it’s incumbent upon the merchant to withhold the tax and remit it. If he doesn’t, he’s liable. With FATCA it’s Bank of America, Wells Fargo, Goldman Sachs. If they don’t withhold, they’re liable.”

That means if there’s any uncertainty about the trust’s status as an FFI, they’ll withhold that 30%.

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