Tax Insights: CRA and IRS issue updated guidance on FATCA and the Common Reporting Standard

August 30, 2018

Issue 2018-31

In brief

On July 31, 2018, the Canada Revenue Agency (CRA) issued revised guidance relating to Enhanced International Information Reporting - Part XVIII of the Income Tax Act, FATCA, and Part XIX of the Income Tax Act, the Common Reporting Standard (CRS). The US Internal Revenue Service (IRS) has also issued guidance and enabled new features on the IRS Financial Institution portal.

This Tax Insights discusses, among other things: 

  • highlights of the CRA’s updates to the Part XVIII (FATCA) and Part XIX (CRS) guidance 
  • CRA’s plans for joint FATCA/CRS audits
  • IRS registration portal changes for all registrants and updates related to certification of pre-existing accounts and periodic certifications made by financial institutions outside of Model 1 jurisdictions

In detail

Highlights of the CRA’s guidance on Part XVIII (FATCA) and Part XIX (CRS)

The CRA’s updated guidance on FATCA and CRS incorporates IRS Notice 2017-46 and also works to align the Canadian guidance with the 2nd editions of the Organisation for Economic C0-operation and Development’s (OECD’s) Standard, Implementation Handbook and frequently asked questions.

CRA guidance for Part XVIII (FATCA)

Canadian reporting financial institutions (FIs) are generally required to collect US tax identification numbers (TINs) for US accounts. Notice 2017-46 established a safe harbour for FIs that have not yet been able to obtain US TINs from account holders and extends the time horizon through calendar year 2019. (See our Tax InsightsCollecting and reporting US and foreign TINs: IRS issues additional guidance” for a detailed discussion of Notice 2017-46.)

The Part XVIII reporting schema has been updated to accommodate reporting for accounts where FIs are following Notice 2017-46 but have not yet obtained a US TIN. If an FI has been following the requirements of the Notice, pre-existing accounts with missing US TINs may be reported with 9 “A”s in the US TIN field. All other accounts where the US TIN is missing (such as new accounts and pre-existing accounts that do not meet the conditions of the Notice) should be reported with 9 “O”s in the US TIN field.

CRA guidance for Part XIX (CRS)

The CRS guidance was updated to include two new types of financial accounts that are considered low-risk and are now treated as excluded accounts:

  • condominium association accounts – a financial account held by or on behalf of a group of owners or by the condominium company for the purpose of paying expenses, only if:

–      the account is held by an entity that is exempt from tax under section 149 of the Income Tax Act

–      the account is used only for covering costs of a condominium or housing co‑operative

–      the amounts in the account may be used only to pay condominium association expenses, and

–      no single owner can annually contribute more than USD 50,000, or no more than 20% of the annual total contributions due in the year is attributed to a single person

  • certain prepaid cards – a depository account in the form of a reloadable payment card on which monthly deposits cannot exceed USD 1,250 and the FI applies Anti-Money-Laundering (AML)/Know-Your-Client (KYC) procedures

PwC observes

It may be difficult for Canadian FIs to identify condominium entities that meet the conditions to qualify as an excluded account without updating self-certification forms.

Reloadable payment cards are specifically included in the definition of depository accounts under both FATCA and CRS, however only FATCA allows FIs to exclude low-value depository accounts from due diligence procedures. This new provision creates a full exemption for certain reloadable payment cards under both FATCA and CRS, but will require additional work by FIs to track monthly deposits.

CRA guidance for both Part XVIII and Part XIX

Updates that are consistent in both the FATCA and CRS guidance include:

  • Trusts: A trust is treated as resident in Canada under Part XVIII and Part XIX if one or more of its trustees is resident in Canada. However, where multiple trustees are resident in multiple jurisdictions, the trust may have more than one residence under FATCA/CRS. Under Part XVIII and Part XIX, a trust must be a listed FI to have reporting obligations in Canada. This requirement does not exist in other jurisdictions. This means that a trust with two trustees, one in Canada and one in another jurisdiction (e.g. United Kingdom), that is not a listed FI under Part XVIII or Part XIX, may be treated as a passive non‑financial entity in Canada, but could be treated as an FI in the other jurisdiction.
  • Legal arrangements: For the purposes of Part XVIII and Part XIX, a legal arrangement means a corporation, trust, partnership, foundation or an unincorporated association or organization.
  • Controlling persons: In the case of a legal arrangement other than a corporation or a trust, controlling persons are persons in equivalent or similar positions as a trust’s settlors, trustees, protectors, beneficiaries or class of beneficiaries, and any other natural persons exercising control, who directly or indirectly own or control 25% or more of the legal arrangement.

CRA joint FATCA/CRS audits

The CRA recently announced that it is preparing for combined FATCA and CRS audits. Canadian FIs may be contacted by the CRA by phone in 2018, with in-person visits possible in 2019. The CRA has indicated that it will use a risk-based approach, and is considering using a questionnaire to gather initial information from FIs. The scope of reviews could range from a desk interview to a full review of FATCA/CRS compliance. Prior CRA risk-based audit programs suggest that large FIs are more likely to experience in-depth reviews.

The CRA has not provided details on potential questions or triggers for audit, but we can look to other jurisdictions to gain some insight into what Canadian FIs can expect from the CRA. The Irish tax authorities have indicated that they will select audit candidates on a risk-based framework, including the quality and timeliness of reporting. Inquiries from partner jurisdictions’ tax authorities may influence which FIs may be audited.

PwC observes

Data errors and inconsistencies have been a focus of recent comments from both the CRA and the IRS. FIs should conduct a thorough review of their current FATCA and CRS compliance, with a focus on data integrity.

IRS Financial Institution portal updates

The IRS recently updated the FATCA registration system to enable the certification of pre-existing accounts and periodic certifications. It also announced extended deadlines for submitting the certifications. Canadian FIs are not required to make these certifications because of the Model 1 Intergovernmental Agreement (IGA) between Canada and the United States. However, Canadian FIs with branches or entities in Model 2 jurisdictions and participating foreign FIs in countries without an IGA may be required to submit certifications by the December 15, 2018 deadline.

The registration system has also been updated to expand the number of FATCA classifications. The FI portal will not distinguish between FIs with certification requirements and FIs with no certification requirements, unless the FI logs in to the portal and affirmatively selects the appropriate FI classification. To avoid receiving system-generated reminders or notices for certifications, the IRS is encouraging all FIs to log in and select an FI classification.

The takeaway

Canadian FIs should:

  • review the changes to the FATCA and CRS guidance and determine any  impact to their business and reporting obligations
  • update their FATCA classification on the IRS registration portal and ensure they are ready to make necessary certifications for any branches or entities that are not in Model 1 jurisdictions
  • undertake a health check to ensure their FATCA and CRS processes, documentation and data are audit-ready

Contact us

Nicole Lorenz

Partner, Global Information Reporting, PwC Canada

Tel: +1 416 687 8202

Irene Coelho

Senior Manager, PwC Canada

Tel: +1 416 687 8084

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