Tax Insights: FATCA and CRS ─ Canada Revenue Agency outlines audit plans

Issue 2022-21

In brief

In the years since the U.S. Foreign Account Tax Compliance Act (FATCA) and then the Common Reporting Standard (CRS) were implemented as Parts XVIII and XIX of the Income Tax Act, respectively, Canadian financial institutions have worked hard to develop and implement systems, policies and procedures to ensure they comply with these complementary information reporting regimes. The Canada Revenue Agency (CRA) is ready to start auditing that compliance and recently provided an update on its audit plans. The CRA:  

• established a specialized team in 2021 with FATCA and CRS compliance as its exclusive mandate
• may begin on-site audits during 2022 and Toronto area audit teams are being recruited and trained
• provided valuable information regarding how these audits will be conducted and the information financial institutions will be expected to provide

Certain financial institutions may already have been subject to a desk audit or received questionnaires regarding FATCA and CRS compliance. Every financial institution with FATCA or CRS responsibilities should be objectively reviewing their current FATCA and CRS programs and addressing any shortcomings before the CRA contacts them.

This Tax Insights provides details on the information recently shared by the CRA and suggests steps Canadian financial institutions can take to prepare for FATCA and CRS audits.

In detail

FATCA and CRS audit highlights

The CRA confirmed a few years ago that it was planning to leverage the huge amounts of data it receives annually from financial institutions as it built and implemented its audit program for FATCA and CRS. In 2020, when financial institutions started receiving information reporting questionnaires from the CRA, anecdotal evidence suggested the primary recipients were Canadian financial institutions that had not previously filed FATCA or CRS information returns – the CRA seemed to initially target those financial institutions from which they had received no data.

At the Investment Industry Association of Canada’s Tax Withholding and Reporting Conference, which was held on May 19, 2022 in Toronto, the CRA described its audit plans and indicated that it will continue to focus on data, leveraging the specific data points reported by financial institutions over the last several years, to identify audit targets. Potential data flags that the CRA may consider when deciding whether a financial institution is a candidate for an on-site audit include:

• Has the Internal Revenue Service issued error notices for missing US taxpayer identification numbers (TINs)?
• How often is a foreign TIN provided for CRS reportable accounts?
• Do the total number of records or accounts reported by the financial institution make sense?
• Is income data provided?
• Is data integrity an issue (for example, birth dates that are clearly incorrect)?
• Have there been atypical changes to the data year over year?

CRA representatives at the conference also outlined the likely audit process and information requests. Industry participants have assumed that account sampling would be part of any FATCA and CRS audit and the CRA confirmed that sampling will be a core pillar of the upcoming review. In addition, the CRA indicated that it will request service provider agreements, written policies and procedures (specifically procedures related to documentation and reporting) and relevant information about branches.

Various penalties apply to FATCA and CRS non-compliance, ranging from failure to collect a valid self-certification to late filing or failing to include required information. Currently, late filing penalties are being applied through an automatic process. The CRA confirmed that, for the time being, other penalties would be assessed only after an audit and a finding of non-compliance. The CRA also confirmed that there are no plans to extrapolate audit results from a sample of accounts to a financial institution's full population for the purpose of assessing penalties, although its approach could evolve in the future.

What financial institutions should do

The adoption of FATCA and CRS, and ensuring compliance with the related obligations, has been challenging. For example, many smaller Canadian financial institutions relied on exceptions from reporting financial institution status under FATCA, which were subsequently unavailable under the CRS. Many of these financial institutions remain unaware of their CRS requirements and are effectively non-compliant. Other financial institutions in the fund industry have relied on service providers or brokers/dealers to perform various FATCA and CRS compliance tasks, only learning later that such tasks were not within the scope of their service provider contracts. As a result, many financial institutions may be unwittingly non-compliant.

The CRA has provided information that should help financial institutions prepare for the possibility of a FATCA and CRS audit. Financial institutions should:

• if they rely on service providers to manage any aspect of their compliance requirements, review the relevant contracts and confirm those compliance tasks are being performed appropriately
• if they rely on specific statuses or exceptions under FATCA, take a close look at whether those also apply for CRS purposes
• consider engaging an objective third party to conduct a review of their FATCA and CRS programs to ensure that there are no flaws in their systems and processes
• review their current FATCA and CRS policies and procedures and determine if they would be confident in handing them over to the CRA (if not, it is likely time to revise and update those policies and procedures) 

The takeaway

Although we have known that FATCA and CRS audits were on the horizon, we now have a more definitive timeline. The CRA has been open in sharing information with the financial services industry, effectively providing a roadmap for successfully dealing with a CRA audit. Financial institutions should take action to ensure that they are FATCA and CRS compliant.