February 5, 2014 is a significant milestone in the FATCA development. FATCA stands for the Foreign Account Tax Compliance Act. We provided an extensive coverage of FATCA news affecting American expats living abroad. FATCA discussions have created a lot of controversy in Canada. Moreover, many US-Canadian taxpayers anticipated that Canada would not sign the FATCA agreement with the United States. Consequently, it has come as a big surprise that Canada and the USA signed an intergovernmental agreement on February 5, 2014.
FATCA Canada and American Expats living in Canada
What is the Model of FATCA Canada intergovernmental agreement?
FATCA Canada is Treasury’s Model I reciprocal intergovernmental agreement. Similar agreement was signed between Hungary and the United States on February 4, 2014. As of February 5, 2014, the USA has signed 22 intergovernmental agreements.
- Cayman Islands
- Costa Rica
- Isle of Man
- United Kingdom
Moreover, the Department of Treasury initiated Model I reciprocal intergovernmental agreement with Slovenia in February 2014.
What is the impact of Canada FATCA intergovernmental agreement?
Canada is the largest US trading partner. Consequently, many foreign financial institutions originally expressed concerns about the compliance costs and legal implications. Additionally, it has been estimated that more than 1 million US-Canadians live in Canada who are not aware of all US tax reporting requirements as well as FBAR, foreign bank account reporting. Some US Canadians believed that an intergovernmental agreement between Canada and the United States would violate Canada’s Charter of Rights and Freedoms.
The signed Canada FATCA is beneficial for financial institutions for several reasons. Under Model I IGA, Canadian financial institutions will not be required to sign individual agreements with the IRS (Internal Revenue Service). These financial institutions will report the information about financial accounts owned by US persons to their government authorities. Consequently, Canadian government authorities will submit the information to the IRS.
The IGA will be welcomed by Canadian financial institutions, Candice Turner of Davies Ward Phillips & Vineberg LLP said. “Now they won’t have to enter into an agreement directly with the IRS.”
Turner added that due to significant numbers of US citizens live in Canada or have economic ties to Canada, the lack of this intergovernmental agreement would have created a lot of headache for many people. “There are other countries where you have a lot of U.S. people doing business, certainly in most of Europe,” she said. “But I think just that close proximity with Canada made it a key one.”
John L. Harrington of Dentons said the announcement of the IGA with Canada represents a major step forward. “Each new IGA is valuable, since it expands the web of payments and FFIs covered by IGAs, providing greater certainty to persons making payments subject to FATCA and reducing compliance costs for FFIs covered by the IGA,” he said.
“In that vein, the U.S.-Canada IGA is particularly welcome,” Harrington continued. “Considering the amount and number of financial payments between the U.S. and Canada, the certainty provided by an IGA is important both to those making and receiving payments.” Especially appreciated, he added, is Annex II, with its specific listing and description of accounts excluded as financial accounts.
Harrington noted that many U.S. citizens who live in Canada have been concerned about the impact of FATCA on them and their financial institutions. “One hopes that the IGA will go a long way in addressing those concerns,” he said.
How does it affect American expats living in Canada?
Effective July 1, 2014 foreign financial institutions will be required to report the information about financial accounts owned by US persons. The IRS will utilize this information to go after American expats with undisclosed income and foreign financial accounts. To avoid this situation, Americans living abroad are encouraged to become compliant though the IRS streamlined program for Americans with past-due returns or OVDP (Offshore Voluntary Disclosure Program). Expat tax experts at Artio Partners will be pleased to help with the FATCA questions and to review individual expat tax situation.