Lexpert US Guides

www.lexpert.ca | LEXPERT • June 2014 | 23 Canadian fi nancial institutions that did not register by the recommended deadline of April 24, 2014, could fi nd themselves subject to the 30 per cent FATCA withholding tax on US source income paid on or a er July 1, 2014. " at's when US authorities will begin scrutinizing IRS compliance lists: if a Canadian fi nancial institution is not on that list, the US will apply the withholding tax. As it turns out, US authorities have recently added another tool that will help them keep track of the comings and goings of US citizens and others crossing the US-Canada border, and perhaps assist in identifying US citizens who are residents of Canada or have fi nancial dealings there. As of June 30, 2014, travelers have been required to swipe pass- ports both when they enter and depart each country, with the two countries sharing the information that the new practice provides. " ese changes, part of the Entry-Exit Initiative and the Perimeter Security and Economic Competitiveness Action Plan, fall under a larger cooperative eff ort announced in February 2011. Previously, each country counted individuals only when they entered the country but not when they le . Because even that lim- ited information was rarely shared, typically neither country knew how long someone had been within its borders. "Now both countries will be able, for the fi rst time and in real time, to independently determine the number of days spent in each country," Berg says. Julius Melnitzer is a legal affairs writer in Toronto. "" ese regulations are extremely complex and generally lacking in guidance," Chang says. "" ey're almost impossible to get through." All of this will be very expensive. "Canadian banks have been spending multimillions of dollars preparing to be in compliance with the rules," Bratz says. To make matters worse, implementing dra legislation appears to be fraught with problems. Some prominent tax lawyers, for example, believe that the proposed federal legislation "eviscer- ates" the IGA. "" e US Treasury Department may view the legislation, if passed in its current form, as an invalid implementation of the IGA and may therefore not aff ord Canadian fi nancial institutions the benefi t of the agree- ment," Berg says. "What's proposed is kind of a mess, although the Parliamentary Joint Com- mittee on Taxation is putting together a paper to fi x it." Meanwhile, close scrutiny of the dra shows that the proposed Canadian defi nition of "fi - nancial institution" is considerably narrower than the defi nition contained in the IGA, in US Treasury regulations, in intergovernmental agreements executed by other jurisdictions, and in guidance notes issued by the UK and Ireland. "" e result is that many entities that would be classifi ed as 'fi nancial institutions,' such as private trusts and private holding companies, would not be so classifi ed in Canada," Berg says. Should the US regard the fi nal Canadian legislation as an invalid implementation of the IGA, Canadian institutions would face the di- lemma of complying with Canadian law and suff ering the consequences under FATCA, or complying with FATCA and suff ering the con- sequences under Canadian law. As well, Canadian institutions not classi- fi ed as fi nancial institutions under Canadian law but so classifi ed under US law would likely face unnecessary withholding rules for which they would have to seek refunds directly from the IRS. Finally, inconsistent defi nitions among juris- dictions that have executed IGAs with the US will cause increased compliance costs and uncertainty in the marketplace. "" e UK realized this risk early on and has taken the lead in developing its domestic legislation to avoid this result," Berg says. But even if the Canadian legislation is fi xed to the satisfaction of the US, a constitutional challenge may be looming. Peter Hogg, a leading constitutional law scholar who is Professor Emeritus at Osgoode Hall Law School and a scholar-in-residence in Blake, Cassels & Graydon LLP's Toronto offi ce, has warned that the leg- islation may violate Canada's Charter of Rights. However that may be, the IGA will take eff ect when Canada notifi es the US that it has completed its internal obligations under the agreement. In the meantime, the US will deem the IGA to be in eff ect, making Canadian fi nancial institutions immediately eligible to register on the FATCA website. TAX » "On the one hand, the fact that the legislation requires Canadian institutions to fl ag their US accounts to the Canada Revenue Agency rather than the Internal Revenue Service removes some pressure from Canadian banks in terms of their privacy obligations under Canadian law. On the other hand, it changes the landscape for any entities characterized as foreign fi nancial institutions by imposing an obligation on them to fi gure out who their US account holders are." > Roy Berg; Moodys Gartner Tax Law LLP

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