Lexpert US Guides

22 | LEXPERT • June 2014 | www.lexpert.ca "Even US citizens who have lived most of their life in Canada can be considered to have tax obligations under US law, and could face heavy penalties of up to $10,000 for each year they have failed to fi le tax returns," Chang says. "It's even possible that a person born in Canada who has an American parent could be aff ected." What's not widely known about the IGA, however, is that the US, by way of reciprocity, has committed to providing the CRA with information on the accounts of Canadian residents in US fi - nancial institutions, including insurance companies. " is has the eff ect of imposing obligations on US institutions. " e obligations are narrower than those imposed on Canadian FFIs: for example, Canadian FFIs must provide information on all US entities and residents, while the obligations of US institutions relate only to the accounts of individual US residents. Also, while Canadian FFIs must provide information on gross interest, divi- dends and other income generated in the account, US institutions will only be required to provide information on US-source divi- dends and other US-source income that is currently collected under the requirements of US domestic law. But the gap between obligations may only be temporary. Under the IGA, the US has agreed to pursue "the adoption of regulations and advocating and supporting relevant legislation" to achieve "equivalent levels of reciprocal automatic infor- mation exchange." What it all means is that the IGA is certainly worthy of the attention of individuals and institutions on both sides of the border. To comply with FATCA, Cana- dian FFIs (including subsidiaries of US parents) must use due diligence in searching for "US Indicia" that will identify US accounts, and report specifi ed information about these ac- counts to the CRA, which will share such information with the IRS on an automated basis. " e task is daunting, all the more so because Canada's implementing dra legislation, which was released simultaneously with the IGA, provides for signifi cant penalties for non-compliance. "Regardless of the method Canadian banks use to identify US account hold- ers, they will be undertaking a monumental project that is ongoing and not time-limited," Chang says. Indeed, Chang suggests that FATCA projects will likely involve a signifi cant internal restructuring for many organizations. "" e restructuring will be aimed at better aligning an institution's tax function and its operating structure with the aim of improving communication between in-house counsel, the tax department, and the client relationship department and its managers," she says. In-house counsel will have to start by familiarizing themselves with the IGA's 47 pages as well as the more than 500 pages that constitute the US Treasury's regulations under FATCA. US accounts to the Canada Revenue Agency rather than the In- ternal Revenue Service removes some pressure from Canadian banks in terms of their privacy obligations under Canadian law," says Roy Berg, Director, US Tax Law at Calgary-based Moodys Gartner Tax Law LLP. "On the other hand, it changes the land- scape for any entities charac- terized as foreign fi nancial institutions by imposing an obligation on them to fi gure out who their US ac- count holders are." " e upshot is that the IGA has major implica- tions for Americans living in Canada and others defi ned as "US persons" under FAT- CA. Indeed, FATCA's main purpose is to track down Americans who are avoiding their obliga- tions to pay tax on their worldwide income. "" e reason for FATCA's creation was that many American citi- zens, including those not residing in the US, were not reporting their worldwide income," says Bratz. "But instead of going directly a er the non-reporters, the US approach appears to be to have the world police the situation for them." Still, these developments might come as a surprise to a signifi - cant number of US ex-pats. "Many Americans living in Canada and elsewhere don't under- stand that the US is one of only two countries in the world that requires its citizens to fi le tax returns no matter where they are liv- ing," Berg says. It's a gap in understanding that could be costly. « TAX "Even US citizens who have lived most of their life in Canada can be considered to have tax obligations under US law, and could face heavy penalties of up to $10,000 for each year they have failed to fi le tax returns. It's even possible that a person born in Canada who has an American parent could be affected." Veronika Chang > Morris Kepes Winters LLP

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