their jurisdictions held by Canadian residents, and the CRA will
provide reciprocal information regarding Canadian accounts held
by foreigners. As of the July 1, 2017 implementation date, Canadian
FIs will be required to have procedures in place to identify accounts
held by non-residents and to report the required information to the
CRA. However, they will not be required to report accounts held
by Canadian residents with foreign citizenship. Information will be
exchanged reciprocally with other jurisdictions when appropriate
safeguards are in place to protect taxpayer confidentiality and
exchange agreements have been formalized. Draft proposals will
be released for public comment in the coming months.
FATCA and the Common Reporting Standard
The CRS is modelled after the FATCA Model 1 IGA agreement
with some differences. The FIs that are obligated to report under
the CRS include banks and custodians, brokers, certain collective
investment vehicles and certain insurance companies, unless
these FIs present a low risk of being used for evading tax and
are excluded from reporting. The CRS also requires the reporting
of accounts held by individuals and entities (including trusts and
foundations). With respect to entities, FIs will be required to look
through shell companies, trusts or similar arrangements to ensure
situations where taxpayers seeking to hide the principal but pay the
tax on the income don’t fall through un-noticed and the individuals
that ultimately control these entities are reported. Financial
information to be reported with respect to reportable accounts will
include all types of investment income: interest income, dividends,
income from certain insurance products, proceeds from the sale of
financial assets, other income generated with respect to assets
held in the account, payments made with respect to the account,
and account balance. Given some of these similarities with FATCA
reporting, many FIs have already begun to coordinate their FATCA
compliance efforts with that of the CRS.
However, there are some differences between FATCA and
the CRS. The CRS will not include some of the exemptions
permitted under the FATCA regulations or the Model 1 IGA. Certain
FIs including those with a local client base, local banks, certain
retirement funds, and FIs with only low-value accounts that are
exempt under the FATCA Model 1 IGA are not exempt under the
CRS. As a result, FIs not impacted by FATCA may now have to
start thinking about the CRS and the compliance efforts they need
to put in place. In addition, the de minimis thresholds applied to
financial accounts differ between the CRS and FATCA. As a result,
all individual and all new entity accounts held by a FI are subject to
the CRS due diligence and potential reporting.
What are the Implications?
Given the CRS’ global scope, a greater number of financial
accounts will be impacted. Instead of only identifying U.S. citizens
or residents under FATCA, a Canadian FI will be required to identify
the residency of all their reportable accounts. In addition, since
a greater number of FIs will have to get on-board with the CRS
relative to the FATCA regulations, there will be an increase in due
diligence and reporting of financial accounts. Furthermore, due
to the lack of some of the de minimis thresholds, there will be
an increase in the number of financial accounts required to be
reviewed under the CRS. Banks and other FIs will face a challenge
in implementing appropriate compliance programs to carry out
due diligence and provide the necessary data in the right form by
the agreed deadlines. Many FIs will be able to utilize their new
FATCA systems set up by the financial institutions which will be
robust enough to enable them to meet their additional obligations
under the CRS.
The wide scope of the CRS and the increase in the number
of financial accounts required to be reviewed will translate into
an increase in the number of self-certification requests made
by Canadian FIs. Every new entity account holder will receive a
request to certify their tax residencies and status under the CRS
rules. As a result, compliance efforts will increase both by financial
institutions that maintain the accounts and by the account holders
themselves. Private enterprises holding financial accounts with
Canadian financial institutions need to ensure they are accurately
completing and complying with the self-certification requests.
For more information contact:
• Canadian FIs that have not already started to understand their obligations under the CRS should start a
process of understanding their obligations and planning for implementation. This will impact Canadian
FIs who are exempt or have limited reporting obligations under FATCA.
• Financial institutions need to be aware that the CRS requires identification of tax residency as opposed
to determining whether a person is a citizen of a particular country.
• Ultimately, Canadian FIs will need to implement and enhance the necessary changes to internal systems
and processes to ensure all required accounts are reviewed for potential reporting.
• Part of this CRS implementation will include development and implementation of alternative self-certifications forms to ensure the required information is captured.