The Foreign Account Tax Compliance Act, passed by Congress in 2010, requires U.S. financial institutions to impose a 30 percent withholding tax on payments made to foreign banks and other financial entities that don’t agree to identify and provide information on U.S. account holders.
Under today’s agreement, Canadian financial institutions will not report any information directly to the Internal Revenue Service. Instead, data would be collected by the Canadian Revenue Agency, which would would in turn exchange information with the U.S.
“This is strictly a tax information-sharing agreement,” Canadian Revenue Minister Kerry-Lynne Findlay said today in a statement. “This agreement will not impose any U.S. taxes or penalties on U.S. citizens or U.S. residents holding accounts in Canada.”
The issue has taken on a high profile in Canada because of the large number of dual U.S.-Canadian citizens. According to the 2011 National Household Survey, 263,475 Canadians identified themselves as immigrants from the U.S.
Canadian banks, which had argued that implementing FATCA’s requirements would be costly because there’s no easy way of sifting through accounts to find customers with a U.S. citizenship link, will still face costs associated with providing information to Canada’s revenue agency.
Toronto-Dominion Bank (TD), Canada’s largest bank by assets, estimated in 2011 that complying with FATCA would cost $100 million.
The Canadian Bankers Association said that while it doesn’t agree with FATCA’s implementation in Canada, the agreement signed today is the “best approach under the circumstances.”
Exemptions from the reporting requirements include all federally registered savings vehicles such as registered retirement savings plans, accounts under C$50,000 ($45,150), small financial institutions and local banks that deal primarily with Canadian residents.
The U.S. has signed similar pacts -- known as intergovernmental agreements, or IGAs -- with a number of countries including Germany and France as a July 1 deadline approaches for banks to begin collecting information.
“Canada engaged in lengthy negotiations with the U.S. government to address our concerns,” Finance Minister Jim Flahertysaid in a statement. “‘As a result, significant exemptions and other relief were obtained.’’
The Investment Industry Association of Canada said today in a statement that the agreement greatly reduces the burden of compilance for financial firms.
‘‘FATCA alone would have required Canadian financial institutions to close client accounts; could have imposed U.S. tax withholding and penalties on persons with no connection to the United States; and could have included in its scope Canadian investment vehicles which are low risk for tax evasion use,’’ the industry group said in the statement.
The agreement ‘‘provides a more reasonable and fair approach’’ to addressing cross-border tax compliance, the group said in the statement.
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