"Canadian banks are NOT required to report "U.S. accounts" less than $50,000 under FATCA, but…" — John Richardson https://t.co/a97wFrQbfW
— Citizenship Lawyer (@ExpatriationLaw) April 25, 2016
The above tweet references a comment I left at an Ipoltics.ca article.
The truth is that …
Canadian banks are NOT required to report “U.S. accounts” less than $50,000 and certain other accounts under the IGA. Nevertheless, some banks may be reporting these accounts anyway.
This conclusion follows from an examination of (A) the terms of the IGA and (B) Part VIII of Canada’s Income Tax Act, which is the Canadian legislation to implement FATCA.
Part A – Beginning with the IGA which is the master “agreement” (either your brains or your signature will be on this contract)
1. We must refer to the U.S. Canada FATCA IGA.
FATCA-eng
We look to the definitions section to understand what is a “U.S. Reportable Account”.
cc) The term “U.S.Reportable Account” means a Financial Account maintained by a Reporting Canadian Financial Institution and held by one or more Specified U.S. Persons or by a Non-U.S. Entity with one or more Controlling Persons that is a Specified U.S. Person. Notwithstanding the foregoing, an account shall not be treated as a U.S. Reportable Account if such account is not identified as a U.S.Reportable Account after application of the due diligence procedures in Annex I.
JR Comment: cc) above is means that certain accounts that would normally meet the test of being a “U.S. Reportable Account” will NOT be treated as a “U.S. Reportable Account” as long as the values do NOT exceed certain amounts. This is different from “Retirement Accounts” that are specifically excluded from the definition of “Financial Account” (Annex II) and are therefore NEVER reportable accounts.
2. Go to page 19 which is where “Annex I” begins. “Annex I” provides the framework for the “due diligence” requirements (meaning what the banks are required to report).
3. Go to page 20 – “II A” (Preexisting individual accounts). The language is as follows:
“II. “Preexisting Individual Accounts
The following rules and procedures apply for purposes of identifying, reviewing and reporting U.S. Reportable Accounts among Preexisting Accounts held by individuals (“Preexisting Individual Accounts”).
A. Accounts Not Required to Be Reviewed, Identified, or Reported.
Unless the Reporting Canadian Financial Institution elects otherwise, either with respect to all Preexisting Individual Accounts or, separately, with respect to any clearly identified group of such accounts, where the implementing rules in Canada provide for such an election, the following Preexisting Individual Accounts are not required to be reviewed, identified, or reported as U.S. Reportable Accounts:
1. Subject to subparagraph E(2) of this section, a Preexisting Individual Account with a balance or value that does not exceed $50,000 as of June 30, 2014
2. Subject to subparagraph E(2) of this section, a Preexisting Individual Account that is a Cash Value Insurance Contract or an Annuity Contract with a balance or value of $250,000 or less as of June 30, 2014.
3. A Preexisting Individual Account that is a Cash Value Insurance Contract or an Annuity Contract, provided the law or regulations of Canada or the United States effectively prevent the sale of such a Cash Value Insurance Contract or an Annuity Contract to U.S. residents (e.g., if the relevant Financial Institution does not have the required registration under U.S.
law, and the law of Canada requires reporting or withholding with respect to insurance products held by residents of Canada).
4. A Depository Account with a balance of $50,000 or less.”
You will see similar language on page 26 “III” for new accounts (accounts opened after June 30, 2014).
III. New Individual Accounts.
The following rules and procedures apply for purposes of identifying U.S. Reportable Accounts among Financial Accounts held by individuals and opened on or after July 1, 2014 (“New Individual Accounts”).
A. Accounts Not Required to Be Reviewed, Identified, or Reported.
Unless the Reporting Canadian Financial Institution elects otherwise, either with respect to
all New Individual Accounts or, separately, with respect to any clearly identified group of such accounts, where the implementing rules in Canada provide for such an election, the following New Individual Accounts are not required to be
reviewed, identified, or reported as U.S. Reportable Accounts:
1.A Depository Account unless the account balance exceeds $50,000 at the end of any calendar year or other appropriate reporting period.
2. A Cash Value Insurance Contract unless the Cash Value exceeds $50,000 at the end of any calendar year or other appropriate reporting period.
(The IGA contains analogous rules for “Pre-exiting entity accouts” and for “New entity accounts”.)
According to the IGA, this appears to mean:
“(1) Where the implementing rules in Canada provide for such an election, (2) unless the Reporting Canadian Financial Institution elects otherwise, then (3) the following Preexisting Individual Accounts are not required to be reviewed, identified, or reported as U.S. Reportable Accounts …”
What this means is that, the Government of Canada (via its implementing rules) and the banks (by opting to take advantage of those rules) are able to choose whether an account less than $50,000 is reportable. This is extremely important! Put it another way: if accounts less than $50,000 (and others are being reported) this is NOT because of the FATCA IGA. It is because either the Income Tax Act of Canada (the implementing rules) does NOT allow for an election or because the bank is not making the election that it is permitted to take under the implementing rules.
Part B – Does Part VIII of Canada’s Income Tax Act (the implementing legislation) allow for an election?
The answer appears to be YES. The Canada Revenue Agency “Guidance on enhanced accounting reporting read”:
“Threshold exemptions that apply to preexisting individual accounts
8.5 Monetary threshold exemptions are set out in section II of Annex I of the Agreement in connection with the review of preexisting individual accounts. If a financial institution wants to rely on an exemption in connection with a preexisting account, it must designate the account under paragraph 264(1)(a) of the ITA.
8.6 When a financial institution does not rely on paragraph 264(1)(a) of the ITA to designate any accounts, it must review all of its preexisting individual accounts.
8.7 A financial institution that wants to use any threshold exemptions that may be applied to preexisting individual accounts is required to document that it has done so in its internal procedures. Doing so would result in not having to review, identify, or report to the CRA the following accounts:
a depository account with a balance or value of US$50,000 or less on June 30, 2014;
a preexisting individual account with a balance not exceeding US$50,000 on June 30, 2014, unless the account subsequently becomes a high value account; and
a preexisting individual account that is a cash value insurance contract or an annuity contract with a balance or value of US$250,000 or less on June 30, 2014, unless the account subsequently becomes a high value account.”
and for new accounts:
“Threshold exemptions that apply to new individual accounts
9.4 A financial institution may apply the monetary threshold exemptions set out in section III of Annex I of the Agreement in connection with the review of new individual accounts. More specifically, a financial institution may rely on paragraph 264(1)(b) of the ITA to designate accounts for a calendar year in relation to which it wants to apply the thresholds.
9.5 A financial institution may apply paragraph 264(1)(b) of the ITA to trigger the threshold exemption for all new individual financial accounts or for a clearly identifiable group of accounts, such as by line of business or the location at which the account is maintained.
9.6 If a financial institution does not apply paragraph 264(1)(b) of the ITA with respect to any account, it will be required to review all new individual accounts.
9.7 A financial institution that applies paragraph 264(1)(b) of the ITA to a group of accounts is not required to review, identify, or report to the CRA the following accounts that fall within that group:
depository accounts, unless the account balance or value exceeds US$50,000 on December 31, 2014, or on December 31 of any subsequent year thereafter; or
cash value insurance contracts, unless the cash value exceeds US$50,000 on December 31, 2014, or on December 31 of any subsequent year thereafter.”
Part C – What does this all mean?
This means that any bank that reports an account that is below the $50,000 threshold (and certain other types of accounts) is doing so because it has chosen to do so and NOT because it is required to do so. Interestingly the ability to make this election means that banks can compete against each other based on whether they report ALL “U.S. Person” accounts or ONLY those that they are required to report. One could imagine a new bank slogan like this:
“Our bank does NOT report ALL “U.S. person” accounts!”
