Part I – What does the $50,000 threshold for FATCA reporting mean in practice?
This post is focused ONLY on accounts held by (1) individuals who (2) are “US Persons” within the meaning of the FATCA IGA who (3) have been identified as “US Persons” and who (4) have been unable to “self-certify” that they are not “US Persons”. There are tens of thousands of US citizens in Canada and other countries that carry on normal banking activities with their “USness” undetected. Their accounts are not being forwarded to the USA.
This post is NOT intended to apply to entity accounts or any other kind of account.
The Context …
As a result of the FATCA IGA, Canadian financial institutions are required to report any accounts owned by “US Persons” to the Canada Revenue Agency. The definitions section of the IGA stipulates that the definition of “US Person” is determined by the US Internal Revenue Code. Therefore, all countries who have signed FATCA IGAs have allowed the United States to define any of their citizens or residents as “US Persons” now and in the future. (I wonder whether this is a reason why China has not signed a FATCA IGA.)
The Canada Revenue Agency (acting as a conduit) forwards those (“US Person”) accounts to the US Internal Revenue Service. The rules are complicated and include some discussion of a $50,000 USD threshold before the account is to be reported. Although that threshold had some meaning with respect to pre-existing accounts, it has been rendered less meaningful through time. It is reasonable to infer that the Canadian banks are reporting some accounts that they are not required (but permitted) to report. Nevertheless, I suspect that most of the lower value accounts ARE subject to FATCA reporting. Many of the complaints focusing on the banks reporting accounts less than $50,000 are justified. But, many of those under $50,000 accounts are required to be reported. To put it simply: When it comes to accounts with balances less than $50,000 – some are required to be reported and some not.
The $50,000 USD Question? Concerns from 2016 …
As early as 2016, Elizabeth Thompson writing for iPolitics raised this issue here. At a minimum her article highlights the confusion surrounding the reporting of accounts with a balances less than $50,000 USD. Her article includes this paragraph:
Testifying before a House of Commons committee in April, Privacy Commissioner Daniel Therrien told MPs he was concerned that information on bank accounts under $50,000 that doesn’t have to be shared with the IRS is being shared.
“There seems to be a discrepancy between the agreement between Canada and the U.S – the IGA – on the one hand and the income tax act on the other as to what happens to accounts under $50,000,” Therrien explained in an interview after the hearing. “The agreement seems to suggest that accounts under $50,000 do not have to be disclosed to the IRS where the Income Tax Act, the Canadian legislation, says under $50,000 is disclosable unless the financial institution decides that it is not.”
“So that gives a lot of discretion to financial institutions to report or not and I think that’s not desirable.”
2021 – The $50,000 USD Question Continues …
The result of an information request to the Government of Canada, which was reported at the Isaac Brock Society, suggests that:
Information request suggests: Majority of Canadian Accounts Reported under #FATCA to Tax Authorities have balance below $50,000 USD. How does this follow from the IGA and Part XVIII of the Income Tax Act of Canada? Does any USness mean automatic reporting? https://t.co/9eyQlHP04z
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 11, 2021
I suspect that the majority of accounts reported under the FATCA are below $50,000 USD. Furthermore, I suspect that (at least with respect to accounts) opened after July 1, 2014, that reporting many lower value accounts IS required under the FATCA IGA. With respect to the small number of “depository accounts” that may not meet the reporting requirement, Canada’s banks probably find it administratively easier (and a certain route to remain compliant) to report.
The $50,000 USD threshold had greater significance for accounts that existed on June 30, 2014. The threshold (for reasons I will explain) has less significance for accounts opened after July 1, 2014. This post will explain why this is.
The $50,000 USD FATCA Question Answered – Quick And Dirty Summary
Canadian residents should not believe that accounts less than $50,000 USD are not reportable under the FATCA IGAs. (Registered accounts: RRSP, TFSA, RESP, RDSP, etc. are NOT defined as accounts and by therefore by definition are not subject to reporting.) All other accounts are, whether mandatory (as per the agreement) or optional (the banks can opt to report them), subject to FATCA reporting.
Pre-existing Accounts in existence on June 30, 2014: To the extent that a $50,000 USD exemption is available, that exemption would apply to ALL individual accounts in existence on June 30, 2014. In determining whether the $50,000 threshold had been met, account balances were not considered individually. They were considered in their aggregate.
New Accounts opened after July 1, 2014: To the extent that a $50,000 USD exemption is available, that exemption would apply only to “depository accounts”. Canadian banks are REQUIRED to report all accounts that are not “depository accounts”. “Depository accounts” below the $50,000 USD threshold are not required to be reported under the FATCA IGA, but are permitted to be reported under the FATCA IGA and the Income Tax Act of Canada. Again, when it comes to determining the $50,000 USD threshold: it’s the aggregate of the account balances that matters.
(At the risk of oversimplification, a “depository account” should be thought of as a basic bank account. An example of a “custodial account” would be a basic investment/securities account.)
Beware of the account aggregation rules in determining whether the $50,000 threshold has been met!!!
First there was FATCA. Then came the CRS
The CRS (“Common Reporting Standard”) came after FATCA. Although both FATCA and the CRS are AEOI (“Automatic Exchange Of Information”) information exchange agreements, they operate very differently.
On the most basic level:
FATCA: Information flows from a country where the individual does live and is a tax resident (Canada) to a country where the individual does not live, but is deemed to be a tax resident (USA). Because of the “saving clause“, tax treaties cannot be used by US citizens to assign tax residency to one country. This means that Canadian citizen/residents who are also US citizens are treated as though they are tax residents of both Canada and the United States. Information will be transferred from Canada to the United States.
CRS: Information flows from a country where the person is not a tax resident (Canada) to a country where the person is a tax resident (for example France). But, how is it determined where a person is a tax resident? Each country is free to determine its own rules for tax residency. In cases where a person is a tax resident of two countries, tax treaties CAN be used to assign tax residency to one country. A treaty can be used to assign tax residence ONLY to Canada. Because, tax residency is assigned only to Canada, information will not be transferred from Canada to the other country.
Both FATCA and the CRS require banks to ask customers to certify their tax residency. Canada uses one form to both FATCA and the CRS. Canada’s combined FATCA/CRS Self-Certification form focuses ONLY on questions of tax residency. The CRS has no monetary threshold for reporting. This has the effect of encouraging financial institutions to ignore any monetary threshold in the FATCA IGAs.
Part II – Analysis and discussion …
FATCA requires the reporting of certain Canadian accounts with limited exceptions. It is commonly assumed that accounts with balances below the $50,000 USD threshold are included in the exceptions. The above tweet references a recent article at the Isaac Brock Society which reports that numerous accounts with balances below $50,000 USD are being reported to the Canada Revenue Agency. The purpose of the article is to suggest that Canadian Financial Institutions are, pursuant to FATCA, NOT required under the IGA, to report accounts with balances less than $50,000 USD. This is NOT necessarily true.
Here are seven circumstances to consider when deciding whether accounts with balances less than $50,000 USD:
– are required to be reported
– are not reportable under the FATCA but can be reported at the discretion of the bank
– are not reportable at all (these are the items in Annex II of the IGA which are not reportable and are excluded from the definition of account)
Circumstance 1. Some kinds of accounts are NOT included in the definition of account and are therefore not required to be reported. Furthermore, Canadian Financial Institutions do NOT have the discretion to report them.
On page 45 of the US Canada FATCA IGA it confirms:
IV. Accounts Excluded from Financial Accounts
The following accounts and products established in Canada and maintained by a Canadian Financial Institution shall be treated as excluded from the definition of Financial Accounts, and therefore shall not be treated as U.S. Reportable Accounts under the Agreement:
A. Registered Retirement Savings Plans (RRSPs) – as defined in subsection 146(1)
of the Income Tax Act.
B. Registered Retirement Income Funds (RRIFs) – as defined in subsection 146.3(1)
of the Income Tax Act.
C. Pooled Registered Pension Plans (PRPPs) – as defined in subsection 147.5(1) of
the Income Tax Act.
D. Registered Pension Plans (RPPs) – as defined in subsection 248(1) of the Income
E. Tax-Free Savings Accounts (TFSAs) – as defined in subsection 146.2(1) of the
Income Tax Act.
F. Registered Disability Savings Plans (RDSPs) – as defined in subsection 146.4(1)
of the Income Tax Act.
G. Registered Education Savings Plans (RESPs) – as defined in subsection 146.1(1)
of the Income Tax Act.
H. Deferred Profit Sharing Plans (DPSPs) – as defined in subsection 147(1) of the
Income Tax Act.
I. AgriInvest accounts – as defined under “NISA Fund No. 2” and “net income stabilization account” in subsection 248(1) of the Income Tax Act including Quebec’s Agri-Quebec program as prescribed in section 5503 of the Income Tax Regulations.
J. Eligible Funeral Arrangements – as defined under subsection 148.1 of the Income Tax Act.
K. Escrow Accounts. An account maintained in Canada established in connection with any of the following:
1. A court order or judgment.
2. A sale, exchange, or lease of real or immovable property or of personal or movable property, provided that the account satisfies the following requirements:
a. The account is funded solely with a down payment, earnest money, deposit in an amount appropriate to secure an obligation directly related to the transaction, or a similar payment, or is funded with a
financial asset that is deposited in the account in connection with the sale, exchange, or lease of the property;
b. The account is established and used solely to secure the obligation of the purchaser to pay the purchase price for the property, the seller to pay any contingent liability, or the lessor or lessee to pay for any damages relating to the leased property as agreed under the lease;
c. The assets of the account, including the income earned thereon, will be paid or otherwise distributed for the benefit of the purchaser, seller, lessor, or lessee (including to satisfy such person’s obligation) when the property is sold, exchanged, or surrendered, or the lease terminates;
d. The account is not a margin or similar account established in connection with a sale or exchange of a financial asset; and
e. The account is not associated with a credit card account.
3. An obligation of a Financial Institution servicing a loan secured by real or immovable property to set aside a portion of a payment solely to facilitate the payment of taxes or insurance related to the real or immovable property at a later time.
4. An obligation of a Financial Institution solely to facilitate the payment of
taxes at a later time.
Circumstance 2. When calculating account balances, the aggregation rules apply. The balances of all accounts at the institution are identified and the balances are aggregated to determine whether the threshold has been met.It appears that the aggregation rules apply regardless of account type.
On page 36 of the US Canada FATCA IGA it states:
C. Account Balance Aggregation and Currency Translation Rules.
Aggregation of Individual Accounts. For purposes of determining the aggregate balance or value of Financial Accounts held by an individual, a Reporting Canadian Financial Institution is required to aggregate all Financial Accounts maintained by the Reporting Canadian Financial Institution, or by a Related Entity, but only to the extent that the Reporting Canadian Financial Institution’s computerized systems link the Financial Accounts by reference to a data element such as client number or taxpayer
identification number, and allow account balances or values to be aggregated. Each holder of a jointly held Financial Account shall be attributed the entire balance or value of the jointly held Financial Account for purposes of applying the aggregation requirements described in this paragraph 1.
Note also that there can be double counting of the same money. For example if money is transferred from one account to another account, the money will be counted twice. Imagine a person with only a depository account with $26,000 USD. He decides to open a second account. He then transfers the first $26,000 to the second account. The $50,000 threshold has been triggered.
Circumstance 3. Preexisting (in existence as of June 30, 2014) accounts less than $50,000 are not required to have been reported, but the Canadian Financial Institutions had/have the option of reporting them pursuant to the IGA and S. 264 of the Income Tax Act of Canada.
Page 20 of the IGA states:
II. Preexisting Individual Accounts. The following rules and procedures apply for purposes of identifying 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.
Circumstance 4. New (opened after July 1, 2014) DEPOSITORY accounts less than $50,000 are not required to have been reported, but the Canadian Financial Institutions have the option of reporting them pursuant to the IGA and S. 264 of the Income Tax Act of Canada. Note that this exemption applies ONLY to DEPOSITORY accounts.
Page 26 of the IGA states:
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.
Note that the exemption is available ONLY for depository accounts. All custodial accounts (regardless of account balance) are reportable.
Circumstance 5. Some accounts are required to be reported pursuant to the FATCA IGA and those accounts are reported pursuant to this requirement
An individual who is identified as being a “US Person”, who opens an account that is NOT a depository account, is required to be reported as per the FATCA IGA. Note that this requirement exists regardless of the value of the account.
Circumstance 6. Some accounts are NOT required to be reported pursuant to the IGA, but are reported at the option of the Canadian Financial Institution
The terms of the FATCA IGA have been legislated into the Income Tax Act of Canada. FATCA – referred to as “Enhanced International Information Reporting – is Part XVIII of the Income Tax Act. Specifically S. 264 reads as follows:
Designation of account
264 (1) Subject to subsection (2), a reporting Canadian financial institution may designate a financial account to not be a U.S. reportable account for a calendar year if the account is
(a) a preexisting individual account described in paragraph A of section II of Annex I to the agreement;
(b) a new individual account described in paragraph A of section III of Annex I to the agreement;
(c) a preexisting entity account described in paragraph A of section IV of Annex I to the agreement; or
(d) a new entity account described in paragraph A of section V of Annex I to the agreement.
Marginal note:U.S. reportable account
(2) A reporting Canadian financial institution may not designate a financial account for a calendar year unless the account is part of a clearly identifiable group of accounts all of which are designated for the year.
Marginal note:Applicable rules
(3) The rules in paragraph C of section VI of Annex I to the agreement apply in determining whether a financial account is described in any of paragraphs (1)(a) to (d).
S. 265 of the Income Tax Act confirms that without the S. 264 designation having specifically been made that the account is required to be reported under the FATCA rules. (This does allow for banks to compete each other on the basis that some might make a S. 264 election and some might not.) For example, banks might adopt the following policy and slogan:
“We afford rights and dignity to US citizens with low value accounts!”
“We’re fairer than you think!”
Due diligence — no designation
(3) If a reporting Canadian financial institution does not designate a financial account under subsection 264(1) for a calendar year, the institution shall have the following due diligence procedures with respect to the account:
(a) if the account is a preexisting individual account described in paragraph A of section II of Annex I to the agreement, the procedures described in paragraphs B and C of that section, subject to paragraph F of that section;
(b) if the account is a new individual account described in paragraph A of section III of Annex I to the agreement, the procedures described in paragraph B of section III of Annex I to the agreement;
(c) if the account is a preexisting entity account described in paragraph A of section IV of Annex I to the agreement, the procedures described in paragraphs D and E of that section; and
(d) if the account is a new entity account described in paragraph A of section V of Annex I to the agreement, the procedures described in paragraphs B to E of that section.
S. 264 provides the legislative authority for Canadian Financial Institutions to report “depository accounts” which are NOT otherwise required to be reported under the FATCA IGA. Only if the aggregate of ALL accounts is less than $50,000 USD, would this election be applicable.
Circumstance 7. Some accounts are not required to be reported and are not reported.
Clearly, an individual with ONLY depository accounts, with an aggregate balance of less than $50,000 USD, should expect that their accounts would NOT be reported.
The fact that accounts with balances less than $50,000 are being reported to the Canada Revenue Agency does NOT lead to the conclusion that the banks are reporting accounts that are less than $50,000 USD that are not required to be reported.
This is true because:
A. The accounts reported could include any custodial account regardless of value; and
B. Depository accounts below $50,000 could be reportable if the aggregate of all accounts, at the institution exceeds $50,000 USD.
That said, it is administratively more simple for Canadian financial institutions to make a policy decision of reporting ALL US accounts. This ensures that they will always be in compliance with the IGA and Part XVIII of the Income Tax Act of Canada. I am unaware of any information that would reveal how many of the accounts below $50,000 USD that are being reported are: (1) depository accounts (2) where the aggregate balance of all the accounts is less than $50,000 USD.
Finally, it bears repeating that Canadian financial institutions have no authority to report the accounts excluded under Annex 2 of the IGA (RRSP, TFSA, RESP, RDSP, etc.)
You can read the Canada US FATCA IGA here.