Canadian advisors won't be pulling out their hair over FATCA - a U.S. tax law that could have cost Canadian banks $100 million a pop - as, under a new agreement announced by the federal government Wednesday - a number of accounts, including RRSPs and TSFAs, are exempt from the reporting process.
The Foreign Account Tax Compliance Act (FATCA) - enacted in March 2010 - raised concern in Canada as, under the new law, Canadian financial insitutions may have been compelled to report information on account holders who are U.S. residents and U.S. citizens directly to the IRS, potentially violating Canadian privacy laws.
Costs incurred were estimated at upwards of $100 million per bank, while U.S.-Canada citizens could be nailed for unexpected back taxes. Those who failed to comply would be subjected to sanctions including the withholding of taxes on U.S. payments. Without an agreement, FATCA obligations would have come into affect on July 1, 2014
Under the longstanding Canada-U.S. Tax Convention, financial institutions will not report any information directly to the IRS. Instead, relevant information on accounts held by U.S. residents and citizens (including those who are Canadian residents or citizens) will be reported to the Canada Revenue Agency (CRA) and exchanged with the IRS, adhering to existing provisions and safeguards and the privacy act. (continued.)