Backgrounder: Intergovernmental Agreement for the Enhanced Exchange of Tax Information under the Canada-U.S. Tax Convention
Canada and the U.S. have a long history of exchanging tax information, going back to the first comprehensive tax treaty signed between the two countries in 1942. The current Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital was first signed on September 26, 1980, and has been amended several times since.
The purpose of the Convention is to avoid double taxation (i.e., a situation where a taxpayer would have to pay tax on the same income twice, once in the U.S. and once in Canada) and to prevent the evasion of taxes on income and on capital, including through the exchange of tax information. The intergovernmental agreement (IGA) signed today will enhance that information exchange and support international efforts to improve the automatic exchange of tax information to fight tax evasion.
The IGA is consistent with Canada’s support for the recent G-8 and G-20 commitments to develop a global standard for the automatic exchange of tax information.
The IGA takes into account the objectives and provisions of the U.S. Foreign Account Tax Compliance Act (FATCA), while supporting Canada’s objectives for improving the integrity and fairness of the Canadian tax system. The IGA tailors the FATCA provisions to address Canadian concerns.
The IGA between Canada and the U.S. is similar to the ones negotiated with the United Kingdom and several other countries. To date, Bermuda, the Cayman Islands, Costa Rica, Denmark, France, Germany, Guernsey, Ireland, the Isle of Man, Italy, Japan, Jersey, Malta, Mauritius, Mexico, the Netherlands, Norway, Spain, Switzerland and the United Kingdom have signed agreements, nine other countries have reached an agreement in substance, and a large number of countries have been reported to be in negotiations with the U.S. to sign agreements.
Below are some key features of the IGA.
Reporting and Privacy
Canadian financial institutions will report information on their U.S. clients directly to the Canada Revenue Agency (CRA), which will ensure that the collection and use of the information is consistent with Canadian privacy laws. In addition, exchanged information will be protected by the provisions of the Canada-U.S. Tax Convention.
U.S. Taxes and Penalties
The IGA will not impose any new U.S. taxes or penalties for non-compliance with U.S. tax laws on U.S. persons holding accounts at Canadian financial institutions, or provide for additional assistance in collection beyond that already permitted by the Canada-U.S. Tax Convention. The IGA is strictly an information-sharing agreement.
The IGA also protects Canadians and Canadian financial institutions from the tax withholding provisions in FATCA.
Limits on Reporting
The IGA exempts key Canadian savings vehicles from being reviewed and reported on, including most federally registered accounts such as:
- Registered Retirement Savings Plans
- Registered Retirement Income Funds
- Pooled Registered Pension Plans
- Registered Pension Plans
- Tax-Free Savings Accounts
- Registered Disability Savings Plans
- Registered Education Savings Plans
- Deferred Profit Sharing Plans
Smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt.
The IGA is reciprocal, meaning that information will flow both ways between the tax administrations of the two countries to assist each in administering its own domestic tax laws. The information exchanged will provide tax authorities with greater information on accounts held by their taxpayers in the other country.
The Government will introduce legislation at an early opportunity to implement the IGA.
The CRA will issue guidance to financial institutions on complying with the IGA, and will also provide information to taxpayers about the IGA on its website.
In accordance with the IGA, the implementing legislation, and the CRA guidance, financial institutions in Canada will begin applying their due diligence procedures starting in July 2014. Information reporting by financial institutions to the CRA and exchanges of information pursuant to the IGA will begin in 2015.
U.S. Tax Filing Obligations
Since 1913, U.S. persons in Canada, including dual citizens, have been required under U.S. tax law to file an annual U.S. federal income tax return with the U.S. Internal Revenue Service (IRS). In addition, since 1972, these persons have been obliged to file an annual Foreign Bank Account Reporting (FBAR) form with the U.S. Department of the Treasury.
The IRS has a streamlined process to recognize that some U.S. persons living abroad have not filed timely U.S. federal income tax returns or FBAR forms. Information on this process can be found on the IRS website.