Tax Insights: Canada Revenue Agency issues revised guidance for FATCA and the Common Reporting Standard

Issue 2020-26

In brief

On April 20, 2020, the Canada Revenue Agency released revised guidance on the Foreign Account Tax Compliance Act and the Common Reporting Standard.

• the Foreign Account Tax Compliance Act (FATCA) – “Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement: Part XVIII of the Income Tax Act,” and
• the Common Reporting Standard (CRS) – “Guidance on the Common Reporting Standard: Part XIX of the Income Tax Act,”

(collectively the “April 2020 Guidance”). While most changes in the revised guidance take effect April 20, 2020, certain provisions are not effective until January 1, 2021. Notable changes:

• implement financial institution penalty provisions for documentation failures
• revise requirements to report undocumented accounts
• expand due diligence and disclosures for controlling persons, including discretionary trust beneficiaries 

In detail

Changes affecting both FATCA and CRS compliance

$2,500 penalty for failure to obtain a self-certification at account opening

Financial institutions (FIs) are required to obtain a self-certification from a new account holder in most circumstances. Starting with accounts opened after December 31, 2020, the CRA may impose a $2,500 penalty (under subsection 162(7) of the Income Tax Act) for each failure to collect a valid self-certification (if one is required) when an account is opened. This penalty may be imposed under both Part XVIII and Part XIX for each account.

Many FIs have incorporated self-certifications as part of account opening documents, or collect the self‑certification as part of their “Day One” process. FIs that have maintained collecting the self‑certification in their “Day Two” process may need to reconsider their account opening processes to avoid potential penalties, starting 2021. FIs that offer accounts subject to the Access to Basic Banking Regulations may need to consider additional controls to track applicable accounts and the efforts taken to collect self-certifications when the FI is required to open the account, even when the account holder does not provide a self-certification.

Reporting requirements for undocumented accounts

Before the April 2020 Guidance, FIs were required to include certain undocumented accounts in their annual FATCA and CRS reporting. Under the revised standard in the April 2020 Guidance, when an FI is not able to obtain a self-certification from an account holder, and has not otherwise been able to identify the account holder as an FI or an active non-financial foreign entity (active NFE or NFFE), the FI is required to include the account in its annual Part XVIII (FATCA) and Part XIX (CRS) information return only if it has identified indicia of US or other non-Canadian status that remains uncured. Otherwise, the FI is not required to report the account.

This change is expected to reduce the number of accounts included in FATCA and CRS information reporting. However, even though the account may no longer be reportable, the FI will still be subject to the $2,500 penalty for failure to obtain a required self-certification. In effect, eliminating the reporting requirement and imposing the penalty has shifted the negative implications of non‑compliance from the account holders to the FIs.

Disclosing trust beneficiaries

The April 2020 Guidance includes specific guidance on disclosing discretionary beneficiaries of trusts. A trust that is a passive non-financial foreign entity (passive NFE or NFFE) must generally disclose a variety of controlling persons, including the trustees, settlors, protectors, beneficiaries or other individuals exercising ultimate effective control over the trust. In accordance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), discretionary beneficiaries are not generally viewed as controlling persons unless they have received a distribution from the trust.

The CRA has expanded the due diligence and reporting requirements for trusts, by adding a caveat that discretionary beneficiaries do not need to be reported, but only if the FI has implemented procedures to identify distributions to discretionary beneficiaries. The CRA suggests that one suitable procedure would require the trust or trustee to notify the FI of a distribution to a discretionary beneficiary.

In practice, many trusts/trustees do not disclose discretionary beneficiaries unless a distribution has been made to that beneficiary. The new language in the April 2020 Guidance suggests that discretionary beneficiaries should be disclosed on the self-certification, leaving the FI and trust/trustee to coordinate on an annual basis to determine whether the disclosed discretionary beneficiaries are reportable. Account holders are already required to notify an FI if the information provided on a self-certification changes or becomes invalid. The existing requirement could reasonably be interpreted as requiring a trust/trustee to provide an updated self-certification to add, as a controlling person, a discretionary beneficiary that has received a distribution. The revised language in the April 2020 Guidance shifts this burden to the FI to more closely monitor and police account holders.

FIs that are trying to implement this expanded requirement face multiple practical challenges. Discretionary beneficiaries are sometimes unaware of the trust in which they are mentioned, so providing their personal identifying information on a self-certification would require disclosures that the settlor or trustee may not desire. Even when disclosures to the discretionary beneficiaries are not an issue, implementing a process for annual notifications or confirmation of distributions will require FIs to revisit their inventory of trust accounts and potentially collect new or expanded certifications.

Controlling person determinations         

Both FATCA and CRS require the disclosure of certain controlling persons when an account is held by a passive NFE. Controlling persons are the individuals (not entities) who exercise direct or indirect control over the passive NFE. FIs and account holders are instructed to refer to the PCMLFTA and associated regulations for the definition of a controlling person and examples of controlling persons for different entity types.

Previous FATCA and CRS guidance provided that, when the controlling person of a passive NFE was a trust, one should look through the trust to identify the controlling persons of the trust. The April 2020 Guidance expands this language to say that, when the controlling person of a passive NFE is an entity, one must look through to the controlling persons of that entity. For example, when a passive NFE is controlled by a corporation, the April 2020 Guidance specifies that the controlling persons of that corporation are subject to disclosure in relation to the passive NFE account holder.

While some account holders may have previously applied the PCMLTFA regulations in this manner, it is likely that this expanded and more specific language in the April 2020 Guidance will result in passive NFEs providing expanded or additional controlling person disclosures in their self-certifications.

Changes affecting CRS compliance

Citizenship by investment and residence by investment programs

Citizenship by investment/residence by investment (CBI/RBI) programs are offered by a variety of jurisdictions. CBI/RBI programs generally allow foreign individuals to obtain citizenship or temporary/permanent residency rights in exchange for local investments or a flat fee. The Organization for Economic Co-Operation and Development (OECD) has identified specific jurisdictions where these CBI/RBI programs pose a high risk of misuse. The OECD suggests that FIs implement additional CRS due diligence procedures for CBI/RBI programs and the CRA included these recommendations in the April 2020 Guidance.

The CRA now recommends that FIs adjust due diligence procedures when account holders indicate tax residence in any of the high-risk CBI/RBI jurisdictions identified by the OECD. The CRA recommends that FIs confirm the reasonableness of a self-certification that indicates tax residence in a flagged jurisdiction by asking questions, such as:

• Did you obtain residence rights under a CBI/RBI scheme?
• Do you hold residence rights in any other jurisdictions?
• Have you spent more than 90 days in any jurisdictions during the previous year?
• In which jurisdictions have you filed personal income tax returns during the previous year?

FIs that implement these additional due diligence elements may need to enhance existing internal controls to flag the specific jurisdictions that have been identified by the OECD. Self-certifications may also require changes to capture the suggested clarifying information when an account holder has indicated tax residence in a flagged jurisdiction.

The takeaway

Canadian FIs should evaluate account opening processes and incorporate self-certifications into Day One procedures, if they have not already done so. Account opening documents and internal controls must also be assessed to determine whether they capture the required information for passive NFE account holders, and account holders that indicate tax residence in jurisdictions at risk of abusing CBI/RBI programs.

Trustees and family offices may need to review their controlling person disclosures when they complete their self‑certifications. In some cases, prior disclosures may no longer meet the expectations of their FIs under the revised guidance. Rather than relying on a previously completed self-certification, trustees and family offices should consider whether an updated analysis is now required.