On February 5, 2014 Canada and the U.S. executed a model 1 intergovernmental agreement (“IGA”), which relieved Canadian financial institutions from many of the onerous obligations under FATCA. On the same day, the Canadian Department of Finance issued draft legislation required under Canadian law to implement the IGA and requested comments on the draft legislation before March 10, 2014.
As we addressed in our report to the Department of Finance (click here), our primary concern with the draft legislation is that it eviscerates the definition of “Financial Institution” contained in: a) the IGA; b) Treasury Regulations; c) intergovernmental agreements executed by other jurisdictions; and d) guidance notes issued by the U.K., and Ireland.
The consequence of this narrowed definition is that many Canadian entities that would be classified as Financial Institutions by other jurisdictions would not be classified as such in Canada (e.g., private trusts and private holding companies).
This result is problematic for several reasons:
- The U.S. Department of the Treasury could conclude that the legislation (if it becomes final) has failed to validly implement the IGA, which would subject Canadian entities to the full force and effect of FATCA.
- If the legislation does bring into force the IGA (which is unlikely) a Canadian entity that is not classified as Financial Institutions (e.g., private trust or private holding company) under domestic law but would be classified as a Financial Institution under the Treasury Regulations or other intergovernmental agreements will likely face unnecessary withholdings and the concomitant obligations to seek a refund directly from the IRS.
- Inconsistent definitions of Financial Institution amongst jurisdictions that have executed intergovernmental agreements will cause increased compliance costs and uncertainty in the marketplace. The U.K. realized this risk early on and has taken the lead in developing its domestic legislation to provide a model framework for the consistent application of definitions and resulting entity classification.
The comments we have submitted to the Department of Finance provide greater analysis of these and other issues with the draft legislation. We are hopeful that the Department of Finance will consider our comments and takes appropriate action.