First FATCA, now CRS: Canada signs up for increased transparency measures for foreign accountholders
Article 4 minute read

First FATCA, now CRS: Canada signs up for increased transparency measures for foreign accountholders

02 April 2018

Chances are if you’ve been doing business in Canada, you know the country is strong on compliance and transparency.

Already a participating signatory to the Foreign Account Tax Compliance Act (FATCA) - the US’s requirement that foreign financial institutions report on foreign assets held by US account holders - Canada has now also signed up to the OECD’s Common Reporting Standard (CRS), and the first reporting deadline is 1 May 2018.

The CRS was developed in response to a G20 request and approved by the OECD Council back in 2014, but it’s only really going live in Canada now, with the first reporting deadline right around the corner. CRS calls on jurisdictions to obtain information from their financial institutions, and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

While both FATCA and CRS operate from a similar desire for transparency across borders - and to make it more difficult to hide assets in a foreign land - CRS is in fact much broader in scope. It relates to Canada’s obligations on non-resident entity account holders from multiple jurisdictions, approximately 100 participating jurisdictions to date. The classification of what makes a financial institution is quite broad, too, and doesn’t just include banks.

CRS under Canadian law

Canada takes great pride in having a strong tax compliance culture and takes its obligations very seriously, so CRS is another string in its bow to ensure Canada plays its part in the global fight against tax avoidance and evasion. CRS ups the ante a bit in terms of making sure those doing business in Canada have their obligations tied down in their home jurisdiction.

CRS leaves each individual revenue authority to establish its own guidelines. In Canada, both CRS and FATCA requirements have been rolled into a single requirement in Canadian law for Enhanced Financial Account Information Reporting. That law requires financial institutions to provide certain information to the Canada Revenue Agency (CRA), which in turn transfers that information to the US as a result of FATCA, and to other countries under CRS.

Financial accounts that are subject to review and possible reporting include:

  • Bank accounts
  • Holdings in mutual funds and similar investments
  • Brokerage and custodial accounts
  • Annuity contracts (including segregated fund contracts)
  • Life insurance policies with cash value

The Canadian Bankers Association says certain types of accounts, including most CRA registered plans, are exempt, including: Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Registered Education Savings Plans (RESPs), Registered Pension Plans (RPPs), Pooled Registered Pension Plans (PRPPs), Tax Free Savings Accounts (TFSAs) and Registered Disability Savings Plans (RDSPs).

What to do ahead of the first reporting deadline

Canada’s first reporting deadline is 1 May, so it’s important any entity currently operating in Canada has its classification status settled as soon as possible - that is, each entity must be assessed to see if it qualifies as a “financial institution” for the purposes of exchange of information.

TMF Canada’s experts are currently offering all entities which they do business with a classification exercise to ensure that their clients are clear as to their status - only then will they know where they stand for reporting obligations.

CRS is just one part of the larger bucket of what it costs to do business in Canada - there’s bookkeeping and tax filings, payroll processing and corporate compliance and now there’s also obligations under automatic exchange of information.

It’s important to remember, though, that classification is just a snapshot of what a business is doing at one point in time. As activities evolve, the classification might change, so while it is imperative to be clear on classification before the first reporting deadline, it is also advisable to schedule in a regular health check to make sure the form and function of a business hasn't changed to the point of changing its classification.

As with FATCA, the penalties for getting CRS compliance wrong continue to be severe. It’s a sign that the seriousness of tax compliance is not going to go away any time soon, so both businesses and financial institutions should be much more mindful of the pitfalls and penalties of not seeking out the right guidance.

To check the classification status of your Canadian entity, get in touch with TMF Group Canada’s local experts. We specialise in helping companies stay on the right side of rules and regulations wherever they do business.

Written by

Lisa Wilcox

Market Leader, North America

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