We are all familiar with the expression “the long arm of the law.” However, few laws’ arms are longer than that of the U.S. Foreign Account Tax Compliance Act (FATCA). Administrators of Canadian pension plans and financial institutions that hold or invest pension assets learned this last year when FACTA came into force on July 1, 2014.
Most are now at least passably familiar with FATCA’s requirements and the consequences of non-compliance. Approximately nine months later, though—and despite numerous concessions and exemptions for Canadian pension plans—Canadian administrators have begun more and more to feel the growing pains of FATCA compliance as financial institutions strive to keep on top of their reporting obligations.
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The U.S. is one of the world’s few jurisdictions to tax citizens on worldwide income irrespective of whether or not the citizens are U.S. residents or have any U.S.-source income. The U.S. government first enacted FATCA in 2010 to counter taxpayers who avoid (intentionally or not) U.S. income taxes by holding their assets in non-U.S. accounts. FATCA goes one (big) step beyond the Internal Revenue Service’s (IRS) previous measures and deputizes foreign financial institutions as the IRS’s eyes and ears abroad.
FATCA requires non-exempt foreign financial institutions to register with and report information on their “U.S. person” account holders or face a 30% withholding tax on their U.S.-source income. Since many worldwide financial institutions will have U.S.-source income, FATCA amounts to a de facto global requirement. In other words, as burdensome as compliance with FATCA may be, the cost for many financial institutions is less than being effectively frozen out of the U.S. market.
FATCA casts a big net, and, when you trawl with a big net, you catch the minnows as well as the sharks. FATCA defines financial institution broadly. The term picks up not only traditional banks and investment funds but also many foreign retirement, employee benefit and deferred compensation arrangements.
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The good news for Canadian pension plan administrators is that, by virtue of an intergovernmental agreement between the Canadian and American governments, Canadian registered pension plans should be “Non-Reporting Canadian Financial Institutions” and “exempt beneficial owners” carved out from FATCA’s onerous registration and reporting requirements. Note that these exemptions apply only to the plans themselves. U.S. persons who happen to participate in these plans may still be required to report their own holdings to the IRS on an individual basis, if the values of their accounts exceed certain thresholds.
The exemptions for Canadian pension plans are not, however, automatic. To be entitled to the exemptions, pension plan administrators must complete and file U.S. Form W-8BEN-E with each financial institution holding pension fund assets that itself is a “foreign financial institution” under FATCA. Those in the field have likely already received various copies of this form from each of their plans’ investment managers, insurance companies, pooled and hedge fund administrators, and custodial trust companies.
Form W-8BEN-E is self-certifying. The U.S. government doesn’t require evidence of a Canadian pension plan’s registration, funding structure or status under Canadian federal or provincial laws. It does, however, ask each entity completing a W-8BEN-E to identify and certify the particular basis upon which it is claiming a FATCA exemption. For this reason, it’s important for Canadian administrators asked to complete these forms to review them carefully with both Canadian and U.S. counsel. The form (and each box that is ticked) constitutes a representation that the Canadian investor meets certain criteria under both U.S. tax laws and the Canada-U.S. intergovernmental agreement. As always, it’s important for the administrator to understand exactly what it is certifying and why. A plan administrator must notify a financial institution with which it has filed a W-8BEN-E of any changes within 30 days of the change(s) having occurred.
Crucially, because the third-party financial institution (the investment manager, custodian, etc.) is responsible for receiving the W-8BEN-E, it may ask the administrator for additional certifications and information to give it comfort that its client is in fact non-reporting or “deemed-compliant.” This may include confirmation of the plan’s registration with the Canada Revenue Agency and/or federal or provincial pension regulator and may also include other information similar to “know your client” disclosure provided when the account was first opened.
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As a practical matter, when dealing with third-country financial institutions with FATCA obligations (such as investment managers based in the U.K. or Ireland), the administrator may need to explain fundamental differences with the Canadian pension legal regime, for example, that “trustee” as that term is used in Canada refers primarily to a custodial trust company, whereas a “trustee” under U.K. pension law refers to a person akin to the Canadian plan administrator with day-to-day decision-making authority. Some level of proactive disclosure (such as a covering email explaining to the financial institution or its agent a pension plan’s structure under Canadian law) may be helpful. Otherwise, there’s a risk of becoming “lost in translation,” where the financial institution requests documents, business information and certifications all out of proportion to what it actually (reasonably) needs for its own comfort and protection. There is also the risk that the third-country financial institution misclassifies the Canadian pension plan. In this regard, the Canadian administrator may need to consult local experts in the third country.
In short, while Canadian registered pension plans are themselves able to avoid FATCA’s onerous registration and reporting requirements, that doesn’t mean there’s no work to do and no chance of headaches along the way. Administrators should involve their advisors early in the disclosure, certification and Form W-8BEN-E process and should not consider the fact that they are otherwise non-reporting or “deemed compliant” under FATCA to mean that their dealings with financial institutions will always be worry-free.