OTTAWA - Canada and the United States have signed a tax-information sharing agreement, officials from the two countries said on Wednesday, months ahead of implementation of a new U.S. law to crack down on offshore tax avoidance.
The so-called intergovernmental agreement (IGA), one of 22 Washington has signed so far with individual countries, aims to address Canadian government concerns about the reach of Washington’s Foreign Account Tax Compliance Act (FATCA), due to come into effect in July, a senior Canadian finance official told reporters in a briefing session.
FATCA would have forced Canadian banks to hand over information to the U.S. tax-collecting Internal Revenue Service (IRS) on accounts worth more than $50,000 US held mainly by U.S. citizens and residents. It also would have automatically imposed a 30% withholding tax on non-compliant foreign businesses.
Instead, the IGA allows Canadian tax authorities to collect information from the country’s banks and share it with the IRS under an existing bilateral tax treaty.
The U.S. Department of Treasury hailed the agreement with Canada and another with Hungary also announced on Wednesday, as a sign of global support for its campaign against tax evasion.
“The agreements announced today clearly demonstrate the considerable international support behind FATCA and we are proud to lead the global charge on this pressing issue,” said Robert Stack, Treasury’s deputy assistant secretary for international tax affairs.
Washington announced several new intergovernmental agreements in December and more recently with Italy and Mauritius.
The Canadian official, who spoke on condition that he not be named or quoted, said Ottawa had been concerned that the FATCA might violate domestic privacy laws and placed a heavy burden on financial institutions.
The IGA also narrows the scope of information required to be collected from account holders in Canada, the officials said. Some smaller financial institutions will be exempt as well as certain registered savings vehicles such as Canadian registered retirement savings plans.
It is estimated that about 1 million U.S. citizens reside in Canada, although there is no data available on how many would be affected by the new agreement.
Banks will start collecting information in July of this year and the Canada Revenue Service will begin reporting to the IRS in 2015.
The tax sharing agreement will not require changes to Canadian laws but will need Parliament’s approval, the official said.
Signed into law by President Barack Obama in 2010, FATCA was originally supposed to take effect on Jan. 1, 2013. In 2011, the start-date was postponed to Jan. 1, 2014. Then in the middle of last year, the start-date was pushed back again to July 1, 2014.
The U.S. Treasury and IRS are rushing to finish FATCA rules and forms that financial institutions say they need to avoid the law’s tax penalty.
Speaking to reporters on Wednesday, IRS Commissioner John Koskinen said he met with Treasury officials on Tuesday about the FATCA regulations.
“They’re going to come out soon, but I can’t tell you date,” Koskinen said.