On February 5^th, 2014, the Canada signed an intergovernmental agreement (“IGA”) with the U.S. regarding the U.S. Foreign Account Tax Compliance Act (“FATCA”). Under the terms of FATCA, Canadian financial institutions need to report directly to the U.S. Internal Revenue Service (“IRS”) any information regarding bank accounts held by U.S. taxpayers as from July 1^st, 2014.

FATCA has raised many significant issues, including the violation of Canada’s privacy laws as well as the treatment of dual citizens of Canada and the U.S. The IGA signed by Canada and the U.S. customizes the application of FATCA respecting Canada as follows:

• Canadian financial institutions will report relevant information on accounts held by U.S. taxpayers to the Canada Revenue Agency (“CRA”) instead of the IRS as from July 2014. The IGA requires every reporting Canadian financial institution that maintains a U.S. reportable account to file an information return with the Minister of National Revenue before May 2^nd of the following taxable year;
• The CRA will then exchange the information with the IRS through existing provisions and safeguards pointed out in the Canada-U.S. tax treaty starting in 2015;
• Certain accounts will be exempt from FATCA, including registered retirement savings plans and income funds, tax-free savings accounts, registered education savings plans, deferred profit sharing plans, and registered disability savings plans;
• Smaller deposit-taking institutions with assets of less than $175 million will be exempt from FATCA;
• The 30% FATCA withholding tax will not be applicable to clients of Canadian financial institutions; it will only apply to Canadian financial institutions if the institution is in long-term non-compliance with its obligations under FATCA;
• Based on the documentation requirements of IGA, every reporting Canadian financial institution needs to maintain records of documentary evidence;
• The IGA includes an anti-avoidance rule: Where a person enters into an arrangement or engages in a practice with the aim of avoiding an obligation, the person is subject to that obligation, as if the person had never performed that arrangement or practice.

The Department of Finance clearly pointed out that the IGA is strictly an information sharing agreement. Further it noted that while the Canada-U.S. tax treaty allows a country to collect taxes imposed by the other country, the treaty does not apply to penalties under laws that impose only a reporting requirement. The CRA also confirmed that it will not collect the U.S. tax liability of a Canadian citizen, if the individual was a Canadian citizen when the liability arose.

Prior to releasing draft legislation implementing the IGA for public comment, the CRA is going to issue guidance to financial institutions on complying with the IGA, and will also provide information to taxpayers about the IGA.