Monthly Archives: December 2015

Part 3: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – “Active or passive NFFE”?

In Part 2 of this series I concluded that:

The FATCA IGAs are now being used AROUND THE WORLD to hunt for people with “US indicica. The purpose of FATCA is clearly to:

Review non-U.S. “Entity Accounts”; to
Identify those beneficial owners who are “U.S. Persons”; to
Report those “U.S. owners” to the banks who will report them to the IRS

It’s the “RIR” principle! Understand that pursuant to the “RIR” principle, the United States is using FATCA to force disclosure of beneficial ownership of “Entity Accounts” in the whole wide world. The goal is to locate “U.S. Persons”. “U.S. Persons” are composed primarily of those with a U.S. place of birth.

When it comes to the hunt for those with a “U.S. place of birth”, FATCA is being used to “smoke em out“.

Part 1 of this series described how the FATCA inquisition has impacted impacted “entities” in general and a U.K. PTA in particular. A principal purpose of the inquisition is to identify what is called (in FATCASpeak) a “passive NFFE”. The search extends to the trust accounts maintained by lawyers. This includes lawyers in New Zealand.

Let’s let the New Zealand Law Society explain what a “NFFE” is and what makes a “NFFE” passive. Their description does NOT explain why the New Zealand Government “passively” acquiesced to FATCA. That said …


Understanding the importance of the Non-Financial Foreign Entity (“NFFE”)

In order to understand how the FATCA IGA applies to “non-DNA persons”, one must distinguish between:

  1. Financial Institutions (think your bank) – “FI”
  2. Non-Financial Foreign Entities (think active businesses, trusts, etc.) – “NFFE”

Furthermore, Non-Financial Foreign Entities” (“NFFE”) must be categorized as either “passive” or not passive. The following explanation from the New Zealand Law Society (how should laywers’ trust accounts be categorized?) is very interesting.

In June of 2014, the Government of New Zealand entered into an IGA with the United States

The “RIR” principle applies to all business bank accounts in every country that has signed a FATCA IGA. What follows is a fascinating discussion of how the New Zealand Law Society understands FATCA to apply to law firm trust accounts. (For an extensive discussion of how FATCA and FBAR apply to Canadian law firm trust accounts read here.)


Are you an FI or an NFFE?

Under FATCA your firm will either be a “financial institution” (FI) or a “non-financial foreign entity” (NFFE).

All non-US entitles are classified either as FIs or NFFEs. For the purposes of FATCA, entities include legal persons and legal arrangements such as joint ventures, associations, corporations, partnerships and trusts, but not natural persons.

A FI law firm will have greater obligations under FATCA (registration, due diligence and reporting) than a NFFE law firm.

Active and passive NFFEs

NFFEs are either active or passive. An NFFE is a passive NFFE if it is not an active NFFE. FATCA is concerned with passive NFFEs, not active NFFEs because active NFFEs do not give rise to US reportable accounts.
For present purposes, an active NFFE means an NFFE where less than 50% of the NFFE’s gross income for the preceding calendar year or other reporting period is passive income (under New Zealand tax law) and less than 50% of the assets held during such period produce or are held for the production of passive income.
Passive NFFEs are of interest to the IRS (and therefore the law firm’s bank and the IRD) if they have “controlling persons” who are US citizens or tax residents. Controlling persons would be the client if an individual or, for an entity, the natural persons exercising control over the entity.

For example, In the case of a trust client, the controlling persons would include a settlor, trustees, protector, beneficiaries or class of beneficiaries and any other natural person exercising ultimate effective control over the trust.

An NFFE law firm’s “trust account relationship entity” is likely to be a passive NFFE because none of the criteria for an active NFFE is likely to apply. This will be a question of fact in each case. If clients’ funds are held on interest bearing deposit, all income is likely to be passive income and it is likely that the clients’ funds would be assets that produce or are held for the production of passive income. Likewise if moneys are not placed on interest bearing deposit then it is likely that none of the criteria for an active NFFE would apply – with the
result that the trust account relationship entity will be a passive NFFE.

Bank requirements

When a law firm notifies its bank of an election it has made and that it is not an FI, but an NFFE, and that its trust account relationship entity is a passive NFFE, its bank will request the law firm to provide a self-certification. This is to be made by the law firm or controlling persons and must state whether the controlling persons of the passive NFFE “trust account relationship entity” are US citizens or US tax residents.
Effectively the information required is whether the client is a US citizen or US tax resident, or whether the client entity has any controlling person who is a US citizen or US tax resident.

Q. Why the hunt for U.S. citizens or tax residents associated with passive “NFFEs”?

Two answers:

A 1. To find U.S. citizens who are hiding taxable income behind “entities”.

A 2. To attribute the income of the passive “NFFE” to the individual U.S. citizen or tax resident. In the case of a corporation, this would mean that the individual would pay tax on income earned by the corporation even though that income was not paid to the individual. See SubPart F income.


Part 2: “What God Hath Wrought” – Interpreting the IGA: Definitions incorporated by reference reveal the true intent of the FATCA IGA

Introduction – Updated April 4, 2016

The above tweet references a comment posted at

Thanks to Elizabeth Thompson for her continued coverage of the FATCA Chronicles.

Her article contains the following statement from the Minister of National Revenue:

“Minister Lebouthillier wants to reassure Canadians that all exchanges of information are subject to strict confidentiality rules,” reads the e-mail sent by Lebouthillier’s office.

“The CRA ensures that tax cooperation with its foreign partners is done in a manner fully consistent with privacy rights in Canada. It is important to note that Canada and the United States have a long history of exchanging tax information in a fair and responsible manner, going back to 1942.”

Whether the Minister believes what she says or not, FATCA supporters in the United States have made it clear that the use of information obtained pursuant to FATCA, should NOT to be used only for tax purposes. Since this post references, Liberal Leader Justin Trudeau’s letter to Lynne Swanson, I will reference you to a blog post written by Lynne Swanson which appears on her blog at:…

Ms. Swanson’s post references a 2012 letter written by the then U.S. Senator Carl Levin.

The letter from Senator Levin includes:

“Although FATCA is structured to address offshore tax abuse, offshore account information has significance far beyond the tax context, affecting cases involving money laundering, drug trafficking, terrorist financing, acts of corruption, financial fraud, and many other legal violations and crimes. Given the importance of offshore account disclosures, FATCA guidance and implementing rule should create account FATCA forms that are not designated as tax return information but, like FBARs, may be provided to law enforcement, regulatory, and national security communities upon request. FFIs are not, after all, U.S. taxpayers, and will not be supplying tax information on behalf of their U.S. clients; they will instead be providing information about accounts opened by U.S. persons. The U.S. Supreme Court has long held that bank account information is not inherently confidential but is subject to inspection by law enforcement and others in appropriate circumstances. Foreign account information is too important to a wide range of civil and criminal law enforcement and national security efforts to be designated as tax return information bound by Section 6103’s severe restrictions on access.”

You can read the letter yourself here:…

Ms. Swanson concludes her post by asking the obvious question:

“Why bother with a warrant or surveillance when you can simply declare someone a “US person” and FATCA them?!?”

In Part 1 I described how the FATCA IGA is being applied to a U.K. PTA. My next post will continue the discussion of “Entities”. That said, this series of posts is about how the FATCA IGA works and how it may be interpreted. This post will focus on how some of the definitions in the FATCA IGA are found NOT in the IGA but in other sources.

This post will also explain how the clear definitions  in the IGA (incorporation by reference from other sources) makes it clear that the purpose of the IGA is to extend beyond taxation. The IGA is supposedly justified as an extension to the Canada U.S. Tax Treaty which is found here.

Article XXVII of the Treaty reads as follows:

Article XXVII

Exchange of Information

1. The competent authorities of the Contracting States shall exchange such information as is relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes to which the Convention applies insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Article I (Personal Scope). Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the taxation laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the administration and enforcement in respect of, or the determination of appeals in relation to the taxes to which the Convention applies or, notwithstanding paragraph 4, in relation to taxes imposed by a political subdivision or local authority of a Contracting State that are substantially similar to the taxes covered by the Convention under Article II (Taxes Covered). Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. The competent authorities may release to an arbitration board established pursuant to paragraph 6 of Article XXVI (Mutual Agreement Procedure) such information as is necessary for carrying out the arbitration procedure; the members of the arbitration board shall be subject to the limitations on disclosure described in this Article.

To put it simply:

  1. The clear terms of the U.S. Canada Tax Treaty make it clear that the treaty is about taxation.
  2. The clear terms of the U.S. Canada IGA make it clear that it is about much more than taxation.

Yet, the Governments of both Canada and the United States claim that the IGA is justified as an extension of the tax treaty.

Introduction …

So much has been written about FATCA IGAs that few people consider the original FATCA legislation. The IGAs seem to have taken on a life of their own. As a reminder, the original FATCA legislation may be found in S. 1471 to S. 1474 of the Internal Revenue Code.


Much has written about the reason for the FATCA IGAs. Much has written about the role that the Canadian banks played in lobbying for the FATCA IGAs. Much has written about the Canadian laws that have been changed to comply with the FATCA IGAs.

Very little has been written about how to interpret the IGAs. It is assumed that the FATCA IGAs are to facilitate the intent of FATCA as expressed in S. 1471 to S. 1474 of the Internal Revenue Code. A perusal of the definitions section of the Canada U.S. FATCA IGA suggests that this may not be true.

This post is to highlight certain definitions found in the IGA that are incorporated by reference from other sources. I believe that the passage of time will demonstrate how important these “incorporations by reference” are.

Continue reading

Part 1: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – “Entity Edition”

Prologue – All non-U.S. “Entities are subject to the FATCA inquisition” …


How the U.K. IGA affects the U.K. PTA …

The online discussion referenced in the above tweet is about a U.K. PTA account. How can FATCA, (like the recent passport revocation bill which is one of the many “Revenue Offshore Provisions” used to target Americans abroad), included to finance the costs of the 2010 HIRE Act, possibly intrude into a U.K. PTA? To be clear, a U.K. PTA is similar to a U.S. PTA. Full details on a UK PTA are here. The information (maybe U.S. Treasury doesn’t believe it) is that a U.K. PTA is a charity and is described as:

A PTA is an excellent way to bring together parents, teachers and your local community to raise money and to support the school. It provides an opportunity for everyone to work together towards a common goal. All parents, teachers and school staff can get involved even if they only have a small amount of time available. Whatever type of association you decide to form, your school will benefit from the additional funds it will raise and the increased opportunity for parents to be more involved in school life.


Continue reading

Converting the RRSP to the RRIF constitutes opening a new account and #FATCA enquiry

This is a problem that I have dealt with a couple of times (at least) in the last few months. Sooner or later your contributions (no later than the year you turn 71) must cease. At that point your RRSP savings must be converted to income. A RRIF is a popular way to convert that RRSP to income.

Remember that by creating a RRIF you are opening a new account. Interestingly some banks are treating the opening of the RRIF account as grounds to subject the retiree to the complete “due diligence” FATCA inquisition. This is strange. Annex II of the FATCA IGA clearly specifies that RRIFs are NOT subject to FATCA reporting.

U.S. citizenship creates planning problems to be solved!



Distributions from Canadian RRSPs are subject to #Obamacare surtax while distributions from US plans exempt

Yes, you read right.

By way of background, Obamacare was financed in part by the 3.8% Net Investment Income Tax (“NIIT”). At the risk of oversimplification, this is a tax on passive income. What those Canadians who are also “U.S. persons” need to know includes:

1. The NIIT is an instance of pure double taxation. It is believed by most practitioners that this tax CANNOT be offset by the usual foreign tax credit rules. (But, then again – maybe the NIIT is really a Social Security Tax and therefore NOT payable under the Canada U.S. Social Security Totalization Agreement.)

2. Assuming that the NIIT is NOT a “Social Security Tax”: As is described in the following article by Toronto tax lawyer Sunita Dooby, distributions from Canadian RRSPs and RRIFs ARE subject to the NIIT. That said, comparable U.S. plans (401K and IRAs) are NOT subject to this tax.

In summary Ms. Doobay notes that:

Qualified pension plans are NIIT­ exempt under Code section 1411(c) (5), which exempts any distribution from a qualified plan and arrangement set out in Code section 401(a). RRSPs and RRIFs are not qualified plans or arrangements for these purposes.

Ms. Doobay’s article is referenced in the above tweet.

So, what does this mean? Well, Canadians are required to pay for the Health Care of Americans when similarly situated Americans are not required to pay for their health care.

While I’m at it, here is another interesting article from Ms. Doobay referenced in the following tweet:

Talk about freeloading and extracting capital from other nations …