Part 4: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Imposing FATCA on the world in two steps

In previous posts I have described how the FATCA Inquisition has been used to determine whether the beneficial owners of various associations (PTA) small businesses (New Zealand law firms) are U.S. persons. I note that the great American FATCA Inquisition is being used to target the world. To put it simply:

All of the world is required to:

  1. Review their affairs for “U.S. Persons”
  2. Identify those “U.S. Persons” in their midst
  3. Report those “U.S. Persons” to the IRS.

Yes, the “RIR” objective really is that simple.

This post is somewhat more technical. In this post I am going to explain exactly how and why the Canada U.S. FATCA IGA requires that “U.S. Persons” be subjected to the “RIR Inquisition”. I will then show how the principle applies to U.S. “smoking them out” methodology which is the purpose of the IGA. But, first things first.

Implementing the objective – A two step process

Step 1 – Signing the IGA: Establishing the terms of the relationship between the Government of Canada and the Government of the United States

The IGA provided the legal framework and objectives for the U.S. imposition of FATCA on Canada. It was signed on February 5, 2014. Under the IGA Canada agreed to assist the United States in its hunt for “U.S. persons”. The IGA is a broad agreement which provides the general rules for the relationship between Canada and the United States. A key provision of the IGA is that Canada will change it’s domestic laws to make the hunt for “U.S. persons” (as defined from time to time by the U.S. Internal Revenue Code) mandatory.

It is the IGA that provides the framework for “FATCA Hunt”. Those who have not read the Canada U.S. FATCA IGA can read it here.

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Step 2 – Establishing the terms of the relationship between the Government of Canada and it’s financial institutions – Canada changes it domestic laws to force Canadian banks to hunt for those with a U.S. place of birth

In May 2014 the Government of Stephen Harper added Part VIII to the Income Tax Act of Canada. In general terms, Part VIII of the Income Tax Act was to:

  1. Require Canadian Financial Institutions to search for both “Individual” and “Entity” U.S. accounts
  2. Require individuals and entities to disclose the “U.S.ness” of accounts to the Financial Institutions
  3. Authorize Canadian Financial Institutions to disclose “U.S. accounts” to the CRA
  4. Impose penalties on “Individuals” and “Entities” who refused to disclose the information requested by the financial institution

For example S. 162(6) of Canada’s Income tax reads:

Failure to provide identification number

(6) Every person or partnership who fails to provide on request their Social Insurance Number, their business number or their U.S. federal taxpayer identifying number to a person required under this Act or a regulation to make an information return requiring the number is liable to a penalty of $100 for each such failure, unless

  • (a) an application for the assignment of the number is made within 15 days (or, in the case of a U.S. federal taxpayer identifying number, 90 days) after the request was received; and

  • (b) the number is provided to the person who requested the number within 15 days after the person or partnership received it

To summarize – Part VIII of Canada’s Income Tax Act:

  • requires the banks to hunt for “Individuals” and “Entities” that are or are owned by “U.S. persons”; and
  • requires the “Individuals” and “Entities” to be captured. The “terms of their capture” require them to:

A. Answer all questions that are part of the “FATCA Inquisition”

B. Answer all questions truthfully

C. Either ADMIT to being a “U.S. person” or DENY being a “U.S. person”.

Once again, I remind you that the fact that someone is a Canadian citizen residing in Canada is NOT a defense to the accusation of being a “U.S. person.

How does Canada comply with Part VIII of the Income Tax Act of Canada? What are the “made in Canada” rules for  the FATCA Inquisition?

Paragraph 2 of Article 1 of the Canada U.S. FATCA IGA allows (in general) for each country to interpret various provisions of the IGA. To be specific it reads:

2. Any term not otherwise defined in this Agreement shall, unless the context otherwise requires or the Competent Authorities agree to a common meaning (as permitted by domestic law), have the meaning that it has at that time under the law of the Party applying this Agreement, any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party.

The Canada Revenue Agency created its own set of guidelines for precisely how the financial institutions are to implement the broader objectives of FATCA Hunt. Those guidelines are here.

FATCA Canada Guidance gdnc-eng

Never forget that the guidelines are made pursuant to the broad terms of the IGA. Canada’s domestic laws that are to assist the United States with the implementation of the IGA.

Summary: Understanding FATCA …

When in doubt about how to interpret the Canada’s domestic laws, one should look to the provisions of the IGA. As a reminder, here is the Canada U.S. IGA which was signed on February 5, 2014.

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