Part 8: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – The Canadian “not for profit” and other FATCA Free Entities/Zones

FATCA is about withholding and reporting. The basic principle is that a financial institution will:

1. Withhold payments unless the “RIR” (“Review, Identify and Report”) rule has been satisfied; and

2. The individual or entity has “reported” his or her possible U.S. status.

It’s that simple. That said, there are some “entities” that are NOT required to report. It is possible that a Canadian “not for profit” (that meets certain requirements) may be exempted from the burdens of FATCA compliance.

In other words, it is possible that the world may still include (other than Algonquin Park) certain “FATCA Free Zones”.

This issue was discussed in the following memo from KPMG.

KPMG fatca-and-not-for-profit-entities-v2

The KPMG memo includes:

FATCA Classification

Both the FATCA Regulations and the IGA describe various entities whose obligations under FATCA are reduced or eliminated.

A Canadian not-for-profit entity would generally be classified as one of the following “Excepted NFFEs” under the FATCA Regulations:

1. A “Section 501(c) Entity,” which includes such things as charitable organizations, corporations holding title to property for exempt organizations, civic leagues, social welfare organizations, certain associations of employees, labour, agricultural and horticultural organizations, business leagues, chambers of commerce, real estate boards, social and recreational clubs and certain credit unions;

2. A Canadian non-profit organization (NPO; as that term is defined in the FATCA Regulations) that is established and maintained in Canada exclusively for educational, charitable, scientific, artistic, cultural or religious purposes if:

a.The NPO is exempt from income tax in Canada;

b. The NPO has no shareholders or members with a proprietary or beneficial interest in its income
or assets;

c. With certain limited exceptions, applicable Canadian law or relevant formation documents of the NPO do not permit its income or assets to be distributed to, or applied for the benefit of, a private person or a non-charitable entity; and

d. Applicable Canadian law or formation documents generally require all assets of the NPO to be distributed to another NPO or
the Canadian government on its liquidation or dissolution.

3. An active NFFE. An NFFE is active if less than 50 percent of its gross income for the preceding taxable year (calendar or fiscal) is passive and less than 50 percent of its assets produce, or are held for the production of, passive income (based
on a weighted average percentage of such assets tested quarterly). For this purpose, passive income includes dividends, interest, rents, royalties, and similar amounts, as well as net gains from sales of assets that give rise to passive income.

….

FATCA Obligations

If it qualifies as an Excepted NFFE, a not-for-profit entity may avoid FATCA disclosure obligations (and penal withholding) by providing payors of US-source withholdable payments with a certification of its status as such.

Not-for-profit entities should be prepared to certify their classification on updated documentation (i.e., Form W-8BEN-E)
when requested by a US withholdingagent. For these purposes, the definitions in the Regulations continue to be controlling.

Conclusion:

Yes, it’s true there are “FATCA Free Zones” left in the world. Who could use a “not for profit” for tax evasion?  Certain “non-profits” (like Algonquin Park) may be a “place of refuge” for those “U.S. Persons in our midst” (only kidding, it’s vital that ALL “US Persons” be identified).

Thank God for Canadian “not for profits”!