Category Archives: Little Red FATCA Book

#FATCA Inquisition applied to Canadian residents applying for life insurance in Canada

Sad but true. It’s quite understandable that from a “U.S. Worldview” that a life insurance policy is nothing but a “sacred instrument of tax deferral” (and therefore of tax evasion). U.S. citizens are the most highly regulated people in the world. As such it is no surprise that the possible purchase of life insurance could trigger FATCA scrutiny. (In that “Shining city on the hill” those who purchase life insurance are clearly “up to no good” – “no good at all”!)

Thank of it! A Canadian citizen who resides in Canada is now being asked the most important biographical question of the 21st century:

“Where were you born? Are you or have you ever been an American citizen?”

(Given the dangers of interacting with U.S. citizens, one’s citizenship status should be required information on every profile …)

So, what led up to this post …

Last night (fear of U.S. citizenship takes place 24 hours a day) I received an email from a man in his seventies. In order to provide for his wife (should he die) he was in the process of applying for a life insurance policy. Now (if it matters), I am not entirely clear on what kind of life insurance policy he was seeking (and unfortunately neither was he). (The policy very likely had a “cash value” component.) That said, shouldn’t a normal person be allowed to apply for a life insurance policy without being accused of being – the only “carbon life form” not deserving of human rights – an American?

The question – “Where were you born?” is interesting. Some overpaid lawyer in the company’s legal department obviously thought that a “U.S. place of birth” was proof positive of “USness”. Well, no. It’s proof positive that somebody was born a U.S. citizen. The U.S. has always used “citizenship as a weapon”. In fact, almost all of the law of U.S. citizenship is a study of the U.S. Government forcibly stripping people of their citizenship – AKA the law of relinquishment. But, I digress … Bottom line: it was and continues to be possible for people born in the United States to relinquish U.S. citizenship.

In this case, (say it isn’t so), this poor guy had actually been born in that great Museum to freedom and opposition to “taxation without representation” – the state of Massachusetts. You know, of “Boston Tea Party” fame and assorted other historical shrines to liberty. Well fortunately, the poor guy had overcome his disabilities triggered by birth (being born American) and had (many years ago) voluntarily naturalized as a Canadian citizen with the full intent of relinquishing U.S. citizenship. Of course he did NOT follow up this liberating event by receiving a CLN (who knew they existed at that time). He therefore, proudly “self-certified” the fact of his “non-USness” and presumably will avoid becoming a FATCA victim.

In any case, I thought it might be important to make people aware, that even the simple act of applying for a life insurance policy can now subject people to the FATCA inquisition. I have decided to NOT identify the company in question. But, I promise you that it is a rather large (is there a small one) Canadian life insurance company. You would know them. And of course:

“To know, know, know them … is to avoid, avoid, avoid them” – as the song goes!

(All Canadian insurance companies presumably operate in the same way.)

Casualty Insurance and the American abroad …

Speaking of insurance in general. Let me remind you Americans living outside the United States that:

1. Although you are allowed to purchase a home or automobile insurance policy from a non-U.S. company that;

2. You are subject to a special excise tax for buying that policy.

You will find this in Section 4371 of the Internal Revenue Code which talks about “Policies issued by FOREIGN insurers” and is in the broader section on “Miscellaneous excise taxes“.


Spread the word! You can now be FATCAed by attempting to provide for your family by applying for life insurance. Oh and by the wife. Policies with a cash value are likely PFICs! To learn more about the problems of “PFICs and Americans abroad” read here.

John Richardson

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 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.


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