August 31, 2012 Michael Danilack Deputy Commissioner (International) Internal Revenue Service Caryl S. Grant Margaret C. Martin National Public Liaison Internal Revenue Service Information Reporting Program Advisory Committee (IRPAC) SUBMITTED VIA EMAIL Re: Form 3520: Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts ( Form 3520 ) and Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner ( Form 3520-A ) (collectively, the Forms ) This letter has been prepared jointly by Investment Industry Association of Canada (IIAC), the Investment Funds Institute of Canada (IFIC) and the Canadian Bankers Association (CBA) (descriptions of each association are included in Attachment A). It has recently been brought to our attention that many of our members (financial institutions (FIs) in Canada) have been receiving a large volume of apparently automatically generated correspondence from the IRS with respect to the Forms. This correspondence generally seeks additional information that has been omitted from the Forms, requests other clarifications or corrections, provides notification that the Forms have been filed late, or asks that the foreign trust complete an application for an Employer Identification Number (EIN). Unfortunately, in the vast majority of instances, the Forms have been filed by a client (not by the FI), and the correspondence from the IRS usually contains only a Taxpayer Identification Number (TIN), and/or an IRS reference number, rather than a client name or other identifying information that would allow the FI to forward the correspondence to the filer. In many cases, it 1
is not even clear whether or not the filer is in fact a client of the FI that has received the correspondence. Large Canadian FIs have millions of accounts, some of which are held by U.S. citizens who live or have lived in Canada, who are seeking to comply with their U.S. tax obligations. Many U.S. clients hold investment accounts with Canadian FIs that may be considered to be grantor trusts for U.S. tax purposes, but which are offered by the FIs simply as investment accounts that may be tax-exempt as registered plans under Canadian law, and for which little or no tax reporting may be required in Canada, such as RRSPs, RRIFs, TFSAs, RESPs and others (please see Attachment B for a description of each of these types of accounts). Since the Canadian FIs do not provide information concerning U.S. tax laws to their clients, certain clients may be unaware of the existence of some of these U.S. tax obligations or how to fully comply with them. Form 3520-A is intended to be filed by a foreign trustee. However, the tax-exempt accounts referred to above are generally not provided with the extensive account management services normally associated with a trust account. Rather, they are treated simply as investment accounts, with trustee involvement only at a very high level with respect to a large aggregation of investment accounts that have been registered with the Canada Revenue Agency. Furthermore, Canadian FIs do not account for such investment accounts in U.S. currency or according to U.S. generally accepted accounting principles. Consequently, Canadian FIs cannot assist U.S. clients by completing or filing Form 3520-A. Nor can Canadian FIs assist U.S. clients with their own responsibilities to complete and file Form 3520. When U.S. persons request such reporting or assistance with respect to registered plan investment accounts, the general industry practice is to suggest that clients follow the directions in the Instructions to Form 3520, and complete a substitute Form 3520-A to the best of their ability. We surmise that the automatically generated letters from the IRS are created when the Forms are completed incorrectly or are deficient in some respect, or when no EIN has been applied for by the foreign trustee. However, instead of sending the requests directly to the filer (i.e. the account holder), they are instead being sent to the FI named on the form and as mentioned earlier, there is often no way for the FI to identify the client from the information provided. We are concerned that the filers in question may assume that they have successfully fulfilled their filing obligations, and will remain unaware of any deficiencies, leading potentially to future penalty assessments. Recommendations for Relief: 1. With respect to all the Canadian registered investment account types listed in Attachment B, in order to ensure that IRS correspondence reaches the U.S. person who filed the Forms so that deficiencies may be addressed, we strongly recommend that IRS contact the U.S. person directly, either using the contact information provided on Form 3520 or on the Foreign Grantor Trust Owner Statement on page 3 of the substitute Form 3520-A, or by utilizing other information at the IRS disposal. 2. In addition to Recommendation 1, we ask that IRS and Treasury recognize that Canadian FIs are unable to become involved with Form 3520-A reporting requirements with respect to any of the Canadian registered investment account types listed in Appendix B, due to the sheer number of such accounts, the absence of suitable U.S. accounting or record-keeping, and the low or nil fees charged to clients on these investment accounts, which makes it impossible for a Canadian FI to hire or enter into a binding contract with a U.S. agent to complete any U.S.- specific accounting and filing on its behalf. 2
Exceptions to Form 3520 and 3520-A reporting requirements under Section 6048(b) of the Code have already been provided for Canadian RRSPs and RRIFs where the U.S. citizen or resident alien interest holder is eligible to file Form 8891 (U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans). As described in IRS Notice 2003-75, these exceptions were intended to provide a simplified reporting regime for these types of savings plans in Canada. We would also appreciate similar exceptions for all such plans (not just RRSPs and RRIFs) from Form 3520-A reporting requirements, as well as the replacement of Form 3520 requirements with a simplified form that does not anticipate Form 3520-A reporting. We would be happy to discuss the foregoing recommendations with you at your convenience. Please contact Andrea Taylor at ataylor@iiac.ca or 416-687-5476 for further information. Sincerely, James Carman Senior Policy Advisor, Taxation Investment Funds Institute of Canada Andrea Taylor Director Investment Industry Association of Canada Darren Hannah Director, Banking Operations Canadian Bankers Association cc. John Sweeney, Office of the Associate Chief Counsel (International), IRS Rosemary Sereti, Industry Director (Financial Services), IRS 3
ATTACHMENT A Participating Associations Canadian Bankers Association The Canadian Bankers Association (CBA) works on behalf of 53 domestic banks, foreign bank subsidiaries and foreign bank branches operating in Canada and their 267,000 employees. The CBA advocates for effective public policies that contribute to a sound, successful banking system that benefits Canadians and Canada's economy. The Association also promotes financial literacy to help Canadians make informed financial decisions and works with banks and law enforcement to help protect customers against financial crime and promote fraud awareness. Investment Funds Institute of Canada The Investment Funds Institute of Canada is the national association of the Canadian mutual funds industry. Our members include fund managers, distributors and industry service organizations (including accounting, legal and other service providers). The Canadian mutual fund industry is comprised of investment fund managers that sponsor, manage and administer funds, and dealer and broker firms that distribute funds' securities. As of May 2012, the mutual fund industry in Canada represented about CAD $789 billion in total assets under management in highly-regulated, publicly offered mutual funds. Investment Industry Association of Canada The Investment Industry Association of Canada (IIAC) is a member-based professional association with over 180 members representing 95% of IIROC registered organizations (IIROC is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada). IIAC advances the growth and development of the Canadian investment industry, acting as a strong, proactive voice to represent the interests of our members and the investing public. 4
ATTACHMENT B List of Registered Investment Account Types in Canada 1. Registered Retirement Savings Plan (RRSP) Personal/individual retirement savings vehicle. Must be registered with CRA. Limits on allowable contributions, based on earned income from employment and selfemployment and comprehensive retirement savings system limits. Maximum contribution to an RRSP is $22,000 for 2010: contribution to an RRSP will not be allowed to the extent of contributions to other registered retirement plans under the comprehensive retirement savings system limits. Contributions are tax-deductible. All contributions must be reported to CRA. No reporting of deferred income earned. No limits/restrictions on withdrawals. All withdrawals are fully taxed in year of withdrawal. Plan must be converted to retirement income by the end of the calendar year in which the individual attains age 71. Withdrawals by a resident are reported to CRA and holder on form T4RSP includes full amount of withdrawal and amount withheld if a lump-sum payment. Withdrawals by a non-resident are reported to CRA and holder on form NR4 includes full amount of withdrawal and amount withheld. 2. Registered Retirement Income Fund (RRIF) Retirement income vehicle that must pay out a minimum amount each year. No maximum limit on amount of withdrawal. Must be registered with the CRA. Restricted to transfers from other registered retirement plans (most generally RRSPs, but transfers from RPPs and other registered retirement plans are allowed) no new money contributions allowed. 5
No reporting of deferred income earned. Minimum annual withdrawal based on age and fund balance at beginning of year. No maximums placed on withdrawals. All withdrawals are fully taxed in year of withdrawal. Withdrawals by a resident are reported to CRA and holder on form T4RIF includes full amount withdrawn and any amount withheld (withholding required where withdrawals exceed the prescribed minimum withdrawal). Withdrawals by a non-resident are reported to CRA and holder on form NR4 includes full amount of withdrawal and amount withheld (withholding required on all withdrawals). 3. Deferred Profit Sharing Plan (DPSP) Trusteed employer-sponsored savings plan. Must be registered with CRA. Employer contributions made by reference to profits and deductible to employer. Annual limits on the amount contributed on behalf of each employee, based on employee earnings and comprehensive retirement savings system limits. Maximum contribution to a DPSP is $11,225 for 2010: contribution to a DPSP will reduce available RPP and RRSP contribution room under the comprehensive retirement savings system limits. No employee contributions allowed. No reporting of deferred income earned. All withdrawals are fully taxed in year of payment Withdrawals/pension income received by residents are reported to CRA and resident on form T4A includes full amount of withdrawal in the year and tax amount withheld. Withdrawals/pension income received by non-residents are reported to CRA and nonresident on form NR4 includes full amount of withdrawal and amount withheld. 4. Registered Education Savings Plan (RESP) 6
Plan registered with CRA to promote savings for post-secondary education. Some government grants also available to plan. Contributions are not tax deductible. Lifetime limit of $50,000 per beneficiary contributions only allowed until age 21 of beneficiary. Government grants to a maximum of $7,200 may also be available where beneficiary is Canadian resident. Earnings grow tax-deferred within plan. Limited deferral period. Original contributions not taxable; amounts representing growth in plan are taxed upon withdrawal. Withdrawals will be taxable in the hands of the student who is enrolled in a qualifying post-secondary program. Reported to the student on Form T4A. If student does not attend a qualifying post-secondary program, plan must be collapsed and growth can be returned to contributor where it will be taxed as normal income with a 20% additional tax imposed. 5. Registered Disability Savings Plan (RDSP) Savings plan registered with CRA. The plan is intended for parents and others to save for the long-term financial security of a disabled individual. Contributions are not tax-deductible. Beneficiary must be Canadian resident in year of contribution and qualify for the disability tax credit (i.e. loss of activities of daily living). Contributions permitted until the end of the year in which the beneficiary attains age 59. No annual contribution limit, but $200,000 lifetime limit in respect of a particular individual. Income-tested government matching contributions excluded from taxable income in year of contribution. 7
No reporting of deferred income earned. Payments must begin by the end of the year in which the beneficiary attains age 60. Maximum withdrawals based on age and life expectancy. Government matching contributions and investment income earned in the plan included in income for tax purposes when paid to the beneficiary. Payments to Canadian residents reported on T4A. 6. Tax-Free Savings Account (TFSA) TFSAs are savings plans registered with CRA. They are designed to encourage savings for future expenses, including retirement. They are analogous to Roth IRAs in many respects. They are targeted at lower-income individuals to whom benefits payable under retirement plans registered with the CRA might reduce publicly funded retirement benefits otherwise available to those individuals. Beginning in 2009, Canadian residents who are 18 years of age or older may establish TFSAs. TFSAs are accorded special tax treatment. Contributions to the plan are not deductible, but payments from the plan are not subject to Canadian tax. Contributions are not tax-deductible. All contributions are reported electronically to CRA. Must be Canadian resident in year of contribution. Annual contribution limit is $5,000 (subject to indexing based on changes to a consumer price index; unused contribution limits roll over to succeeding years). Account balances are reported electronically to CRA. All withdrawals are reported electronically to CRA. 8