FIs CRA Gives Details on CRS Approach for 2017

FIs CRA Gives Details on CRS Approach for 2017 April 6, 2017 No. 2017-18 In new guidance, the Canada Revenue Agency (CRA) clarifies the upcoming reporting rules that require Canadian financial institutions to provide information on accounts held by residents of jurisdictions outside of Canada and the United States. While the detailed account information must be provided to the CRA beginning in 2018, affected financial institutions must have procedures in place to identify this information by July 1, 2017. This guidance, which applies to Canadian entities that will be subject to the Common Reporting Standard (CRS), provides much-needed clarity in some areas, and addresses many of the concerns raised by a number of industry groups. Specifically, the guidance extends relief for client name accounts held by investment funds and dealers to client name accounts held by custodians and investment managers. Further, the guidance sets parameters under which financial institutions can rely on documentation collected by their agents to reduce their own documentation procedures, and reduces the number of controlling persons that must be reported for collective investment vehicles established as trusts in countries that are not participating jurisdictions for CRS purposes. However, some additional clarification would be welcome in certain areas, including whether reloadable payment cards can be treated as exempt accounts and how broadly to interpret certain comments made regarding using some U.S.-based Foreign Account Tax Compliance Act (FATCA) and CRS definitions interchangeably. Background The CRA signed the international Multilateral Competent Authority Agreement in June 2015 to activate the automatic exchange of financial information between tax jurisdictions beginning in 2018, based on a standard developed by the OECD. Canada is one of more than 100 countries around the world that have committed to implement Page 1 of 13

the CRS, and many have begun enacting legislation in their jurisdictions. These measures are a significant step towards a globally coordinated approach to disclosure of income earned by individuals and organizations and are drawn heavily from the intergovernmental approach to implementing the FATCA. To make the exchange of information possible, financial institutions, as defined under domestic and international law, must report information according to the CRS on accounts held by foreign-resident individuals and entities such as certain corporations, trusts and foundations. Canada s government passed legislation on December 15, 2016 that comes into force on July 1, 2017 to implement this reporting requirement, by adding sections 270 to 281 as Part XIX of the Income Tax Act (Canada) (Act). Financial institutions required to report under the legislation will need to have procedures in place beginning July 1, 2017 to identify accounts held by tax residents of various foreign jurisdictions and report the required information to the CRA beginning in 2018. Canada s CRS measures include concepts that are largely drawn from FATCA, with a similar focus on financial accounts and the financial institutions that maintain them. As a result, Canadian financial institutions may be able to leverage certain aspects of the systems they currently have in place to meet the Canadian rules that require them to comply with the Canadian FATCA rules in Part XVIII of the Act. Despite their similarities, however, there are key differences between the two regimes. For more details see TaxNewsFlash-Canada 2016-22, FIs - Get Ready for New Common Reporting Standard Rules and TaxNewsFlash-Canada 2016-40, Canadian FIs Start Collecting Non-Resident Account Details. CRA s new guidance The new CRA guidance consists of 145 pages and 12 chapters. In the introduction to the guidance in Chapter 1, the CRA discusses the purpose and scope of the guidance and explains that it will highlight different approaches between CRS and FATCA throughout. The CRA also notes that the guidance will be updated where appropriate to ensure proper alignment with the international consensus that can emerge on CRS. It further states that, in the event of any variation between the OECD Commentaries on the CRS, the OECD FAQ and guidance, the guidance prevails as the CRA s view. The CRA also provides a list of key terms that are defined in the CRS legislation as well as a list of acronyms in Chapter 2. Financial institutions with reporting obligations in Canada Chapter 3 The CRA guidance describes the types of entities that are considered financial institutions under the CRS rules (i.e., depository and custodial institutions, investment entities, and specified insurance companies). The guidance notes that, unlike FATCA, CRS does not Page 2 of 13

contain the concepts of exempt beneficial owners and deemed-compliant financial institutions. Consequently, certain Canadian financial institutions that do not have obligations under FATCA will have obligations under CRS. The guidance also clarifies that an entity can be more than one type of financial institution, and notes that there is a three-step process to determine whether an entity has a potential reporting obligation in Canada under the implementing legislation. Specifically, the entity must: Determine whether it is a financial institution for the purposes of Part XIX Determine if the financial institution is a Canadian financial institution, and Determine if the Canadian financial institution is a reporting financial institution. In considering which entities are financial institutions, the CRA provides specific guidance to clarify the treatment of non-profit organizations, partnerships, and entities providing investment advice. Registered pension plans will also find the guidance s comments on self-certification useful. The CRS rules differ from the Canadian FATCA rules in a number of ways. For example, the guidance provides that charities, religious organizations and other types of non-profit organizations can be treated differently for the purposes of FATCA and CRS. Under CRS, these entities can be active non-financial entities (NFE) or financial institutions, while for the purposes of FATCA, these entities are non-reporting financial institutions. As well, the CRS rules do not provide an exemption for financial institutions with a local client base. As a result, certain financial institutions that benefit from this FATCA exemption will not be exempt from CRS and will need to design a CRS compliance program. The guidance also notes that a Canadian financial institution can be organized as a partnership and that, if the control and management of a partnership s business takes place in Canada, the partnership is considered resident in Canada for purposes of CRS. This is helpful as partnerships are generally not considered entities that have a residence status and, without guidance, different practices could arise to determine whether partnerships are Canadian financial institutions. The CRA has also adopted certain relieving comments from the OECD Commentary to address situations including where an entity that provides investment advice could be considered a financial institution. Consistent with the OECD Commentary, the guidance provides that such an entity would not be classified as a financial institution in certain situations. Specifically, it would not be classified as a financial institution solely because Page 3 of 13

it carries on a business of providing customers with non-binding investment advice that does not involve any form of portfolio management or investing, administering or managing of financial assets or money on behalf of other persons. The CRS legislation prescribes certain registered plans not to be reporting financial institutions even though many of these plans would not be considered to meet the definition of a Canadian financial institution. The guidance provides that, when completing a self-certification form to provide its entity classification to a reporting financial institution, an entity that is prescribed as a non-reporting financial institution can classify itself as a financial institution even if it is not a Canadian financial institution. This should be helpful to certain registered plans, such as RRSPs, RPPs, and DPSPs, that are prescribed to be non-reporting Canadian financial institutions. By following the guidance, these entities should not be considered to be passive NFEs and therefore reporting financial institutions will not have to perform due diligence on these entities or to obtain information about their controlling persons. Entity classifications Chapter 4 The guidance describes key terms and classifications under CRS, including the various types of NFEs, financial assets and related entities. The distinction between an active NFE and a passive NFE is important as financial institutions are required to collect additional information regarding passive NFEs. Specifically, the guidance notes that the term, passive income, which is relevant for determining whether an entity is an active NFE, is not defined in the Act and that the term should be interpreted consistently with the OECD Commentary. The CRA further clarifies that passive income will not include, in the case of a NFE that regularly acts as a dealer in financial assets, any income from any transaction entered into in the ordinary course of such dealer's business. In addition, income received on assets used as capital in an insurance business is treated as active rather than passive income. Multiple financial institution structures Chapter 5 The guidance discusses investment funds and their dealers as well as investment managers and custodial institutions, including the treatment of accounts held in nominee versus client name. The guidance also considers the relationship between custodial institutions, as well as carrying brokers and introducing brokers under various services arrangements, and whether an account is considered maintained by each party. The CRA discusses its due diligence expectations for dealers and investment managers in this chapter of the guidance. Page 4 of 13

In the guidance, the CRA confirms that in most instances it expects dealers to perform CRS due diligence and funds to perform CRS reporting to avoid duplicative efforts that would otherwise arise for fund investments held in client-name. Even so, the guidance allows flexibility for dealers and funds to co-ordinate their efforts to best suit each relationship. It would be a best practice to have written agreements between dealers and funds, even though the guidance does not appear to require this and limits its discussion to the requirements to be satisfied when no written agreement exists. The guidance also addresses relationships between investment managers (e.g.,advisors and portfolio managers) and custodial institutions, an area that is also now addressed in the latest update to the FATCA guidance. The guidance suggests that the CRA expects that, typically, investment managers would perform CRS due diligence and communicate account classification to custodial institutions, and custodial institutions would report under CRS. The CRA also notes that it understands that institutional account holders often engage the services of an investment manager and custodial institutions independently. In this case, both investment managers and custodial institutions generally have an ongoing relationship with the institutional clients and both complete anti-money laundering and know our client (AML/KYC) procedures separately. In such a situation, the CRA will not treat the investment manager as maintaining the account as long as the investment managers have written confirmation from the custodian that the custodian has, and will comply with, Part XIX CRS obligations in respect of the institutional account holder. This should reduce the duplicative efforts that would otherwise arise. Financial accounts Chapter 6 The guidance describes the types of accounts that are considered financial accounts under CRS, including depository and custodial accounts, cash value insurance and annuity contracts, and equity or debt interests in certain entities. The guidance also describes the types of accounts that are not considered financial accounts and notes that, although the definition of financial account in CRS differs from the definition of financial account in FATCA, the results are intended to be the same. Therefore, a financial institution can use the definition of financial account in CRS for the purposes of FATCA. The CRS guidance should further clarify the appropriate definition of cash value insurance contracts (compared to FATCA) and should address whether reloadable payment cards may be treated differently than credit cards. The guidance further clarifies that the definition of a cash value insurance contract is considered to have the same meaning under FATCA and CRS. We understand that this comment is meant to address concerns that certain insurance contracts, such as critical illness insurance, might be considered to have a cash value for CRS purposes even Page 5 of 13

though they were not considered to have a cash value for FATCA purposes. Clarification may be needed to determine how broadly the relief can be applied. Unlike the FATCA definition, the CRS definition of a cash value insurance contract does not require that the contract s cash surrender or termination value, or the amount the policyholder can borrow under the contract, be greater than US$50,000. As CRS has generally removed threshold exemptions, it is unlikely that the FATCA definition would be acceptable for CRS purposes in this instance. Depository accounts include reloadable payments cards. However, it appears that reloadable payments cards may be treated differently than credit cards. Depository accounts meeting certain requirements, including having policies and procedures in place so that the total customer overpayment never exceeds US$50,000 for a period exceeding 60 days, can be treated as excluded accounts. The guidance explicitly uses credit cards and revolving credit facilities as examples. Therefore, reloadable payment cards do not appear to be excluded accounts. The guidance also clarifies that a financial account held by a U.S. entity that is a passive NFE is a reportable account under CRS if one or more controlling persons reside in one or more reportable jurisdictions. This is the case even if it is also a reportable account under FATCA. General requirements Chapter 7 The guidance provides a discussion of the general due diligence requirements of reporting Canadian financial institutions under CRS, including discussions and examples related to self-certification, account aggregation and currency conversion. The CRA also provides guidance regarding necessary record keeping and retention. The guidance notes that, although financial institutions may rely on service providers to fulfill their due diligence and reporting obligations, those obligations remain the financial institution s responsibility. The due diligence chapter provides welcome guidance that relieves the administrative burden of documentation. Specifically, it provides that a financial institution can rely on an agent s documentation that a combined self-certification form can be used for both CRS and FATCA, and that Canadian currency can be treated at par with the U.S. dollar in some cases. The guidance provides that a financial institution may rely on documentation collected by the financial institution s agent (including an insurance advisor, a banking consultant and a fund advisor for mutual funds, pooled funds, hedge funds, or a private equity group). Where the agent retains the documentation as part of an information system maintained on behalf of multiple financial institutions, an account will only be a new account if it is a new account to the agent (e.g., a fund manager), regardless of whether Page 6 of 13

it is new to the financial institution (e.g., a fund managed by the fund manager). This is a welcome clarification for financial institutions and should reduce duplication of account opening procedures. The CRA confirms that combined self-certification forms can be used for both CRS and FATCA. Financial institutions are not required to use the forms developed by the CRA. However, when financial institutions develop their own forms, they must ensure that their forms appropriately capture all the proper attestations and information required to comply with the CRS legislation (and FATCA in cases where the self-certification forms are combined). Similar to the administrative position provided for FATCA, the guidance provides that financial institutions can treat the Canadian dollar at par with the U.S. dollar for years during which the Canadian dollar was, at all times, valued at less than the U.S. dollar. Based on recent exchange rates this approach results in more pre-existing entity accounts being reviewed. A financial institution is not required to review a pre-existing entity account with an aggregate account balance or value that does not exceed US$250,000 on June 30, 2017 until such balance or value exceeds US$250,000 as of the last day of any subsequent year. As the option to treat the Canadian dollar at par with the U.S. dollar is only available if the Canadian dollar was, at all times, valued at less than the U.S. dollar, this may result in more accounts exceeding the US$250,000 threshold exemption. On the other hand, financial institutions that do not rely on the threshold exemption for pre-existing entity accounts will be reviewing all entity accounts regardless of the account balance. Pre-existing individual accounts Chapter 8 The guidance provides a detailed discussion of the due diligence requirements that reporting Canadian financial institutions must satisfy related to pre-existing individual accounts in order to determine whether the account holder is resident in a country other than Canada or the US and therefore reportable. The guidance includes discussions and examples related to, among other things: Cash value insurance contracts and annuity contracts Lower value accounts High value accounts Acceptable documentary evidence Timing of reviews. Page 7 of 13

The guidance provides that the residence address test can be applied when a financial institution has in its records the account holder's current residence address that has been recorded based on documentary evidence. In this case, the financial institution can treat the individual account holder as a resident of the jurisdiction in which the address is located for tax purposes. While this alternate approach is helpful, financial institutions that follow this approach will need to have procedures in place to confirm that the current residence address is supported by documentary evidence. Where the residence address test cannot be used, financial institutions will be required to review electronically searchable data for certain criteria that may indicate that the individual is a reportable person. The guidance also notes that determining tax residency can be complex for account holders but confirms that financial institutions are not expected to provide information on all aspects of tax residency to their account holders. In addition, the guidance clarifies that there is no requirement for a financial institution to report a foreign Taxpayer Identification Number (TIN) or a date of birth for a pre-existing individual account holder who resides outside of Canada until the end of the second calendar year following the year in which such account is identified as a reportable account. However, the CRA says that having account holders furnish their TINs and date of birth when they self-certify is desirable. The guidance also clarifies that financial institutions can apply the due diligence procedures for new accounts to pre-existing accounts, and the due diligence procedures for high value accounts to lower value accounts. If a financial institution decides to apply the new account procedures, the rules that otherwise apply to pre-existing accounts will continue to apply. For example, the financial institution can still rely on the exception for reporting a foreign TIN or date of birth if it is not in its records and is not otherwise required to be collected under domestic law. New individual accounts Chapter 9 The guidance also considers issues specific to new accounts, including the requirements related to new accounts of pre-existing account holders, and differing forms of selfcertification depending on the way in which a new account is opened (i.e., in person, online or by phone). In considering new accounts, the guidance clarifies the treatment of new accounts opened as well as the determination of residence for purposes of these rules. Page 8 of 13

According to the guidance, financial institutions do not need to re-document the account holder for new accounts opened by pre-existing individual account holders under CRS, as long as certain requirements are met. One requirement is that the due diligence procedures must have been carried out or are in the process of being carried out on the pre-existing individual account holder. This suggests that the financial institution should retain documentary evidence of some action to benefit from this rule. The guidance notes that, generally, an individual will only have one jurisdiction of residence for Canadian tax purposes. It also notes that, where an individual is resident for tax purposes in two or more countries, tiebreaker rules in various tax conventions can be used to determine which country should take precedence. The guidance also clarifies that financial institutions are not expected to carry out an independent legal analysis of relevant tax laws to confirm the reasonableness of a self-certification. As the determination of residence can be complicated, this comment is helpful. The guidance also answers an often asked question regarding whether Canadian financial institutions are required to refuse opening accounts. In particular, the guidance states that CRS in no way requires or encourages financial institutions to refuse to open an account or to otherwise deny service. Entity accounts Chapter 10 Chapter 10 of the guidance discusses concepts and issues similar to those related to individual accounts, but also contains additional information specific to entity accounts. This includes a discussion related to the definition of the term controlling person and how to determine whether an account holder is a passive NFE with one or more controlling persons. In the chapter on entity accounts, the guidance provides details of the monetary threshold exemption and the treatment of reportable persons and jurisdictions. The guidance discusses the monetary threshold exemption for a pre-existing entity account with an aggregate account balance or value not exceeding US$250,000 on June 30, 2017. According to the CRA, such an account is not required to be reviewed until the balance or value exceeds US$250,000 as of the last day of any subsequent year. However, unlike FATCA, a financial institution cannot rely on the US$250,000 monetary threshold to exempt new entity accounts from due diligence and reporting under CRS. Some financial institutions may opt to perform due diligence on all preexisting entity accounts, regardless of balance, rather than designing procedures to identify when the year-end balance exceeds US$250,000. Page 9 of 13

The guidance provides that financial institutions must determine if any of a passive NFE s controlling persons are reportable persons (regardless of whether the NFE is itself a reportable person). This could significantly increase financial institutions compliance burden. For example, the controlling persons of a trust may include settlors, trustees, protectors, beneficiaries and any other natural person exercising ultimate effective control over the trust entities. Where the settlor, trustee, protector, or beneficiary of the trust is an entity, it is necessary to look through the chain of control or ownership over the entity to identify the natural persons exercising ultimate effective control over the entity and, when required, report them as controlling persons of the trust. Some relief is provided for certain collective investment vehicles that are organized as trusts that must be treated as passive NFEs, because they are not resident in a participating jurisdiction. In particular, where the trust is widely held and publicly traded, holds a diversified portfolio of securities, is subject to investor protection laws, and is taxed as a corporation in its country of residence, the trust can be treated as if it were a corporation for purposes of determining the controlling persons. In the case of a corporation, a natural person who directly or indirectly owns or controls 25% of more of the corporation is generally considered a controlling person. In addition, if no natural person is identified as exercising control over the corporation then a director or senior official of the corporation is to be treated as the controlling person. The guidance states that, if a financial institution does not receive a self-certification from an entity account holder or any controlling person, the financial institution must rely on the indicia that it has in its records to determine whether any of the controlling persons are a reportable person. Among other things, indicia includes: Identification of the account holder as a resident in a reportable jurisdiction A current mailing or residence address (including a P.O. Box) in a reportable jurisdiction One or more telephone numbers in a reportable jurisdiction and no telephone number in Canada. If the financial institution has no such indicia in its records, no further action is required until there is a change in circumstances that results in one or more indicia with respect to the controlling person. However, the guidance also suggests that, if reasonable efforts to obtain self-certification fail, the financial institution should treat the account as reportable for each jurisdiction in respect of which there is indicia. According to the guidance, information that indicates that a trust may be resident in a reportable jurisdiction for a pre-existing entity account includes an address of the trustees in a reportable jurisdiction. While this is consistent with the OECD Commentary, Page 10 of 13

it differs from recent Canadian case law on the residence of trusts which may create confusion. The guidance also states that an account holder that is a financial institution is not reportable under CRS except where the financial institution is a professionally managed investment entity resident in a non-participating jurisdiction. In such a case, the financial institution will be a passive NFE for reporting purposes. Special circumstances Chapter 11 The guidance also discusses employment-based group plans, account transfers and dormant accounts. The guidance provides examples of employment-based group plans that may not need to be reviewed or reported until an amount is payable to the beneficiary as long as certain requirements are met. The examples include a group cash value insurance contract or group annuity contract, employee life and health trusts, group payroll deduction savings plans, retirement compensation arrangements, and health and welfare trusts. As most of these plans are established as trusts, absent the relief, a financial institution would need to document and cure every beneficiary of the plan. The guidance confirms that a reportable financial institution can apply its normal operating procedures to classify an account (other than an annuity contract) as dormant and that a reporting financial institution can classify a dormant account based on documentation it already has for the account holder. As only dormant accounts with a balance of less than US$1,000 on December 31st are excluded accounts, financial institutions will need to review dormant accounts with a balance of US$1,000 or more for indicia. If, based on this review, the account is a reportable account, the reporting financial institution should report the account even if there has been no contact with the account holder. Information reporting Chapter 12 The guidance discusses the information related to reportable accounts that must be provided to the CRA, as well as specifying certain data elements to be used for entity account holder type and controlling person type. This chapter also includes examples and a timetable for the specific reporting required for 2017 and subsequent years, and describes the conditions and consequences of a financial institution s non-compliance. Page 11 of 13

In the chapter on information reporting, the CRA provides additional details on situations involving reportable persons and entities, the treatment of accounts where a required TIN has not been provided, and the requirements for reporting undocumented accounts. The guidance clarifies that an account held by a U.S. entity that is a passive NFE with one or more controlling persons that is a reportable person must be reported under both FATCA and CRS. It also clarifies that, for the purposes of CRS, where an individual is a tax resident in Canada or the U.S., and a reportable jurisdiction, the financial institution should report the individual's tax residency using only the country code of the reportable jurisdiction. The guidance provides some helpful examples to assist financial institutions in determining the account holder type for reportable entities, and a list of all the different types of controlling persons. Canadian financial institutions should note that, if a TIN is required to be reported and has not been provided by the account holder, the account must still be reported, as well as the reason why the account holder did not provide a TIN. The guidance also describes the requirements for reporting undocumented accounts, such as where a financial institution is unable to obtain information from the account holder of a pre-existing individual account. In this case, Canada should be used as the residency country code where no address is available and the undocumented account s only indicia is a hold mail instruction. In contrast, if the only indicia is a care of address in a reportable jurisdiction, then that reportable jurisdiction should be used as the residency country code. List of participating jurisdictions The guidance refers to the list of participating jurisdictions committed to implement the CRS and that are able to enforce reporting by its financial institutions. The list is not provided in the guidance but rather is only provided online and will be updated, as required. Note that, since the U.S. has not been listed as a participating jurisdiction, Canadian financial institutions will need to ask account holders that are U.S. investment entities to provide information regarding all of their controlling persons. We can help Canadian financial institutions should put due diligence procedures in place by July 1, 2017 to comply with the common reporting standard rules. Your KPMG adviser can help you evaluate your organization s readiness for reporting obligations in countries adopting the OECD s Page 12 of 13

common reporting standard, including Canada. We can help you meet reporting obligations as required by domestic and international tax law. kpmg.ca Contact Us KPMG in Canada Privacy Policy KPMG On-Line Privacy Policy Legal Information is current to April 5, 2017. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Page 13 of 13