Charities and NPOs exempt from FATCA

May 30, 2014 | Natasha Smith, Donald Carr

In March 2010, the United States enacted the Foreign Account Tax Compliance Act (FATCA), which requires non-U.S. financial institutions to report to the United States Internal Revenue Service (IRS) on the details of “U.S. Reportable Accounts” held by U.S. taxpayers.  “Accounts” and “financial accounts” have very broad definitions and the terms are not limited to regular bank accounts, but also extend, for instance, to certain life insurance policies.

Pursuant to FATCA, financial institutions outside the United States that fail to provide the requisite reporting are exposed to severe sanctions.  Provision was made for intergovernmental agreements (IGAs) between other countries and the US to further refine the application of FATCA to those countries.

FATCA comes into effect on July 1, 2014.

Since the enactment of FATCA, a number of concerns have been raised about its effect on stakeholders, such as dual citizens and U.S. citizens who hold accounts in Canadian banks.  Also, Canadian financial institutions expressed specific concern about how they would abide by Canadian privacy laws in the face of FATCA.

In September 2013, G-20 leaders (including Canada) committed to fight global tax evasion and improve tax fairness by instituting the automatic exchange of tax information as a new global standard by the end of 2015. On February 5, 2014, in an effort to enhance the exchange of tax information and define specifically how FATCA was to be followed in Canada, Canada and the United States entered into an IGA under the Canada-United States Tax Convention.  The agreement attempts to address many of the concerns expressed by Canadian stakeholders since FATCA’s enactment, including the way in which account information may be exchanged in a manner consistent with Canada’s privacy laws.  Thus, financial institutions will not report to the IRS, but to CRA.  CRA will then pass the information on to the IRS.

The agreement includes significant exemptions and relief based on the type of account holder and the type of financial institution.

It is not necessary here to venture into the details of FATCA and the IGA.   However, of particular importance to the Canadian voluntary sector is that under the IGA, accounts held by an organization, which:

  1. is established and operated exclusively for religious, charitable, scientific, artistic, cultural, athletic, or educational purposes;
  2. is exempt from tax in its jurisdiction of residence;
  3. has no shareholders or members with proprietary or beneficial interest in its income or assets;
  4. under the laws of its jurisdiction or pursuant to its formation documents:
    1. is not permitted to apply any income or assets of the organization for the benefit of a private person or non-charitable entity; and
    2. is required, upon liquidation or dissolution, to distribute all of its assets to a governmental entity or non-profit organization,

are not “U.S. Reportable Accounts” and, thus, do not have to be reported at all.

It is to be noted that the definition of “Account Holder” does not appear to extend to, among other individuals, agents, signatories or intermediaries.  This means that if, for instance, a charity maintains a financial account at a Canadian financial institution, the fact that one or more of the charity’s directors or officers, or those who have signing authority, are U.S. or dual citizens,  will not cause the financial account to be subject to the reporting obligations of the Canadian financial institution under FATCA.

We note that the foregoing is a brief analysis of FATCA as it pertains to Canadian registered charities and some non-profit organizations.  We encourage our readers to consult US counsel for advice pertaining to US organizations.  

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