Report On Legislative Proposals Relating To Canada – United States Enhanced Tax Information Exchange Agreement

Moodys Gartner Tax Law LLP is pleased to provide you with this written submission on certain aspects of the draft legislative proposal entitled Legislative Proposals Relating to Canada - United States Enhanced Tax Information Exchange Agreement ("Draft Legislation"). We welcome the opportunity to discuss this report ("Report")1 with you in person at your convenience.

We commend the Department of Finance (the "Department" or the "Department's Office") in concluding the intergovernmental agreement ("IGA")2 with the U.S. Government and issuing the Draft Legislation. But for the Department's endeavours in this regard, the U.S.'s Foreign Account Tax Compliance Act ("FATCA")3 would have applied unilaterally and required Canadian Financial Institutions to face the dilemma of complying with Canadian law (and suffering the consequences under FATCA) or complying with FATCA (and suffering the consequences under Canadian law). The Department's office faced a daunting task and we wish to recognize its dedication and effort.

While the Department's efforts are laudable, the Draft Legislation requires refinement in numerous respects. Perhaps most importantly, the Draft Legislation defines the term "financial institution" more narrowly than any other signatory to an intergovernmental agreement, which may preclude the IGA from entering into force, and if not will create problems for Canadian entities that we discuss in further detail below. In this Report we discuss suggested clarifications and modifications to the Draft Legislation that will bring it closer to achieving its intended purpose and mitigating these problems.

The IGA, FATCA, the U.S. Treasury Regulations, and the Draft Legislation are replete with terms that sometimes overlapping and contradict one another. In an effort to bring clarity to the discussion of these terms, capitalized and italicized terms in this Report refer to defined terms in the IGA. All other terms are defined as indicated.4

SUMMARY OF RECOMMENDATIONS

General Recommendation We recognize the Department has requested comments on only the Draft Legislation and we have limited our recommendations accordingly. However, the U.S. Department of Treasury has shown willingness to enter into memoranda of understanding with several jurisdictions to clarify matters relating to domestic law.5 Except as noted below, our specific recommendations could be addressed in legislation, guidance notes, or in a memorandum of understanding with the U.S. Department of Treasury. In light of this fact we make the following two general recommendations: FATCA will go into effect on July 1, 2014 and, we are concerned the Draft Legislation will not become final before that date. The Netherlands and Norway both entered into memoranda of understanding with the U.S. Treasury Department to effectively extend the implementation date until their implementing legislation is adopted as domestic law.Accordingly, we recommend the Department seek similar dispensation. In Notice 2013-43,6 the Internal Revenue Service ("IRS") has agreed to relax the compliance requirements for financial institutions in jurisdictions that have executed intergovernmental agreements but that have not yet been brought into force. Given the significance of the issues identified below we believe that the Department may not be entitled to rely on that notice and should, instead, seek the memorandum of understanding referenced above. If the Department disagrees with the specific recommendations discussed below we recommend it address and resolve these issues with the U.S. Department of Treasury in a memorandum of understanding as noted below. Specific Recommendations As discussed in further detail in Part B of this Report, our specific recommendations are as follows: The Draft Legislation narrows the definition of Financial Institution beyond that which is provided in the IGA, the Regulations, and intergovernmental agreements with other jurisdictions. The result will be confusion and uncertainty in the marketplace that will result in unnecessary withholding on certain Canadian Financial Institutions, which will require them to seek a refund of from the IRS. We therefore recommend: Draft subsection 263(2) should be amended to remove the language that limits the definition of Financial Institution to the enumerated entities: (g) The term "Financial Institution" means any Entity that is a Custodial Institution, a Depository Institution, an Investment Entity or a Specified Insurance Company, [including]: . . . . Alternate Recommendation 1(a): In light of the risks discussed below, if the Department is determined to narrowly define Financial Institution as set forth in the Draft Legislation, it should confirm its interpretation with the U.S. in a memorandum of understanding. Under the IGA, Canada has the right to more favourable terms granted to other signatories to intergovernmental agreements (which are typically more favourable than the terms set forth in the Regulations), yet the Draft Legislation contains several references to the Regulations only. Assuming recommendation 1 or 1(a) is accepted we therefore recommend: References to the Regulations should include reference to the IGA in the event the IGA provides more favourable terms. Under the IGA, Trusteed Tax Free Savings Accounts ("TFSAs")7 are excluded from the definition of Financial Account yet are Reporting Canadian Financial Institutions because they are neither described in Articles XVIII(3) nor XXI(3) of the Canada - U.S. Tax Convention (the "Treaty").8 Assuming recommendation 1 or 1(a) is accepted, we therefore recommend: Draft subsection 263(1) should include any entity or product referenced in Annex II, § IV; specifically: "non-reporting Canadian Financial institution" means any Canadian financial institution or other entity resident in Canada that (a) is described in any of paragraphs C, D, and G to J of section III of Annex II to the agreement [or in section IV of Annex II to the agreement]; . . . . Alternate Recommendation 3(a): Since TFSAs are the functional equivalent of Roth IRAs and Roth IRAs are referenced in Article XVIII(3) of the Treaty, the Department should seek to enter into a memorandum of understanding with the U.S. Department of Treasury to include TFSAs within the definition of Exempt Beneficial Owner ("EBO") under Annex II, § II(C). Similar to TFSAs, Trusteed Registered Education Retirement Funds ("RESPs")9 are excluded from the definition of Financial Account yet are Reporting Canadian Financial Institutions because they are neither EBOs nor Deemed-Compliant Financial Institutions. Assuming recommendation 1 or 1(a) is accepted we therefore recommend: Draft subsection 263(1) should include any entity or product referenced in Annex II, § IV; specifically: "non-reporting Canadian Financial institution" means any Canadian financial institution or other entity resident in Canada that (a) is described in any of paragraphs C, D, and G to J of section III of Annex II to the agreement [or in section IV of Annex II to the agreement]; . . . . Alternate Recommendation 4(a): While RESPs are not similar to the definitions of Retirement Funds or Exempt Organizations under the Treaty, there is little risk of non-compliance associated with these accounts and, accordingly, the Departments Office should seek to execute a memorandum of understanding with the U.S. to include RESPs within the definition of Deemed-Compliant Financial Institutions under Annex II, § III. DISCUSSION OF SPECIFIC RECOMMENDATIONS

Draft Subsection 263(2) Defines "financial institution" in a Manner that is More Narrow than the IGA any other Intergovernmental Agreement, or the Treasury Regulations General Comments Draft subsection 263(2) eviscerates the definition of Financial Institution found in the IGA and other intergovernmental agreements because only listed entities will be classified as such. This narrow definition of Financial Institution would exclude numerous Canadian entities, including all private Canadian trusts and private Canadian holding companies. Ultimately, this restrictive definition will result in confusion for those...

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