Canada marks the 23rd country to have finalized a tax information sharing agreement with the US under the Foreign Account Tax Compliance Act (FATCA).
The 2010 law requires foreign financial institutions, including private equity firms, to report to the Internal Revenue Service (IRS) information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. Failure to comply with the law could result in hefty withholding taxes for certain US-connected payments.
On Wednesday, Canada signed a “Model 1” type agreement that will have Canada-based GPs share information on their US investors with local officials, who will then relay the information to US officials on GPs' behalf. Likewise, US officials will in turn share information on US financial accounts owned by Canadian citizens.
Other countries to have finalized FATCA agreements include Germany, France, Italy, Spain, the Channel Islands, Japan, Cayman, Ireland and Mexico.
However, some major jurisdictions with active private equity markets have yet to negotiate a FATCA agreement ahead of a July 1 compliance deadline. These countries include: China, South Africa, Brazil, Argentina, South Korea, India, Indonesia, Russia, Turkey, Saudi Arabia and Australia.
The Canada agreement itself was a “long drawn-out negotiation”, said in a statement Jim Flaherty, Canada’s Minister of Finance. Canada was able to win “significant exemptions and relief” for some financial institutions, Flaherty said. For instance, smaller Canada-based deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt from FATCA.