On July 1, amendments to the Income Tax Act (Canada) implementing international common reporting standards (CRS) will come into force. The CRS regime is intended to facilitate the exchange of taxpayer information between governments. Financial institutions will be required to report financial information about individuals and entities not resident in Canada[1] to the Canada Revenue Agency (CRA), which will in turn share the information with the tax authorities in the individual or entity’s jurisdiction of residence.

Due diligence obligations

Under CRS, financial institutions in Canada will be required to conduct due diligence on all financial accounts they maintain that are in existence prior to July 1, 2017. Financial accounts are defined broadly under CRS and include not just bank accounts, but most types of investment accounts, most types of investments in investment funds, and certain insurance contracts.

Financial institutions must determine, based on information already in their possession, whether any of their account holders have certain indicia of residence in jurisdictions other than Canada. If such indicia are found, the financial institution is generally required to report information about the account to the CRA. The information that must be reported includes the value or balance of the account, and in many cases also includes the flow of funds into and out of the account. Financial institutions are also required to conduct due diligence on the holders of any accounts opened after June 30, 2017 by obtaining a self-certification from the account holder identifying the account holder’s jurisdiction of residence.

As a result of these rules, detailed information about the accounts of foreign investors who set up financial accounts in Canada will be reported to the CRA and to the tax authorities in the investors’ home jurisdictions.

Identification of controlling persons

Even if an account holder is a Canadian resident entity (such as a corporation, partnership, or a trust), the account holder may still be required to provide its financial institution with a list of its “controlling persons”, including their jurisdiction of residence.

Once a financial institution determines that an entity is a Canadian resident, it is required to obtain a self-certification from the account holder identifying whether it is a passive non-financial entity (Passive NFE). If the holder certifies itself as a Passive NFE, it must also identify its controlling persons and their jurisdiction of residence. For CRS purposes, controlling persons are any natural persons who exercise control of the entity. The legislation deems certain individuals to be controlling persons of trusts and other entities. In the case of corporations, the CRA’s published administrative policy identifies the controlling persons as any natural person who owns at least 25% of the shares of the corporation, or, if no such natural person exists, the directors and senior officers of the corporation.   If any of the controlling persons are non-residents of Canada, the financial institution must report the account and the non-resident controlling persons.

Passive NFEs are generally any entities other than financial institutions and active non-financial entities (Active NFEs). An entity will generally be an active NFE if interests in the entity, or its parent company, are traded on an established securities market or if less than 50% of the entity’s income is passive income. Generally, if an entity is not a private company (or controlled by a private company) and earns at least 50% of its income as passive income, it will generally be required to identify its controlling persons.

What does this mean for investors?

The compliance burden on most investors that acquire Canadian businesses will likely be quite small, involving no more than completing self-certifications. However, anyone looking to acquire a Canadian business should be aware that, as of July 1, 2017, their Canadian holdings may be reported to the CRA, and then to their local taxation authorities.

Canadian investors looking to acquire businesses in foreign jurisdictions aren’t in the clear either. Jurisdictions around the world are implementing similar CRS regimes. Canadians investing into foreign jurisdictions may soon finds their investments reported to foreign tax authorities and shared with the CRA.

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[1] Other than entities resident in the United States, which are dealt with under a similar regime commonly referred to as FATCA.