understanding international tax reporting (including fatca) grant morton learning & development...
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Understanding International Tax Reporting(including FATCA)
Grant MortonLearning & Development ConsultantDistributor Relations & Training
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By the end of this session, you will be able to:
Describe international tax reporting, including what it is, its rationale and Canada’s response
Explain how international tax reporting impacts Manulife, advisors & distributors, and the clients they support and;
Identify where to go for further information
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What is international tax reporting?
What it means for: Manulife
Clients
Advisors
Additional resources
Agenda
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Exchange of information between nations to learn about offshore accounts
Governments are augmenting self-reporting (honour system) tax regimes
Growing global focus on international tax compliance & transparency
What is International Tax Reporting?
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Offshore tax evasion seen as a serious growing international problem
Law-abiding taxpayers pay more than their share
Rationale for Multinational Tax Information Exchanges
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7
The U.S. is at the forefront of international tax reporting
FATCA stands for Foreign Account Tax Compliance Act
It is a new U.S. tax regulation aimed at reducing offshore tax evasion through enhanced reporting Requires foreign (non-U.S.) financial institutions (FFIs) to report U.S.
account holders to the U.S. Internal Revenue Service (IRS)
Will require reporting on all U.S. persons by potentially imposing punitive withholding tax on FFIs who do not cooperate
Does not impose new taxes – only helps ensure foreign income is reported properly
What is FATCA?
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Examples of FFIs include most:BanksLife insurance companiesCollective investment vehiclesHedge fundsMutual fundsTrust companiesCustodiansStockbrokersInvestment banks
A number of Manulife’s businesses are considered FFIs under FATCA
Foreign (Non-U.S.) Financial Institutions (FFIs)
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Canadian Income Tax Act and CRA guidance contain new reporting requirements for financial institutions
and clients
Canada has negotiated an agreement with the U.S for mutual sharing of information
This is consistent with Canada’s commitment to developing a global standard for automatic exchange
of tax information
Canada’s Response to FATCA
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CRA IRS
Canadian Financial
Institutions
American Financial Institutions
Information about U.S. persons holding Canadian accounts
Information about Canadian persons holding U.S. accounts
Canada – U.S. Information Sharing Agreement
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Avoids imposing U.S. rules on Canadian financial institutions
Ensures Canada will receive equal reporting from the IRS
Reporting to CRA allows Canadian privacy laws to be upheld
Exempts most registered accounts from reporting
Eliminates U.S. withholding taxes under FATCA and possible account termination for non-responsive clients
Canada – U.S. Agreement – Key Benefits
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Who?Clients with “U.S. status” – I.e., U.S. persons, or entities with substantial ownership by U.S. personsClients who fail to respond to inquiries about their U.S. status
What?NameAddressU.S. Taxpayer Identification Number (TIN)Account and/or policy number(s)Account balances or valuesAmounts credited to the client’s account, including interest, dividends and other incomeAny withdrawalsFor accounts owned by non-U.S. entities, the name, address and TIN of each substantial U.S. owner
Impact – New CRA Reporting Requirements
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Financial institutions may collect the U.S. status of non-registered account holders by asking questions such as:
Are you a U.S. Citizen or U.S. Resident for tax purposes?If yes, please provide your Taxpayer Identification Number (TIN)
Impact – New Accounts & Policies
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Financial Institutions will need to look for 7 indicators of a person’s U.S. status. These indicators are:
1. U.S. citizen or resident2. U.S. place of birth3. U.S. mailing or residence address (if not temporary)4. U.S. telephone number5. Standing instructions to transfer funds to an account maintained in
the U.S.6. POA or signing authority granted to a person with a U.S. address7. An “In-care-of” or “hold mail” address that is the sole address on
file for the account holder
7 Indicators of U.S. Status
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Manulife must review the U.S. status of clients who have certain non-registered accounts opened before July 1, 2014 – does not apply to
cash value insurance policies or annuities owned by individuals
Individual account holders will be screened using the same 7 indicators
Clients will have an opportunity to confirm if they have U.S. status or not
Investigations will be required prior to reporting
Impact – Preexisting Accounts & Policies
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Manulife must monitor for
indicators of a change in U.S.
status
Account and policy
maintenance forms have been updated with new questions to verify
U.S. status
Advisors and distributors may
be asked to collect and follow up for
this additional information from
clients
Impact – Change of Circumstances
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Performax Gold
Manulife UL
InnoVision
Security UL
All cash value insurance policies are impacted including:
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All non-registered Manulife Investments products are impacted including:
Manulife RetirementPlus
GIF Select
Manulife PensionBuilder
Manulife Private Investment Pools
Manulife Investments Guaranteed Interest Contracts (GIC)
Annuities
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Non registered deposit products (individual and business):
Individual Accounts: Personal Advantage Account
U.S. $ Advantage Account
Personal GICs
Business Accounts: Business Advantage Account
U.S. $ Advantage Account
Business GICs
Mortgage products are also impacted, but remain part of the Banking Consultants’ application process with clients
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What International Tax Reporting Means for Clients
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U.S. persons must file annualtax returns to the U.S. IRS, regardless of where in the world they resideThis is different from most countries, where tax reporting obligations are based on residencyThis has always been the case and is not a result of FATCA
U.S. Person Tax Reporting
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A U.S. person is defined in U.S. law and examples include:
A U.S. citizenA permanent resident (green card holder)A person residing in the U.S. i.e., a person who spends a significant number of days in the U.S. each year – the U.S. refers to these individuals who meet its substantial presence test as “resident aliens”
U.S. Persons - Individuals
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Snowbirds: Canadians who travel south every winter to enjoy a warmer climate
The U.S. IRS uses a formula to establish whether a snowbird should be classified as a resident alien for tax purposes; if so, they would be a U.S. person under the FATCA rules
CRA has a guide called “Canadian Residents Going Down South” to assist Canadians in assessing their international tax situations
Snowbirds
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A temporary U.S. address or phone number may be confused as a permanent address by financial institutions, resulting in the U.S. tax status questions being asked
Temporary U.S. Address or Phone Number
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Entities are grouped into the following broad categories:
1. Entities organized in the U.S. (or subject to U.S. law)
2. Foreign (non-U.S.) Financial Institutions (FFIs)
3. Non-Financial Foreign (non-U.S.) Entities (NFFEs)
U.S. Tax Classification of Entities
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FFIs include most:BanksLife insurance companiesCollective investment vehiclesHedge fundsMutual fundsTrust companiesCustodiansStockbrokersInvestment banks
FFIs must abide by international tax reporting rules set out in the Canadian Income Tax Act and administered by the CRAManaging General Agencies and Insurance Broker Corporations are categorized as NFFEs, not FFIs
Foreign (Non-U.S.) Financial Institutions (FFIs)
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NFFEs are defined as any non-U.S. entity that is not an FFINFFEs include:
CorporationsPartnershipsTrustsEstates
NFFEs are classified as either active or passive
Non-Financial Foreign Entities (NFFEs)
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NFFEs are generally classified as active if:
Less than 50% of their income is investment income and;Less than 50% of their assets held produce passive income, such as: dividends, interest, royalties etc.
Accounts of active NFFEs are not reportable
Active NFFEs
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Entities that do not pass the active tests are passivePassive NFFEs must provide added details regarding ownership and controlIf beneficial owners or those controlling the entity directly or indirectly are U.S. persons, then the entity and the beneficial owner information is reportable under FATCA
Passive NFFEs
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What International Tax Reporting Means for Advisors
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Advisors are the first person clients will call for helpYou can support your clients by:
Ensuring that their information is captured accurately at financial institutionsHelping them obtain the right information on CRA and IRS websitesProviding historical account/policy information and tax receipts as needed
Ways to Support Your Clients
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Earn trustBuild loyalty Strengthen client relationshipsImprove retentionEarn referrals
International Tax Reporting is an Opportunity
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While the financial planning services that advisors provide their clients often include tax planning, it is inappropriate and illegal for advisors or agents to assist clients in avoiding legal tax obligationsAdvisors should direct their clients with questions or issues about complex tax obligations to obtain independent tax advice
Complex Tax Obligations & Advice
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Available in Repsource (Home) under Quick Links > CE Centre > CE Centre > Doing Business > Compliance > Compliance Rules & Regulations Learning Series > Understanding Int’l Tax Reporting
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To learn more about international tax reporting, visit the following key resources:
CRA website:Enhanced financial account information reportingCanadian Residents Going Down South
IRS website:Foreign Account Tax Compliance ActFATCA Information for IndividualsFATCA Information for Foreign Financial Institutions and EntitiesDo You Need to File a Federal Income Tax Return?
Additional Resources
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