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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