Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA) was signed into U.S. law in March 2010. Its aim is to ensure U.S. taxpayers with financial accounts held outside of the U.S. are paying U.S. taxes.
On July 1, 2014, the Intergovernmental Agreement for the Enhanced Exchange of Tax Information under the Canada-U.S. Tax Convention (the Agreement) between the Canadian government and U.S. government came into effect. Under the Agreement, Canada enacted Part XVIII of the Income Tax Act (Canada) (Part XVIII), requiring Canadian financial institutions to report to the Canada Revenue Agency (CRA) on specified accounts held in Canada by U.S. persons. The CRA will forward this information to the U.S. Internal Revenue Service (IRS) under the provisions and safeguards of the Canada-U.S. Tax Convention.
Why was FATCA introduced?
FATCA was introduced by the U.S. to ensure U.S. taxpayers with assets outside the U.S. are paying U.S. taxes.
When does this become effective?
The Agreement and Part XVIII came into effect on July 1, 2014.
What does the Agreement mean?
Canadian financial institutions, including Fidelity, are required to identify financial accounts held by U.S. tax residents and U.S. citizens and report certain information to the CRA. The CRA will then exchange that information with the IRS.
Who is affected?
The Agreement affects every U.S. person or U.S.-owned or U.S.-controlled entity with financial accounts in Canada.
Non-U.S. persons are also asked about their tax residency status when opening certain accounts.
Fidelity recommends investors consult their financial advisor or a U.S. tax professional regarding their tax status.
Who is considered a U.S. person?
An individual is considered a U.S. person if he or she is
- a citizen of the U.S., residing in the U.S. or abroad
- a U.S. tax resident, including a Green Card holder (permanent resident)
- a corporation, trust or other entity organized in the U.S.
- an entity substantially owned or controlled by one or more U.S. persons
Note: This list is not exhaustive.
Fidelity recommends that investors consult their financial advisor or a U.S. tax professional regarding their tax status.
What is considered a U.S. account?
A U.S. account is an account held by any of the following:
- a U.S. person
- an entity organized in the U.S.
- an entity owned or controlled by a U.S. person
Whom should I speak with to find out if I qualify as a U.S. citizen?
Fidelity recommends that investors consult their financial advisor or a U.S. tax professional regarding their tax status.
Does the Agreement apply to all account types?
No, the Agreement only applies to certain accounts, including non-registered investment accounts. All registered plan accounts, including Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Registered Education Savings Plans (RESPs) and Tax-Free Savings Accounts (TFSAs), are exempt from these reporting requirements.
What is the impact for U.S. persons with an existing Fidelity account?
If you have a non-registered account opened before July 1, 2014, you may be asked to inform us of your tax status and to provide your U.S. Taxpayer Identification Number (TIN). Your account information will be reported to the CRA on an annual basis.
What is the impact on persons opening a new Fidelity account?
If you are opening a new non-registered account with Fidelity, you will be asked to inform us of your tax status, and to provide your U.S. TIN. Your account information will be reported to the CRA on an annual basis.
What does this mean for Canadians who are not U.S. citizens or U.S. tax residents?
For the majority of Canadian investors, the Agreement has little impact, beyond being when opening an account to indicate whether or not they are U.S. persons.
Investors who have a U.S. address may be asked to complete an IRS form for our records.
How will “snowbirds” be treated under the Agreement?
Snowbirds have the opportunity to provide a self-certification, which will remain valid for a period of seven years, allowing them to update their accounts with U.S. addresses and phone numbers when they vacation in the U.S. without having to provide a new certification each time.
Fidelity recommends that snowbirds consult their financial advisor or a U.S. tax professional regarding their tax status.
How are joint accounts handled if only one account owner is a U.S. person?
If at least one joint account owner qualifies as a U.S. person, then that individual would be treated as the owner of the entire account.
If more than one of the joint owners are U.S. persons, then each individual would be treated as the owner of the entire account.
What happens if a U.S. person or potential U.S. person does not respond or complete a request to clarify his or her tax status?
If we do not receive the required tax status information, Fidelity may be required to report your account to CRA.
Please check with your financial advisor or a U.S. tax professional.
If the CRA is sharing information with the U.S. government, how will my personal information be protected?
The CRA will forward this reporting to the IRS under the provisions and safeguards of the Canada-U.S. Tax Convention.
Does the Agreement have any impact on the IRS’ treatment of Canadian mutual funds under passive foreign investment company (PFIC) rules?
No. Please refer to the PFIC Q&A for further information on PFIC rules, or speak with your financial advisor or a U.S. tax professional.
Now that TFSA and RESP accounts are exempt under the Agreement, does a U.S. person still have to treat these as taxable accounts when filing a U.S. income tax return?
Yes. The Agreement does not change the taxable status of TFSA and RESP accounts for U.S. persons, who must still include the required information when filing their U.S. tax returns.
Note that RSPs and RIFs are not treated as taxable as long as investors file the appropriate forms to defer tax on these accounts with their U.S. tax returns.
Please check with your financial advisor or a U.S. tax professional for further information.
Where can I get more information about this?
Fidelity recommends that investors consult their financial advisor or a U.S. tax professional regarding their tax status.
You can also find information on the Agreement and requirements at these sites:
Passive Foreign Investment Company (PFIC)
Fidelity is helping investors comply with U.S. PFIC tax rules.
Fidelity knows there is concern among investors about the U.S. passive foreign investment company (PFIC) rules. These rules could significantly affect “U.S. persons” who hold Canadian mutual funds, so we are providing you with information about these complex rules.
We believe it is important for those who may be affected by these rules to have the information necessary to make informed decisions. However, we also believe that investors affected by these rules should not make changes to their Canadian holdings without first speaking with their advisors and a U.S. tax specialist.
Fidelity continues to make available, upon request, PFIC Annual Information Statements for all of our mutual funds for the 2016 tax year. The 2016 PFIC Annual Information Statements will be available by March 3, 2017.
Learn more in our PFIC overview
The following list of frequently asked questions has been created to help you better understand how PFIC rules might affect you.
Frequently asked questions on passive foreign investment company (PFIC) rules
1. Who are U.S. persons?
The definition of a U.S. person is broad and generally includes U.S. residents, U.S. citizens, U.S. green card holders, other persons with a substantial connection to the U.S. and certain entities organized in the U.S. It should be noted that U.S. citizens and green card holders are considered U.S. persons regardless of their country of residence. Some Canadian residents could be unaware that they have U.S. tax filing requirements.
2. What is a PFIC?
A PFIC (passive foreign investment company) is a non-U.S. corporation that has 75% or more of its gross income consisting of passive income or 50% or more of the average fair market value of its assets consisting of assets that produce passive income.
Passive income includes, among other things, dividends, interest, rent, royalties and capital gains from the disposition of securities.
The Internal Revenue Service (IRS) has confirmed that Canadian mutual funds are classified as corporations for U.S. tax purposes and, as such, are subject to the PFIC rules.
3. How do the PFIC rules work?
U.S. persons who own PFICs must report, annually, each PFIC investment on a separate IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund). An investor or advisor can find Form 8621 here.
The U.S. taxation of PFICs can be punitive (see question 5 in part I below), although two elections may be available to improve the taxation:
- Mark-to-market election
Under the mark-to-market election, investors must, on an annual basis,
- report all distributions (interest, dividends, capital gains, etc.) as ordinary income; and
- recognize all increases/decreases to the value of the fund as a gain/loss on their holdings as if the funds were sold at the end of each year. This gain/loss is rated as ordinary income.
2. Qualified electing fund (QEF) election
- Under the QEF election, investors must, on an annual basis, include their pro-rata share of the mutual fund’s earned income for U.S. tax purposes.
Please note that T3 and T5 slips issued by Canadian mutual funds are for Canadian tax purposes only and do not contain sufficient information to support a QEF election.
Fidelity provides investors with all of the information they need to make a QEF election on Form 8621. Importantly, on disposition, the gain on a PFIC that has followed the QEF election is treated as a capital gain taxed in the year of disposition.
4. Which option, mark-to-market or QEF, is better?
Investors should consult their financial advisor or a U.S. tax specialist to make this decision. However, generally the QEF election is preferred, because it is more closely aligned with the tax treatment of mutual fund investments by both the U.S. and Canadian tax systems.
5. What are the consequences of not making a mark-to-market or QEF election?
If the U.S. person does not make one of the two elections above (mark-to-market or QEF), the following tax treatment would apply:
- Any gains recognized on disposition of the PFIC shares and distributions received from a PFIC during the year greater than 125% of the average distributions received during the previous three years would be taxed as ordinary investment income. This income would be considered earned over the holding period on a pro-rata basis.
- The amounts allocated to prior tax years will be subject to U.S. tax at the highest marginal rate and also subject to a deemed interest charge.
6. How should a PFIC be reported for a mutual fund with a fund-of-funds structure?
For a mutual fund with a fund-of-funds structure, the top-level fund and each of the underlying funds require a separate Form 8621 to be filed. Fidelity will provide the PFIC Annual Information Statements needed for both the top-level fund and the underlying funds, so that U.S. persons can make the QEF election. Investors should consult with their U.S. tax specialist to understand the tax preparation costs associated with these types of holdings, because the costs may be higher than that of a single fund structure.
7. How does Fidelity help simplify the PFIC reporting requirements and tax preparation costs?
Fidelity offers comprehensive and individually customized PFIC reporting support for all its mutual funds to reduce the PFIC tax reporting burden. Investors, upon request, will receive a personalized AIS that reflects their allocation of ordinary earnings and net capital gains, and total distributions received for each top fund and any of its underlying funds. This is contrary to simply just receiving a general daily ordinary earnings and net capital gains factor, which requires investors or their U.S. tax specialist to perform a potentially complex day-by-day calculation in order to arrive at the equivalency of information readily supplied by Fidelity’s AIS.
In addition, Fidelity is pleased to provide customized supplemental information along with the AIS to help facilitate the completion of Form 8621.
8. Are investors at any U.S. tax disadvantage when investing in a mutual fund that regularly distributes return of capital (ROC)?
An investor who makes a QEF election for a mutual fund that regularly distributes ROC will not be at any U.S. tax disadvantage.
Investors will report their pro-rata share of ordinary earnings and net capital gains as shown on the AIS as additions to their U.S. tax basis. All cash distributions from the mutual fund will be treated as tax-free ROC for U.S. tax purposes to the extent of previously taxed income reported on the AIS or to the extent of the clients’ remaining basis in that mutual fund. A U.S. tax specialist should be consulted to ensure the basis calculation considers all of these circumstances.
9. How do these rules affect different types of accounts, such as non-registered accounts, TFSAs and RRSPs?
These rules affect investments in non-registered accounts, TFSAs and RESPs. For PFICs held in retirement savings accounts such as RRSPs and RRIFs, most tax advisors suggest the PFIC rules should not be applicable. However, Fidelity recommends speaking with a U.S. tax advisor.
10. Why did Fidelity select April 30 as its PFIC fiscal year-end?
While any date can be chosen for a PFIC year-end, including December 31, Fidelity selected April 30 as the PFIC fiscal year-end for its Funds. An April 30 year-end allows Fidelity sufficient time to complete the PFIC analysis and schedules for all its mutual funds well before the time that most individual investors would request their PFIC information.
11. What are the tax implications for a U.S. person having a year-end that differs from April 30?
Each investor will report any PFIC having a year-end that falls within the investor’s tax year-end.
In the case of a Fidelity mutual fund, an investor who has a tax year-end that differs from April 30 simply experiences a timing difference. For individuals with a calendar year-end, there will be a seven-month deferral of PFIC income to the subsequent year, meaning PFIC income from May 1 to December 31 is deferred until the following year. This timing difference is eliminated once the position in the Fidelity PFIC is fully disposed of.
12. What if investors dispose of their PFIC after April 30, but before their tax year-end?
Investors who dispose of their PFIC holding after April 30, but before their taxation year-end, will simply pick up their remaining PFIC income in the subsequent tax year-end. Their next Annual Information Statement will reflect the number of days the PFIC was held between May 1 and the date of disposition.
Investors should speak with their U.S. tax specialist to discuss how to report the disposition of the PFIC for U.S. tax purposes.
13. What if investors buy a PFIC after April 30, but before their tax year-end?
Investors who acquire a new PFIC holding after April 30, but before their tax year-end, will not be allocated a pro-rata share of the ordinary earnings and net capital gains of that PFIC until the following tax year-end. However, investors in this situation will be provided with certain information on their Annual Information Statement so that they can complete IRS Form 8621 in the year of acquisition, and discuss the appropriateness of a QEF election with their U.S. tax specialist in light of their personal tax circumstances.
14. How is a U.S. cost basis calculated?
The calculation of the U.S. cost basis is similar to the calculation of the Canadian adjusted cost basis, but additional considerations apply. For instance, if a QEF election is made, any amounts included in income (including those reported on underlying funds in fund-of-funds situations) increase the U.S. cost basis. Cash distributions under a QEF election decrease the cost basis, while distributions that are reinvested in the PFIC (“property distributions”) do not. A U.S. tax specialist should be consulted to ensure the basis calculation considers all of these circumstances.
15. How do I obtain PFIC Annual Information Statements for Fidelity mutual funds?
Once available, PFIC Annual Information Statements for Fidelity mutual funds can be obtained from fidelity.ca by following the instructions below:
- Begin by logging into My Book using your user ID and password.
- Enter the Fidelity account number or name of the client for whom you would like a PFIC Annual Information Statement.
- Click on the Client Account menu. Under Documents, select PFIC Statements.
- PFIC Annual Information Statements for all Fidelity Funds held by the client will be available. Enter the desired date range to generate a PDF of the PFIC Annual Information Statement required.
For direct assistance, Fidelity representatives are available to speak to you from 8:00 a.m. to 8:00 p.m., EST, Monday to Friday.
Toll-free: 1 800 263-4077
Telephone: (416) 307-5200
TTY: 1 800 855-0511
Fax: 1 800 387-8092
16. How do my clients find a U.S. tax specialist?
There are tax lawyers and accountants who specialize in this area. An Internet search may help identify suitable tax advisors. As well, any of the top ten accounting firms in Canada should have the expertise to help with PFIC-related questions.
17. Given these new rules, is it better for U.S. persons to invest in individual stocks rather than mutual funds?
Making a QEF election minimizes the difference in the U.S. tax consequences for individual securities and for mutual funds. Mutual funds offer a number of advantages to investors, including professional money management and high liquidity, and through pooling of money, investors gain exposure to asset classes and stocks that might otherwise be difficult to invest in. In addition, many individual stocks, such as certain REITs and natural resource stocks in the development stage of their life cycle, may also be PFICs for U.S. federal income tax purposes, and the issuers of such stocks might not have the resources to produce PFIC Annual Information Statements.
In addition, tracking the U.S. cost base for numerous separate holdings can increase tax compliance costs.
18. Are the Canadian mutual fund companies doing anything to help clients affected by this?
The industry (including IFIC, The Investment Funds Institute of Canada) is continuing to work with the IRS to determine whether the rules can be relaxed or whether a simpler, more cost-effective method can be used to report the ownership of Canadian mutual funds by U.S. persons.
19. I have clients who are considered U.S. persons and who have a Fidelity Investments Canada ULC mutual fund. What should they do?
The PFIC rules and the reporting rules for investments in Canadian mutual funds are complex, with multiple elections available. Fidelity encourages all U.S. persons to contact their financial advisor and a U.S. tax specialist for specific advice about their particular situation and to inform them that Fidelity is making PFIC Annual Information Statements available for all of its funds. This will allow investors to make the qualified electing fund (QEF) election on their 2016 U.S. returns.
20. Where is the information from the PFIC Annual Information Statement entered onto Form 8621?
Below is a filled-in sample Form 8621 with the amounts entered from the Annual Information Statement. This sample is for illustrative purposes only, to show the boxes and lines on Form 8621 that the information is entered into, on the assumption that the QEF election is made. Certain questions that do not involve the information provided with the Annual Information Statement are left blank (for example, question 5 in Part I), even though your client may need to answer them.
The PFIC rules are complex in respect of the various election choices and answers to all of the questions; a U.S. tax specialist should be consulted to ensure these matters consider all of your clients’ circumstances. Fidelity is unable to give advice in this regard.
IRS tax information
- IRS 8937 Form - Report of Organizational Actions Affecting Basis of Securities (2011)
- IRS 8937 Form - Report of Organizational Actions Affecting Basis of Securities (2012)
- IRS 8937 Form - Report of Organizational Actions Affecting Basis of Securities (2013)
- IRS 8937 Form - Report of Organizational Actions Affecting Basis of Securities (2014)
- IRS 8937 Form - Report of Organizational Actions Affecting Basis of Securities (2015)
- IRS 8937 Form - Report of Organizational Actions Affecting Basis of Securities (2016)
- IRS 8937 Form Attached Schedule (2011)
- IRS 8937 Form Attached Schedule (2012)
- IRS 8937 Form Attached Schedule (2013)
- IRS 8937 Form Attached Schedule (2014)
- IRS 8937 Form Attached Schedule (2015)
- IRS 8937 Form Attached Schedule (2016)
Common Reporting Standard
The Common Reporting Standard (CRS) is a new international standard of tax co-operation, first published by the Organization for Economic Cooperation and Development (OECD) in 2014.
Part XIX of the Income Tax Act (Canada) (Part XIX), which was enacted to implement the CRS due diligence and reporting obligations in Canada, came into effect on July 1, 2017.
Under Part XIX, Canadian financial institutions, including Fidelity, must collect and report information to the Canada Revenue Agency (CRA) about tax residents of countries other than Canada who hold certain accounts. The CRA will then share this information with the jurisdiction in which the account holder resides for tax purposes, under the provisions and safeguards of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
Why was CRS introduced?
CRS was introduced by the OECD member countries to fight international tax evasion and to ensure taxpayers with assets in other countries are paying taxes in the jurisdictions in which they are tax residents.
When does CRS become effective in Canada?
Part XIX came into effect on July 1, 2017.
Does CRS replace FATCA?
No. The CRS reporting regime is in addition to FATCA, which was implemented under Part XVIII of the Income Tax Act (Canada) (Part XVIII) in 2014.
However, the CRA has issued a combined self-certification form to capture information required under both Part XVIII and Part XIX. Information on U.S. persons holding non-registered accounts will continue to be reported separately under Part XVIII to the CRA, and the CRA will exchange this information with the Internal Revenue Service (IRS).
Who is impacted by CRS?
All investors who are opening a new non-registered account on or after July 1, 2017, will be required to provide their tax residency status, including investors who are tax residents of Canada.
Only accounts owned or controlled by individuals and/or entities who are tax residents of countries other than Canada or the U.S. will be reported to the CRA under CRS.
How do I determine my tax status?
Fidelity recommends investors consult their financial advisors or a tax professional regarding their tax status. Fidelity is unable to provide advice in respect of an investor’s tax status.
What is considered a reportable account under CRS?
A CRS reportable account is an account owned or controlled by individuals and/or entities who are tax residents of countries other than Canada or the U.S.
How will “snowbirds” be treated?
Unlike FATCA, there is no “snowbird” status under CRS.
Does CRS apply to all account types?
CRS only applies to certain accounts, as defined under Part XIX.
For mutual fund accounts, it will only apply to non-registered accounts.
All registered accounts, including Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Registered Education Savings Plans (RESPs) and Tax-Free Savings Accounts (TFSAs), are exempt from these reporting requirements.
What is the impact for investors with an existing Fidelity account?
If you are a tax resident of a country other than Canada, you will be asked to inform us and your dealer of your tax status, and to provide your Taxpayer Identification Number (TIN). This information will be reported to the CRA on an annual basis.
How are joint accounts handled if only one account owner is a tax resident of a country other than Canada?
If at least one joint account owner is a tax resident of country other than Canada, then that reportable individual would be treated as the owner of the entire account, and reported to the CRA.
If more than one of the joint owners are tax residents of a country other than Canada, then each individual would be treated as the owner of the entire account for reporting purposes.
Does CRS replace the existing non-resident withholding tax?
No. There is no withholding tax under CRS. Where the account holder is a non-resident of Canada, current CRA non-resident withholding tax rates will continue to apply.
What happens if account holders do not respond to Fidelity or the dealer’s request to clarify their tax status?
If account holders do not respond or provide the required documentation to confirm their status, they may be deemed to be reportable account holders, and Fidelity may be required to provide reporting to the CRA on such accounts.
If the CRA is sharing information with other governments, how will my privacy be protected?
The CRA will share tax information with participating jurisdictions under the provisions and safeguards of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
Fidelity uses a secure electronic method for the transmission of personal tax information to the CRA.
Where can I get more information about CRS?
Account holders should contact their financial advisors or a tax professional for more information regarding CRS and tax residency.
You can also find information on CRS and requirements on the CRA website at the link below.