JOURNAL OF INTERNATIONAL TAXATION28

The Canadian regime raises ahost of questions that ariseprimarily from the diverging

scope of terms in the differentbodies of rules applicable to

Canadian investment entities,including the Canada IGA,

Canadian implementinglegislation, and FATCA

Regulations.

FATCA

JOURNAL OF INTERNATIONAL TAXATION 29

“Investment entities,” asdefined broadly in the FAT-CA Regulations,1 that areresident in Canada nowhave detailed guidance fordetermining their statusunder FATCA. Canada andthe United States enteredinto a Model 1 intergovern-mental agreement (IGA) onFebruary 5, 2014, that cameinto force on June 27, 2014(Canada IGA).2 Canadaenacted legislat ion toimplement the Canada IGAon June 19, 2014. OnDecember 23, 2014, theCanada Revenue Agency(CRA) released 160 pagesof guidance notes on theCanada IGA and the Cana-dian legislat ion (CRA

Guidance).2.1 Each of thesesources contains detailedprovisions for determiningthe FATCA status (e.g.,reporting Model 1 foreignfinancial institution (FFI),non-reporting IGA FFI, ornon-financial foreign entity(NFFE))3 of the types ofCanadian resident entitiesthat would be consideredinvestment entities underthe FATCA Regulations.While providing manyanswers, however, theCanadian regime also rais-es a host of questions thatarise primarily from thediverging scope of terms inthe different bodies of rulesapplicable to Canadianinvestment entities, includ-ing the Canada IGA, theCanadian implementinglegislation, and the FATCARegulations.4

Canada-U.S. IGA5

The Hiring Incentives toRestore Employment (HIRE)Act of 2010 (P.L. 111-147,March 18, 2010) addedChapter 4 to the Code (Sec-tions 1471-1474) (FATCA)with a view to curbing off-shore tax evasion by U.S.citizens and residents hold-ing assets through non-U.S.financial intermediaries.Absent an IGA, FATCAwould have required Cana-dian resident investmententities and other FFIs toenter into an agreement(FFI Agreement) with the

M AT I A S M I L E T

IRS to identify U.S. accounts and reportinformation on those accounts to theIRS (such an FFI is a “ParticipatingFFI”). FATCA also requires NFFEs, oth-er than excepted NFFEs, to provideinformation regarding their substantialU.S. owners to U.S. withholding agents.Failure by an FFI to enter into an FFIAgreement or by an NFFE to providethe required information generallywould have resulted in the impositionof a 30% withholding tax on “withhold-able payments”6 made to these non-compliant payees.

FATCA raised several concerns inCanada including whether Canadian FFIscould be compelled to report informationdirectly to the IRS while complying withCanadian privacy laws. The Canada IGAattempts to address those concerns byrequiring Canadian FFIs to provide infor-mation on U.S. accounts to the CRA,which will make the information avail-able to U.S. tax authorities under theexchange-of-information Article (Article27) of the 1980 Canada-U.S. income taxtreaty. In addition, under the CanadaIGA, the United States commits to pro-vide the CRA with certain informationabout accounts that Canadian residentshold in U.S. financial institutions.

The Canada IGA and the relatedannexes conform closely to the Recipro-cal Model 1 IGA that has served as thebasis for the IGAs that the United Stateshas signed with at least 35 other coun-tries.7 Like these other IGAs, the Cana-da IGA is intended to streamline FATCAinformation reporting, reduce FATCAcompliance burdens for financial insti-tutions, and allow for FATCA compliancein a manner that is consistent with appli-cable privacy and other laws in the IGAcountry.8 However, notwithstanding thereduced compliance burdens, a constitu-tional challenge has been launched in aCanadian court against the applicationof U.S. FATCA rules in Canada.9

A reporting Canadian financial insti-tution that complies with the requisitedue diligence and reporting require-ments and registers with the IRS in

accordance with the Canada IGA is gen-erally eligible to be treated as a reportingModel 1 FFI and as a registered deemed-compliant FFI under the FATCA Regu-lations.10 As a consequence, such areporting Canadian financial institutionwill not have to enter into an agreementdirectly with the IRS to be exempt fromwithholding tax under FATCA. TheCanada IGA also relieves Canadian FFIsof certain obligations that otherwisewould be imposed under FATCA, includ-ing the obligation to withhold on pay-ments to, or to close accounts of,recalcitrant accountholders (includingaccountholders who do not providerequested information to establish theiridentity), if the IRS receives specifiedinformation with respect to the accounts.

Like the Reciprocal Model 1 IGA, theCanada IGA includes an annex (AnnexII) that exempts specified entities andfinancial products with a low potentialfor U.S. tax avoidance from FATCA’sreporting and withholding regime. Verygenerally, Annex II establishes that,among other entities, the Bank of Cana-da, certain international organizationsoperating in Canada, and certain pen-sion and retirement funds will be treatedas “exempt beneficial owners” for FATCApurposes and, therefore, will not be sub-ject to FATCA withholding.11 FATCAwithholding will also not apply to certainentities that Annex II treats as “deemed-compliant FFIs,” including Canadianfinancial institutions that provide finan-cial services only within Canada to Cana-dian residents, certain Canadiannon-profit organizations, and certainentities formed by non-profits and pen-sion plans. These entities also will not berequired to comply with the due dili-gence and reporting requirements underFATCA. Although a discussion regardingthe Chapter 4 status of tax-exempt Cana-dian financial institutions (or their pool-ing vehicles) that may qualify asinvestment entities is beyond the scopeof this article, it is relevant for presentpurposes that Annex II generally treatsinvestment entities in which the investors

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MATIAS MILET is with Osler, Hoskin & Harcourt LLP in Toronto. He has written previously for the Journal and mem-bers of the firm are regular contributors. Mr. Milet thanks Nigel Johnston, Jennifer Lee, Grace Pereira, and Paul Seragan-ian, who reviewed and commented on a draft of the article. Special thanks to his colleague Sharon Ford for her input. Anyerrors are solely the author’s.

are exclusively certain Canadian residenttax-exempt investors—such as pensionplans, charities, or foundations—as non-reporting Canadian financial institutionsand as deemed-compliant FFIs for pur-poses of Section 1471.12

The Annex also excludes from thedefinition of “financial account” certainaccounts and products, including regis-tered retirement savings plans, registeredretirement income funds, pooled regis-tered pension plans, registered pensionplans, tax-free savings accounts, regis-tered disability savings plans, registerededucation savings plans, and deferredprofit-sharing plans. The effect of thisexclusion is that reporting Canadianfinancial institutions will not be requiredto obtain information from, or reportinformation about, these accounts.

The Canada IGA requires reportingby Reporting Canadian Financial Insti-tutions13 with respect to accounts heldby Passive NFFEs that have as control-ling persons one or more U.S. residentsor citizens.14 Thus, a Canadian residentPassive NFFE that wants to comply withthe Canadian FATCA regime will becalled on to collect and provide informa-tion regarding itself and certain of its U.S.accountholders. Accordingly, having Pas-sive NFFE status may entail considerableinformation collecting and reportingobligations.

FATCA Comes to Canada: ITA Part XVIIIThe Canada IGA is a bilateral instru-ment that is binding on the two contract-ing states, and by itself does not imposeobligations directly on Canadian FFIs(although it spells out which obligationsCanada agrees to impose on these FFIs).To put in place the legal framework thatwould impose domestic law obligationson reporting Canadian financial institu-tions to collect and report informationto the CRA (largely as the Canada IGAindicates), Canada enacted an entirelynew Part of the Income Tax Act (Cana-da) (ITA). New ITA Part XVIII includesprovisions that require reporting Cana-dian financial institutions to establishand maintain due diligence procedures,file an annual information report with

31FATCA AND CANADIAN IES l MARCH 2015 l JOURNAL OF INTERNATIONAL TAXATION

the CRA, and maintain certain docu-mentary records. The information thatthe CRA collects will be provided auto-matically to the IRS pursuant to theexchange-of-information provisions inthe Canada-U.S. tax treaty. While PartXVIII incorporates by reference many ofthe definitions, procedures, and rules inthe Canada IGA, it also significantlymodifies the scope of some concepts inthe IGA.

Interaction of the IGA and ITAUnder the Canada IGA, a Canadian enti-ty (including a partnership) will be aReporting Canadian Financial Institu-tion, Non-Reporting Canadian Finan-cial Institution, or an NFFE.15 Generally,the Canada IGA and ITA Part XVIIIimpose comprehensive due diligenceand reporting obligations on ReportingCanadian Financial Institutions and noton Non-Reporting Canadian FinancialInstitutions.

A Non-Reporting Canadian FinancialInstitution is any Canadian FinancialInstitution, or other Entity resident inCanada, that is identified in Annex II as aNon-Reporting Canadian Financial Insti-tution or that otherwise qualifies as adeemed-compliant FFI or an exempt ben-eficial owner under the FATCA Regula-tions in effect on February 5, 2014 (thedate that Canada and the United States

signed the IGA). Because of the residuallanguage (“any other Entity resident inCanada”), despite the words “FinancialInstitution” in “Non-Reporting CanadianFinancial Institution,” the phrase can applyto a Canadian resident entity that is not aFinancial Institution (and that is eitherlisted in Annex II or qualifies as a deemed-compliant FFI or exempt beneficial own-er under the FATCA Regulations). This ishelpful to certain investment entities thatotherwise would be listed in Annex II buteither do not clearly satisfy or would pre-fer not to affirm that they satisfy all of theconditions to be an Investment Entity(and thus a Financial Institution) asdefined by the Canada IGA.16

The scope of what constitutes a“Reporting Canadian Financial Institu-tion” under the Canada IGA is consider-ably broader than that of thecorresponding term in ITA Part XVIII. Asa result, while Canada may have obligateditself vis-a-vis the United States to createcertain reporting obligations in respect ofa broad range of entities, it in fact imposedthose obligations under domestic law ona narrower range. Under the Canada IGA,a Reporting Canadian Financial Institu-tion is defined as any Canadian FinancialInstitution that is not a Non-ReportingCanadian Financial Institution. Canadi-an Financial Institutions generally areCustodial Institutions, Depository Insti-tutions, Investment Entities, and Specified

Insurance Companies that are resident inCanada (or the Canadian branch of sucha nonresident entity).

The Canada IGA does not define “res-ident.” The CRA Guidance provides thatresidence for most entities will be deter-mined under the usual Canadian statuto-ry and factual tests. Although apartnership, as a type of Entity, can be aFinancial Institution, there is no generalconcept of partnerships being residents(or nonresidents) of Canada under Cana-dian income tax law. However, the CRAGuidance states—in an effort to be help-ful and provide a test where none mayhave existed—that if the control and man-agement of a partnership’s business takesplace in Canada, the partnership is resi-dent in Canada under the Canada IGA.

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1Treasury and IRS released two sets of final andTemporary Regulations (TD 9657, TD 9658, Feb-ruary 20, 2014) under FATCA. TD 9657 includedchanges to Chapter 4 of the Code. TD 9658 coor-dinated the documentation standards and report-ing and withholding rules relating to payments tonon-U.S. and U.S. persons (Chapters 3 and 61and Section 3406 of the Code), with the FATCARegulations. See PwC, “More FATCA Regula-tions,” 25 JOIT 23 (May 2014).

2See “FATCA IGA Update—Nine More Countries,”25 JOIT 6 (March 2014); “U.S.-Canada Sign Long-Awaited FATCA IGA,” 25 JOIT 5 (April 2014).

2.1The CRA Guidance was initially released on June23, 2014, and later amended to reflect stakehold-er comments.

3These categories reflect the nomenclature in theFATCA Regulations and on Form W-8BEN-E (Cer-tificate of Status of Beneficial Owner for UnitedStates Tax Withholding and Reporting (Entities)).The Canada IGA and the Canadian implementinglegislation use other terms that have overlappingscope. For example, a reporting Canadian finan-cial institution as defined in the Canadian legisla-tion is a Reporting Model 1 FFI as defined in theFATCA Regulations.

4This article focuses in particular on the Chapter 4status of Canadian investment entities and doesnot address the Chapter 4 status of other typesof Canadian financial institutions or the FATCAdue diligence, reporting, and withholding require-ments applicable to Canadian financial institu-tions, including investment entities. For acomprehensive (and excellent) overview, seeChong, “Canada and FATCA,” 43 Tax Mgmt. Int’lJ. (Bloomberg BNA) 527 (September 12, 2014).

5The description of the Canada IGA that follows(not including the further discussion of how theIGA interacts with the ITA) is based on a publica-tion by colleagues of the author. See Colan, Cor-coran, Marley, and Seraganian, “Canada SignsFATCA Intergovernmental Agreement With theUnited States” (February 6, 2014), www.osler.com/NewsResources/Canada-Signs-FATCA-Intergovernmental-Agreement-with-the-United-States.

6“Withholdable payments” generally include U.S.-source interest, dividends, rents, salaries, wages,premiums, annuities, and compensation, as wellas gross proceeds from the sale or disposition ofproperty that can produce U.S.-source interest ordividends. Section 1473(1)(A)(i). (Unless other-wise stated, “Section” refers to the U.S. InternalRevenue Code.)

The ITA generally defines a “report-ing Canadian financial institution” as aReporting Canadian Financial Institu-tion within the meaning of the CanadaIGA that is also a “listed financial insti-tution,” as defined in new ITA section263. Thus, there are two components tothe ITA definition. First, applying theCanada IGA definitions, the relevantentity must be a Financial Institution—and, as such, a Custodial Institution, aDepository Institution, an InvestmentEntity, or a Specified Insurance Compa-ny—that is not a Non-Reporting Finan-cial Institution. Second, the entity willhave to satisfy the ITA definition of “list-ed financial institution.” The “listedfinancial institution” category, which hasno counterpart in the Canada IGA, is a

statutory list of financial entities, manyof them regulated. There is a specific cat-egory for investment entities, which dif-fers from the way that the Canada IGAdefines Investment Entities. Article 1(j)of the Canada IGA defines InvestmentEntity as follows:

The term “Investment Entity” meansany Entity that conducts as a business(or is managed by an entity that con-ducts as a business) one or more of thefollowing activities or operations foror on behalf of a customer:

(1) trading in money market instru-ments (checks, bills, certificates ofdeposit, derivatives, etc.); foreignexchange; exchange, interest rate andindex instruments; transferable securi-ties; or commodity futures trading;

(2) individual and collective portfoliomanagement; or

(3) otherwise investing, administering,or managing funds or money onbehalf of other persons.

The definition in the Canadian IGAfinishes with a statement that “Invest-ment Entity” is to be construed in lightof the Financial Action Task Force(FATF) recommendations, a set of guide-lines relating to money laundering andterrorist financing that includes a defini-tion of “Financial Institution.”17

So long as an entity is managed byan asset manager or other institutionthat conducts any of the activities listedin the above definition as a business, itwill be an “Investment Entity.” Thus, forexample, an environmental remediationtrust or a family trust managed by anentity the business of which includesadministering or managing funds onbehalf of other persons would seem tobe an Investment Entity under theCanada IGA. Unlike the definition of“investment entity” in the FATCA Reg-ulations (but as in the Model 1 IGA),18

there is no requirement in the CanadaIGA that the applicable InvestmentEntity or its manager/administrator“primarily” conduct the listed activitiesas a business.19

The corresponding concept forinvestment entities in the ITA is not asbroad as in the Canada IGA. Paragraph(k) of the ITA definition of “listed finan-cial institutions” (Part XVIII, section263(1)(k)) refers to an entity that is:

represented or promoted to the pub-lic as a collective investment vehicle,mutual fund, exchange traded fund,private equity fund, hedge fund, ven-ture capital fund, leveraged buyoutfund or similar investment vehicle thatis established to invest or trade infinancial assets and … managed by anentity referred to in paragraph (j).

For such an entity to be a “listed finan-cial institution,” it must, among otherthings, be managed by a “listed financialinstitution” described in paragraph (j),which refers to an entity that is “autho-rized under provincial legislation toengage in the business of dealing in secu-rities or any other financial instruments,or to provide portfolio management,

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investment advising, fund administra-tion, or fund management, service.”

The concept of an investment entityin paragraph (k) of the ITA “listed finan-cial institution” definition, together withits companion description of qualifyingentity managers in paragraph (j),includes further limitations that circum-scribe which Investment Entities (asdefined in the Canada IGA) will be “list-ed financial institutions” and, therefore,“reporting Canadian financial institu-tions” under the ITA. Paragraph (k) con-tains a requirement, which is not in theCanada IGA, that the entity be “repre-sented or promoted to the public” assome sort of investment vehicle. TheCRA Guidance says that the requirementwill be satisfied even if marketing or oth-er communication efforts are directed ata limited or small group of potentialinvestors. However, the CRA Guidanceindicates that trusts that do not seekexternal capital (such as those used tohold family investable assets) would notsatisfy the requirement of being promot-ed or represented to the public.20 Thus,for example, the environmental remedi-ation trust and family trust mentionedabove as being Canadian Financial Insti-

tutions under the Canada IGA wouldlikely not be Canadian financial institu-tions under the ITA in light of the CRAGuidance and the securities law jurispru-dence on the concept of offering invest-ments to “the public.”21

The further requirement in paragraph(k) that the investment vehicle be “simi-lar” to those types of investment fundslisted (e.g., mutual funds, exchange-trad-ed funds (ETFs), and private equityfunds) raises questions as to which typesof investment entities are sufficientlysimilar to be “listed financial institutions”under the ITA. The listed categories ofinvestment entities in paragraph (k) pro-vide investors with a return on an equi-

ty investment that varies based on theperformance of underlying holdings ofthe vehicle. When an entity issues onlydebt to investors, who do not participatein the upside of the entity’s underlyingfinancial assets, there may be questionsas to whether there is the requisite simi-larity to the listed types of investmentvehicles. Depending on the facts, howev-er, the debt-issuing entity may have oth-er features that make it sufficiently similarto the listed investment entities to raisequestions as to whether it should be cat-egorized as a paragraph (k) “listed finan-cial institution.”

There are several issues regarding therequirement in paragraph (k) that the

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7See “Model 1A IGA Reciprocal, Preexisting TIEAor DTC,” www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Reciprocal-Model-1A-Agreement-Preexisting-TIEA-or-DTC-11-4-13.pdf.

8The Canadian enabling statute that included newFATCA provisions to be added to the ITA providesthat in the event of any inconsistency between (1)that statute or the Canada IGA, and (2) any otherlaw, the statute and the IGA prevail to the extentof the inconsistency. See section 4 of “An Act toImplement the Canada-United States EnhancedTax Information Exchange Agreement,” in Part 5of Bill C-31 (Economic Action Plan 2014 Act, No.1), enacted June 19, 2014. This provision wouldappear to permit disclosure or reporting mandat-ed by the Canada IGA or the FATCA provisions ofthe ITA when this disclosure or reporting to theIRS might otherwise be prohibited under privacyor other laws in Canada—at least to the extentthat those laws are federally enacted.

9Two U.S. citizens resident in Canada have filed alegal action in Canadian federal court seeking adeclaration that the Canada IGA, related annexes,and ITA Part XVIII (impugned provisions) areunconstitutional and of no force and effect underCanadian law. The plaintiffs challenge theimpugned provisions on two bases: (1) the exclu-sive jurisdiction that the Canadian constitutiongrants to provincial governments to pass lawsrelating to property and civil rights in theprovinces and to regulate private industry, includ-ing the banking industry, in the provinces, andthat the federal government lacks jurisdiction tovalidly enact the impugned provisions; and (2)

that by singling out and disclosing personal infor-mation of anyone who meets any of the indicia ofa U.S. person or has any connection to a U.S.reportable account under the IGA, the impugnedprovisions are grossly over-inclusive and unjusti-fiably violate individual liberty, personal security,and equality rights in Canada’s constitution.

10See Reg. 1.1471-5(f)(1).

11In addition, smaller deposit-taking institutions,such as credit unions, with assets of less than$175 million are exempt.

12Specifically, this favorable treatment applies toentities or arrangements described in ArticleXXI(3) of the Canada-U.S. tax treaty. Section III(I)of Annex II of the Canada-U.S. IGA.

13See note 15, infra, regarding capitalization ofterms in this article.

14“Controlling persons” is defined, in part by refer-ence to the Financial Action Task Force Recom-mendations, at Article 1(mm) of the Canada IGA.

15In the remaining discussion, capitalized undefinedterms have the meaning given to them in theCanada IGA.

16For example, an entity that might be classified asan Investment Entity as defined in Article 1(j) ofthe Canada IGA but is not managed by anotherentity that conducts as a business the types ofactivities listed in the definition (such as portfoliomanagement) may have domestic Canadian taxreasons for not wanting to affirmatively take theposition that it is an Investment Entity, as it maynot want to describe itself as conducting invest-ment activities “as a business,” as per the lan-guage in Article 1(j). If the entity is resident in

Canada and listed in Annex II, it need not affirma-tively take the position that it is an InvestmentEntity. The ITA definition for a non-reporting Cana-dian financial institution is similar, in that it appliesboth to any “Canadian financial institution” (whichunder the ITA requires that the entity be a “listedfinancial institution,” a fairly narrow term as dis-cussed in the text below) or other entity residentin Canada, in each case that meets conditions likethose in the IGA definition of Non-Reporting Cana-dian Financial Institution. But for the “other entityresident in Canada” language in the ITA, a non-reporting Canadian financial institution would haveto be a “listed financial institution.”

17See Canada IGA Article 1(j) and FATF, “Interna-tional Standards on Combating Money Launder-ing and the Financing of Terrorism &Proliferation—The FATF Recommendation” (Feb-ruary 2012), www.fatf-gafi.org/media/fatf/docu-ments/recommendations/pdfs/FATF_Recommendations.pdf.

18See Reg. 1.1471-5(e)(4)(i)(A).

19The omission of the “primarily conducts as a busi-ness” requirement potentially raises the questionwhether certain entities in which the business activ-ities secondarily include administering or manag-ing funds on others’ behalf were intended to resultin a finding that such an entity (or one managed byit) is an Investment Entity under the Canada IGA.

20See CRA Guidance, para. 3.21, and Example Cin para. 3.27.

21The leading Canadian case on whether securitiesare offered to the public is R. v. Piepgrass, [1959]29 W.W.R. 218.

FATCA

investment vehicle be managed by anentity that, as stated in paragraph (j), isauthorized under Canadian provinciallaw to act as a dealer, investment advisor,fund administrator, fund manager, orportfolio manager. If the primary man-ager of an investment vehicle is not itselfso authorized, will the requirement besatisfied if the manager enters into aninvestment management, sub-advisory,or administration agreement with a port-folio manager, investment advisor, orfund administrator that has the requisiteprovincial authorizations? In otherwords, would a portfolio manager, sub-advisor, or administrator that has a con-tractual relationship with the “primary”fund manager be considered to be man-aging the entity in determining if para-graph (k) is satisfied? That is somewhatunclear, although the inclusion of portfo-lio management, investment advising,and fund administration in paragraph (j)suggests that the concept of entity man-agement in paragraph (k) is a broad one.

Another interpretive issue concerningthe investment vehicle manager stemsfrom the requirement that the managerbe “authorized” under provincial legisla-tion to engage in the enumerated activi-

ties. One possible interpretation of theauthorization requirement is that underprovincial securities or similar laws, themanaging entity is registered as a dealeror advisor, for example, or acts under anapplicable registration exemption. TheCRA Guidance takes a broader view ofwhat it means to be “authorized,” sayingthat no registration is required and thatan entity will have the requisite authoriza-tion so long as the provincial legislation“contemplates” any of the listed activitiesand the entity can perform one or moreof them in the province (e.g., if it isexempt from a registration requirement).

The CRA Guidance regarding themeaning of “authorized” in paragraph (j)is helpful in the context of Canadian pri-vate equity. The expectation is that pri-vate equity fund partnerships managedin Canada will generally take the posi-tion that they are reporting Canadianfinancial institutions under Part XVIII ofthe ITA. The author understands that, asa securities law matter, the general indus-try position of Canadian general part-ners of private equity fund limitedpartnerships that are actively involved inthe management of portfolio companiesis that they are generally not engaged in

activities requiring registration, so theyare neither registered as fund managers(or otherwise) nor purporting to be act-ing under a registration exemption.22 Itseems that if the law of a particularprovince “contemplates” that an entitycan act as a general partner of a limitedpartnership, and permits the entity to dowhat is required to manage a limitedpartnership engaged in investment activ-ities without requiring registration underprovincial law, the CRA would at leasttake the view that a general partner of aprivate equity fund limited partnershipacting in that province has the requisiteprovincial law authorization to make thepartnership a “listed financial institution”under the ITA.

New Kind of HybridityAs should be evident from the discussionabove, there is imperfect overlap betweenthe concept of Investment Entity in theCanada IGA and the corresponding con-cept in the ITA, namely, paragraph (k) ofthe definition of “listed financial institu-tion.” For the most part, the latter is thenarrower concept, which raises the issueof the status under the FATCA Regula-

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22This industry position is supported by section I.3of “Companion Policy 31-103CP RegistrationRequirements and Exemptions.” The issue ofwhether registration is required would depend inpart on the type of fund, with fund of funds orhedge funds making it more likely that the fundmanager will be considered engaged in activitiesrequiring registration.

23Unlike other defined terms used in this article,“Hybrid Canadian FI” is not used in anylaw/rule/IGA, but is created just for purposes ofthis discussion.

24See CRA Guidance, para. 3.28, which addressesthe status of an entity that fails to qualify as botha Reporting Financial Institution and a “listed finan-cial institution.” The CRA says that such an entity“is a NFFE...(or, a nonreporting Canadian financialinstitution...).” The parenthetical reference to “non-reporting Canadian financial institution” should notbe taken as an indication that a Hybrid Canadian FImight be a nonreporting Canadian financial insti-tution. A Hybrid Canadian FI is defined herein as anentity that is Reporting Canadian Financial Institu-tion under the Canada IGA but not a “listed finan-cial institution” under the ITA. The parentheticalreference by the CRA (which was not in the June23, 2014, initial release of the CRA Guidance)would seem to address the reverse scenarizo--anentity that does not qualify as a “listed financialinstitution” but does qualify as a Non-ReportingCanadian Financial Institution (for example,because it is a Canadian Financial Institution that isidentified in Annex II of the Canada IGA). Thiswould be consistent with ITA Part XVIII, underwhich, to qualify as a “non-reporting Canadian

financial institution,” an entity need not be a “list-ed financial institution.” In other words, Canadadoes not intend that the narrowness of the “listedfinancial institution” definition in the ITA cause enti-ties to fail to qualify for a beneficial status (non-reporting) under the Canada IGA and ITA.

25Reg. 1.1471-5(d).

26See Regs. 1.1471-5(e)(i) (definition of financialinstitution), 1.1471-1(b)(80) (definition of NFFE).

27Reg. 1.1471-1(b)(114).

28The requirement in the reporting Model 1 FFI def-inition that the foreign government has agreed toobtain and exchange information pursuant to aModel 1 IGA can be read as being more robust.An alternate reading is that the foreign govern-ment needs to have actually implementeddomestic rules imposing on a reporting Model 1FFIs in its jurisdiction the obligation to obtain andexchange the applicable information.

29See Reg. 1.1471-1(b)(80).

30If the Hybrid Canadian FI in fact does not techni-cally qualify as a “listed financial institution” underPart XVIII of the ITA, its decision to engage in FAT-CA reporting may put it in a position where it iscontravening the domestic privacy laws that PartXVIII was meant to override but without the pro-tection of acting in compliance with Part XVIII.

31The author understands, based on anecdotal evi-dence only, that in light of the narrow scope ofthe “listed financial institution” category forinvestment vehicles and clear statements in theCRA Guidance, most trusts established for fam-ily estate planning purposes in Canada, whetheror not they have professional management, are

taking the position that they are NFFEs underCanadian law and not registering on the IRS por-tal. While entities taking that position would notperform their own due diligence and reporting tothe CRA, they may have accounts with Canadianfinancial institutions that must apply a higher stan-dard of due diligence to financial accounts held bypassive NFFEs to identify their controlling per-sons and determine whether any such person isa U.S. resident or a U.S. citizen.

32See flush language at the end of Canada IGA Arti-cle 4(1), which requires the IRS to first notify theCRA of significant noncompliance by an entity,and then for at least 18 months to elapse withoutthe noncompliance being resolved, before theIRS can treat the entity as nonparticipating.

33See Parillo, “Canada’s FATCA Guidance: Too MuchDiscretion Used?,” Tax Notes Today (July 9, 2014).

34See Bennett, “Treasury OK With Canadian Stanceon Listed Financial Institutions Under FATCA,”BNA Daily Tax Rep’t, October 7, 2014, page G-4.

35An official of Canada’s Department of Finance hasalso cited the reference to the FATF recommen-dations in the definition of “Investment Entity” asindicating that the Canada IGA intends to excludeprivate trusts from the definition. See DiSpalatro,“Canada’s FATCA Legislation Could Irk UncleSam,” advisor.ca, May 22, 2014 (www.advisor.ca/tax/tax-news/finance-bites-back-at- FATCA-crit-icism-148790). For a detailed criticism of thenotion that the FATF recommendations can beused to support Canada’s approach, see Berg andBarba, “FATCA in Canada: The Restriction on theClass of Entities Subject to FATCA,” Canadian TaxJ. (2014) 62:3, 587-633.

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tions (Chapter 4 status) of an investmententity that for purposes of the CanadaIGA is a Reporting Canadian FinancialInstitution but for purposes of the ITA isnot a reporting Canadian financial insti-tution because it is not a “listed financialinstitution.” According to the CRA, suchan entity (“Hybrid Canadian FI”)23 is anNFFE.24 An example of a Hybrid Cana-dian FI would be a Canadian residentprivate investment trust that is a Finan-cial Institution under the IGA but not alisted financial institution under the ITA.It is unclear whether the CRA is correctin asserting that such an entity is anNFFE when the frame of reference forconstruing the statement includes theCanada IGA and the FATCA Regula-tions. As defined in this article, a “Cana-dian Hybrid FI” is a Reporting CanadianFinancial Institution under the CanadaIGA and thus cannot be an NFFE forpurposes of the Canada IGA, and whileITA Part XVIII modifies the meaning ofcertain Canada IGA terms when incor-porated by reference into the ITA, it doesnot “reach into” the Canada IGA tochange the meanings of terms therein. Asdiscussed below, however, perhaps theCRA is referring to the Hybrid CanadianFI’s overall Chapter 4 status, as definedin the FATCA Regulations, taking intoaccount the applicable Model 1 IGA andthe IGA partner’s legislation.

The FATCA Regulations provide thatan FFI includes any entity that is residentin a country that has in effect a Model 1or Model 2 IGA and that is treated as anFFI pursuant to that IGA.25 Based on itsstatus under the Canada IGA, the HybridCanadian FI would appear to be an FFIunder the FATCA Regulations, and if (asis assumed here) it is an investment enti-ty for purposes of the FATCA Regula-tions, it will then be a financial institutionand thus by definition not an NFFE(unless, as discussed below, it is treatedas an NFFE under an IGA).26 In addi-tion, the Regulations generally define a“reporting Model 1 FFI” as an FFI withrespect to which a foreign governmentagrees to obtain and exchange informa-tion pursuant to a Model 1 IGA.27

Because the Hybrid Canadian FI is clas-sified as a Reporting Canadian FinancialInstitution under the Canada IGA, it is

arguably an entity with respect to whichthe Canadian government has commit-ted to obtain and exchange informationpursuant to a Model 1 IGA (notwith-standing that Canada’s implementing leg-islation could be regarded as notfollowing through on that commit-ment).28 Thus, the Hybrid Canadian FIseemingly fits within the definition of aReporting Model 1 FFI under the FAT-CA Regulations.

While the FATCA Regulations deferto IGAs to the extent of treating whatotherwise would be an FFI as an NFFE ifthe entity is treated as an NFFE in anIGA,29 we have concluded that a HybridCanadian FI is not an NFFE within themeaning of the Canada IGA, and theFATCA Regulations do not go so far asto provide that an NFFE includes any for-eign entity treated as an NFFE under thedomestic laws of an IGA partner. Thatsaid, and as discussed below, it may bethat the IRS will defer to determinationsof Chapter 4 status under local lawsimplementing an IGA.

That the CRA would declare a HybridCanadian FI to be an NFFE, while suchan entity seemingly remains a financialinstitution under Chapter 4, puts theentity in a difficult place in terms of com-pliance. In Canada, the Hybrid CanadianFI may find it attractive, particularly if itis not controlled by U.S. residents or cit-izens, to accept the less onerous path laidout for it under the ITA and the CRAGuidance, i.e., taking the position that itis not a reporting Canadian financialinstitution. However, when it comes tocertifying its Chapter 4 status on a FormW-8 under penalty of perjury, usingterms that have meanings laid down byU.S. law, the entity understandably mayhesitate to certify that it is a (passive oractive) NFFE.

It would appear that differentapproaches have been adopted in the faceof the compliance quandaries facingHybrid Canadian FIs. There is margin forjudgment and flexibility in approachsince an entity may find itself a possibleHybrid Canadian FI as result of arguableconflicts between rules that are some-what ambiguous and, in any event, notyet subject to longstanding administra-tive guidance. In this light, even if the ITA

might be read as not treating the entityas a Canadian financial institution sub-ject to reporting obligations, oneapproach that some entities are adoptingis to (1) register on the IRS portal as areporting Model 1 FFI; (2) fully complywith the due diligence and reportingobligations imposed under the ITA andCanada IGA on reporting Canadianfinancial institutions;30 and (3) state onForms W-8 that the entity is a reportingModel 1 FFI.31A variant of this approachwould be for an entity to take steps (1)and (3) but not (2), that is, to treat itselfas a Reporting Canadian Financial Insti-tution without in fact doing any report-ing. A Hybrid Canadian FI adopting thelatter approach may seek to rely on lan-guage in Article 4(1) of the Canada IGAstating that even if a Reporting Canadi-an Financial Institution does not in factcomply with basic reporting obligationsthat the Canada IGA attaches to that sta-tus, the entity will not be subject to FAT-CA withholding unless and until the IRSaffirmatively declares the entity to be aNonparticipating Financial Institution.32

Yet another position being adoptedwith respect to Hybrid Canadian FIs isthat the instructions to Form W-8BEN-E (Certificate of Status of BeneficialOwner for United States Tax Withhold-ing and Reporting (Entities)) can beread as indicating that the IRS wantsforeign entit ies to determine theirChapter 4 status based on their local-country implementing legislation,33

arguably even when the resulting classi-fication may be inconsistent with theclassification under the FATCA Regu-lations. Based on that position, anotherpossible approach would be for theHybrid Canadian FI to take the standthat it is an (active or passive) NFFE notjust vis-a-vis the CRA for domesticFATCA reporting purposes, but alsowhen certifying its status to U.S. with-holding agents and other FFIs. Thoseadopting this compliance posture mayalso seek to derive comfort from theabove-mentioned language in Article4(1) of the Canada IGA regardingReporting Canadian Financial Institu-t ions that do not comply with thereporting obligations in the CanadaIGA for entities having that status.

A U.S. withholding agent obtaining awithholding certificate and an FFI col-lecting accountholder information maynot, without further inquiry, rely on pay-ee or accountholder documentation ifthe withholding agent or FFI has “reasonto know” that the information providedis unreliable or incorrect. Accordingly, inchoosing a compliance approach, aCanadian Hybrid FI should be mindfulthat questions may be raised when theexpectations of a withholding agent orFFI as to an entity’s Chapter 4 status areinconsistent with the status reported bythe entity.

There is some indication that Treas-ury will not be opposing the approachto Investment Entities adopted in Cana-da’s implementation of the CanadaIGA.34 Speaking at a public FATCAsymposium on October 6, 2014, BrettYork, an Attorney-Advisor in Treasury’sOffice of International Tax Counsel, wasasked about Canada’s exclusion of pri-vate trusts from the definition of “listedfinancial institution” (and thus from theCanadian domestic concept of a report-ing Canadian financial institution).York said that Treasury had given a lotof thought to Canada’s narrowing of thescope of what counts as a financialinstitution through its listed financialinstitution category in the ITA, and thatTreasury was “okay with this interpre-tation in the context of the Canadian

IGA.” York referred to the cross-refer-ence in the Canada IGA definition ofInvestment Entity to the FATF recom-mendations as in some way explainingTreasury’s acceptance of the Canadianapproach, although the reasoningoffered as to the relevance of the FATFrecommendations was somewhatopaque.35 York was not asked, so it isunclear, whether Treasury’s benignacceptance of Canada’s narrowing ofthe Financial Institution concept in thecase of private trusts would extend toother types of Financial Institutionsthat Canada has excluded from domes-t ic FATCA report ing obligat ionsthrough the ITA “listed financial insti-tution” concept. Put another way, it maybe going too far to interpret these initialcomments from Treasury as signallingthat it has decided that its public posi-tion is that now all Hybrid Canadian FIscan simply choose NFFE as their Chap-ter 4 status.

There is an additional, though far lessproblematic, way in which an entitycould be classified inconsistently underthe Canada IGA and the “listed financialinstitution” definition in the ITA. An enti-ty that fits in one of the categories of “list-ed financial institution”—for instance, a“loan company regulated by a provincialAct” (paragraph (i) of the definition)—could, based on its facts, not qualify asany type of Financial Institution in the

Canada IGA (for example, not a Depos-itory Institution or Custodial Institu-tion). If it indeed does not qualify as aFinancial Institution for purposes of theCanada IGA, such a “listed financialinstitution” would be classified the sameway under the Canada IGA and the ITA,since a reporting Canadian financialinstitution under the ITA must qualify asa Financial Institution under the Cana-da IGA, in addition to being a “listedfinancial institution.”

ConclusionWhile this article has noted gaps andinconsistencies between Canada’simplementing legislation on one hand,and the FATCA Regulations and Cana-da IGA on the other, it is at least equal-ly important to emphasize that for mosttypes of Canadian investment entities,there will be little uncertainty or incon-sistency with respect to their statusunder ITA Part XVIII, the FATCA Reg-ulations, and the Canada IGA. Forexample, a mutual fund or ETF inwhich investments are managed by anentity that is registered in a province asa portfolio manager or investment fundmanager, as well as the manager itself,will be a reporting Canadian financialinst itut ion under the ITA and theCanada IGA and, on registering on theIRS FATCA portal, a reporting Model1 FFI under the FATCA Regulations.Thus, the entity will clearly be a regis-tered deemed-compliant FFI under theRegulations that will have reportingobligations to the CRA but will nothave to enter into an FFI Agreementwith, or do information reportingdirectly to, the IRS. However, for cer-tain Canadian investment entit ies(Hybrid Canadian FIs herein), thisclarity is lacking and there are judg-ment calls to be made in terms of theirChapter 4 status and resulting compli-ance duties. These entities will perhapsbe emboldened by recent favorable sig-nals from Treasury to rely on the CRAGuidance to select their Chapter 4 sta-tus and domestic reporting posture,and pay less regard to contrary indica-tions in the FATCA Regulations or theCanada IGA. �

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