On this page
- New reporting requirements for financial accounts
- Why are there new requirements?
- How a financial institution determines accounts that must be reported to the CRA
- Information reported to the CRA and shared with the U.S. or a CRS partner
- Information a financial institution requires about an entity account holder
- Details about entities
New reporting requirements for financial accounts
This information is for corporations, trusts, partnerships, and other organizations (referred to in this document as entities). The information will help entities that hold or want to open an account with a financial institution in Canada and that want to know if information about their financial account will be reported by their financial institution to the Canada Revenue Agency (CRA) and shared with the United States (U.S.) and/or other jurisdictions.
The intergovernmental agreement between Canada and the U.S., and the international standard for the automatic exchange of financial account information between tax administrations, also known as the Common Reporting Standard (CRS), are designed to improve tax compliance. To achieve this, financial institutions need to collect additional information from their account holders. If you are a sole proprietorship, see the information for individuals holding accounts with Canadian financial institutions.
Under the agreement with the U.S. and under the CRS, financial institutions have to follow the due diligence procedures by reviewing information in their records or that is publicly available and / or collecting information from their account holders to identify entity account holders that are non-residents, as well as entity account holders that are controlled by non-residents or U.S. citizens. For example, a corporation may be asked to certify or clarify where it is incorporated, the nature of its activities, and to provide information about its controlling persons. Financial institutions need this information to meet their obligations for tax reporting to the CRA.
The CRA gives the financial information it receives from financial institutions about U.S. entities and entities controlled by U.S. residents and U.S. citizens to the U.S. government. The CRA also gives to each of its CRS partners the same type of financial information about other non-resident entities and entities controlled by other non-residents with respect to their own residents. The U.S. and those CRS partners provide the CRA similar information on Canadian entities and entities controlled by Canadian residents holding accounts with financial institutions located in their jurisdictions.
These requirements are in addition to obligations under other regulatory regimes, for example, for money laundering purposes.
Why are there new requirements?
With the world becoming increasingly global, it is easier for entities to invest through financial institutions outside their country of residence. Without increased international cooperation, vast amounts of money are kept offshore and risk going tax-free. Governments must modernize their approaches to make sure all taxpayers pay their fair share of taxes. In Canada, these changes mean that financial institutions have to take steps to more accurately record the tax residence status of their account holders, so that Canada can exchange information with the appropriate foreign government.
The intergovernmental agreement with the U.S. is a way to meet U.S. objectives under the Foreign Account Tax Compliance Act. To do so, the agreement relies on the provisions for information exchange in the Canada-U.S. tax treaty. The agreement requires Canadian financial institutions to identify financial accounts held by entities that are organized in the U.S. or controlled by U.S. residents or U.S. citizens and to report certain information to the CRA. The CRA provides the information to the Internal Revenue Service (IRS) in the U.S. and the IRS provides the CRA with information on accounts of Canadian residents held at U.S. financial institutions.
The intergovernmental agreement is entered into force on June 27, 2014. Laws have been enacted to support its implementation, including Part XVIII of the Income Tax Act. Canadian financial institutions started to collect information about new client accounts on July 1, 2014. Starting in 2015, these financial institutions report annually to the CRA information on their U.S. account holders.
Part XIX of the Income Tax Act was enacted on December 15, 2016 to implement the Common Reporting Standard (CRS). Canadian financial institutions will begin collecting information about new client accounts on July 1, 2017. Starting in 2018, these financial institutions will report annually to the CRA information on their non-resident account holders.
Under the agreement with the U.S. and the CRS, financial institutions have new requirements for reporting information to the CRA.
How a financial institution determines accounts that must be reported to the CRA
Financial institutions have to know the tax status of account holders and others they deal with. In the past, tax residency was often determined based on information at hand, such as an address, without more detailed enquiries.
If you hold an account at a financial institution as of June 30, 2017, it may need to be reviewed. Your financial institution may rely on information in their records or that is publicly available to determine if the account is held by a non-resident entity or by an entity controlled by non-residents or U.S. citizens. If there is such an indication, your financial institution may request a self-certification to verify the status of the entity and the controlling persons.
If you are a new client at a financial institution after June 30, 2014, with respect to the agreement with the U.S. and after June 30, 2017, with respect to the CRS, your financial institution will ask you to certify whether you are a non-resident entity or if you are an entity controlled by one or more non-residents or U.S. citizens when you open the account and to provide documentation to support any representation you make. Your financial institution will confirm the reasonableness of such self-certification based on the information obtained.
The CRA has developed a form that financial institutions can use for collecting the information required to determine the tax residency of the account holder and of its controlling persons. However, financial institutions are free to collect the information in other ways, as long as they meet their reporting requirements.
Financial institutions have to send to the CRA information on account holders who do not cooperate with requests for information. The CRA sends this information to the U.S. if the entity or the controlling person refused to attest their status or to the government of the jurisdiction in which the entity or the controlling person appears to be a resident of.
Information reported to the CRA and shared with the U.S. or a CRS partner
The account information that is collected and shared with the U.S. and CRS partners includes the name, address, entity's tax identification number, and certain financial information about the account as well as the name, address, taxpayer identification number and in certain cases the date of birth of the individual(s) controlling the entity.
Financial institutions have to collect and report to the CRA information on the account holder and the related controlling persons that are reportable. For U.S. entities and entities controlled by U.S. residents and U.S. citizens, the CRA will send the information to the U.S. government under the provisions of the Canada-U.S. tax treaty. For other non-resident entities and entities controlled by other non-residents, the CRA will send the information to each of its CRS partners with respect to their own residents under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters or the relevant bilateral tax treaty. The Convention and Canada's bilateral tax treaties, including the Canada-U.S. tax treaty, contain robust safeguards to ensure that the U.S. and the CRS partners treat the taxpayer information they receive as confidential and that it is used solely to administer tax laws.
For more information on the agreement with the U.S. and on the CRS, see the Intergovernmental Agreement for the Enhanced Exchange of Financial Account Information under the Canada-U.S. Tax Convention and the Standard for Automatic Exchange of Financial Account Information in Tax Matters, respectively.
Information a financial institution requires about an entity account holder
A financial institution has to determine:
- Where an entity is resident for tax purposes.
- Whether the entity is a U.S. person and, if so, whether it is a specified U.S. person.
- Whether the entity is a financial institution and, if so, the type.
- Whether the entity is a non-financial entity (or a non-financial foreign entity) and, if so, whether it is a passive non-financial entity controlled by non-residents or a passive non-financial foreign entity controlled by U.S. residents or U.S. citizens.
Details about entities
Residence status
Generally, an entity will be a tax resident of a jurisdiction if, under the laws of that jurisdiction, it pays or should be paying tax there because of its domicile, residence, place of management or incorporation, or any other similar criterion. An entity will generally be considered resident:
- if it is a corporation, in the jurisdiction where it is incorporated;
- if it is a trust, in the jurisdiction where its place of management and control is located;
- if it is a partnership, a limited partnership, or a similar legal arrangement, in the jurisdiction where its place of management is located.
For more information on the residence of a corporation or a trust for Canadian tax purposes, see Residency of a corporation and Residency of a trust or estate.
U.S. person
Generally speaking, an entity is a U.S. person if it is:
- a corporation or partnership organized in the U.S.;
- a trust subject to U.S. law that is controlled by one or more U.S. citizens or U.S. residents, for tax purposes;
- a testamentary trust of a deceased person who was a U.S. citizen or a U.S. resident, for tax purposes at the time of death.
A corporation that was incorporated in Canada, or organized in any other jurisdiction outside of the U.S., is not generally a U.S. person.
For more information on the classification of taxpayers for U.S. tax purposes, see the IRS publication Classification of Taxpayers for U.S. Tax Purposes.
Specified U.S. person
An entity that is a U.S. person is not a specified U.S. person if it is a corporation whose stock is regularly traded on an established securities market, or if it is a U.S. agency or government. A specified U.S. person also does not include most entities that fall into any of the following categories:
- a trust or organization exempt from tax;
- a bank, real estate investment trust, regulated investment company, common trust fund, or securities or commodities dealer;
- a corporation that is related to a corporation whose stock is publicly traded.
If an entity falls in one of the foregoing categories, it should consult the definition of specified U.S. person in subparagraph 1(ff) of Article 1 of the Intergovernmental Agreement for the Enhanced Exchange of Financial Account Information under the Canada-U.S. Tax Convention to determine if it can certify that it is not a specified U.S. person.
Financial institution
An entity that holds an account at a financial institution in Canada may be asked to declare whether it is a financial institution. Accounts held by an entity that is a financial institution are generally not reportable.
To be a financial institution, an entity must be a custodial institution, a depository institution, an investment entity, or a specified insurance company that offers insurance contracts with an investment component or annuity contracts. More guidance on entities that are financial institutions is available at Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement and Guidance on the Common Reporting Standard.
An entity resident in Canada that is a financial institution must determine whether it is a Canadian financial institution, when completing a self-certification form. An entity resident in Canada that is not a Canadian financial institution is a non-financial entity (NFE) or a non-financial foreign entity (NFFE). This entity has to identify itself as an active or passive NFE/NFFE. However, an entity that is prescribed as a non-reporting financial institution can identify itself as a financial institution, even if it is not a Canadian financial institution.
More guidance on entities that are Canadian financial institutions is available at Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement and Guidance on the Common Reporting Standard.
Types of investment entities
An entity that holds an account at a financial institution in Canada may be asked whether it is an investment entity in a non-participating jurisdiction, if it is managed by another financial institution. An investment entity in a non-participating jurisdiction, managed by another financial institution and for whom at least 50% of its gross income is from investing or trading in financial assets, is considered a passive non-financial entity.
Note
See the List of participating jurisdictions.
Non-financial entity
All entities resident in Canada are non-financial entities (NFEs) if they are not Canadian financial institutions while all entities that are not resident in Canada are NFEs if they are not financial institutions.
Example
Bill is a carpenter whose business (entity) is incorporated in Canada. Since Bill’s entity is not a financial institution, it is an NFE.
Non-financial foreign entity
All entities resident in Canada are non-financial foreign entities (NFFEs) if they are not financial institutions or U.S. persons. So all Canadian and other non-U.S. entities that are not financial institutions are NFFEs.
Note
The agreement with the U.S. uses the term non-financial foreign entity (NFFE), while the CRS uses the term non-financial entity (NFE). For the purposes of the CRS, a U.S. entity that is not a financial institution is an NFE, and unless specifically stated, the term NFE has the same meaning throughout this document.
Active non-financial entity
An entity that is not a financial institution and that carries on an active trade or business is generally an active non-financial entity (active NFE). An active NFE also includes:
- a public corporation with shares that regularly trade on an established securities exchange (for example, the Toronto Stock Exchange or the New York Stock Exchange);
- an entity related to a public corporation (as described in the first bullet);
- a government (or an agency or its instrumentality thereof) that performs functions of a governmental nature;
- a non-profit organization that is exempt from tax.
A Canadian corporation that is dedicated only to running a restaurant, hair salon, car dealership, or factory is engaged in an active pursuit and is an active NFE. On the other hand, a personal investment corporation or trust that holds investments to produce passive income will not be an active NFE.
A business corporation or other entity can be involved in multiple activities or hold a combination of assets, which may make it more difficult to know whether it should be categorized as an active NFE. For example, a corporation may be carrying on an active business, but also earning significant income from portfolio holdings. It is an active NFE as long as the entity earned less than 50% of its gross income in its last fiscal year from passive income; and less than 50% of its assets held during that year were held to generate passive income (the passive income/asset test).
Passive income is generally understood to include income from the holding of investment property, such as interest, dividends, and rent.
Example
Michele is a professional photographer and her business is incorporated as ABC Photo in Alberta. She is the one shareholder of the corporation. In its last fiscal year, 70% of ABC Photo's income was from fees and commissions, and 30% was from passive income in the form of interest and dividends from assets owned by ABC Photo, which represent 25% of its total assets.
ABC Photo is an active NFE.
Passive non-financial entity
Entities that do not engage in substantive business activities to produce a good or service and that are not active NFEs are generally passive NFEs.
However, under the CRS, an entity that is an investment entity in a non-participating jurisdiction, managed by another financial institution and for whom at least 50% of its gross income is from investing or trading in financial assets, is considered a passive NFE.
Example
Joe is an optometrist whose practice is incorporated in Quebec. He is the sole shareholder of the corporation. He is preparing to retire and has reduced the number of hours he works. So the portfolio owned by the corporation now earns more income from investment assets than from fees for service. As reported for the last fiscal year, 40% of the corporation's income was from fees and 60% was passive income from investment assets.
Joe's corporation is a passive NFE.
Active or passive NFE, or NFFE?
An entity may need more information to determine if it is an active or a passive NFE, or NFFE. Before certifying its status, an entity should check the definitions of passive and active NFE in subsection270(1) of the Income Tax Act and of active and passive NFFE in Section VI, Annex I, of the Intergovernmental Agreement for the Enhanced Exchange of Financial Account Information under the Canada-U.S. Tax Convention, respectively. Also, see the following:
- Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement
- Guidance on the Common Reporting Standard
The distinction between active and passive NFE or NFFE is important. If an account holder is a passive NFE, the financial institution must identify all of the holder’s controlling persons who are non-residents of Canada. If the account holder is a passive NFFE, the financial institution must identify all of the holder’s controlling persons who are U.S. residents or U.S. citizens.
For the purposes of reporting a financial account of a passive NFE or NFFE, a financial institution is required to collect additional information in respect of the entity’s controlling persons. As such, a financial institution that maintains an account of an entity controlled by a non-resident of Canada or a U.S. citizenmay berequired to report that controlling person’s date of birth and taxpayer identification number (TIN) associated with such jurisdiction of tax residence when reporting information to the CRA. If the controlling person is a non-resident of Canada or a U.S. citizen, they must provide the date of birth and TIN to the financial institution when it asks for it. For U.S. residents and U.S. citizens, the TIN is generally the U.S. social security number. Note that if the controlling person has a Canadian social insurance number (SIN), it must also be provided to the financial institution.
Controlling persons
The term controlling persons of an entity means the individuals who have direct or indirect control over the entity. For details, see the Proceeds of Crime Money Laundering and Terrorist Financing Act (PCMLTFA) and the related regulations, particularly section 11.1. Generally, whether an individual has control over an entity is determined by how beneficial owners are identified in the PCMLTFA, as well as the ownership thresholds set by Canadian financial regulatory authorities.
For a corporation, an individual is considered to be controlling if they directly or indirectly own or control 25% or more of the corporation. If no individual is identified as controlling the corporation, a director or senior official of the corporation will be treated as the controlling person.
For a trust, the controlling persons include its settlors, trustees, protectors (if any), beneficiaries or class of beneficiaries, and any other individuals having ultimate effective control over the trust.
If the settlor, trustee, protector, or beneficiary of a trust is an entity, then for purposes of determining the trust's controlling persons, one has to look through the chain of control or ownership of that entity to identify the individual(s) having ultimate effective control over the entity. When required, the individual(s) will be reported as controlling the trust. Financial institutions can apply this requirement in a way that is consistent with how beneficial owners are identified for the PCMLTFA.
For a legal arrangement other than a trust, controlling persons are individuals in equivalent or similar positions.
Types of controlling persons
A financial institution can ask an individual to describe the type of controlling person they are. The financial institution has to identify if the individual is controlling the entity by way of ownership or by other means. If no individual can be identified as controlling the entity by way of ownership, the entity account holder must name a director or a senior officer as a controlling person. For a trust, the financial institution has to identify who the controlling person is: the settlor, the trustee, the protector, or a beneficiary. For other legal arrangements such as a partnership, the financial institution has to identify the controlling person as: the equivalent of a settlor, trustee, protector, beneficiary of the partnership, or other legal arrangements.
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