Canada simplifies CRS filings for PMIEs
The OECD drafted the Common Reporting Standard and related Commentary with particular attention paid to areas that were likely to be exploited by offshore investors trying to avoid reporting. At the same time, it used, where appropriate, definitions and constructs that mirrored those employed in FATCA’s Final Regulations.
Type B Investment Entities
Under both regimes, personal holding companies and trusts earning primarily passive income that are managed by financial institutions are themselves classified as financial institutions, as a (type b) Investment Entity.
“Managed by” includes retaining an institutional asset manager to manage the entity’s investment accounts on a discretionary basis.
An important result of this classification is the entity’s custody bank is not required to report on that entity’s account [so long as it is not resident in a non-participating jurisdiction – in which case it is treated as a passive non-financial entity (passive NFE)]. However, that entity is likely required report on the holders of its “equity interests” itself – essentially, in the case of a personal holding company, on its controlling shareholders.
This result is rather counter-intuitive. The owners of a typical BVI holding company, formed to hold an investment account, is unlikely to i) think of themselves as a financial institution, ii) have any idea that they need to report, or iii) know how to report.
Many investment managers provide their clients with a decision tree to guide them through the CRS classification maze. These guides tend to lead the owner of a typical BVI Holdco, with a professionally-managed discretionary investment account, to the professionally managed investment entity (“PMIE”) classification. The bank leaves it there (other than to indicate no reporting will follow).
The Canada Revenue Agency (CRA) has published CRS guidance notes, which initially look much like those of other countries.
However, CRA form RC519 E [essentially a CRS self-cert] after repeating certain CRS definitions, including word-for-word the definition of a type b Investment Entity, then advises on page five that
A passive non-financial entity is an entity that is:… …b) an investment entity described in paragraph b) of the definition of investment entity; …
In others words, something is not what it was otherwise defined to be. Curious, but perhaps helpful ultimately for those providing Canadian banks with self-certs.
The OECD has already responded to country-specific entity classifications where it sees opportunities for abuse (e.g., exempt pension plans under Hong Kong’s ORSO regime). However, choosing passive NFE means that the bank will report on the account owner and its controlling persons, and therefore does not seem a likely approach for those trying to avoid reporting. But the OECD would have the Standard with certain outcomes in mind and this approach introduces potential confusion.
Non-Canadian residents completing CRS self-certs for their offshore holding company (or trust) for a Canadian bank should now feel comfortable selecting passive NFE (if they don’t mind the reporting). Most have been doing that anyway.
However, if that entity also has a discretionary investment account booked, for example, in Zurich with a Swiss private bank, then they will likely have selected PMIE on the bank’s self-cert form, which then requires that they think about their own reporting obligations.
We doubt OECD intended the same entity would have different classifications simultaneously; after all, minimizing reporting overlaps was a stated objective.
If the entity, wearing its PMIE hat, reports to its own tax authority, should it report only the accounts maintained in those countries where it has self-certified as a PMIE, or should it report all accounts (to be passed on to authorities in participating countries)? Should being advised by the CRA that it is a passive NFE be justification for using that classification everywhere? If the IRS has not been clear that it agrees with that treatment, how should the entity complete its W-8BEN-E for the same Canadian bank? For other banks?