Thank you, Mr. Chair.
Good afternoon, everyone. My name is Katie Walmsley. I am the president of the Portfolio Management Association of Canada. I also have joining with me today in the audience Mr. Paul Harris, who is chair of PMAC's board of directors and managing partner of Avenue Investment Management.
PMAC represents more than 180 investment firms across Canada, which in total manage assets of more than $800 billion and more than $1 trillion including mutual fund assets. PMAC members manage investment portfolios for private individuals, foundations, universities, and pension plans.
For FATCA purposes, portfolio managers are considered to be an “investment entity” under the FATCA rules, as they provide individual and collective portfolio management services. Portfolio managers also fall within the definition of “financial institution” under the Canadian legislation.
Our recommendation this afternoon is that portfolio managers should fall under the “deemed compliant” foreign financial institution exemption, thereby exempting portfolio managers from the registration and reporting requirements under FATCA.
Currently, given the narrow scope of the exemptions included in annex II of the Canada-U.S. intergovernmental agreement, it appears that portfolio managers in Canada will need to register with the IRS and report on their client accounts to the CRA in order to be FATCA-compliant. This is because in Canada portfolio managers have been included in the definition of “financial accounts”. As a result, they cannot avail themselves of the deemed compliant foreign financial institution exemption and therefore must register with the IRS and report on their client accounts.
There are two key reasons for our recommendation opposing both this registration requirement and reporting requirement.
First of all, custodians are the most appropriate financial institutions to report on portfolio-managed client accounts. Portfolio managers do not maintain custody of the assets for their clients; these client accounts are in actual fact maintained by a third-party custodian. The custodian has reporting responsibilities for these accounts by virtue of holding the legal title to the assets in the accounts. Custodians are already reporting on the portfolio client accounts for other tax reporting purposes and act as qualified intermediaries for these purposes. If portfolio managers cannot avail themselves of the deemed compliant foreign financial institution exemption, reporting on client accounts will occur from both the portfolio manager and the custodian. We believe this duplication is a both unnecessary and avoidable result.
The current definition of “financial accounts” under the Canadian implementing legislation will cause unnecessary duplicative reporting. As per the definition of financial accounts, portfolio managers do not maintain these financial accounts—they do not hold the assets—and the reporting should only be required by the custodial institution, which is the entity that does maintain the financial accounts. To this end, we believe that portfolio managers should be carved out of the definition of financial accounts.
The second reason for this view is that there should be a consistent application of FATCA for portfolio managers across other jurisdictions around the world. We strongly believe that the treatment of portfolio managers under the Canada-U.S. IGA should be aligned with approaches taken in the U.S. and the U.K. The “certified deemed compliant financial institution” exemption is available for investment advisers in the U.S. and the U.K. but is not available to portfolio managers in Canada.
In the U.K., when the sole activity of an entity is to act as an investment adviser of its customers' investments and the investments are held with a custodian, the investment adviser will be regarded as a certified deemed compliant financial institution. No registration or reporting is required for these investment advisers in the U.K.
Similarly in the U.S., financial institutions that are financial institutions under FATCA solely by virtue of being investment entities, but which do not maintain financial accounts, are referred to as deemed compliant financial institutions. Again, no registration or reporting is required.
We submit that there should be alignment in the application of the rules. Canadian portfolio managers and their clients are being disadvantaged unnecessarily by the approach taken in Canada. Ultimately, Canadian investors will be at risk of over-reporting on their accounts, as their accounts will now be scrutinized and reported on to the CRA by both portfolio managers and custodians. In our view, this is a very inefficient and unnecessary application of the FATCA rules.
In summary, we submit that portfolio managers who do not have custody of client assets should not be included in the definition of “financial accounts”, given that in the portfolio management context the financial account is maintained by the custodial institution. We believe that an approach similar to that taken in the U.K. or the U.S. would be more appropriate and that it ought to be made clear to portfolio managers not to maintain financial accounts for the purposes of FATCA reporting.
Investment entities in Canada, including portfolio managers, need clearly articulated rules and guidance. In all cases, it should be clear with whom the reporting responsibility lies in respect of financial accounts in order to ensure CRA receives reporting financial information on financial accounts from the appropriate source and from one single source.
Thank you.