Author: Dean Smith (PhD, CFP, TEP, CPA, CA, RWM; Partner)
The U.S. Corporate Transparency Act (CTA)
Over the last number of years, various countries have introduced, and continue to do so, new rules aimed at providing beneficial ownership information.
Some background
The CTA was enacted as part of the “Anti – Money Laundering Act of 2022” contained within the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (P.L. 116-283). According to the U.S. Department of the Treasury and its Financial Crimes Enforcement (FinCEN) bureau “It is intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.”
Corporate Transparency Act (CTA) – What do I need to know?
The CTA took effect on January 1, 2024, requiring certain companies to submit beneficial ownership information reports (BOIR) to the Financial Crimes Enforcement Network (FinCEN). Reporting companies that have been in existence prior to January 1, 2024, have until January 1, 2025, to file their initial report. For companies formed in 2024, FinCEN extended the deadline from 30 days to 90 days “from the date of receiving actual or public notice of their creation or registration becoming effective to file their initial reports.” Companies formed after January 1, 2025, will be required to file their first report within 30 days.
What is a reporting company?
A reporting company is defined as a corporation, limited liability company or other similar entity that is created by filing a document with the secretary of state (or an equivalent office) of any state, or formed under foreign law and registered to do business in the United States in a like manner.
Examples of reporting companies include:
1. U.S. domestic companies (i.e. incorporated in the one of the 50 states)
2. Non- U.S. companies that are registered to do business in any state.
The Act exempts many categories of companies from the reporting requirement, specifically:
• Companies that are already subject to supervision or otherwise closely regulated by the federal government (e.g., banks)
• Dormant companies
• Companies that employ more than 20 people, filed a tax return reporting gross receipts in excess of $5 million, and have a physical presence in the United States
• Any entity owned by an entity otherwise exempt.
Who is a beneficial owner and/or an applicant?
A beneficial owner is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over an entity or (ii) owns or controls at least 25% of the ownership interests in an entity. A few notable exceptions from the Act include:
• Minors, provided that information with respect to a parent is otherwise reported
• An individual acting as nominee, intermediary, custodian or agent on behalf of another individual
• Persons who control an entity solely because of their employment
• An individual whose only interest in a reporting company is through a right of inheritance
An applicant is defined broadly as an individual who files an application to form a corporation, limited liability company, or other similar entity under the laws of a State of Indian Tribe; or registers or files an application to register a corporation, limited liability company or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under the laws of a State of Indian Tribe.
As such, a beneficial owner of a Canadian corporation would be required to file a BOIR if the Canadian corporation has registered to do business with a state’s secretary of state. Many Canadian entities, who carry on a business within the United States, have registered with a state secretary of state in order to have legal standing in that State.
At the time of writing, it appears that a Canadian company which has not registered to do business with a secretary of state (see comments below), is not required to file a BOIR. Canadian companies holding passive investments, such as U.S. limited partnership units, in the United States would not be required to file a BOIR.
In general, a company should be registered in a state if the company is deemed to be “transacting business” in that state. This may include, amongst other factors, having employees located in a state, having a store front located in the state or owning real property in the state. Laws vary from state to state.
Readers are cautioned that they should seek appropriate U.S. legal advice when determining what their state registration requirements may be. The above discussion is for informational purposes only.
What information must be reported and when?
The report shall include the full legal name; date of birth; current, as of the date on which the report is delivered, residential or business street address; and unique identifying number from an acceptable document for each beneficial owner and/or an applicant, with an option for such individuals to request and use a FinCEN unique identifying number instead. A reporting company will need to update the information provided to FinCEN upon a change in beneficial ownership.
How do I file?
FinCEN has created a website (https://www.fincen.gov/boi ) where one can obtain information and file their BOI reports (BOIR). You can either print off a PDF form, complete it and later submit it on-line or you can prepare and file the report directly online. The website appears to be relatively easy to use.
What happens if I don’t file?
It is unlawful for any person to
• Willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or documents or
• Willfully fail to report complete of updated beneficial ownership information to FinCEN.
Any person that violates either, of the above conditions, shall be liable for a civil penalty of not more than US $500 for each day that the violation continues or has not been remedied; and may be fined not more than US $10,000 and/or imprisoned for not more than 2 years.
It should be noted that the potential penalties apply to a willful violation. In general, willfulness is shown by an individual’s knowledge of the reporting requirements and a conscious decision not to comply. Willfulness means that the individual acted with knowledge that their conduct was unlawful – a voluntary, intentional, violation of a known legal duty. The IRS Internal Revenue Manual (IRM) states “The civil test for willfulness is whether a person either: (1) knowingly violated a legal duty; (2) recklessly violated a legal duty; or (3) acted with “willful blindness” by making a conscious effort to avoid learning about a legal duty.” With respect to the filing of the Foreign Bank Account Reports (FBARs) IRM 4.26.16.5 provides guidance as to how IRS agents may assess penalties. Absent any new guidance, we would expect the IRS to assess CTA penalties in a similar manner.
There are also significant penalties for any unauthorized disclosure or use such beneficial ownership information.
Legal challenge
On March 1, 2024, the U.S. District Court for the District of Alabama declared the Corporate Transparency Act unconstitutional. Judge Liles C. Burker determined that the CTA “transcends the limits imposed by the Constitution of the legislative branch and lacks a strong connection to any enumerated power to serve as a necessary or appropriate means to achieve Congress’ policy objectives.”
The National Small Business Association (NSBA) alleged that the CTA reporting requirements obligate U.S. citizens and residents to report sensitive personal information, in violation of their constitutional rights. The U.S. District Court decision enjoined enforcement for NSMA members. All other business entities, however, are still obligated to file the required information.
At the time of writing, the case is on appeal before the Eleventh Circuit Court.
How can Cadesky U.S. Tax Ltd. help?
Please feel free to reach out to us at usadminsupport@cadesky.com for questions on the filing requirement for your entity or assistance with submitting the online form with FinCEN.
