For the London Free Press – June 4, 2012 – Read this on Canoe
In March 2010, the U.S. government enacted the Foreign Account Tax Compliance Act (FATCA) that aims to obtain information to prevent American citizens from evading taxation through the use of foreign entities.
Sounds innocuous enough – but the act is going to have some extreme effects on Canadian financial institutions and Canadian citizens with U.S. connections, even tenuous ones.
This law is in force Jan. 1, 2013, and raises privacy issues for Canadians.
In brief, the act requires an additional layer of reporting from all U.S. taxpayers who have “foreign financial accounts” at “foreign financial institutions.”
Keep in mind that unlike most countries, the U.S. assesses income tax based on citizenship, not just residence.
This could mean that someone who has lived in Canada virtually their entire life, but was born in the U.S., or who may have been born in Canada to parents who were American citizens, is expected to file and pay U.S. taxes.
Though there are tax treaties between Canada and the U.S. that essentially say that someone who resides in Canada and pays taxes here will not be double taxed, those treaties are not simple, and may not apply in situations where tax treatment differs.
The Foreign Account Tax Compliance Act also imposes reporting requirements for all foreign financial institutions worldwide.
Banks in Canada and elsewhere are forced to use systems to identify U.S. persons who have invested in either non-U.S. financial accounts or non-U.S. entities.
Banks must also enter into an information-sharing agreement with the IRS whereby they provide account information about these individuals to the IRS. Banks who do not enter into this information-sharing agreement will have a 30% tax withheld on funds that originate from, or go through, the U.S. banking system (the “withholding tax”). Banks are obliged to withhold the 30% tax on transfers to other banks who do not enter into the agreement.
The enhanced reporting burden on Canadian banks comes with a hefty financial burden as the act is expensive and complex to implement. Banks must alter their information-gathering policies to ensure that their identification requirements match those of the act’s requirements.
In other words, we have U.S. legislation that requires Canadian banks to create and instal expensive systems to send the U.S. government financial information about Canadians who may have some tenuous connection with the U.S.
The cost of these systems will be borne by the banks, and thus indirectly by Canadians in general, and Canadian governments in terms of fewer taxes as a result of the higher initial and ongoing compliance costs.
Good article!
There are deeper problems with FATCA than privacy concerns.
FATCA would make US-born Canadians second-class citizens in their own country. This would violate the Charter of Rights and Freedoms and Human Rights Act, along with well-established principles of sovereignty, Canadian bank laws, and Canadian court judgments regarding banking and foreign tax revenue claims.
If Canadian financial institutions, with the complicity of the Canadian government, single out certain customers by birthplace, irrespective of actual economic activity, location of assets, residence or physical presence, it’s discrimination based solely on nationality or ethnic origin. It violates substantive equality by formalizing discrimination in banking services for Canadians having a certain place of birth. And it exposes these individuals to harm.
Canadians born in the US have no exemption from the protection of Canadian law; all Canadians are equal under the Charter, regardless of place of birth. The term “US person” is meaningless in Canadian law.
Any Canadian government assistance in enforcement of the foreign law FATCA would adversely affect US-born Canadian citizens who earn, bank and invest solely in Canada – long-term Canadian taxpayers with no US economic ties or presence. This includes Canadians who were simply born there while parents were visiting, or through cross-border hospital arrangements, and Canadian-born children of US-born Canadians.
For now this is hypothetical. But when there is a tort, the Canadians affected may ultimately mount a Charter challenge.