US Cross-Border Tax Blog

Published by W.L. Dueck LLP

WLDTax

Will FATCA Be Implemented in Canada?

Some commentators have suggested Canada’s recently signed Intergovernmental Agreement (“IGA”) with the US violates Canada’s Charter of Rights. If they are right and the IGA is implemented, it may be overturned by Canadian courts. The IGA is an agreement that modifies the US’s Foreign Account Tax Compliance Act (“FATCA”).

FATCA and the IGA

FATCA is primarily a reporting system that requires financial institutions outside the US to identify their clients who are US persons (including US citizens, residents and green-card holders) and report their investments and income to the US Internal Revenue Service.

Persons who do not identify themselves as US or not US persons, signed under penalty of perjury, will be subject to a 30% US withholding tax on US source investment income and gross proceeds from the sales of US securities. The withheld tax may not be creditable in the taxpayer’s home country and can only be refunded by filing a US tax return.

Canada’s IGA eliminates FATCA’s 30% withholding tax requirement and excludes reporting entirely for a variety of registered plans in Canada. The excluded plans include Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Educational Savings Plans, Tax-Free Savings Accounts and more.

What if IGA Violates Charter of Rights?

If the IGA violates Canada’s Charter of Rights and cannot be implemented or is overturned then Canadians will be subject to FATCA without the benefits of the IGA. Instead of being subject to the reporting system under the IGA, Canadians including individuals, businesses and other entities resident in Canada would be subject to the 30% withholding unless they assert their status as US persons or not US persons. The reporting will include the accounts otherwise excluded under the IGA.

Where Canadian financial institutions are prevented from collecting information on whether their client is or is not a US person, then monies arising from US transactions paid to Canadians would be subject to the 30% US withholding tax. This would be a devastating result for Canadian financial institutions and their customers who exchange hundreds of millions of dollars daily with US individuals, businesses and other entities. These entities would have to wait a year or more to claim the tax refunds owed to them.

FATCA Worldwide

FATCA is not about the US and Canada. It is about the US and the entire world. The US now has IGAs with 31 countries to date. Those countries include most Western democracies, Chile, Japan, Mexico and a handful of tax havens including Bermuda and the Cayman Islands. Another 40 countries are actively negotiating agreements. The negotiations with Russia were recently suspended by the US.

These countries are signing IGAs for two principal reasons. Firstly, even though they might not agree with FATCA, an IGA creates an opportunity to modify its terms and limit the adverse implications that may go along with it. Secondly, they want information on their own taxpayers that have accounts outside their home countries and are using such accounts to evade tax.

FATCA’s Objective and Solutions for Canadians

FATCA is a means for the IRS to identify US persons who have accounts outside the US that they do not pay tax on or disclose as required under US tax law. Compliance with these requirements by US persons resident in the US is not strong, but of 7 million Americans resident outside the US only an estimated 1 million file annual US tax returns.

For US persons resident in Canada, the IRS’ Streamlined Filing Program for delinquent filers allows qualifying taxpayers to get their tax filings current without being subject to interest and penalties. Most of these individuals will not have any US tax liability. If you wait for the IRS to find you instead of complying voluntarily, the alternatives available to you may be less attractive.

Final Comments

As offended as some Canadians and others may be about FATCA, the IGA and the US tax on its citizens and green-card holders resident outside the US, it is hard to believe that the US has any intention of revoking FATCA. Doing so could be perceived to give license to those who are already evading taxes.

It is not apparent that there is any significant political will in the US to change FATCA. The US is very focused on both attacking tax evasion by US persons in the US and outside the US. FATCA has a complementary benefit of encouraging US persons resident outside the US into compliance with their US tax filing requirements. Neither tax evaders nor non-compliant US persons abroad represent an attractive political demographic. In fact, many voters in the US appear to equate these two groups.

Clearly dumping the IGA would hurt Canadians even more than complying because they would be exposed to the full force of the tax withholding under FATCA. For US persons resident in Canada, FATCA is another reason that you should comply with your US filing obligations or at least put yourself in a position so that those obligations no longer exist.

Written by Warren Dueck, FCA, CPA

10 responses

Mr. Dueck, please understand that US tax law that requires “US Persons” who live, work, earn income & pay taxes in other countries (and who receive no services & benefits from the US government) is UNJUST.

How would you like to pay taxes with threats of draconian penalties to a FOREIGN government where you have never lived or worked?

The United States is committing EXTORTION. They are making innocent people feel like criminals, where in reality the true criminal is the US government. And you are guilty in your collaboration, taking advantage of and profiting from the innocent victims of injustice.

Remember the words of Dr. Martin Luther King Jr.:

“One has a moral responsibility to disobey unjust laws.”

Regarding this so-called “article”– here is my comment cross-posted from the popular blog isaacbrocksociety.ca:

Wow – that’s like a Babelfish translation of a North Korean government press release.

‘For US persons resident in Canada, FATCA is another reason that you
should comply with your US filing obligations or at least put yourself
in a position so that those obligations no longer exist.’

Is the author suggesting lawyer-assisted suicide?

FYI – as public service its important to note that CRA will not assist in collection of a U.S. tax debt from any Canadian citizen, unless the tax debt preceded their becoming a Canadian citizen. And the U.S has no legal power to collect taxes in Canada from Canadians.

“It is not apparent that there is any significant political will in the US to change FATCA.”

Baloney. There is growing opposition to FATCA from many quarters in and connected to the US, including the Texas and Florida bankers associations, American Citizens Abroad, Democrats Abroad, Republicans Overseas and the RNC, which has made the repeal of FATCA party policy. Rand Paul is completely committed to dismantling FATCA and vows to filibuster any more FATCA-related debates.

There is a growing awareness from every side of the highly-polarized US political divide that FATCA is simply bad for EVERYONE, no matter what their party politics might be.

I submitted the following comment to the Wall Street Journal this week :

http://blogs.wsj.com/washwire/2014/05/07/rand-paul-fights-tax-treaties-citing-privacy-concerns/

Deckard1138 wrote:

It is important to put Rand Paul’s opposition to FATCA into a larger context. Mr. Paul is simply part of a much larger anti-FATCA movement which defies all attempts at marginalization or demonization. This rapidly growing grassroots movement represents people of every political persuasion, Democrat to Republican, liberal to conservative, libertarian to green. If any good can emerge from the anti-FATCA experience, it will be to demonstrate what true respect and cooperation really means between traditional adversaries when they are ALL confronted equally by a common existential threat. Perhaps America’s diaspora may very well hold they key to breaking the self-destructive cycle of suspicion and polarization that is completely paralyzing the American system of government and civic discourse.

The terrible law that is FATCA is completely indiscriminate in its discrimination. It stems directly from a deeply entrenched mythology that has been promulgated and pandered-to for generations of Americans – that every emigrant should be regarded with suspicion, for why would anyone want to leave the greatest country on Earth? Surely such people are intrinsically suspect and should be regarded as probable tax cheats or traitors. So much so, that their vestigial constitutional rights should be suspended, that onerous penalties should be assessed for arcane, unenforceable laws imposed in the early 1970′s, and that the very sovereignty of their adopted countries should be unilaterally breached to impose extraterritorial tax law that is simply breathtaking in its imperialistic scope and audacity.

The United States is now embarking on a global economic war which it cannot possibly win, any more than it could ever hope to win an all-out nuclear war. Either this is a massive poker game and the US government is indeed bluffing, or the world is truly about to collide with the greatest single train wreck ever devised by an ostensibly democratic republic. FATCA is a clear and present danger for all of humanity; its true shape and power to be revealed beginning July 1st, 2014. Pay attention.

Mr. Dueck,

I am puzzled by the complete lack of outrage by members of the Canadian government as well as professionals such as yourself at the strong likelihood that the IGA does indeed violate the Canadian Charter of Rights & Freedoms. What is the point of having a Charter if those it is designed to protect, do not rise to the occasion of defending it when it is necessary? The Charter is designed to protect citizens from the government. The government has a duty to protect its citizens. When it fails to do so, there is no other choice.

The presumption that no other factors will come into play as this situation develops and that the doomsday scenario of FATCA being applied full-force has the same flavor of the endless fear-mongering displayed by tax lawyers and accountants when the IRS introduced the Overseas Voluntary Disclosure Program. Frankly, this technique has grown tiresome and it is time for the government to stop acting like it is completely helpless. Expats developed a name for those who could not decide whether to come forward and deal with the terror created; “full ostrich.” I cannot think of a better description for the behavior displayed by the Canadian government. As far as the motives for those in the legal and accounting professions, greed readily comes to mind. I regularly hear from people who have been quoted a cost of $900 to file a very simple 1040, $500 to do an FBAR, $500 per 3520 and so on. These are people who have very simple financial situations. That is simply shameful.

There are options which have simply not been explored. Professor Arthur Cockfield (Queens University) has consistently cited provisions in NAFTA as well as possible options of using the WTO to fight the economic sanction that FATCA is. Professor Allison Christians (McGill) has repeatedly demonstrated the strong possibility that the Treasury Department is not empowered to create IGAs in order to implement FATCA in the first place. In the United States, a new legal challenge will be launched by Constitutional lawyer, Jim Bopp. (see: http://www.washingtontimes.com/news/2014/may/5/superlawyer-jim-bopp-takes-on-mccain-backed-tax-ac/#ixzz31qYAABEg).

“Mr. Bopp told The Times that he plans to attack the act on three legal grounds: that it violates the Senate’s sole possession of foreign treaty power, the Eighth Amendment’s ban on cruel or unusual punishment and the Fourth Amendment’s personal privacy guarantee.”

Some of us (those who can) have dealt with becoming compliant and renouncing US citizenship. Not everyone is in a position to do so. The irony here is that FATCA is not about tax evasion, it is merely “sold” that way. I grew up in America. I was never encouraged to simply sit back and “take it” when something was unfair. I see no reason to be any different now.

    Patricia, You have put forth a good argument which I completely agree with. I am one of those who are free of the US Citizenship through relinquishment by becoming a Canadian Citizen in the early 1990s. I thought I was no longer a US citizen when I became a Canadian citizen. I was shocked when I found out in 2012 that the USA still considered me an American. I went to a meeting hosted by the Democrats Abroad where there were tax lawyers/accountants there waiting to sign us all up to their high fees and still saying that some of us would most likely have to pay heavy fines. Most Ex Americans did not know they had to file US tax returns, thinking that the USA was just like the rest of the world , Resident based taxation. I now have my formal CLN, Citizen Loss of Nationality. I am free of FATCA but am on the bus with my fellow American Canadian persons for the Charter Challenge. We are the Rosa Parks of this time. FATCA is immoral and a violation of our Charter of Rights and Freedom and privacy.

    The investment and compliance industry welcomes FATCA because of the profits it will bring to them. People must stand up to the US bully. Canada has said NO to the USA in the past and they should do so now.

    Mark 8:36
    For what shall it profit a man, if he shall gain the whole world, and lose his own soul:

FATCA is actually a means for the US to discriminate against Canadian residents in violation of US law which prohibits national origin discrimination and citizenship status discrimination. A Canadian resident must be treated the same as any other Canadian resident regardless of place of birth, just as how place of birth is irrelevant in the US. If America applied FATCA upon the US like how it seeks to force it upon Canada, then FATCA would be quickly abolished. It is for this reason that the US will never proviced full reciprocity, since FATCA is a US federal crime.

At the recent finance committee meeting quite a few suggestions were made that would not cost the banks the sanction while at the same time not violate our Charter. The government could undertake these amendments. It’s not as difficult as this article makes it sound and in fact is what this government should do. Something like FATCA is coming world wide but, it is only workable if the U.S. goes to residency based taxation like the rest of the world which is after all the international “norm” In the meanwhile, our government in Canada has a first responsibility to it’s own citizens and residents to uphold the laws of Canada. It has already been stated by the U.S. several times that FATCA and the sanctions that caused it will be used in the future for “political leverage” So these excuses that we have to do things exactly as they say even in violation of our own laws now will ring very hollow when even further violations are “asked” of us. If you did not watch the entire finance meeting I would do so asap. Allison Christians and Arthur Cockfield had some excellent suggestions as to how the IGA could go forward while at the same time protecting the citizens of Canada. It is not impossible to do so and there IS time to do it. If this government fails in fact to do so there will be law suits coming.

The various registered accounts that are said to not be reportable under FATCA are in fact reportable. The accounts are reportable by the individual holding the account but not by the bank where the accounts are domiciled.
These accounts are still reportable and taxable under U.S. citizenship based taxation rules. They are NOT exempt from U.S. taxation.
The only parties that benefit from the FATCA reporting exemptions are the banks. The fact that the banks don’t have to hand over information on these accounts means that they don’t have to collect client information. The U.S. gave this concession only as a face saving gesture for the Canadian government. The accounts are still considered foreign under U.S. law and they will be taxed by the U.S. in such a way as to eliminate any gain.
The I.R.S. is not anxious to have to deal with every financial institution on an individual basis so they need FATCA. FATCA streamlines everything and relieves the U.S. from having to absorb the costs of administering this part of FATCA. The IGA’s therefore make FATCA workable when it otherwise would not be so.
For the Canadian Supreme Court to strike down the IGA would be a serious pubic blow to U.S. prestige and a shock for the U.S. to find that there really are limits to its power. I for one hope that the IGA is struck down as an extraterritorial overreach by a foreign government.

I am not nor ever have been a “US person”. I am enraged at the ability for my bank to require me to identify myself one way or the other for the benefit of a foreign government. Am I likely to be penalized in my Canadian investment accounts (which may include American securities) or during borders crossings by refusing to answer my bank out of simple privacy principles.

    Thank you for your comment Alan. In general terms, under the Canada-US intergovernmental agreement, your information will be sent by your bank to the Canada Revenue Agency. The Canada Revenue Agency will determine what information needs to be sent to the Internal Revenue Service for US persons. If you confirm to your bank that you are not a US person, then no information about you will go to the Internal Revenue Service. However, if you do not inform your bank that you are not a US person and ignore their requests, then your account information will be considered that of a “recalcitrant” account. Consequently, your information would be sent by the Canada Revenue Agency to the Internal Revenue Service.

    As you can see, if you are not a US person, you are better off to confirm this to your bank so that your information does not get sent to the Internal Revenue Service.

Leave a Reply

Your email address will not be published. Required fields are marked *