Over the past six years, the United States has become
increasingly concerned that Americans are stashing money offshore,
essentially evading U.S. tax. The IRS has increased filing
requirements around foreign assets through the Foreign Account Tax
Compliance Act (FATCA), which requires financial institutions
around the world to report activities of U.S. investors. Banks that
don't comply with FATCA are punished severely; they can
effectively be shut out of the U.S. financial system.
The U.S. is not alone in this concern. Governments around the world are under pressure when it comes to both taxes and spending, so lots of countries are taking on similar initiatives. The CRA recently imposed much heavier reporting requirements around foreign assets. Because of this change, your accountant might have checked in with you more than usual this past spring.
The problem is Americans subject to this scrutiny include U.S. citizens who live abroad, including and especially in Canada. These people have to file U.S. tax returns reporting their worldwide incomes. Many are also Canadian citizens and some don't want their information going to the IRS.
Compliance with FATCA isn't just a problem for taxpayers – it's a nightmare for banks too. TD said it may cost $100 million to change over its systems.
To deal with this problem, Canada and the United States have negotiated an Inter-governmental Agreement (IGA). Instead of having Canadian banks sending information directly to the IRS, it will go to the CRA, which will then send it to the IRS. There are a lot of practical advantages with this government-to-government approach, including dealing with the privacy question. Tax information can legally be provided by banks to CRA and CRA can legally provide it to other revenue authorities under exchange-of-information agreements. The IGA is merely an extension of this long-established practice.
Gwen Deegan and Ginny Hillis are U.S. citizens living in Canada. They say they have not filed U.S. tax returns and do not intend to do so. They are suing the Attorney General of Canada, arguing that the IGA is unconstitutional because:
- It deprives them of the right to life, liberty and security of the person, because it facilitates U.S. tax, interest and penalties;
- It amounts to an unreasonable search and seizure, because it infringes upon their privacy;
- It discriminates against U.S. citizens, based on their national origin; and,
- It amounts to a surrender of Canadian sovereignty.
The full statement of claim can be seen
FATCA may be overkill and the scope of its collateral damage (Americans living overseas) may be excessive compared to the target (mainly U.S. residents hiding money offshore), but all countries have an interest in preventing tax evasion.
FATCA is an enforcement mechanism, not an actual tax.
Canada has had a tax treaty with the United States since 1942 – it was our first one. It contained an exchange of information article, as does every one of the 93 treaties we have in place. There are an additional 21 countries where there is no treaty (typically, these countries have little or no income tax), but where we have negotiated a Tax Information Exchange Agreement.
Information exchange has previously been found to be constitutional. It is true the FATCA goes further and potentially moves into the realm of "fishing expeditions," which have previously been held to be improper. Some commentators have said that on this basis, the IGA would be void. Peter Hogg, a respected law professor, has argued that singling out U.S. citizens amounts to discrimination based on national origin.
But under the IGA, information will also flow northward. There is worldwide support for the concept of automatic sharing of bulk information. The Organization for Economic Cooperation and Development is behind the notion and Canada has been supportive of this change for many years. This two-way sharing with the IRS is likely to morph into multi-jurisdictional sharing among many nations. It's not about one country. I think the law will stand.
What's really important is that the information exchange doesn't change any individual's obligation. Americans living in Canada always had to file U.S. returns. FATCA just makes it easier for the IRS to find these people.
Bottom line: I think the IGA will be upheld.
As a practical matter, this will be a good thing. The costs to the Canadian banking industry will be much higher without it.
They will find you anyway
The main (but not only) objection to the IGA is that it gives the IRS too much power to delve into Canadian-resident US citizens' information, and allows them to find people who haven't been filing US returns. It's important to understand that they will find you anyway:
- They will find you when you get or renew your US passport, which is required to enter the United States;
- They will find you when you cross the border with that passport;
- They will find you when you invest in US securities (with a US or Canadian broker);
- They will find you when your mother (who lives in the US) dies;
- And if all else fails, they will find you when you die. Because even if you were willing to pretend you weren't a US citizen, your executor, or her lawyer won't want to play that game.
The real problem here isn't the sharing of information, but
citizenship-based taxation. The United States is the only advanced
nation that taxes its citizens regardless of where they live.
It's a dumb idea. It's complicated. It costs Americans abroad a lot of money to file returns and plan for two (or more) tax systems. It costs the IRS a lot of money to administer it (or they can just slide the returns through, which seems pointless). It generates little revenue. The only winners are lawyers and accountants.
Unfortunately, U.S. politics is such that it's unlikely to change - try telling voters in Des Moines that their fellow Americans in Hong Kong or London shouldn't have to pay the same tax as they do.
Lastly, there's the problem of estate tax, which becomes easy to avoid in a residency-based system (Canada doesn't have an estate tax).
There is a ray of hope here. Last week the Republican National
Committee officially endorsed a change to residence-based taxation.
It's only a first step. Most Democrats still support
citizenship-based taxation, because it works for them as a partisan
Still, the Republican change gives us hope the U.S. might eventually join the rest of the world. FATCA would cease to apply to people living in Canada and this issue will go away.
To learn more about FATCA, contact Kevyn Nightingale, CA, CPA (IL), TEP at 416.515.3881 or firstname.lastname@example.org, or contact your local MNP Advisor.
1) Montreal Aluminium Processing and Philip Klein [91 DTC 5424],
Djokich [96 DTC 6214]
2) Bonham, Andrew, Canadian Tax Journal 2012 #2, FATCA and FBAR Reporting by Individuals
3) Automatic Exchange of Information, OECD, 2012
4) An Insider's View of Treaty Negotiations, Patricia Brown et al, 2009 Conference Report, Canadian Tax Foundation
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.