U.S. act sparks privacy concerns in Canada
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.