Starting next July, Canadian banks will be required to ask anyone opening a new account if they are now, or ever have been, an American "person."
It comes at the behest of the U.S. government and its efforts to “smoke out” tax dodgers.
The Foreign Accounts Tax Compliance Act, or FATCA, was passed by the U.S. Congress in 2010 and comes into force July 1, 2014.
The law forces all banks and other financial institutions outside the U.S. to search for customers who have certain "indicia." Those are markers that show the person may be a U.S. citizen or a former permanent resident who, under U.S. law, must file income tax returns to Uncle Sam no matter where they reside in the world.
The only other country with similar tax rules for expats is Eritrea.
When announcing the law, U.S. President Barack Obama said, “if financial institutions won’t cooperate with us, we will assume they are sheltering money in tax-havens and act accordingly.”
The threat is a withholding tax of 30 per cent levied on every transaction a non-compliant bank has coming from, or even passing through, the U.S.
“Bottom line is: there is absolutely no way that a large, modern financial institution like a Canadian bank or a large credit union could escape FATCA,” says Marion Wrobel, vice-president of policy and operations at the Canadian Bankers Association (CBA).
Wrobel says his organization has been fighting FATCA since it was announced, calling it the “extra-territorial” application of American law.
"The only reason the Americans can do it is because it is a large economy, financial markets are integrated globally," Wrobel adds, "and it is virtually impossible for a large institution like a Canadian bank, an insurance company, a securities dealer, a large credit union to avoid being caught up in a FATCA net."
Starting July 1, 2014, banks will be required to scour the records of all of their customers with more than $50,000 in an account.
They will be looking indicators such as: place of birth, alternate addresses and phone numbers, and past residency in the United Sates. Every file with at least one indicia marker will be flagged as a “U.S. Reportable Account.”
At the same time, anyone wanting to open a new account will be asked directly if they are a “U.S. person” as defined by the IRS. Anyone who answers affirmatively will be flagged.
Wrobel says refusing to answer the question could also land any Canadian in trouble.
“If you refuse to answer it you could be considered recalcitrant and your information could be reported.”
So far the banks' protests have changed little. The best they have been able to do is take some of the heat off themselves directly. Canada is close to negotiating an Inter-Governmental Agreement (IGA) with the U.S. to implement FATCA.
Once in place, the bank would no longer be required to send private customer information directly to a foreign government agency. Instead, Canadian banks will flag their customers to the Canada Revenue Agency, and — under the terms of the agreement — the CRA will be the one that automatically transmits all the information to the IRS.
'Infringement of liberty and privacy'
To enact the IGA, the Canadian government would almost certainly need to introduce a new law or amend existing ones to allow financial institutions to breach the privacy of Canadian citizens and residents.
It’s not clear how that can be done without running afoul of the Canadian Charter of Rights and Freedoms.
Constitutional lawyer and expert Peter Hogg wrote to the Finance Department to express his concerns about the proposed deal.
In a copy of the letter released under Access to Information, he says: “To impose on financial institutions the duty to report to CRA (en route to the IRS) the names, addresses, place of birth and date of birth and details of the bank accounts of account-holders identified only by their place of birth in or citizenship of the United States, and all under the implicit threat of taxes, penalties or prosecutions by the IRS, seems to me to be a clear case of discrimination in contravention of [Section] 15 [of the Charter].”
He goes on to say: “There is no mechanism in the Model IGA whereby individuals who are suspected to be U.S. citizens would even know that their personal information was provided, “ Hogg’s letter argues, “thus there may be no opportunity to provide additional information or take other steps in order to prevent the transmission of this information from Canada.”
At best, Hogg believes, it is an infringement “of liberty and privacy,” but possibly also violations of at least three sections of the Charter.
The plan has critics around the world.
"I don’t think it's pejorative to use the term 'fishing expedition,' that term has been used by the U.S. government already and people talking about FATCA — that's exactly what this is," says Allison Christians, the Stikeman Chair of Tax Law at McGill University.
She points out Canada and the U.S. already have a tax treaty that’s been in place for almost 20 years, which allows the IRS to obtain information on specific individuals from the CRA automatically.
"But FATCA wants more," Christians adds. "They want not just the ones we have already identified; they want to, in the words of a former treasury secretary, 'smoke out' the Americans who are hiding."
And this is where many experts believe FATCA might not just be unconstitutional, but also misguided.
"It's not risk-based, it's not targeting known tax havens. It's looking at places like Canada, you know — Americans do not come to Canada for the low taxes," says Wrobel.
Perhaps to add insult to injury, the individual Canadian financial institutions being deputized by the IRS to sniff out wayward U.S. taxpayers need to cover the cost of the added scrutiny, monitoring, and reporting themselves.
The CBA estimates it will likely cost the big banks $100 million each to comply with FATCA.