FATCA facts: What Canadians need to know about new U.S. tax law
New international sharing pact will put banks, unsuspecting Canadians under scrutiny
In six months, a little known U.S. tax law goes into effect that will affect people around the world, including Canadians.
Not only might the law — the Foreign Account Tax Compliance Act (FATCA) — reach into Canadians' pockets, by raising bank costs, but it also brings privacy and financial implications for those with American ties.
Here's a rundown on what the law is and what it means for Canadians.
What is FATCA?
The Foreign Account Tax Compliance Act became U.S. law in March 2010 but will take effect around the world on July 1, 2014. The goal of the law is to find offshore accounts held by U.S. taxpayers seeking to avoid paying taxes on them.
Under the law, banks from around the world will be asked to sift through their accounts to look for clients with U.S. connections, then share that information with the U.S. Internal Revenue Service.
The U.S. is looking for tax cheats, but critics say innocent people are getting caught up in the hunt.
Who is affected by this law?
The short answer is almost every Canadian. It is expected to cost banks substantial amounts of money to implement the systems required to find residents with U.S. connections, costs the banks may well pass along to all their clients.
Some estimate it could cost $100 million for each financial institution.
Those directly affected by the law include dual citizens, Canadians with Green Cards and some snowbirds who spend considerable time in the U.S.
Why does this affect them?
Many dual citizens in Canada comply with U.S. rules requiring them to file taxes every year. That's because the U.S. is one of two countries in the world that taxes people based on citizenship instead of residence.
But some residents didn't know until recently that they were dual citizens. For example, U.S. citizenship is automatically given to people born in Canada to U.S. parents or born in the U.S. to Canadian parents.
Also, the U.S. sees registered savings accounts like RDSPs, RESPs and TFSAs as "offshore trusts," and therefore can potentially tax gains in them.
The annual cost of filing U.S. taxes can be "astronomical," tax expert Allison Christians notes. Accounting firms estimate the cost of filing personal U.S. taxes can be anywhere from $500 to several thousand dollars.
Who's agreed to this?
To date, more than a dozen countries and several jurisdictions have signed one of the possible agreements with the U.S., many of them inking deals in the past few months. The majority signed intergovernmental agreements in which their banks will give information about U.S.-related accounts to their national tax authorities, who will then pass it along to the IRS.
This list includes Britain, Denmark, France, Mexico, Costa Rica and the Cayman Islands.
Only two countries — Japan and Switzerland — signed a different agreement that allows banks to report information directly to the IRS, rather than have it go through their national government.
Dozens of countries are either in negotiations, like Canada, or exploring their options. Experts say no bank or country will remain untouched.
What are Canada's options?
The Canadian Bankers Association calls this a costly law that does nothing to make our banking systems safer or more sound but says there is no way to avoid it.
If banks refuse to hand over lists of client accounts with U.S. ties, both clients and banks face "very severe" penalties, the CBA points out.
Penalties for banks and customers include a 30 per cent withholding tax on all U.S. source income and the sale of U.S. securities.
Is the FATCA constitutional?
Some say FATCA may not be constitutional. Law expert Peter Hogg has said that the international agreements are discriminatory because they would cause different treatment of individuals based on citizenship. He also suggested that the requirements could conflict with federal and provincial privacy laws.
What is the federal government saying about this?
In September 2011, Finance Minister Jim Flaherty sent a letter to U.S. newspapers saying that he understands efforts to crack down on tax evasion, but questioned whether FATCA would achieve that.
He said the law would waste resources on "all sides" and raises privacy concerns.
"Most of these Canadian citizens, many with only distant links to the United States, have a very limited knowledge of their reporting obligations to the United States," he wrote.
What does Canada get in return?
Currently, there's no quid pro quo for Canada but the specific agreement has yet to be signed.
Unlike many countries, Canada currently has a tax treaty in place with the U.S., meaning the two countries exchange a basic level of information relevant to authorities trying to find tax cheats. However, under FATCA, that information sharing will increase.
Starting on July 1, new rules will be put into place to help identify which accounts are "U.S. Reportable Accounts."
Over 2014 and 2015, the financial institutions will be sifting through their accounts to figure out which ones are "U.S. Reportable Accounts" — meaning which ones are owned by a U.S. person or corporation.
A system will be developed to do this that will look for indicators of U.S. connections, such as U.S. birthplace, U.S. addresses or phone numbers, an American power of attorney, or standing orders to transfer funds to the U.S.
Financial institutions can also flag individuals if they have any reason to believe they are a U.S. citizen.
Accounts under $50,000 will be deemed compliant unless a bank has reason to know the client has U.S. status. Accounts above $50,000 will get flagged if any electronic data on hand indicates U.S. connections.
Those deemed U.S. persons will be asked to complete a special taxpayer identification and certification form.
Starting in March 2015, banks will begin annually sending information about those accounts to the IRS, either directly or through the Canada Revenue Agency, depending on the agreement the federal government signs.
- This story has been edited from an earlier version that incorrectly stated the U.S. sees RRSPs as offshore trusts. In fact, the story should have said RDSPs.Jan 23, 2014 5:38 PM ET