OTTAWA – The final thrust of Canada-U.S.. tax treaty negotiations is triggering fears among bankers on this side of the border that they will be dragged into helping out on an American hunt for tax cheats — and passing along information about Canadians to U.S. tax authorities.
The U.S. Internal Revenue Service has put dual U.S.-Canadian citizens on notice that they need to file U.S. tax returns — whether or not they have paid in Canada — or face stiff penalties.
Intense lobbying by Ottawa achieved some relief on a related issue involving tax obligations of dual citizens, with the IRS issuing a guidance that those owing no U.S. tax would not be subject to penalties for failing to report in past years.
The two sides appear headed toward a compromise on the issue affecting banks and their U.S. clients as well.
But recent statements and precedent-setting deals with the United Kingdom and other European countries suggest the IRS will still be able to secure — if indirectly — some, if not all, the information it is seeking.
Canadian Bankers Association president Terry Campbell said in an interview he is hoping Ottawa can convince the IRS to back off, but suggested that was unlikely.
“It’s very likely that under any scenario we will have to be gathering more information than we had to do beforehand,” he said.
Campbell added that he did not know the direction of the current bilateral discussions, but the recent U.K. deal with the U.S. suggests Canadian banks may be able to avoid turning over account information on dual citizens directly to the IRS.
Instead, the account information would go to the Canada Revenue Agency, which the IRS can then access by using bilateral tax information exchange agreements or any new arrangement the two countries agree to.
Such an outcome would be “an improvement,” said Campbell, although not ideal.
Current Canadian law does not require banks to ask clients whether they are also U.S. citizens, and changing bank procedures could cost in the tens of millions of dollars in administrative fees.
“The challenge with FATCA (the U.S. law) has always been it is an extraterritorial application of U.S. law which conflicts in many regards, including privacy, with Canadian law,” Campbell explained. “Secondly, it is an intrusion of U.S. authority into the Canadian space and it is administratively a very, very burdensome exercise.”
The federal Office of the Privacy Commissioner said they had been following the issue and that Canadian financial institutions remain subject to privacy laws.
“They will need to be continually mindful to … limit the amount of personal information they collect about individuals, obtain consent for collections, uses and disclosures of individuals’ personal information, and safeguard the personal information in their care,” said Scott Hutchinson, the senior communications adviser for the commissioner.
Hutchinson said the privacy office would respond to concerns “as they arise.”
Finance Minister Jim Flaherty has said Ottawa is “nearing a conclusion” on the issue, suggesting a similar arrangement as reached by the U.K. is in the offing.
“An agreement with the U.S. to share information on a government to government basis, within prescribed limits, will bring certainty to the application of the FATCA regime to Canadians, and will also facilitate compliance by our financial institutions,” he said in a statement.
In its previous deal with Washington involving dual citizens, Ottawa said it would not collect penalties on behalf of the IRS, nor would Revenue Canada collect taxes for the IRS on an individual that was a Canadian citizen at the time the liability began.
The U.S. Treasury Department said it is engaged in negotiations on FATCA with more than 50 countries — including Canada — and aims to reach agreements by the end of the year.
Campbell said financial institutions have no choice but to comply with U.S. law because the penalties can be onerous — a 30-per-cent tax on U.S.-source income.
“This isn’t just a Canadian problem,” he said. “The American authorities have managed to raise very serious concerns in virtually every country in the world.”
“(But) short of having the U.S. authority change their law, and short of having the world financial system being radically restructured, neither of which is going to happen, authorities around the world have come to the conclusion they must deal with the United States to make this as administratively feasible as possible.”
Wednesday, November 28, 2012