What’s FATCA? The IRS peeking into Canadians’ bank accounts

New U.S. law raises a lot of questions

<p>Finance Minister Jim Flaherty speaks following the signing of an agreement on securities regulation,  Thursday September 19, 2013 on Parliament Hill in Ottawa. THE CANADIAN PRESS/Adrian Wyld</p>

Finance Minister Jim Flaherty speaks following the signing of an agreement on securities regulation, Thursday September 19, 2013 on Parliament Hill in Ottawa. THE CANADIAN PRESS/Adrian Wyld

This article appeared first on CanadianBusiness.com

Liberal MPs Ted Hsu and Scott Brison have a bunch of questions about FATCA.

FATCA, in case you don’t know, stands for Foreign Account Tax Compliance Act, a piece of U.S. legislation that requires financial institutions around the world to disclose to the IRS foreign accounts held by American citizens and others who might owe money to Uncle Sam.

To say that FATCA is controversial is an understatement. The law is so complex and onerous to implement that some foreign banks have reportedly kicked out their U.S. clients in order to avoid dealing with it. Americans living abroad are queuing to give up their U.S. passports over it. The other problem with FATCA is that it asks foreign banks to do things that are often illegal in their home countries, such as passing on certain private information.

It has caused a stir in Canada as well, but the press here generally portrays it as something that affects only dual citizens and green-card holders. Given the number of Americans who live in Canada, that would be enough to make it a big issue (and a big headache for Ottawa). But the truth is FATCA has the potential to touch a much larger number of unsuspecting Canadians.

Want to know more about how it might all play out? Well, Hsu and Brison are a good place to start.

On Oct. 25 and 28, respectively, each MP separately submitted a long lists of questions to the government that provide an excellent map to many of the issues surrounding FATCA. I’ve teased out some the highlights below—the government has 45 days to get back to them.

How will the government implement FATCA?

FATCA is so intrusive it often needs to be somehow incorporated into foreign countries’ legislation in order for the banks to be able to comply with it without breaking domestic laws (such as the ones that govern the release of confidential information). It isn’t clear yet how Canada plans to do this.

The “how” here matters, because it might determine whether Parliament gets a say in all this or not. Ottawa might, for example, decide to re-interpret the existing U.S.-Canada tax treaty to allow financial institutions to abide by FATCA provisions. This would shut out lawmakers.

Another way to by-pass the Hill could be to draft a document that looks like an intergovernmental agreement and then call it by another name–say, “memorandum of understanding,” which does not require parliamentary action.

What does Canada get in exchange for putting up with FATCA?

In general, what you get for signing an agreement to enforce FATCA is a pledge that the U.S. will do its best to share some of its information on your country’s potential tax cheats. You read that right: Not a duty to reciprocate your efforts, but a lame “we’ll try hard” promise. That’s because the U.S. government does not, at the moment, have permission to force U.S. banks to share information with foreign governments. Only Congress can change that.

That sounds bad enough, but it gets worse for Canada. We are the exception—the only country with which the U.S. has an automatic information-sharing agreement. Now, the trouble with FATCA is that it demands some new information: Not about the Canadian assets and incomes of people who live in the U.S. but about the assets and incomes of people who live in Canada but might have some ties to the U.S. While Canadian taxation, thankfully, is based on residency—you owe the CRA if you’ve been living in Canada—the U.S. has started demanding that its citizens file taxes regardless of where they live.

In other words, the U.S. wants extra information from Canada, but it isn’t immediately obvious that Canada needs or even wants more information from the U.S. than it already receives. And if not information, are we going to get anything in exchange at all?

Do we have a rough idea of how many people FATCA would affect in Canada?

The number one million usually gets bandied about. As in: “There are roughly one million Americans living in Canada.” It is unclear, though, where that number comes from and how up-to-date it is.

Besides, it doesn’t necessarily take a U.S. passport or greencard to fall into the FATCA net. Spouses of U.S. citizens and permanent residents with shared ownership of assets would be subjected to the information-sharing requirement.

Also, there are a number of ways in which Canadians could potentially be considered to have acquired U.S. citizenship based on their American parents and grandparents.   

Finally, even people who are beyond a doubt not U.S. citizens or permanent residents might be affected. Having lived or worked in the U.S. or been issued a Social Security Number could be enough for your bank to raise a red flag.

Not knowing who is affected leaves MPs in the dark as to how FATCA might impact their constituencies.

How far will Canadian banks be expected to go in trying to identify “U.S. persons” among their clients?

Will it be a matter of singling out, say, clients who have a U.S. address or a forensic analysis of everyone’s account activity, legal status and ancestry?

Do the provinces have to get involved?

This set of questions likely stems from the fact that some financial institutions are regulated at the provincial level.

Here, again, we have the problem of not knowing exactly who’ll be affected and how. Are Canadians affected by FATCA geographically concentrated? Should some provinces care more than others? Your guess is as good as mine.

How much will all of this cost us?

You know the implementation costs for banks could be high when some of them are ready to disown their U.S. clients in order to try to avoid the headache altogether.

On top of that, there will likely be public costs for Canada. One of the few things the government has said about FATCA is that it won’t allow the banks to release information directly to the IRS. Instead, they will have to file to the CRA, which will then send it across the border. This, though, sounds like a big operation that might require Ottawa to set up a new body to gather and transmit the data, as well as monitor compliance across the country.

Is FATCA even constitutional?

Constitutional law expert Peter Hogg—one of the people former Governor Michaelle Jean turned to in December 2008—has questioned the constitutionality of FATCA under Canadian Charter of Rights and Freedoms.

An intergovernmental agreement on FATCA could infringe on Charter provisions protecting privacy, liberty and forbidding discrimination based on “national or ethnic origin,” he wrote in a December 2012 letter to the Department of Finance retrieved by Green Party leader Elizabeth May.

*Many thanks to Allison Christians, of McGill University, for her assistance with research for this story.