Canadian Tax Adviser
September 20, 2011
Canada's Finance Minister Reacts to U.S.
Extraterritorial FATCA and FBAR Requirements
Toronto, International Executive Services
Minister of Finance Jim Flaherty has sent a letter
to several major U.S.
newspapers expressing Canada's concerns about the far-reaching implications
extraterritorial U.S. Foreign Account Tax Compliance Act (FATCA) and the
"nerve-wracking" effect that the Foreign Bank Account
Report (FBAR) reporting rules has on Canadians.
dated September 16, 2011,
criticizes the broadness of the U.S. rules that would essentially cause Canadian
banks to become "extensions" of the Internal Revenue Service (IRS).
Flaherty also notes that the rules raise
privacy concerns for Canadians who may not be aware that they needed
to file U.S. tax returns.
It is unclear what effect this Canadian political pressure may have on
the U.S. administration of the reporting requirements and penalty regime
that apply to Canadian residents.
The letter comes
shortly after the deadline for the IRS's second Offshore Voluntary
Disclosure Initiative, which allowed individuals to bring offshore funds
back into the U.S. tax system and helped those with undisclosed income from
offshore accounts resolve their U.S. federal income tax liabilities.
The letter reads as follows:
Canada and the United States are neighbors and have long been the closest
of friends. We share a common border and we share many common values.
One of those values is fighting tax evasion. We believe in fair tax systems
where everybody pays their share.
Many Canadians, however, have become concerned about the impact of a
proposed piece of American tax legislation – the Foreign Account Tax
Compliance Act, or FATCA.
I share their concern.
We appreciate efforts to combat tax evasion. In fact, our two jurisdictions
co-operate to prevent it. But FATCA has far-reaching extraterritorial
implications. It would turn Canadian banks into extensions of the IRS and
would raise significant privacy concerns for Canadians.
To be clear, Canada respects the sovereign right of the United States to
determine its own tax legislation and its efforts to combat tax evasion –
the underlying objective of FATCA.
But put frankly, Canada is not a tax haven. People do not flock to Canada to
avoid paying taxes. In addition, we have existing ways of addressing these
issues with the United States through our Bilateral Tax Information Exchange
Agreement. As I said, we share the same goal of fighting tax evasion and we
already have a system that works.
To rigidly impose FATCA on our citizens and financial institutions would not
accomplish anything except waste resources on all sides.
Another issue, this one affecting more directly the large numbers of dual
U.S.- Canadian citizens and their relatives living in Canada, is the IRS’s
Foreign Bank Account Report (FBAR) filing requirements.
Most of these Canadian citizens, many with only distant links to the United
States, have a very limited knowledge of their tax reporting obligations to
the United States. These are honest and law-abiding people, including many
senior citizens now caught in a nerve-wracking situation. Moreover, because
they work and pay taxes in Canada, they generally do not owe any taxes in
the United States in any event. Their only transgression is failing to file
the IRS paperwork they were never aware they were required to file.
These people are not the targets of a crackdown on tax evasion. These are
not high rollers with offshore bank accounts. These are people who have made
innocent errors of omission that deserve to be looked upon with
Rather, these people are typically hard-working citizens of our two
Faced with the knowledge that they do have an obligation to file U.S. tax
returns (even if they most often do not actually owe any taxes) they want to
do the right thing.
But the threat of prohibitive fines for simply failing to file a return they
were unaware they had to file, is a frightening prospect that is causing
unnecessary stress and fear among law abiding hardworking dual citizens.
We support efforts to crack down on legitimate tax evasion. These measures,
however, do not achieve that goal.
For more information on how these U.S. reporting requirements might affect
you, contact your KPMG adviser.