In signing an agreement spelling out the details of how Canada will comply with a U.S. tax law targeting Americans living in Canada, our country surrendered its sovereignty
Succumbing to pressure from the U.S., the Harper government announced on February 5 that it has signed an agreement with the States that will apply American tax law in Canada and expose an estimated one million Canadians with U.S. connections to the long arm of the Internal Revenue Service.
The agreement commits Canada’s banks, credit unions and other financial organizations to comply with the 2010 U.S. Foreign Account Tax Compliance Act (FATCA) by identifying—at their own expense—any account holders who are either U.S. citizens, or “U.S. persons” (people who hold a green card), and send account details, via Canada Revenue Agency, to the U.S. Internal Revenue Service.
Under negotiation for two years, this new tax-information-sharing agreement (it still needs parliamentary approval) represents a colossal surrender of financial sovereignty for Canada, along with a potentially significant outflow of Canadian money directly to the U.S. Treasury.
For the U.S., it’s arguably the most successful assault on Canada since the War of 1812. A close rival for that claim might be the 2006 softwood lumber capitulation (also orchestrated by the Harper government), but this tax-sharing agreement negatively affects far more Canadians and for much longer.
How can the U.S. enforce this extra-territorial law? Very simple: any foreign bank that refuses to comply would have an automatic 30-per-cent IRS withholding tax applied to every U.S.-dollar transaction that goes through the bank. That likely violates NAFTA (for Mexico and Canada) and the WTO (for the rest of the world) but no one seems to have sufficient backbone to call the U.S. bluff on it.
Touted by the Obama Administration as an assault on U.S. offshore tax evasion, FATCA instead drastically complicates tax compliance for more than seven million U.S. expats living and working in other countries, and drags into the tax net people whose connections to the U.S. are tenuous at best. The U.S. is one of only two countries in the world (the other is Eritrea) that levies income tax based on citizenship rather than residence. That means an American citizen or anyone who holds a green card is required to file returns and possibly pay U.S. income tax, never mind that they pay taxes to their country of residence. (For details of how this might affect you or someone you know, see our earlier story.)
Cutting a deal with the U.S. was done at the behest of Canada’s big banks, which argued that without this intergovernmental agreement, they would be entirely at the mercy of the IRS and its threatened 30 per cent withholding tax. Credit unions, adamantly opposed to FATCA compliance, are nevertheless dragged along through the agreement and will have no real choice but to comply.
The banks think the intergovernmental agreement is a good thing because it gets around what would have been—should they have to comply with FATCA on their own—blatant violations of both federal and provincial privacy regulations. The intergovernmental agreement allows them to dodge that bullet. But for Ottawa, the banks and the credit unions, the nightmare is really just beginning.
Ottawa was warned a year ago that to sign an intergovernmental agreement based on the U.S. template (and that’s what it has just done) would violate non-discrimination clauses in Canada’s Charter of Rights and Freedoms. Constitutional expert Peter Hogg sent Finance Minister Jim Flaherty a five-page letter—since made public—documenting his concerns.
According to Hogg, any legislation that allows banks to single out for special treatment Canadian citizens and residents who are also “U.S. Persons” would be “discriminatory in a way that would not withstand Charter scrutiny” and would therefore be a violation of Section 15 of the Charter.
If the several blogs devoted to opposing Canada’s capitulation on FATCA are any indication, class action suits are already in the works as people now have something (subject to parliamentary approval) they can take to a lawyer. The million or so “U.S. Persons” in Canada who will be caught up in this—along with another 2-3 million family members also affected—are for the most part outraged and feel they have been betrayed by their banks and now their adopted country. They are looking for revenge.
In the middle of all this are banks and credit unions, which will now have to try to identify account holders who are “U.S. Persons”—and that will be fraught with peril. They will make mistakes. Some “U.S. Persons” will escape detection, leaving the banks open to very nasty sanctions from the U.S. Treasury Department. Some account holders will be misidentified as “U.S. Persons” and, barring immediate redress, they could sue the banks that sent their confidential account details on to the IRS.
This was all so unnecessary. All it would have taken is one major country—and Canada has by far the biggest number of residents with U.S. connections—to say no to the U.S., and FATCA would have been unenforceable. The 30 per cent withholding threat was a monumental bluff; had it been applied to Canada, it would have wreaked havoc not just with Canada’s finances, but also with the U.S. Financial chaos would have ensued, in both countries.
My guess is the Americans can’t believe they are getting away with this.
Don Whiteley is a writer based in North Vancouver.