New U.S. laws targeting overseas tax cheats have not only left a million Canadians facing the potential of financial ruin, but have put local credit unions in an impossible bind.
Maury Williams, a 68-year-old history professor at UBC’s Okanagan campus, was born in Australia, moved to the U.S. with his family as a child and acquired U.S. citizenship at age 15, when his mother decided to become a U.S. citizen. He moved to Canada in August 1973 to take a teaching position at the now-defunct Notre Dame University in Nelson, and became a Canadian citizen in 1986.
That seemingly benign history has created a nightmare. In May 2011 Williams and his wife Linda realized that their status as U.S. citizens requires them to file U.S. income tax returns. The rule has been in place for several decades, although it is rarely enforced by the U.S. Internal Revenue Service. Wanting to do the right thing, Williams and his wife plunged into the Byzantine world of American tax compliance by entering the Offshore Voluntary Disclosure Program — a program designed to give U.S. tax cheats a chance to come clean without facing criminal charges. He has since discovered that it is not the way to go for anyone whose only transgression was not knowing the U.S. requirement for expatriates to catch up on tax filing.
As of this summer, the adventure has cost the couple $28,000 in accounting fees and nearly $18,000 in back taxes owed to Uncle Sam. And it’s not over. At press time, the Williamses were awaiting a response from the IRS on all the paperwork filed through the Offshore Voluntary Disclosure Program in December 2011 on their “catch-up” with filing requirements. The IRS could assess late-filing penalties that would add tens of thousands more to what they’ve already paid, putting them at risk of financial ruin.
And of course, now that they are in the IRS system, they must continue to file annual tax returns along with an annual Report of Foreign Bank and Financial Accounts (which the IRS inexplicably refers to in shorthand as FBAR), covering every account they hold at any Canadian financial institution, using a complicated formula that requires a calculation of whatever the highest dollar amount was in each of those accounts in each year for which they are filed. Keep in mind that all this is on top of the routine Canadian and B.C. taxes the Williamses pay every year, just like all other residents of the province.
“I got some bad advice, and was told I had to file,” Williams said in an interview. “I now regret that.” He could have ignored the accounting advice and sought, instead, a Certificate of Loss of Nationality of the U.S. At the time he became a Canadian citizen in 1986, the U.S. essentially took away the citizenship of any American who swore an oath to another country. But through a series of U.S. court cases over the years, that automatic revocation was ruled unconstitutional. After 1986, the U.S. policy was to assume that anyone who took out citizenship in another country also intended to retain their U.S. citizenship. Had he sought a Certificate of Loss of Nationality (his Canadian citizenship was approved just months before the U.S. rules changed), his U.S. tax liability, if he even had a liability, might not have extended beyond 1986.
Put aside the cost for a moment, and consider what this has done emotionally, psychologically and physically to this ordinary Canadian family whose only “crime” was that at one time they were U.S. citizens. Asked about the impact, Williams said, “Nightmare, unfairness — it goes further for me. I’m not quite sure how to put this, but my wife has an arthritic condition, and it’s gotten a lot worse. We’re both convinced that the stress associated with this has had some impact. It’s affecting our health. Linda and I have gotten to the point where we don’t talk about this anymore.” He adds that he and his wife are close friends with another couple, also dual U.S./Canadian citizens, who feel as though the U.S. government has violated their private lives. “We don’t even talk about it with them — and they’re into it for not quite as much as we are, but pretty close.”
What is a personal financial nightmare for families like the Williamses is also a corporate financial nightmare for every financial institution (and that includes not just banks, but insurance companies, pension funds — any institution that handles financial transactions) in the country — and a particular headache for the province’s credit unions as they cope with the many challenges that compliance with the U.S. Foreign Account Tax Compliance Act will pose. FATCA, which was passed into law in 2010, demands that every financial institution in the world identify all account holders who are “U.S. persons” — defined by the IRS as anyone who is a U.S. citizen, or even a U.S. landed immigrant or green-card holder — and report directly to the IRS on the status and balances in those accounts. Intended to catch U.S. tax cheats stashing money abroad, this huge net threatens to sweep up, along with a handful of tax cheats, those six to seven million U.S. expatriates living ordinary lives in other countries.
One significant challenge for Canadian financial institutions is the fact that Canadian and provincial right-to-privacy legislation prohibits them from sending financial information to a third party (like the IRS) without the consent of the account holder. While Canada’s major banks have taken strong positions on FATCA, the country’s credit unions are also caught up in the controversy and are actively pushing for changes. Collectively, they are not happy. “I’ve never touched a file before in which there is absolutely no public policy benefit, no benefit for Canada, no benefit for a Canadian credit union,” says Gary Rogers, vice-president of financial policy at Credit Union Central of Canada, the association that represents the country’s credit unions. “The burden to follow some rules imposed by a foreign government is quite disgusting. I’ve been trotting out that phrase from the 1960s — ‘Yankee Imperialism.’ I launched that with our board, and got a chuckle. But it is accurate.”
Rogers points out that Canada’s major banks are also caught up in the FATCA net, but they have proportionately more resources to deal with the compliance costs than do the credit unions. While there are a number of large credit unions in the country (B.C.’s Vancity is the largest), there are many more small and very localized credit unions for which the costs of complying with FATCA could be crippling. The problems centre on identifying account holders, including new applicants and existing account holders, who are deemed by the IRS to be “U.S. persons.”
FATCA wants foreign banks to seek out and identify anyone who might be a “U.S. person” and report that information, along with their account data, to the IRS. But Rogers doesn’t think that will happen, and he points out that anyone seeking to open an account at a credit union will be asked for ID that shows he or she has a Canadian address — and nothing else. “I don’t think you have to ask anything else,” Rogers says, again expressing his frustration at dealing with this file: “I specialized in U.S. expatriate tax, and I worked on U.S. tax returns. We prepared U.S. returns for people who spent thousands to do it, only to find they owed no tax because Canada is a high-tax region. No one opens an account here to avoid U.S. tax.”
But this is the nub of the financial institutions’ problem: just how probing do banks and credit unions have to be to satisfy the Americans that they have tried their best to root out any of their account holders who might be “U.S. persons”? A U.S. person includes a U.S. citizen, but also includes anyone who lived in the U.S. with a green card, regardless of his or her nationality. TD Bank has already created a form that asks applicants for new accounts to clarify their citizenship status. And in asking that question, are the banks (and credit unions, should they do likewise) violating Canadian law? And what if existing account holders are asked for this information and refuse to give it? According to FATCA rules, the bank or credit union must close out the accounts of anyone deemed “recalcitrant.”
Vancouver lawyer Ronald Zisman specializes in citizenship and immigration issues, and he sees this as the landmine that awaits any financial institution that puts FATCA compliance ahead of Canadian law. Says Zisman, “It may look like this individual is a U.S. person, but maybe several things point the other way. If you decide someone is a U.S. person who for a number of reasons isn’t, you’re going to have a problem. If you start reporting people [to the IRS] who are not U.S. citizens, you are going to have issues.”
Credit unions and banks are pushing Ottawa to negotiate something with the U.S. that takes away the requirement to report to the U.S. — and instead requires Ottawa to transfer financial data to the Americans under the terms of the existing U.S.-Canada tax treaty. Whether or not that would satisfy the Americans is unclear at this stage, but according to Rogers there are serious negotiations underway between the two countries around that point.
“I expect there will be some agreement at the end of the day. But I don’t think it will make it palatable — just less offensive. Our preference is an agreement — then we know the rules. It would relieve us a lot. It won’t help the duals — just the [financial institutions]. It would reduce our compliance burden somewhat.” Asked for an estimate of what the compliance burdens are likely to cost, Rogers said it is impossible to say because all the rules are still in flux. He did say that until the rules are settled, credit unions are not spending very much money to gear up.
If the two countries fail to reach an agreement, Rogers sees nothing but trouble. Banks and credit unions, to comply with FATCA, would have to ask their customers about their U.S. status. And if they refuse to answer? “If there is no bilateral agreement, that huge issue of privacy will blow up and it will become a big media story. Then you get into this horrible customer relations issue where in order to retain your compliance you have to certify that you are closing out accounts of people who are ‘recalcitrant.’ Can you imagine the conversation at the counter? Some FFIs [foreign financial institutions] are saying, ‘But what if it’s an RRSP — it becomes 100 per cent taxable in Canada. What if it’s a poor widow?’ The scenarios are mind-boggling as far as customer relations go.”
Neither banks nor credit unions have any desire to close out a law-abiding Canadian’s accounts simply because they won’t answer questions that in fact they are not now legally required to answer. And if they do close out a Canadian’s RRSP account, it has the same effect as if an individual suddenly cashes in his or her entire RRSP: Revenue Canada will tax the entire amount in the year in which it was “withdrawn.” In order to retain that tax-free status, an RRSP account has to remain registered at a qualifying financial institution. The individual could try to find another Canadian bank or credit union that will take the RRSP as a transfer, but of course that institution would be in exactly the same bind.
Neither Vancity, Canada’s largest credit union, nor Coast Capital Savings would talk publicly about this issue, preferring to let their trade association handle the questions. But North Shore Credit Union was eager to get this topic out for discussion. Chris Catliff, president and CEO of the North Shore Credit Union, said his organization has had a lot of phone calls from dual citizens concerned about the American incursions. “They are distressed, to be frank,” Catliff says. “And it’s tough to give them answers because the details aren’t finalized. At the moment they look quite draconian. It would cost us hundreds of thousands if not up to a million dollars. Whenever you have to monkey around with the bank’s computer systems it has a huge impact. I guess the bad news is we don’t know what the rules will be yet. The good news is maybe the Canadian government, state to state, has some opportunity to reduce the draconian nature of the potential changes.”