The following article appears here with permission.
IRS says FBAR penalties not collectible under Canada-US Treaty?
- Published on Wednesday, 22 August 2012 10:26
- Written by Roy A. Berg JD, LL.M. (US Tax)
Does the Canada-United States Tax Convention (the “Treaty”)1 require the Canadian government to assist the US government in collecting penalties for failure to file the Foreign Bank Account Report (“FBAR”)?2 The Canadian Ministry of National Revenue thinks not. More importantly, however, on January 23, 2012 the Ministry said that the Internal Revenue Service (“IRS”) agrees. The Ministry even said so in a statement recorded in the Parliamentary Record.
Has the IRS really conceded this issue (ignoring for the moment the US Constitutional issues)? The short answer is “no.” Both the Canada Revenue Agency (“CRA”) and the IRS informed us that there are no documents, briefing papers, talking points, or other memoranda that would support the Ministry’s statement.
The CRA’s argument is based on the fact that the Treaty applies to taxes imposed under the Canadian Income Tax Act and the US Internal Revenue Code.3 The Treaty obligates both Canada and the US to assist one another in the collection of the taxes, interest, and penalties.4 The obligation to file the FBAR does not arise under the Internal Revenue Code, but under the 1970 US Bank Secrecy Act.5 Hence, the argument is that the FBAR filing obligation is not based upon tax covered by the Treaty and Canada is therefore not obligated to enforce the penalties imposed thereon.
Statement in the Parliamentary Record
On January 26, 2012 Mr. Mai, a member of the Canadian Parliament, posed question Q-412 to several Canadian Ministries, which was entered into the Parliamentary Record (relevant portion here). In response, on March 13, 2012 the Ministry of National Revenue wrote the following (relevant portion here):
“…The IRS agrees that the Report of Foreign Bank and Financial Accounts (FBAR) penalties are not covered by the Canada-United States Income Tax Convention (“the Treaty”), therefore the CRA will not be collecting on behalf of the IRS…”
“Access to Information Request” and “Freedom of Information Act Request”
In order to get to the bottom of the rhetoric our office immediately contacted both the CRA with an Access to Information request and the IRS with a Freedom of Information Act request. We asked for all documents, including briefing papers and talking points, regarding the Ministry’s statement. We recently received written responses to our requests.
We received the CRA’s response on May 1, 2012. In sum, the CRA’s response indicates that no documents exist to support the statement and that the Ministry’s statement was based on a “verbal response to a question in a meeting with the Internal Revenue Service in 2011.” The CRA does not indicate who made the statement, the parties present at the meeting, the context in which the statement was made, or any other details.
We received the IRS’s response on July 18, 2012. The IRS indicates that it could not find any documents that would support the statement. The response does not mention any statements made by the IRS that would support the Ministry’s assertion.
Conclusion
Most US tax lawyers would probably agree that the Treaty may not compel the Canadian government to enforce FBAR penalties, though the analysis is nuanced and technical. Shortly we will be publishing an article that provides a detailed analysis of the issue.
1 Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, Sept. 26, 1980, US – Can., 1469 U.N.T.S. 189, as amended by the Protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997, and September 21, 2007.
2 Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.
3 Article II of the Treaty.
4 Article XXVI A of the Treaty.
5 31 U.S.C. 5311.
*Very interesting. Certainly FBAR penalties are not a tax, nor are they penalties applied for failure to pay a tax. The are penalties for falure to to submit the reports or for failure to summit accurate reports.
It will be very interesting to see how this plays out. It sounds like the final chapter has perhaps not yet been written.
@Roger, your assessment is correct. I would imagine that the legal team on the Canadian side studied the convention and determined that there was no provision for FBAR fines. In this case, even if the IRS won’t concede the point, the CRA will not collect them. I think the case is closed, because the IRS will not be able to force the CRA to do anything. But in any case, the lack of concession is significant if only to show that the United States rarely gives any ground, but if you give them an inch they will take a mile.
that explains the creation of the 8938
And, Roy Berg and other readers with US and Canadian tax/law experience;
What do you make of this article: http://www.ctf.ca/ctfweb/CMDownload.aspx?ContentKey=7ae51268-fbf4-4abf-a07a-41c7be3af7f6&ContentItemKey=c3e8c6ab-f4f9-45b3-8d34-c8dde8c018a2 published in the Canadian Tax Journal.
canadian tax journal / revue fiscale canadienne (2012) 60:2, 305 – 54
FATCA and FBAR Reporting by Individuals:
Enforcement Considerations from a
Canadian Perspective
Andrew Bonham*
@Mark Twain; worth reading this Bonham article to see what he says about the relationship between the FBAR and FATCA reporting.
Actually there are at least two questions here:
First, does the treaty compel the Government of Canada to assist the IRS in collecting FBAR penalties?
Second, if the Government of Canada does NOT interpret the treaty as requiring them to help collect FBAR penalties, and the IRS says that it does, would the Government of Canada go with the IRS interpretation and help them collect FBAR penalties?
On the first, Mr. Berg is right in saying that most (if not all) tax lawyers would say that FBAR penalties are not covered by the treaty. As everybody knows, there are levied under title 31 and not title 26. Remember that for this reason, the IRS can’t even collect on this without getting the Dept of Justice to sue. So, the real question is whether the treaty can be interpreted to mean that, Canada is required to help the IRS to collect on a penalty, that under US law is not even a tax penalty, and the IRS can’t themselves collect under Title 26. This seems to me to be far fetched.
On the second question: the IRS says that yes Canada must (under the treaty collect FBAR penalties) and Canada does not interpret it that way. My thinking is:
Dream on! After all the pains the efforts that Flarehty has made to communicate to the Cdn public that they won’t help the IRS enforce FBAR penalties – I can’t see it. Even the IRS would realize that to attempt to force the issue would cause a major major diplomatic problem.
But, for the most part this is a completely irrelevant issue. Why? For those who are lucky enough to be Canadian citizens, the fact of Canadian citizenship means that the Government of Canada won’t assist with collecting tax or FBAR penalties.
Frankly, I still believe that major opposition to FATCA may come from Canada!
Finally though, I am not sure that this is a reason to ignore the FBAR issue. Those who want to perserve a US connection, do (at least I would think) want to be tax compliant and FBAR compliant. So, if you haven’t filed the dam things, see a lawyer and consider whether you should just file the things (you must consider your tax filings too) with the appropriate “reasonable cause” letter. At a minimum start filing them on a going forward basis. I am inclined to think that the amount of publicity on this issue may make it harder and harder to argue lack of knowledge of the FBAR requirement.
Just my two cents.
*Petros, I am not exacly sure when it was that Congress assigned the responsibility for enforcing the law requiring FBAR reports, but reading between the lines in this link it would appear that it was around 2003, or perhaps a little earlier. So it is not surprising that tax treaties between the US and other countries do not include any provisions relating to to enforcing FBAR penalties.
The reason Congress transferred this responsibility for FBAR enforcement to the IRS was because the Treasury Department really had no effective way of enforcing it. Consequently it was not being enforced and compliance was very poor. But with the transfer of enforcement responsibility to the IRS it added staff and, as we well know, is enforcing the FBAR law with a vengeance.
But be that as it may, even if Canada refuses to assist the IRS in collecting FBAR penalties from US persons who are Canadian citizens, or even bona-fide non-Citizen foreign residents of Canada, this does not mean that such persons no longer have any obligation to pay these penalties as far as the IRS is concerned.
Such persons, the moment they step across the border into the US, are subject to US jurisdiction and no longer protected by Canada’s refusal to assist the IRS in collecting these penalties.
Don’t play with fire. Caution is still the better part of valor.
*@Petros, I forgot to include the link.
http://www.taxlitigator.com/main/images/stories/Articles/Fbar_Enforcement.pdf.
There are probably others with more detailed information, but this is what I found in a quick Google search.
@RogerConklin, thanks for reminding us to keep in mind the enforcement issue once one crosses onto US soil, vs. enforcement inside Canada.
and @renounce, your comment reminds me that even for those who do not want to retain US status, but are intending to and planning to renounce/relinquish: re the FBARs there is the question of what to do about the requirement to swear to 5 years compliance. There seemed to be some prior difference of opinions here about whether ‘compliance’ meant only the tax return, or also include FBARs – owing to the difference between title 26 (re 1099) and title 31 (re Fbar).
Mark Twain already hit the nail on the head. It deserves restatement and elaboration. Going forward, FBAR who cares? Form 8938 has plugged that loophole and should be enforceable against all US persons in Canada who are not Canadian citizens. [Present wait time for that exit status is around 18 months and may grow in tandem with the wait time for renunciations.] The future is darker for duals. The present day has been declared “semi good” by our guru – assuming you get out now.
*There is real issue under Canadian law and that is by Flaherty, Shelly Glover, and co. all saying publically Canada will not collect FBAR penalties cannot be undone so to speak. Statements of ministers of the crown in front of the house do have a certain level of legal meaning again that cannot be “undone.” I will try to provide more legal reference later.
*@ Roger Conklin – Roger, you are correct. Caution is warranted. There is an argument that FBAR obligations and penalties may have been drawn into the Internal Revenue Code when enforcement was given to IRS. As I aluded to in my article, this somewhat of a tenuous argument, however, the issue (and the argument) hasn’t been addressed by the courts or Congress.
*Second issue is that if CRA’s position is correct it would also mean that information exchanged under a Tax Treaty could not be used for FBAR enforcement either which would put a pretty substantial hole in the US Government’s UBS prosecutions. I admit to not knowing much if any of the details of UBS prosecutions but I would have to imagine that FBAR is a rather important part of the Governments case.
The article below discusses in a completely different context although the legal implications of statements of in ministers in front of Parliament.
http://www.guardian.co.uk/politics/2010/jul/21/nick-clegg-illegal-iraq-war-gaffe
I am sure there are additional legal analysis of these issues. Here again is the famous FBAR video in front of Parliament:
A question for Roy Berg- Why did you make a request to CRA when the statement regarding non-collection of FBAR penalties clearly came from Finance? Surely there must be a paper trail at Finance.
*clint
Because the response from to MP Hoang Mai’s written question came from the Minister of National Revenue not Finance although I would discount the possibility of a paper trail at Finance. Hoang Mai question though was directed at the government at large so there would have to have been some discussion between Finance and CRA as what department would respond with CRA being the eventually responsdent. I still have a copy of the written response somewhere I will have to take another look after my after dinner choors here in the Eastern Time Zone.
Let me play devil’s advocate. The video of Parliament only shows an announcement. Was there ever any resolution or vote on this subject?
My impression after watching the video was that the woman that was speaking was trusting that the IRS would back off and that, for her, the matter would take care of itself.
My way of thinking is the same as Roger’s and Recal’s. After all, treaties can be amended/changed. In the other paper about “revenue generation” the author speculated that FATCA is an enforcement tool which the US believes can hold up in foreign courts.
Step foot in the US and you will be greeted by:
– the local police
– the local sheriff,
– ICE,
– FBI,
– DHS,
– US Treasury,
– IRS,
– CIA,
– National Guard.
🙂
Roger, hopefully the ACA is pressuring the US on foreign retirement plans. They need to recognize that in some countries, like here, we don’t have 1st-world plans like the Canadians have. The “previdências” can be seized in cases of judgements against someone (you never know what kind of crazy person can try to sue and when).
If we need something more like a real retirement plan, we have to go offshore or to another country. Yet, since we are not citizens of those countries, the best plans are not available to us. It would be a shame to see offshore retirement vehicles discriminated against because it’s not backed by a particular government.
*@ Clint. We did make the Action to Information request to MNR not CRA. It was CRA that responded to the request.
hint: what are the obligations of a tax treaty country (such as Canada, Luxembourgh, Sweden, Switzerland) once a TAX lien has been assessed?
Pretty evil trick.
*Mark Twain
There are NO obligations UNTIL a Tax lien has been assessed. Read Chua vs Minister of National Revenue back in 2001 that dealt specifically with assistance in collection provision of the US Canada Treaty.
http://reports.fja.gc.ca/eng/2001/2001fc27325.html
http://reports.fja.gc.ca/eng/2001/2001fc27673.html
*@Mark Twain. Here is a website with all the tax treaties between the US and other countries. The text of each treaty is accessible from this website.
http://www.irs.gov/businesses/international/article/0,,id=96739,00.html.
All US tax treaties have to be approved by Congress in order to enter into effect and appear on this list.
*Now there is another angle to this story back in 2005 TIGTA(The Treasury Inspector General for Tax Administration) did a heavily redacted audit report claiming that FBAR WAS a TAX and should be considered as such under tax treaties for both Exchange of Information and Assistance in Collection. It is not clear that they had any legal justification for taking this position other than the US should just apply its political “muscle.” At the time the TIGTA report was heavily rejected by the IRS General Counsel’s Office it is also heavily redacted to boot but I will try to post it.
*Here is the TIGTA Audit report from 2005 that challenges Canada’s position regarding FBAR. It is heavily redacted.
http://www.treasury.gov/tigta/auditreports/2005reports/200530101fr.pdf
*It actually doesn’t really challenge Canada’s position per say. It really doesn’t do anything because it is so heavily white-ed out.
Help me out here. I evidently don’t understand some key elements.
As I understand it, a FATCA-compliant Canadian bank or financial institution is required to identify “US persons” holding accounts. If information is needed, e.g. a passport, to confirm US birthplace (for example), the customer must waive privacy rights and produce the information. If the customer does not do so, the account will be declared “recalcitrant” and 30 percent withholding will be applied by the bank, or the account will be closed.
All of this proceeds without the involvement of CRA or Canadian courts.
If a customer is identified as a “US person”, the customer will be required to obtain a US tax information number (TIN) and file certain papers with the IRS. I am unsure how this works procedurally, but this is the point where the IRS may attempt to apply penalties.
Again, this happens without the CRA or Canadian courts, as far as I can see.
So…where does it become relevant that the CRA and the Canadian courts will not assist the US in collecting FBAR fines and other penalties? Isn’t it the point made by the Canadian Bankers Association that they are being required by the IRS to be an arm of that agency, rather than working under existing treaties through the CRA?
Many thanks!
*NorthernStrike
You are correct in terms of what might be called “Original Fatca” however in the past few months supported by the bankers association the US has put forward an option known as Intergovernment FATCA where a country such as Canada would actually pass legislation enshrining FATCA into Canadian law with administration done by the CRA with the US in return thus negating the obligation of each and every financial institution to enter into a direct agreement with the US. How “recalcitrant” account holders would be treated in this scenario is still unclear.