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.
*NorthernStrike. In a nutshell the enactment of FATCA by the US puts the “irristible force” of the US in a direct confrontation with the “immovable object” of the laws of other countries.
This is a conflict where the Last Chapter, in my humble opinion, has not yet been written.
@Tim
Thank you. So…at present, if the Canadian government does nothing, it is strictly between banks and other FFIs and the IRS, and this legal question of the CRA involvement is irrelevant.
On the other hand, if the Canadian government comes to an agreement comparable with the agreements with UK/France/Germany/Italy/Spain, it does become relevant whether these non-tax penalties would be collected.
Just found this: some British MPs are trying to create a British version of FATCA. I suggest this be posted as a separate thread.
http://www.international-adviser.com/news/tax—regulation/influential-committee-calls-british-fatca
http://uk.reuters.com/article/2012/08/23/uk-britain-tax-disclosure-idUKBRE87M00320120823
The articles fail to make the distinction between citizens and residents (the UK taxes based on residence, not citizenship). The EU savings directive (similar to FATCA but a lot more reasonable) already exists in the EU and some other countries.
@Tim, strangely, that redacted report you provded refers to US ‘residents’ throughout, as if that was equivalent to ‘citizens’. It uses residents almost exclusively, and refers to US residents, and US resident aliens who are investing outside the US. I got the impression that it does not seem to be directed towards US persons outside the US at all, except by default? The pool of returns they selected from were not just individual taxpayers, but included other ‘entities’.
Just some initial questions and thoughts I had after reading this. It is too hard to annotate all of it, but:
It refers to ‘similarly situated taxpayers’, ‘neighbours and competitors’ being ‘taxed’ on the same basis. Of course, as that would apply to FBARs, our LOCAL accounts are treated as ‘foreign’, whereas a US resident’s LOCAL account is in the US – and not therefore subjected to FBARs, (and now FATCA), or the draconian and confiscatory penalty structures or the onerous filing requirements. So, using the principle of ‘similarly situated taxpayers’ cited by the IRS commissioner (prepared remarks, Everson, M, Nov. 14, 2004), our ‘local‘ accounts outside the US should not be treated in any way differently that taxpayers inside the US are treated on their ‘local’ US accounts. Those of us outside the US are not ‘similarly situated’ as compared to US residents, and cannot be, because we need accounts where we live, just like they do – except we cannot bank in the US, and they can. We have no choice but to bank where we live and earn and some were born – outside the US.
The sample sizes were carefully redacted – which is very interesting, and makes me wonder whether a statistician would find the methodology sufficient to draw the conclusions that the authors did. How large was the sample size, and how was the subset selected? They said that they selected a subset where the taxpayers had 5000. in foreign account interest, and then decided that meant that the balance of the account or asset was 100,000. or more – but provided no reasoning for that conclusion. It also includes an assumption that the IRS would have been able to charge the maximum penalty – based on an assumption of the existence and proof of ‘wilfullness’ in order to come up with the assumptions to base the estimated loss of income to the US, and then use those assumptions to project further to come up with an estimate of the size of loss of revenues to the US from those with ‘foreign’ accounts (again, they keep alluding to US ‘residents’, not those abroad – see footnote 3 in the memo from Gardiner dated July 26, 2005 specifically saying that they use the term US residents to refer to both US citizens and US resident aliens – the wording does not seem to have non-resident citizens in mind at all ). Seems to me that there are an awful lot of suppositions and assumptions cherry-picked to provide a rationale for what they wanted to do. Too bad we can’t have someone familiar with sampling and statistics look at the un-redacted report and critique the methodology and sample size and selection. If the actual sample size wasn’t a sensitive point, then why redact it? There was no privacy issue – no individual taxpayers could be identified – so what is the big deal, unless they’re not confident about their data, methodology and underlying conclusions?
Page 27 says that the purpose of requiring the filing and collection of FBARs is NOT TO GENERATE REVENUE for the US. Then why is penalty generation on zero tax owing such a priority now? At what point did they decide that it was ethical to focus on grabbing penalties from us via FBAR and FATCA penalties – even where NO US tax could be assessed or owed? Where are the documents that authorized that change in practice? They must exist.
There are no doubt people like Steven Mopsick, or Nina Olson, or probably ex-IRS lawyers or practitioners who would be able to provide more informed insight into these documents, and the change in policy and direction they seem to be indicative of.
It is pitiful that we have to grasp at clues to put together a picture of how this draconian situation came into being. If the US and IRS firmly believes that it is just and ethical to have started down and continued on this path, it should have the backbone to state that clearly, provide unredacted documentation and robust statistics to back up it’s decisions, and the punitive and confiscatory treatment and outcomes for those of us abroad.
@ Roy and Tim
A belated thank you for answering my question posted on August 22 at 7:00 PM.
However, I am still not convinced that there isn’t a paper trail somewhere, if not at CRA or the IRS, then at Finance. There had to be a reason why Don Cayo of the Vancouver Sun was sent an email from Finance just before August 22, 2011 which stated that CRA would not collect FBAR penalties. Maybe there were just internal discussions about an issue that was generating a lot of press at the time, with nothing written down. Maybe?
*NorthernShrike – Don’t confuse FATCA with FBAR. FBAR is a form the taxpayer has to fill in and return to the Treasury/IRS. FATCA covers the taxpayer with the 8938 filing requirement AND the FFI who must report the accounts independently. In the former case it has nothing to do with your bank, in the latter there is no direct relationship between what you put on the 8938 and what the bank reports. In fact the thresholds for filing the 8938 and the bank reporting are significantly different. The FFI is required to penalise you, if you decline to provide your TIN on a W9 along with a reporting waiver, by withholding income and gross sales proceeds from you when they pay them to you.
FBAR fines are just that – a fine from the IRS/Treasury directly on you – and so enforcement is down to whatever the IRS can manage. I would guess that there is an additional penalty for not filing the 8938, but then again it is between you and the IRS.
The FATCA penalty collected by the FFI is in situations where they cannot report your details to the IRS.
Clint – The useful Don Cayo coverage only came in the wake of a slightly earlier new media story that broke at Vancouver Observer. MP Don Davies was already onto the case earlier in the summer of 2011. I would speculate that pressure from the NDP had already gotten the internal wheels turning over many times. The Conservatives have only been reactive on the issue, as far as I can see. Miniscule credit to them for reading the Canada-US treaty in public when pressures started to mount. No evidence that they have done anything.
@usxcanada Don Cayo also wrote 2 articles in the 3rd week of August, 2011 about the plight of Americans in Canada. I had contacted him by email on August 23rd after reading his August 22nd article.He kindly replied almost immediately with the text of an email received from someone (not revealed) at Finance in response to questions he (Don) asked.while writing his first 2 articles. Because of my email, those of others and phone calls, he published the Finance Department email on August 24.
http://blogs.vancouversun.com/2011/08/24/verbatim-what-canada-says-about-collecting-irs-non-filing-penalties/
I agree with your speculation regarding MP Don Davies and the Conservatives role in this mess.
*Interestingly enough if you back to Febuary 2011 Scott Michel of Caplin and Drysdale in Washington was testifying before the House of Commons of Finance Committee in Ottawa. He mentioned FBAR, FATCA, and OVDI multiple times and how they affected US Citizens living outside the US and NONE of the MPs present Conservatives, Liberal, NDP, and Bloc appeared to make any note or raise any concerns about how all of this affected Canada. It was only during the summer of 2011 after the Spring 2011 election that everything we discuss here started to enter the conciousness of the Canadian political class.
@Tim – Link pls?
Never mind: http://www.parl.gc.ca/HousePublications/Publication.aspx?DocId=4937782&Language=E&Mode=1#Int-3723162
*Glad that you found it. There were some pretty heavy hitters on that committee at the time Shelly Glover, Thomas Mulcair, Scott Brison and they all seemed oblivous to was/is happening. That really only seemed to have changed when Don Davies and some of the BC NDP caucus started getting involved a few months later. Now what is really interesting is that these “tax haven” hearings are supposed to some day start back up again but I have no idea when.
*One positive aspect is during these previous hearing the Bloc Quebecois was really adding nothing of value and luckily now they are gone hopefully for good.