From Jim Flaherty:
November 8, 2012
Thank you for your correspondence of July 26, 20 12 regarding U.S. government taxation policy, specifically the Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA). Please excuse the delay in replying.
Rest assured, the Government of Canada shares many of these concerns and has expressed them directly to the U.S. government. While we all understand that Canada and the U.S. share many common values, including ensuring fair tax systems where everybody pays their share, we have concerns about the impact of FBAR and FATCA on Canadians.
For instance, many dual Canadian-American citizens captured under FBAR have complained they have only very remote links to the U.S. and a very limited knowledge of their tax reporting obligations to the U.S. (Note: please find enclosed a ‘ fact sheet’ on the history of U.S. tax and FBAR filing requirements for U.S. citizens no matter where they live in the world.)
We recognize that the vast majority of these dual citizens being targeted are honest, hardworking and law-abiding people – including many senior citizens – who have dutifully paid their Canadian taxes. Their only transgression has been failing to file Internal Revenue Service (IRS) paperwork that they were unaware they were required to file.
Now, faced with the knowledge they have an obligation to file U.S. tax returns (even if they most often do not actually owe any taxes), we appreciate that many dual citizens want to fulfill that obligation. But we also understand that the threat of prohibitive fines for simply failing to file a return they were never aware they had to file has become a frightening prospect causing unnecessary stress and fear among many honest, hardworking individuals.
As such, we have called on the U.S. government to look upon those individuals impacted in Canada with leniency. I am happy to report that the U.S. government has listened to our concerns and the concerns of Canadians. Recent guidance by the IRS on December 7, 2011 and Canada
June 26, 2012 (which are referenced in the attached fact sheet) will help dual citizens residing in Canada deal with their U.S. tax filing obligations and provide assistance to people with Canadian retirement plan issues. The Government of Canada applauds these actions. The December 7, 2011 guidance states that U.S. taxpayers who owe no U.S. tax are not subject to any penalties for a failure to file a U.S. tax return, while other taxpayers may be eligible for reasonable cause relief. In the case of a failure to file an FBAR, where the IRS determines that a violation was due to reasonable cause, the guidance says that there is no penalty.
The June 26,2012 guidance signals the intention of the U.S. to provide simplified procedures to allow taxpayers who pose low compliance risk to become compliant with their U.S. tax and FBAR filing requirements without facing penalties or additional enforcement action.
In addition, the IRS is streamlining the process for U.S. citizens and dual citizens who have contributed to Registered Retirement Savings Plans or Registered Retirement Income Funds in Canada to take advantage of the provision in the Canada-United States Income Tax Convention allowing deferral of taxation in the U.S. of income in those accounts, if they have not already done so.
The new streamlined filing procedures are accessible as of September 1,2012. Instructions for the new procedures can be found by visiting the IRS website (the specific link is also referenced in the attached fact sheet). [not included here]
I should also note that penalties imposed by the IRS under FBAR will not be collected by the Canada Revenue Agency (CRA) on the IRS’ behalf. While the Canada-United States Income Tax Convention contains a provision that allows for the collection by a country of taxes imposed by the other country, this does not apply to penalties imposed under laws that impose only a reporting requirement. Furthermore, the CRA does not and will not collect the U.S. tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose (whether or not the individual was also a U.S. citizen at that time).
A related piece of U.S. legislation causing similar concern is FATCA, which is proposed to come into force on January 1,2014. To be clear, Canada respects the sovereign right of the U.S. to determine its own tax legislation and its efforts to combat tax evasion – the underlying objective of FATCA. In fact, our two jurisdictions cooperate to prevent tax evasion.
However, we are concerned that FATCA would impose significant compliance obligations on Canadian financial institutions, and raise significant privacy concerns for Canadians.
– 3 –
Canada is not a tax haven and people do not flock to Canada to avoid paying taxes. But for those who would seek to evade taxes, we believe that there are ways of addressing these issues with the U.S. through our bilateral Income Tax Convention.
The Government of Canada will continue to express its strong concerns relating to FATCA with the U.S. government and advocate on behalf of Canadians on these issues. Talks arc underway between Canadian and U.S. officials to develop an approach that both countries will find agreeable.
Please consider the enclosed fact sheet, which may provide additional information on FBAR, and which contains Internet links to the recent IRS guidance. This letter and the fact sheet are intended for information purposes only and should not be viewed as tax advice. Taxpayers who think they may be affected by any of the measures discussed in these documents should seek advice based on their particular circumstances from an independent tax adviser with appropriate experience.
Thank you for writing.
James M. Flaherty
Just received same letter by email. Must be the day they’re sending them out!
Interesting to see that the tone is consistent from the earlier versions (with the addition of the details about the Sept 1st streamlined process). Consistent about the CRA not assisting in the enforcement aspect: “I should also note that penalties imposed by the IRS under FBAR will not
be collected by the Canada Revenue Agency (CRA) on the IRS’ behalf.
While the Canada-United States Income Tax Convention contains a
provision that allows for the collection by a country of taxes imposed
by the other country, this does not apply to penalties imposed
under laws that impose only a reporting requirement. Furthermore, the
CRA does not and will not collect the U.S. tax liability ofa Canadian
citizen if the individual was a Canadian citizen at the time the
liability arose (whether or not the individual was also a U.S.
citizen at that time)”…..
Of course we know that there is also other ample opportunity for punishment, via 3520/As, etc., but it is good to see that Flaherty is saying no less than before, and not hedging. Except, don’t really think that the fulsomeness of “I am happy to report that the U.S. government has listened to our concerns and the concerns of Canadians.” is really warranted given the still massive ongoing problems with becoming ‘compliant’ and veil of uncertainty. Renouncing isn’t any easier either. There is nothing constraining the IRS from continuing in the same vein no matter what Flaherty says, and no progress has been made on the RESPs, RDSPs, and Flaherty’s own favourites – TFSAs and now PRPPs. He doesn’t even mention those registered accounts, and it must be an ongoing embarrassment to promote them to Canadians, yet know full well that over 1,000,000. in Canada are being punished or prevented by the IRS from having them.
Some of the worst penalties can be layered in multiples onto the RESPs, RDSPs, PRPPs and TFSAs, and the accounting and reporting for them is complex, incomprehensible, time-consuming and expensive to have done – every year. They are reportable on the FBARs, FATCA (depending on threshold) and on 3520, and 3520As.
So the fact that Flaherty knows this and doesn’t acknowledge it is very disappointing.
At least you know you are safe if you avoid the USA! And it is also a sign that the banks won’t be shipping records south (apparently) in the near future..
Note especially: “The Government of Canada will continue to express its strong concerns relating to FATCA with the U.S. government and advocate on behalf of Canadians on these issues. Talks are underway between Canadian and U.S. officials to develop an approach that both countries will find agreeable.”
This can only mean that Canada is in the process of negotiating an intergovernmental agreement (IGA) with the United States modeled on the agreement with the UK. As I continue to stress, while this is well-intentioned from Canada’s point of view, in its effects no course could be more damaging to Canadian interests.
IGAs, especially with America’s closest partners, are essential to FATCA’s survival. By negotiating an IGA with Washington, Ottawa would be helping to save an otherwise untenable FATCA regime in exchange for only minimal concessions and compliance cost relief. Even worse for Canada, while an IGA on FATCA would purport to be a bilateral, equal partnership, in fact it would signify an unprecedented surrender of Canadian sovereignty to the United States – which is saying a lot.
An IGA on FATCA means allowing enforcement of costly and invasive U.S. extraterritorial requirements on Canada, with Canada’s own government institutions deputized for that purpose. No matter how it is sugar-coated, an IGA would constitute Ottawa’s capitulation to FATCA and installation of the IRS the final authority over Canada’s financial system.
@ALL, re; “By negotiating an IGA with Washington, Ottawa would be helping to
save an otherwise untenable FATCA regime in exchange for only minimal
concessions and compliance cost relief. Even worse for Canada, while
an IGA on FATCA would purport to be a bilateral, equal partnership, in
fact it would signify an unprecedented surrender of Canadian sovereignty
to the United States – which is saying a lot.
An IGA on FATCA means allowing enforcement of costly and invasive
U.S. extraterritorial requirements on Canada, with Canada’s own
government institutions deputized for that purpose. No matter how it
is sugar-coated, an IGA would constitute Ottawa’s capitulation to FATCA
and installation of the IRS the final authority over Canada’s financial
We need to all pepper Flaherty and our MPPs with the message that we oppose any such arrangement, and underscore the effects on Canadians.
I hasten to add: I make these comments with sincere personal respect for Mr. Flaherty. But not just in Canada, I have noticed a curious disconnect between clear-eyed, intelligent statements from non-US government and industry leaders about what’s wrong with FATCA – which are then followed-up by a misplaced and counterproductive plan to negotiate with Washington. I somehow think there must be a miscommunication between the top leaders, such as Mr. Flaherty, and working level experts who are then tasked with the technical task of proposing a plan of action.
Re: “We need to all pepper Flaherty and our MPPs with the message that we oppose any such arrangement, and underscore the effects on Canadians.”
Absolutely! It can’t be stressed enough: no IGAs, no FATCA.
An IGA with Canada would be among the most damaging, given how closely tied our economies and finance systems are already. Conversely, if Ottawa informed Washington that (1) Canada refuses to negotiate an IGA on FATCA; (2) Canadian institutions will not be permitted to comply with FATCA, as such compliance is in violation of Canadian law; and (3) if in the absence of an IGA the United States attempts extraterritorial enforcement of FATCA in Canada, such as slapping American penalties on Canadian institutions (including the 30% withholding, which doesn’t kick in for several years anyway), Canada will prepare and apply appropriate countermeasures.
As was the case with the UK, Washington is counting on signing up our closest friends first, then pressing other countries over time to sign IGAs – or be hammered with FATCA noncompliance, in effect sanctions. But if that first core group of countries doesn’t materialize, it would leave Treasury with a real dilemma on its hands: either proceed with unilateral FATCA enforcement and trigger a global financial crisis (bigger than the one that already exists) – or back down. Based on Treasury’s recent decision to kick the can down the road for another year while they scramble to rope more countries into IGAs, I suspect they would choose the latter.
A Canadian refusal to comply with FATCA would set off shock waves in Washington and internationally. If the rest of the world sees that Canada refuses to knuckle under, other countries will ask themselves: “If the Americans can’t get even Canada to play along, why should we?” It’s already doubtful that China will either negotiate an IGA or comply with FATCA, and there are similar indications with India and Russia. FATCA may be shaping up to be another of those issues where the US expects and gets obedience from supine EU countries (a/k/a, our enablers) while picking a quarrel with the BRICS. In this case, Canada may be better off with the BRICS.
Note in the margins: In case it isn’t obvious, the task of doing anything legislative to overhaul U.S. tax policy (as impacts U.S. citizens abroad), much less getting rid of FATCA, just got very complicated. If Romney had won, and a new Treasury secretary installed in January (Geithner reportedly will be leaving anyway but his successor under Obama will not change anything significantly), we could have looked forward to putting the brakes on IGAs (and FATCA as well) and, in 2013, to comprehensive tax reform in which to address these issues. (I was already getting my ducks in a row to approach the Romney transition team on this — ah well.) Such comprehensive reform is unlikely happen now. While Obama and the divided Congress will try (and possibly succeed — or not) in getting a fiscal deal that will in part address some tax issues, many significant issues like residence-based taxation and FATCA will be much harder (though maybe not impossible) to get into the legislative stew. With respect to FATCA, especially in the absence of an organized anti-FATCA campaign which I’ve been trying to organize, we might be looking at the longer-term scenario — FATCA’s getting repealed or significantly modified only after two or four years of horrendous costs and many ruined lives caused by its enforcement — instead of dealing with it sooner and cleaner.
All that said, Canada’s decision whether to cooperate with FATCA will be a significant factor in terms of how prolonged and costly the road to repeal ends up being.
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@Jim Jatras, I think the answer from Treasury to Rand Paul may be one of the best tools we have to show foreign governments that the US is not interested in reciprocity, and therefore that the agreements they’re negociating are not worth much. They’re promising them one thing while answering US congressmen the opposite. Hyprocrites!
“scope of what US shares versus what other countries share is different. Equivalent levels of reciprocity in the future. For now, no additional obligations will be imposed on U.S. financial institutions unless and until additional laws or regulations are adopted in the United States.
Maybe someone should send this letter to Jim Flaherty. I would also like to send it to my representative, but I can’t find it online anymore. You mentioned you had a copy. Would that be possible to share it? Thanks.
I have it in PDF. To which address can I send it? If you don’t want to post an email address here, send me the address at email@example.com and I’ll send it.
Yes, it is consciously duplicitous, IMHO. While telling the Senators in the letter that the “scope of what US shares versus what other countries share is different,” they omit mention that in Art. 6 of the “reciprocal” version of the IGA the U.S. commits to full reciprocity in the future – a commitment they know they will be unlikely to be able to keep.
So which is more deceptive? Assuring the Senators, hey, no problem, the mutual commitments are different and we’ll come back to you if and when we change that (but not telling them, “we’ve already promised to do that”)? Or telling prospective partners like Canada that the U.S. is committed to genuinely reciprocal exchange (“. . . eventually, but only if you’ll first sign on the dotted line on non-reciprocal exchange”), but don’t honestly ever expect to be able to deliver on that.
Is this what you’re looking for?
No, that’s the Paul, Chambliss, DeMint, Lee letter to Geithner. Christophe is referring to Geithner’s response, which I have just sent him. There is a posted link to that letter somewhere but I can’t locate it at the moment.
Thanks, Jim Jataras. Could you post the reponse if you find that. That will be helpful for any further correspondence some here may want to take on.
*Note to Jim Flaherty: Thank you for selling out the 1.0 million Americans who work to contribute to Canada’s economy to the IRS. Why don’t we just take down the Canadian flag and put up the US Stars and Stripes while we’re at it. What part of “NO Inter-Governmental Agreement” with this American BULLY don’t you understand?
I have the PDF but don’t know how to post it. I sent it to Christophe. Maybe he knows how.
(You could pull up the pdf and copy whatever appears in the address as in the letter to Geithner (i.e., http://www.repealfatca.com/downloads/letter.pdf ). Highlight, right click, COPY — then go back to this comment, hit Reply and paste that — REPLY. Might work for you??)
*Just so all of you understand signing, ratifying, and implementing a treaty are all different things. Canada has “signed” treaties back in the 1930’s Legal of Nations time period that have never been ratified but never “unsigned” or denounced either. In Canada ratification requires a treaty be put before the House for 21 sitting days. However when a treaty requires changes in Canadian law it cannot be ratified until those changes have been made(This could be a while). In the UK for example there is currently an outstanding request for comments as to how they are going to implement this damn thing into domestic UK law. Basically as I understand HMRC really doesn’t even know how to write the UK Domestic legislation they need to pass into law.
*I would also suggest sending any appropriate correspondence in your submission to the Department of Finance such as the letter to Rand Paul.
@Jatras, @Tim, @all:
Have been re-reading as much as possible in order to draft a letter. Have taken note of Tim’s urging that initially, peppering the contact with phone calls is important – to provide evidence of volume/level of interest/concern. Now wondering what is most important to include/emphasize in giving reasons why Canada shouldn’t do this.
But, what are the reasons that will resonate best with Harper and Ottawa? Minister Flaherty has already stated some of his reasons – forthrightly – and in public.
– We can mirror his statements,
– underscore the huge Canadian sovereignty issue,
– numbers potentially affected in Canada (1/32, or >1 million PLUS their Canadian families, employers, etc. – for co-signatory and non-beneficial accts.).
– We can cite the paper by Bonham – which has good phrases and sources.
– We can point to the evidence that the US does not keep it’s commitments and that US Treasury/IRS bad faith has been amply demonstrated by the OVD programs, the public rebukes by the IRS own Taxpayers Advocate – documenting the treatment of those abroad as an area of special concern – and a priority of the TAS for 2013.
– We can underscore the inevitable and pre-existing conflicts with the Canadian system of taxation vs. the US one – use for example;
1. the effect of US taxation of our principal residences where no Canadian tax is due or paid to offset the US claim (AND underscore that our homes are Canadian’s single biggest lifetime investment, and our nestegg for retirement) ;
2. Problem with US IRS punishment for ALL registered accounts (except RRSPs which require annual election) as ‘foreign trusts’ – requiring 3520s/3520As and refusing to treat them as legitimate. Big conflict between Flaherty’s pet TFSAs and PRPPs ( a Conservative pet initiative) and the US arrogant insistence on treating ALL registered savings as suspicious ‘foreign trusts’ – discouraging/preventing/punishing us from holding them – contrary to what the feds want us to do http://www.fin.gc.ca/n11/11-148-eng.asp and this will also be a provincial issue http://www.fin.gc.ca/n12/12-088-eng.asp
This is also the case for RESPs (anything which discourages our use of them conflicts with Canadian federal and provincial initiatives to get a majority of Canadians to invest in post-secondary training – re the ‘skills gap’, etc.). Affects the non-US children because of reporting requirements by US status parent. Discriminates against Canadian born dual children (dual status by birth from US parent) re RESP grant from feds – can’t benefit like other Canadian resident/citizens because are punished by US for having them. Not non-taxable by US.
And actively discriminates against those with disabilities re RDSPs. A potential Human Rights/Charter issue.
– Compliance costs to ordinary Canadians/duals and their non-US families – astronomical and fraught with inadvertant pitfalls already – and FATCA adds to that.
– Confiscatory penalties – in absence of US tax owed – based merely on reporting/information on LEGAL assets held in non-tax haven, registered with CRA and interest reported to CRA already.
– Huge potential for ‘unintended consequences’ re FATCA witholdings, potential for mistakes – lawsuits?
– US crossborder taxation already full of double-taxation potentials and high legal and accounting costs. Already too complex for those who try. Treaty does not currently prevent several significant conflicts between systems, which creates and imposes double taxation on those inside Canada.
– punishes/discourages ordinary savings and investments in Canada – ex. mutual funds as PFICs. Bad for Canadian financial sector and investment in Canada’s economy.
– Creates, and enforces inequality amongst Canadian citizens – some less equal than other – second class citizens vs. those who can fully use grants, tax breaks offered by federal government. Charter issue?
– Cannot remedy and avoid harm by renouncing – too difficult, costly (450. fee, plus required forced tax compliance pitfalls – 5 years worth (plus obtaining SSN). Some cannot ever renounce (re intellectual/mental health disabilities, minors). Covered expatriate issues – high net worth Canadians.
– US sucks money out of Canada – inevitable as real intent (see Ambassador Jacobson’s speech to Canadian club, which acknowledges that rising US debt is reason for enhanced enforcement and search for ‘taxpayers’ abroad – including in Canada – and he is totally unapologetic about poaching those born in Canada with dominant nationality Canadian – or the possibility of double taxation.)
That’s as far as I got, but not sure how extensive it should be or which arguments are strongest – to bolster the major one about Canadian sovereignty.
We should do a list of points for all to draw on, and supplemental sources to back it up with.
These are great points for inclusion in a letter. Are you and other IBS participants (I would assume restricted to Canadian citizens) thinking about a single letter to Minister Flaherty, which could then be sent to MPs; institutions and associations (such as CBA); Canadian media, etc.? Or of a number of letters drafted individually? For what it’s worth, it would seem that the former would be more efficient, both in crafting a comprehensive letter that stands as kind of a manifesto, and then make sure it gets sent to all the right targets and received some media attention. If you are preparing a draft based on your summary above, needless to say I’d be happy to look at it for any useful thoughts you might find useful.
Dumb question: is there any particular MP, or maybe more than one, known for zealous defense of Canadian sovereignty, especially with respect to encroachments by You Know Who?
I also got a letter from Flaherty yesterday, in response to my letter to him about the same time as Joe Smith’s letter. So it is a form letter, yes they are sending it out in batches after not replying to letters for some months, and yes it does reinforce what Flaherty has said all along about non-enforcement of IRS taxes penalties or filing requirements on this side of the border by CRA, IF YOU’RE A CANADIAN CITIZEN regardless of dual citizen. If you’re not a Canadian citizen but only a resident, you are at extreme risk and should think seriously about applying for Canadian citizenship, if you qualify, but as others have noted you could be facing a lengthy wait.
I find very interesting the timing of the release of this form letter, coinciding to the very day with yesterday’s formal announcement of the IGA discussions between US and Canada regarding FATCA among other issues. I sent my letter to Flaherty in June, and I got his PDF reply in an email yesterday November 8 and the PDF letter has the November 8 date stamp on it. That’s the very same date as the announcement Joe posted at the head of this thread, and given the delay in replying I can’t believe it’s a mere coincidence.
I take this as reasonably prima-facie evidence that Flaherty is committed NOT to throwing Canadian citizens under the bus, whatever gets sorted out, at least in terms of enforcement on our side of the border. Maybe I’m being naive but I don’t think so. At least I hope not.
*I agree, not conceivable that any Canadian government or party would so sell out to the Yanks and risk alientation of MANY Canadians.
*BULL!!! Joe. With the IGA negotiation idea, what the hell do you think they’re doing?
“Talks are underway between Canadian and U.S. officials to develop an approach that both countries will find agreeable.” – I think I read that clearly enough that it says “between the lines”. We’re going to roll over and take it up the ***! On top of that, my NDP MP (didn’t vote for him)…openly was supportive of Obama’s re-election. Hell 75% of Canadians are “snowed” by Obama’s “hope and change” bulls****!!! They don’t care if they throw US expats and their Canadian spouses under the bus.
Whenever you guys come up with a well rounded letter, please post it. I am drafting a letter that I plan to send to the French Minister of Finances. Many of the same arguments apply, and I want to make sure not to forget important points.
How long ave you lived in Canada? I have been here since 1975. There is a profound distrust of the Americans by the average Canadian that no government is going to ignore.