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.
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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