Brian Mahany is “a bit miffed by a recent story in Canada’s CBC News criticizing FATCA.”
In his latest article at TaxConnections World-wide Tax Blogs titled CBC Distorts FATCA Facts Brian writes:
There is a tremendous amount of misinformation circulating about FATCA and the requirement for US taxpayers to report foreign financial accounts. Some of the media horror stories are so bad that many taxpayers are simply too afraid to come into compliance. Add a few boneheaded mistakes by the IRS and one has a sea of uncertainty. For some folks, that means anxiety and bad decisions.
According to Brian, CBC’s “recent article on FATCA has several factual inaccuracies and takes editorial license too far. ” Brian dispels these so-called inaccuracies with his own version of the facts:
CBC: “Who is affected by this law [FATCA]? The short answer is almost every Canadian… Some estimate it could cost $100 million for each financial institution.”
FACT: The law affects a small but statistically significant percentage of Canadians who work in the US, are dual nationals, have an American green card or are retired here.” Before we send every Canadian running to find an accountant or tax lawyer, lets be careful in our definitions.
FATCA requires foreign financial institutions to identify Canadian account holders that may be required to file tax returns in the United States. For most Canadian banks, that means accounts where the account holder identifies himself as a U.S. resident or citizen, an account holder possessing a U.S. passport or “unambiguous indication of a U.S. place of birth,” an account holder with a U.S. phone number, an account with instructions to transfer funds to the United States, an account with a power of attorney or signer that has a U.S. address or an account with instructions to “hold mail” at the branch.
The initial review involves larger accounts; many credit union and checking accounts are simply to small to require review. While we are sure that some “expert” claims it will cost $100 million for each financial institution, we think that figure is preposterous. For most banks the cost will be less than $1 million.
CBC: “Some residents didn’t know until recently that they were dual citizens. For example, U.S. citizenship is automatically given to people born in Canada to U.S. parents or born in the U.S. to Canadian parents.”
FACT: We call these folks accidental Americans. There are very, very few people living in the world who are citizens of the United States and don’t know it. (And for those that truly are accidental Americans, special amnesty rules apply. Don’t worry.)
CBC: ‘[T]he U.S. sees registered savings accounts like RRSPs, RESPs and TFSAs as “offshore trusts,” and therefore can potentially tax gains in them.”
FACT: Once again, there are special rules for retirement accounts. In fact, the United States has a specific treaty with Canada covering retirement accounts.
CBC: “The annual cost of filing U.S. taxes can be “astronomical,” tax expert Allison Christians notes. Accounting firms estimate the cost of filing personal U.S. taxes can be anywhere from $500 to several thousand dollars.”
FACT: I suppose if I were Bill Gates or Warren Buffet, the cost to prepare my tax return might be in the thousands. There are many very qualified CPA firms and expat tax services that prepare returns for dual nationals, including FBAR filings, for about $300. [We don’t prepare returns but can certainly send you to folks who do.]
Needless to say, Brockers responded with the real facts in several articulate comments to Brian’s article. Even CBC’s James Fitz-Morris took offence and added a comment of his own. Not to be outdone, Brian emailed me a comment personally in response to all the comments to his article. This is what Brian wrote in his email to me:
Thank you for the comments. There have been so many that it was easier for me to write a new post and try to address everyone. Hopefully, TaxConnections will post it tomorrow. Until then, here is our response: Less than a week ago I took issue with the Canadian Broadcast Corporation’s story about FATCA. Our post has already generated 19 responses through TaxConnections and many more emails. One such response was from the author of the CBC story, James Fitz-Morris.We are humbled by the sheer volume of responses and the attention the original post generated. Clearly this issue is a “hot button” issue for many Canadians. Since so many folks took the time to respond, I will try to address their concerns and comments in this post. Before doing so, however, a brief description of FATCA is in order.
For those not familiar with FATCA, the acronym is short for the Foreign Account Tax Compliance Act. Passed by Congress in 2010, the law requires foreign financial institutions to become the eyes and ears of the IRS. Beginning this July, these banks must begin reviewing their accounts and identifying those with connections to the United States. Congress and the IRS want to identify taxpayers hiding income and evading taxes through offshore accounts. Some say the cost of implementation is far greater than the revenues the law is expected to generated, however.
Shortly after my original post was published by TaxConnections, James Fitz-Morris of CBC responded as follows:
I must take issue with your claim of “factual inaccuracies” in the CBC’s reporting:
1) Every Canadian is affected by this law. Once implemented, all Canadian financial institutions will be required to ask their customers going forward if they have any of the FATCA indicia. Anyone refusing to answer the questions will have their banking records sent to the IRS. More than one Constitutional expert on this side of the border considers that to be a gross violation of Canadian privacy rights. The $100-million dollar figure comes from the president of one Canada’s largest banks – no one has yet to provide evidence to refute his price tag
2) Thank you for agreeing that “accidental Americans” are caught up by this.
3) You caught us on this one! The list should be RDSPs, RESPs, and TFSAs (a correction is coming to the story). The IRS does recognize the special tax status of Canadians’ Registered Retirement Savings Plans (RRSPs) BUT does not recognize the same for families with disabled children (RDSPs), those saving for their children’s education (RESPs), nor special general savings accounts (TFSAs). In the case of RDSPs and RESPs, the Canadian government matches certain levels of contributions with tax-payer funded grants. The IRS calls these grants “income” and taxes it (see point #1). So, while the IRS is willing to respect retirement savings – it does not extend the same established exception for the savings of people with disabilities nor for those wanting an education for their children (you see why some are alarmed by this).
4) Those who discover later in life they were meant to be filing returns with the IRS need to get their accounts into compliance. If you know a CPA willing to do 10 years worth of back-taxes for $300, please pass along their name – I know many families that would very much appreciate the help!
CBC National News
First, our intent was never to take issue with Fitz-Morris or Canadians for being upset with FATCA. The law needs heavily amended if not repealed. I think that we share that common ground. We appreciate that CBC and others are raising some of the troubling problems surrounding FATCA.
Just as some politicians on this side of the border make foolish statements about the need for FATCA and how only tax evaders have foreign accounts, it is equally inflammatory to quote folks that say FATCA threatens the sovereignty of Canada. There are plenty of alarmists on both sides of the border armed with great sound bites.
There is a genuine need throughout the world to combat tax evasion. We personally support tax transparency but FATCA’s heavy handed approach misses the mark. Canada, the United States and the other developed nations should have an extended dialogue as to how to best address tax evasion.
While the many emails and responses help us understand the depth of the problem, we still feel CBC’s article was a bit over the top. For example, CBC quoted a bank president saying it would cost every Canadian bank $100,000,000.00 to comply with the law. Why so much? Evidently because the banks must question every one of their customers.
In our opinion, Canadian banks do not have to “question” their customers. They need to review their accounts and absent certain enumerated indicia of US “nexus,” can rely on the information from account holders without further review.
Lest anyone think we are defending FATCA, we are not. While we don’t think the cost to banks of FATCA will be anything close to the expert quoted by Mr. Fitz-Morris, we also don’t believe that FATCA compliance is cheap. Whatever the compliance costs, you can be assured those will be passed on to customers in the form of higher fees.
Mr. Fitz-Morris’ original article and the many responses are indicative of the need for further dialogue that is needed. One reader said that she gave up her citizenship because of FATCA compliance costs. Assuming that’s true, it is obvious FATCA has many unintended consequences. Rather than trade rhetoric, we urge both nations to sit down and hash out a better way to address a real problem. (A recent data breach by an investigative journalism group revealed that Canada has its fair share of offshore tax evaders too.)
Even if the law is completely repealed, U.S. taxpayers with Canadian accounts (that includes expats living in Canada, dual nationals, accidental Americans, Americans with Canadian accounts and Canadians working in the U.S.) must report those accounts or face huge penalties. (Foreign reporting penalties are an entirely different story).
James Fitz-Morris was a bit off the mark in his comment to Brian’s article when he said: “You caught us on this one! The list should be RDSPs, RESPs, and TFSAs (a correction is coming to the story).” Actually, although Brian correctly added RDSPs to the list of affected investment vehicles quoted in the CBC article, he completely ignored the ramifications of holding such investments, and instead makes brief mention of the special status accorded to RRSPs. Brian Mahany misses the boat completely with his evasive response to the many intelligent comments that were made to his article, and continues to ignore the issues associated with RDSPs, RESPs, and TFSA’s, as well as the new proposed PRPP.
Take away message: Thou must comply!
Typical paternalistic reaction. We are not being inflammatory: FATCA is a violation of the sovereignty of other nations, not least of all because it violates the Master Nationality Rule. As I wrote before:
Agreed. Very paternalistic.
My comment to James Fitz-Morris’s reply was:
If you are going to warn Canadian citizens who happened to be born in Buffalo that their Canadian bank accounts are illicit offshore accounts and subject to huge penalties, it’s also important to note for balance the non-collectability of those penalties. The US cannot collect taxes in Canada, only the government of Canada can. The US cannot seize assets, garnishee wages or place liens anywhere but within its own jurisdiction. Canadian courts (under the “revenue rule”) will not enforce foreign tax claims against Canadians in Canada. Only with “assistance in collection” from the Canadian government can the US collect a tax debt in Canada. However, under the Canada-US tax treaty, Canada will NOT collect any US tax debt from a Canadian citizen, unless the debt was incurred BEFORE they became a Canadian citizen. This has been affirmed by the Canadian Ministry of Finance and CRA.
@Concerned Canadian, how is Mr. Mahany supposed to make a living off expats if we focus on the information that you have provided?
Here in Calgary it has been my experience that you will pay $1,500 to $3,000 as an average person. The person who did my filing and has done my Canadian returns for 20 years wont do it again for $300. They know that is too good of a deal. The other thing to remember is that many accounting firms do not want the trouble of dealing with US forms and issues. If you want the expert to make things happen correctly with a complex US system you must pay.
There seems to be varying degrees of predatoriness between these tax-bots (thanks badger). I would suggest that anyone seeking tax information do so from an accountant within a legal firm. My lawyer told us about the treaty provision that protected Canadians before we ever talked to his accountant. It’s my understanding that the information we provide the accountant in this case is also protected by attorney client privilege.
@bubblebustin, and what is client attorney privilege worth, if your attorney works for the IRS? Attorneys do not work directly for the IRS, but under the rules that the IRS has created to favor the IRS and despoil the client.
At least he told me about the treaty provisions, which no accountant in their right mind would tell you about.
I guess the one good thing about being a pauper is that I don’t need a tax professional. I cannot declare what I don’t have.
Of course the flip side to that, is that the tax policies get really overwhelming, and punitive real quick once I attempt to control my own financial destiny beyond simply having a menial job, and living paycheque to paycheque.
Alas, this is really just another facet to the attitude of paternalism that is present in the USA.
The one problem that they seem to have missed is that a “US person” cannot file US tax forms legally in Canada when they are married to someone like me…. a Canadian. My wife, a Canadian at birth(citizenship paperwork to prove) but born in the USA, is not legally allowed to give my information to a “foreign” government unless I agree. Well, I do not agree…… wonder how long in court we will be with this one….. Many in my position will have lots to say. So there, many cannot properly file US taxes. So at what cost will US persons file?
@bubblebustin – absolutely not true. The accountant I used for OVDI was more informed about treaty provisions than my lawyer was. He has had to do the returns of many US clients who reside in many countries in the world and has needed to become aware of these. As a result, he would automatically check the Tax Treaty when he saw something in my financial life that could be covered in a tax treaty. On the other hand, my lawyer would offer nothing I did not ask for and when a question did come up that could be resolved by a look at a Tax Treaty, he would charge a minimum of USD 500 to look at the issue.
I do not recommend using a lawyer for Tax Treaty issues. Many experienced international accountants have dealt with these and are willing to take positions at one quarter of the price of a lawyer.
Also, in my case, I thought attorney-client privilege was useless as I had nothing that seemed to me to need protection. Certainly, nothing related to a Tax Treaty was that way.
You also have to realize that you are in Canada and it is easy to find English speaking lawyers with good knowledge of the US tax system and the Canadian tax system. This is not true for other countries. If one needs to stay in the US tax system for whatever reason, my experience is that a good international accountant brings a lot more value and this value is enhanced when one is dealing with multiple country tax systems as can often be the case in Europe.
I can only speak from my experience, and if I made generalizations with regards to lawyers vs accountants, I must apologize. I’m glad you found an accountant that didn’t herd you into compliance, but it appears from the stories here and the articles I’ve read written by accountants that they are in the minority. Good to hear your personal account. Thanks. I guess if anyone consults with an accountant and they don’t mention the protections offered by the treaty (i.e. Canada will not collect tax and penalties from Canadians) RUN!. When it comes to choosing an accountant or lawyer, caveat emptor.
Also, to clarify, my accountant was not associated with a legal firm. His experience leads him to be contracted by many legal firms. Initially, I started with an accountant who had no experience with international accounting and I believe his lack of knowledge pushed me into OVDI unnecessarily. When I did have to hire a lawyer for OVDI purposes, this inexperienced international accountant was so paranoid that he ran up my legal bill by refusing to agree with the lawyer on certain terms and conditions of the Kovel agreement (attorney-client privilege agreement for those of you who do not know what it is). I finally got pissed off and went with an accountant the law firm contracts as I did not know where else to go. His experience was invaluable, especially after I fired the OVDI lawyers I was working with. I kept him and we did most of the tax work after the lawyers were gone. My OVDI result speaks well for this approach. No legal firm was necessary. International experience in an accountant is what I think is the key ingredient.
@bubblebustin – Agree! And if they push you into OVDP, run!
Good advice, Lisa. Too late for me, but hopefully not for thousands (ten’s of thousands, maybe hundred’s of thousands?) of others!
I just noticed that no one posted his acknowledgement of the comments by Brockers to his original post.
The Canadians Strike Back – FATCA Post Revisited
and now today, Brocker comments have now resulted in yet another posting…
Yes, comments do have impacts! Good lesson to remember when the temptation is to say, “why bother?”
FATCA And The Law of Unintended Consequences