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!