A new American tax law that will take effect internationally in July 2014 could potentially have disastrous financial consequences for U.S. citizens living abroad—including in Canada. The Foreign Account Tax Compliance Act (FATCA) has already made its mark on the lives of numerous Canadians.
The purpose of the new law, which passed in U.S. congress in 2009, is to catch offshore tax evasion, which has begun to plague the Internal Revenue Agency (IRS). From 2001–2010, the U.S. saw a 5.1 per cent increase in lost tax revenue, jumping from 290 billion to 305 billion USD. In the last decade, there has been an estimated $3 trillion lost to tax evasion.
How it affects Canadians
FATCA is for all intents and purposes an international law. Part of the law requires foreign financial institutions to enter into an agreement with the IRS to identify and provide names of their U.S. American account holders. The IRS will have access to banking and ultimately personal information of any Canadian it deems to be of importance, as of July 2014. If someone has lived in the U.S. for some time, has parents born in the U.S., or if they have dual citizenship, they are subject to inspection by the IRS.
Unfortunately, while the law is meant to catch criminals, it has left in its wake distraught law-abiding Canadians. While it serves the purpose of punishing those who purposely evade U.S. taxes, Canadians who believe they have been paying taxes could potentially end up thousands of dollars in debt to the U.S., because they have failed to file taxes with the IRS.
In 2011, Canadian Finance Minister Jim Flaherty contacted U.S. media, calling out the effectiveness of FATCA “Most of these Canadian citizens, many with only distant links to the United States, have a very limited knowledge of their reporting obligations to the United States,” Flaherty wrote.
Victoria MP and member of the NDP Murray Rankin called FATCA “an agreement that violates Canadians’ rights.” Rankin sent Flaherty a letter urging the minister to implement rapid action against the impending law. In the letter, Rankin also went on to urge the Conservative government to “reject any agreement that violates the rights of Canadians or that fails to offer Canada equal benefits to those provided to the United States.”
While the law has the potential to conflict with provincial and federal privacy laws, it is not yet clear whether the Canadian government has any alternatives. It seems as though some taxpayers’ only option is to renounce their American citizenship, or go through the strenuous procedure of filing taxes annually for both the IRS and the CRA.