Thursday, January 17, 2013

Don't betray 1812 by accepting the FATCA assault

Last time the United States tried to rule us, we sent them packing. Yet 200 years later, our government is about to surrender without a fight!
The assault comes under America’s new Foreign Account Tax Compliance Act (FATCA). Aimed at those using foreign havens to dodge taxes, this law will punish law-abiding Canadian citizens and residents.
When I taught and paid tax in Korea, I notified Canada Revenue about my move and didn’t need to file or pay Canadian taxes while away. But my American teaching colleagues faced a double burden, still paying US taxes, even if they’d been away for years and weren’t planning to return any time soon. The US is the only nation in the world to fully tax non-resident citizens.
Now they’re putting the squeeze on Canadians, too. Under FATCA, anyone the IRS considers a “US person” must report to them and pay tax, if applicable, even if they permanently live in Canada; even if they’re Canadian citizens! Non-filers face huge and punitive fines, even if they owe no tax. To facilitate this, FATCA demands Canadian banks give America’s Internal Revenue Service the private account information of anyone the IRS thinks might be a “US person”. This includes people who were never American citizens, but at some point lived or worked in the US, had a Green Card or a Social Security Number.
The potential for distress is huge. One woman I met was born to Canadian parents living in Connecticut but moved back to Canada at six months. She’s never lived in the US since, and is fully Canadian, but because of her birth, the IRS considers her an American taxpayer. She just sold her condo in Vancouver. America has no principal residence capital gains exemption, so though her sale isn’t taxable in Canada, the US wants a cut. If she doesn’t pay, she risks arrest at the border!
My colleague is a dual Canadian/US citizen. She opened a Tax-Free Savings Account (modeled on America’s own Roth IRA), but had to close it because the IRS sees it as a “foreign trust” subject to full taxation, despite our government’s savings intent. The same goes for registered education or disability plans (RESP & RDSP).
Can you avoid this headache by renouncing US citizenship? Only if you pay a $450 fee, and they won’t process it if they suspect you are doing it to avoid taxes.
As Finance Minister Jim Flaherty noted correctly in 2011, there is no reason for Canadians to be subject to these laws, because Canada’s not a tax haven and people don’t come here for lower taxes. Yet this past fall, his Department of Finance announced they are working on an inter-governmental agreement (IGA) to comply with FATCA.
If you agree this step violates our rights, or are worried about Canadian taxpayers having to cover the costs of IRS enforcement, contact your Member of Parliament and share your concerns.
Written for my Root Issues column in the Barrie Examiner entitled "American FATCA punishes law-abiding Canadians".
UPDATE: Barrie reader David wrote this informative email in response to the article's publication:

It is not only the federal government and Revenue Canada which are not
responding effectively to the U.S. tax imposition on Canadian residents.

From what I have seen, the accounting firms have done nothing to assist with
solving the problem, and are simply using it as a business development

The cost of preparing U.S. tax returns is some multiples of the Canadian
returns' cost.  For example, very likely a difference of $1,500 as compared
to $250.

For the vast majority of taxpayers who are subjected to this, having paid
their Canadian taxes, they owe nothing on their U.S. returns.  As we all
know, our tax rates are considerably higher than U.S. rates.

All in all, a ridiculous situation, which it seems that no one in a position
of authority or influence is even attempting to resolve.
(My response) In general, US federal income taxes are far more complex than Canadian. Most Canadians can do their own taxes on a 4-page T1 General or a 2-page T1 Special, and even then about half the lines are blank. Or we can get tax help at a low cost (or even free). Americans aren't so lucky, and if they want to claim deductions or have any other special circumstances, they need to pay a lot more for professional tax preparation. This is especially galling when, as is the case for most "US Persons" living in Canada, they don't actually owe any tax!

UPDATE: This article has been cross-posted by the Isaac Brock Society.

Erich Jacoby-Hawkins is a director of the Robert Schalkenbach Foundation and Earthsharing Canada.

1 comment:

  1. That's really sad to hear. I'm in no position to judge since I really don't know that much about U.S. Law. So I assume if you decide to do a uk company formation, same rules will apply?