Question about FATCA Answered and CRA Backstabbing

FATCA (U.S. Foreign Account Tax Compliance Act) is about compliance of US Tax Law. USA citizens abroad have been negligent (ignorant) about USA TAX LAWS, which states that all “U.S. persons” are liable for U.S. tax, regardless of where they live in the world.  Being ignorant about the Tax Law is not an excuse, if you are a U.S. person living abroad, from your tax obligation to USA.

Are you a U.S. Person for tax purposes? This is the first question you have to answer regardless if you have lived in USA or not. You are a U.S. Person, with Tax obligation to USA, if you were born in USA and/or have a USA birth certificate, you have a USA passport and/or green card, or you have a USA Social Security Number (SSN).  By law, you must file your annual tax to IRS, no matter where you live in the world. If you do not, you are breaking the USA tax law.

FATCA is a tool, implemented by USA lawmakers to bring out the U.S. persons, who are breaking the USA tax laws. So, if you do not like FATCA and it is applicable to you, only way to get out of this is give up/surrender/relinquish your USA citizenship/passport. Claiming ignorance or stating that you have never been in the USA will not get you any result.

How the FATCA is implemented that is of concern to many Canadians as well as dual Canada/USA citizens.

FATCA compels financial institutions from outside the U.S. to collect the financial information of those deemed to be U.S. persons and submit it to U.S. tax authorities. The law penalizes banks/ financial institutions who fail to supply the information.

Canada and USA, has taken this FATCA to a new level through intergovernmental negotiation. Canada has made a deal with USA that, rather than financial institutions handing over the information, to IRS, they should hand it over to CRA and then CRA will forward the information to IRS. In reciprocate, CRA will get information from IRS about Canadian Citizens living, investing and have bank accounts in USA.

Canadian citizens and media does not seem to express any concern regarding the fact that CRA will be benefitting from FATCA as well.

A recent report from CRA stated that CRA will not help IRS collect penalties imposed against USA (or dual USA/Canada) Citizens, for failing to meet financial information filing requirements or tax filing obligation under U.S. tax laws.

The catch is USA (or dual citizens) who do not enter the U.S. (or U.S. airspace) and have no assets in the U.S. will be shielded from IRS fines.  It might be hard not to enter U.S. airspace for any Canadians.

However, IRS will still be able to make your life miserable with the information, they receive from CRA. The CRA opinion points out the terms of the Canada – USA Tax Convention state specifically that Canada will not assist the U.S. with a “revenue claim” against a Canadian citizen.

But the Canadian Financial Institutions have not signed on to this Tax Convention. These are independent private organizations. With the information IRS receives from CRA about your financial status, IRS can directly go to these Canadian Financial Institutions and ask them to collect penalties from the account holder and remit to IRS.  And if you know, what the power CRA holds over banks, the same can be said about IRS on Canadian banks.

Here is how it will work. IRS will go with a demand to collect penalties from the account holder’s information they have received from CRA to Canadian Banks operating in the USA, namely RBC, TD, HSBC etc. Once the USA branch of Canadian Banks gets the demand letter from IRS, they will forward it to respective Canadian Branch where the account holder has account with the banks. As far as bank operation goes, they will either collect and remit the penalties on behalf of IRS or freeze the account until the penalties are paid.

If Canadian banks don’t comply with IRS demand, any payment coming to them from the U.S. will be subject to 30% withholding tax on gross income. They will be also forced out of doing business in U.S. capital markets and markets that conclude contracts in U.S. dollars, 1.e. the commodity or petroleum market.

U.S. persons now must comply with USA tax laws, or risk the discovery by the CRA and IRS which can make their life miserable and wealth diminished.

To comply with USA tax laws, they must file USA tax return and FBAR every year on time, if they are required to do so.