It may be driving others further underground. Dave McKay, head of Canadian banking at Royal Bank of Canada, said it’s noticed an increase in the number of customers who abandon the online account-opening process when they get to the long list of questions about U.S. citizenship and taxation.
“It’s a huge barrier [to new accounts], because of the amount of information the customer has to provide and their willingness to provide it, and not understanding why they need to do this,” Mr. McKay said. “It shuts the whole process down.”
In the end, many of those affected may not owe any U.S. taxes because they’ll get credit for any taxes they’ve already paid to Canadian authorities under a Canada-U.S. tax treaty.
But they’ll still have to file with the IRS.
Under an amnesty program that expires at the end of August, they’ll still have to pay a blanket tax of up to 25 per cent on the value of all their foreign accounts, including bank accounts, mutual funds and RRSPs.
Once the amnesty period ends, they could also face fines for the years they haven’t filed with the IRS.
As Ms. Shelby found out, Canadian financial institutions are already ramping up for 2013, by identifying customers now who may have ties to the United States. Many institutions have already signed so-called Qualifying Intermediary Agreements with the IRS, a first step toward giving U.S. tax authorities access to client information, including U.S. social security numbers or tax ID numbers.
However, Canadian law doesn’t require account holders to report their citizenship. In the case of bank accounts, for example, customers need only show a driver’s licence and one other piece of identification, verifying residency, but not necessarily citizenship or immigration status.
Canadian and other foreign financial institutions are lobbying furiously for changes and exemptions that would soften the impact on both themselves and their customers. The banks have complained to Finance Minister Jim Flaherty that the law is an end-run around Canadian tax authorities and an administrative nightmare.
Meanwhile, Ms. Shelby is scrambling to find a tax expert before the August deadline to help her sort out what she needs to do and how much she might owe. Even the best-case scenario will leave her poorer.
“If I can get by without a penalty, I’ll be happy,” she said. “But no matter what, I’m going to have a financial hit here. To hire an adviser to do this for me is going to cost money.”
With files from reporter Grant Robertson in Toronto
