Everything Montana Senator Max Baucus touches seems to create work for lawyers and accountants.
The Democratic chairman of the powerful U.S. Senate finance committee was the driving force behind several rounds of bitter Canada-U.S. lumber wars in the 1980s and 1990s. Armies of lawyers built their careers on that dispute.
Mr. Baucus is also the author of a bill that’s about to make life very unsettling for Americans living in Canada and their financial institutions – the Foreign Account Tax Compliance Act (FATCA). The law, which takes effect in 2014, is the hammer behind a U.S. crackdown on offshore tax cheats.
When he unveiled the legislation three years ago, Mr. Baucus said squeezing tax evaders would bring in “tens of billions of dollars a year,” money that would help reduce the massive U.S. deficit.
Recent U.S. government estimates have put the likely take from FATCA at less than a $1-billion (U.S.) a year. That’s barely a rounding error in the country’s trillion-dollar-plus deficit.
Canadians are already paying a steep price for Mr. Baucus’s law – in bureaucracy, aggravation and compliance. Canadian banks, brokers, insurers and mutual funds have begun alerting customers to the impending law, which will require financial institutions to keep tabs on all their American account holders and to remit that information to the U.S. Internal Revenue Service.
Bank of Nova Scotia says on its website that it has created an internal team to implement the law and that it intends to meet its FATCA obligations “across our entire global network.”
For the roughly one million Americans and dual citizens living in Canada, it is going to be a lot trickier to avoid the long arm of the IRS. Financial institutions will begin collecting citizenship information along with the social insurance numbers of customers with accounts worth more than $50,000.
Expatriates with assets of more than $200,000 will have to disclose details of their holding every year or face steep penalties.
The law is already causing considerable angst among Americans in Canada, many of whom have not filed annual U.S. tax returns for years, though that is required by U.S. law. The United States is almost alone in requiring all of its citizens to file tax returns – forever – regardless of where they live and work. Avoiding that lifelong obligation will now become much more difficult.
Many people caught in the trap have sought legal advice. Others have hired accountants to help them file years of back taxes, taking advantage of new rules that waive penalties for late filers who owe little or nothing to the IRS. Others are taking the more radical step of renouncing their U.S. citizenship.
The predicament has spawned a booming business for lawyers and accountants in Canada. It is also a headache for financial institutions, which do not have a firm handle on the citizenship of their customers.
The issue is coming to a head in 2013. U.S. authorities are poised to release final rules in the coming weeks, laying out the precise steps foreign financial institutions must take to comply.
Meanwhile, Ottawa is in the final stages of negotiations with U.S. authorities on a deal that would allow the Canada Revenue Agency, rather than the IRS, to collect the data from financial institutions. U.S. officials would then have to get the information from the CRA.
The United States has already signed deals with Britain, Mexico, Switzerland and Denmark.
It’s not clear how far the Ottawa is willing to go to accommodate U.S. demands. Finance Minister Jim Flaherty has called FATCA a “waste of resources,” pointing out that Canada is not a tax haven and that there is a bilateral tax treaty to deal with tax evasion.
The Canadian Bankers Association worries FATCA could start a new trend. It is urging Ottawa to fight for rules in all future trade agreements that would prohibit “the extra-territorial application of foreign laws to Canadian financial institutions.”
FATCA will force the hand of many Americans in Canada, making them choose between compliance or giving up their U.S. citizenship.
This all has little to do with tax fairness or cutting the deficit, as Mr. Baucus would have Americans believe.
It is particularly troubling that as Canada and the United States work to make the border between the countries more seamless, one side is about to impose a massive new layer of bureaucracy.Report Typo/Error