Arthur Cockfield is a Professor with Queen's University Faculty of Law. Allison Christians is the Heward Stikeman Chair in the Law of Taxation at McGill University Faculty of Law. This article draws from their submissions on FATCA to the Department of Finance, which are posted on the Internet.
For the first time in Canadian history, our federal government is preparing to provide a foreign government with sensitive personal financial information about hundreds of thousands of Canadians. It is doing so to stave off threatened economic sanctions, and is getting nothing in return.
The sad saga began with a U.S. attempt to root out offshore tax evasion through the Foreign Account Tax Compliance Act (FATCA), enacted by Congress in 2010. Under FATCA, all non-U.S. financial institutions, including Canadian banks, are to dig through their bank records for evidence of accounts owned by U.S. expatriates and others with ties to the United States. Once this evidence is uncovered, the banks are to send the account information directly to the U.S. Internal Revenue Service (IRS) so it can go after the alleged tax cheats.
When FATCA was first put in place, former Minister of Finance Jim Flaherty decried the U.S. legislation as an effort to make Canadian banks an enforcement arm of the IRS. The problem is that, unless Canada plays ball, the United States is threatening to shut down the Canadian financial industry by imposing punitive taxes on financial transfers between U.S. and Canadian banks. Faced with this threatened economic sanction, the Canadian government ultimately capitulated and proposes to implement FATCA by July 1, 2014. The proposed law, which is part of Bill C-31 before Parliament, will override Canadian privacy laws so that our tax authorities can transfer the account information to the IRS.
This move is unacceptable as it gravely threatens Canadian financial privacy.
The proposed law applies to a broad class of U.S. expatriates and Canadians who could now be subject to fines, interest penalties, criminal sanctions, and denial of entry into the United States. Under the proposed approach, Canadian banks will have to look to their records on birth places, residences, Social Insurance Numbers and other information to see if any "U.S. person" holds an account. "U.S. person" is a defined term that includes many more people in Canada than almost anyone realizes. It includes U.S. citizens and non-citizens with various personal or economic ties to the United States (for example, former green card holders now residing in Canada).
Canadian snowbirds who travel to the United States for part of each year may also be caught in the tax web if they are deemed to be U.S. persons under facts and circumstances tests. So-called 'accidental Americans', including Canadians with U.S. citizen parents who have never stepped foot in the United States, are also swept up in the net. Finally, any Canadians who jointly hold accounts with a U.S. person for family or business purposes will see their sensitive financial information shipped south of the border too.
All Canadian businesses that are partly owned by a "U.S. person" will also have their sensitive financial account information disclosed to the IRS. This includes confidential information that, if improperly revealed to competitor firms, could harm the ability of Canadian businesses to compete against U.S. firms. In light of recent disclosures surrounding U.S. state-sponsored corporate espionage, the Canadian business community should be yelling to the rooftops about this commercial confidentiality concern.
The proposed law to implement FATCA needs to be amended to account for these privacy concerns. Canada should only transfer data associated with U.S. persons who are not Canadian residents. This approach accords with longstanding practice and emerging global information exchange standards. The government should take immediate steps to ensure this standard is codified in the legislation currently in front of Parliament.
This move would prevent the great privacy giveaway and institute in its place a sensible rule for information exchange. It would safeguard the privacy rights of Canadians while enabling Canada to work co-operatively on a global scale to ensure that tax evaders – American, Canadian, or otherwise – do not have a safe haven anywhere.