Now that the U.S. "fiscal cliff" has been pushed off the front pages for a couple of months, perhaps some attention can be given to a far more ominous cliff of U.S. origin the world actually went over on January 1. That was the day that FATCA – the Foreign Account Tax Compliance Act – officially came into force.
Passed in 2010 by the U.S. Congress, this act requires all foreign financial institutions – banks, credit unions, pension managers, insurance companies, etc. – to find out who among their clients might be U.S. citizens, or "U.S. Persons" (green card holders), and send details of their account balances and transactions to the U.S. Internal Revenue Service. FATCA's goal is to catch U.S. tax cheats with offshore accounts.
Driving this tax jihad is the fact that the U.S. is one of only two countries in the world that levies income tax based on citizenship rather than residence. There are seven million U.S. expatriates around the world who are now caught up in this, and an estimated one million of those live in Canada. They include people who left the U.S. decades ago and are now citizens of other countries, people whose only connection to the U.S. is that one of their parents is an American, and people born in the U.S. but left as children. In the eyes of Uncle Sam they are all taxpayers.
FATCA represents the most egregious example of extra-territorial reach the U.S. has ever attempted. It will turn all the world's banks into IRS auditors – at their own expense of course – and apply US tax law on every country that allows it to happen. Its impact is so onerous that, while the Act is now legally in force, implementation has been delayed several times. The IRS has still not published the final regulations needed for compliance with FATCA, and the world's banks have been given another year – to January 1, 2014 – to get their reporting systems in order. FATCA is so complex that it is expected to take several years for the entire reporting system to be phased in.
Why should we care? Because the Harper government is in the middle of negotiations with the U.S. to produce an intergovernmental agreement (IGA) that would impose U.S. tax law on Canada and turn Canadian banks into IRS auditors. Should this go forward, it would represent a colossal surrender of Canadian sovereignty and likely violates the Canadian Charter of Rights and Freedoms.
When initially approved in 2010, FATCA's aim was to have every bank in the world enter an agreement with the IRS to show that it had taken steps to identify any Americans who might be account holders, and send their financial data to the IRS. The massive club wielded by the IRS to ensure compliance was quite simple – don't do it and we'll withhold 30 per cent from every U.S.-origin financial transaction that goes through your bank.
Canadian banks recognized immediately that such a system would violate all manner of federal and provincial financial privacy rules, and violate non-discrimination statutes in the Charter. They also recognized that the costs of complying with FATCA would be huge, and that the IRS "club" was so draconian that they could hardly thumb their nose at the United States. This is classic rock and hard place territory.
The solution – from the banks' perspective – is to get Ottawa to sign an agreement with the U.S. that lets the banks report not to the IRS, but to the Canada Revenue Agency through existing forms and channels. This is seen as the lesser of two evils, and Ottawa appears to agree with them. Interestingly, this will significantly reduce the banks' FATCA implementation costs by transferring the reporting responsibilities to CRA. In effect, Canadian taxpayers will be paying for the IRS audit costs.
It's clear that the Harper government recognizes the sensitive nature of signing such a tax agreement with the U.S., because the plan is not to bring the details of such an agreement before Parliament, but instead simply seek Parliamentary approval (in another omnibus bill?) of an authorization to conclude a deal. The public will never see what Ottawa is giving the Americans until after it has been signed.
Where this might fall apart (and save both Canadian sovereignty and Canadian dignity) is through the application of the Charter. While an IGA helps the banks lower their costs, they still have to ask all their account holders if they are "U.S. Persons," and that very question violates Charter provisions that prohibit discrimination on national origin or ethnicity. To put this in context, ask yourself what would happen if a bank, or any organization, sent out a questionnaire to account holders asking them if they are Muslims or Jews?
Peter Hogg, one of Canada's leading Constitutional experts, sent a letter to the Finance Department last November, outlining a number of Charter concerns with any tax agreement signed with the U.S. – but he declined to make the letter public because he was attempting to arrange a meeting to discuss the issues.
If a tax IGA with the U.S. violates Canadian Charter rights, the question for Ottawa is, how would they get around it? Ottawa has never invoked the notwithstanding clause, and it's hard to believe that even a Conservative government would do so for an agreement that has absolutely no benefit for Canada.
This issue – of huge significance to any Canadian who is a taxpayer or has a bank account (they will be paying for all this) has so far flown well below the radar. The U.S.-Canada talks on an agreement are shrouded in secrecy, neither opposition party has said a word about it, and the media pays very sporadic attention to it. That all has to change before the government signs away the country's sovereignty.
Eds Note: This updated version clarifies the time frame for implementation of the Foreign Account Tax Compliance Act.
Don Whiteley is a writer based in Vancouver