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Will Canada’s hard line on Eritrea’s ‘diaspora’ tax apply to the U.S.?

How nice to see Canada taking a very hard line with the government or Eritrea and its attempts to impose a diaspora tax on Eritrean citizens now living in Canada. This country really does have a backbone when it comes to standing up to oppression and injustice.

How to explain, then, that while we send the Eritrean consul packing and threaten to shut down the consulate, we let U.S. Ambassador David Jacobsen stay put in Ottawa with nary a word of protest over America's "diaspora" tax?

There are only two countries in the world that levy income tax based on citizenship rather than residence; one is Eritrea and the other is the United States. But while Canada fulminates and threatens mayhem against Eritrea, it says nothing about the U.S. Even worse, it is actively negotiating with the U.S. to implement an intergovernmental agreement (IGA) that would have Canada Revenue Agency help the U.S. IRS track down its citizens in Canada and bring them into the U.S. tax fold.

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Could it be the power gap?

In 2010, the US passed an obscure piece of legislation called the Foreign Account Tax Compliance Act (FATCA). Simply stated, this act (apparently it went through Congress with almost no discussion at all) attempts to impose U.S. tax law on every other nation in the world.

Touted as essential to catching U.S. citizens with offshore accounts (otherwise known as tax cheats), this legislation is making life miserable for about seven million Americans who live in other countries. The vast majority are ordinary folks, not tax cheats, but they are being caught up in this U.S. tax jihad for no other reason than they live outside the country. The majority of them are citizens of those other countries, and of course they pay taxes in those other countries.

Also caught up in this are all the world's financial institutions – who now face exorbitant costs as they revamp their IT and reporting systems so they can identify any American who has an account. In Canada, that would be about a million people, possibly triple that if you include family members also affected by the witch hunt.

Now, given the response to Eritrea, you'd think Canada would be sending Mr. Jacobsen packing, too. After all, what the U.S. is trying to do is not a whole lot different from what Eritrea is trying to do. The only real difference is that rather than try to directly intimidate individual citizens Eritrean-style, the U.S. is going after the banks instead. Don't rat out your American account holders, and we will impose a 30 per cent withholding tax on every U.S.-source transaction that goes through your bank.

That makes the Eritrean 2 per cent diaspora tax look positively benign, doesn't it? But it explains why Canada's banks are falling all over themselves to get Ottawa to do a deal with the U.S. – that 30 per cent withholding fee would destroy them.

But from a public policy point of view, where is the Eritrean-style outrage from the Harper government? Finance Minister Jim Flaherty had some nasty things to say about FATCA a couple of years ago – but there has been an ominous silence ever since, and word out of Ottawa is they are still negotiating this IGA.

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One of the sticking points, and Ottawa has been told this by Constitutional expert Peter Hogg, is that any attempt to send Canadian's financial data (that is, Canadians who may also be U.S. citizens) to the IRS would violate Canada's Charter of Rights and Freedoms. If Ottawa signs an IGA, you can almost certainly expect a class-action suit on that basis.

But the real question Ottawa must now answer is this: if Eritrea's 2 per cent diaspora tax is such an egregious example of extra-territorial tax oppression, how does the U.S. escape the same treatment? Yes, we all know what the answer is.

One last irony: 18 months ago the United Nations passed a resolution condemning Eritrea for its diaspora tax. Co-sponsor of that resolution was the U.S.

Don Whiteley is a writer based in Vancouver

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