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Canada's Privacy Commissioner Jennifer StoddartCHRIS WATTIE/Reuters

Ottawa's privacy watchdog is examining whether a U.S. campaign to pursue tax cheats among the roughly one million Americans living here violates Canadian privacy laws.

Jennifer Stoddart is closely monitoring privacy concerns as U.S. tax authorities prepare to force all foreign financial institutions to identify Americans and the money they have stashed in accounts around the world.

"The concern is the collection of customers' personal information and the transfer to the U.S.," said Valerie Lawton, a spokeswoman for Ms. Stoddart, the federal Privacy Commissioner. "We have been following this issue closely … and have had discussions with a range of industry stakeholders."

A Finance department official echoed the unease, saying the government is worried about potential conflicts with Canadian laws, including "the protection of privacy and Canadians' fair access to banking services."

Among the potential problems with the American law, slated to come into force in 2013, is that it would compel Canadian banks, brokers, insurers and mutual funds to collect U.S. Social Security number and report account balances directly to the Internal Revenue Service.

Under Canadian law, customers are only required to provide identification that shows where they live – not their immigration status or citizenship.

The law is a source of growing angst in Canada, home to more dual U.S. citizens than anywhere else in the world. Many of them are worried about getting caught in the sweep, and may soon face stiff penalties as well as onerous reporting requirements.

Banks and other financial institutions complain the U.S. law puts them in an impossible squeeze between Canadian laws and enormously costly administrative headaches.

Finance Minister Jim Flaherty said last week he's seeking an exemption for Canada, arguing that the country is not a "tax haven" and that Ottawa already cooperates extensively with tax authorities in the U.S. through a tax treaty.

But the Obama administration so far isn't showing much interest in granting exemptions. A senior U.S. Treasury official told banking industry executives recently that it doesn't want to get into the business of "picking and choosing" among jurisdictions that must comply with the law.

Speaking to an American Bankers Association conference in Miami, Michael Plowgian of the U.S. Treasury's Office of International Tax Counsel said bilateral tax treaties are not a substitute for complying with the new law, known as the Foreign Account Tax Compliance Act, or FATCA.

Ms. Stoddart is urging organizations in Canada to work with Industry Canada, which is responsible for the Privacy Act, and the Finance department to make sure the U.S. sets "reasonable thresholds for collection of personal information required to identify U.S. persons."

Ms. Lawton said that until the U.S. finalizes and implements the law, the agency isn't "in a position to fully assess what the impact will be on the privacy and personal information of account holders in Canada."

Canadian banks in particular have been waging a fierce lobbying campaign to soften the impact of the crackdown on "low-risk" countries such as Canada.

In a recent submission to the IRS, Canadian Bankers Association President Terry Campbell backed Mr. Flaherty's pitch for a Canadian exemption, pointing out that it's "virtually impossible" for Americans with accounts here to duck U.S. income taxes, and the Canada-U.S. tax treaty gives the IRS an "open-ended tool" to pursue cheats.

"There is little likelihood that accounts held by U.S. persons in Canada would be used for tax evasion," Mr. Campbell argued.

The United States is using the threat of a 30-per-cent penalty on U.S. income and financial transactions to force compliance. Most large Canadian banks and financial institutions have U.S. subsidiaries that could be hit with the withholding tax if they refuse to identify Americans.

The United States says it's open to the idea of exempting certain registered accounts, such as RRSPs and corporate pensions. But IRS draft rules make no mention of investments such as Tax-Free Savings Accounts and Registered Education Savings Plans.

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