On March 18, 2010, the United States (US) announced a world-wide provision known as the Foreign Account Tax Compliance Act (FATCA) which demands that every non-US financial institution on earth—such as all Canadian banks and credit unions—must enter into an agreement with the US government to report to its tax agency all accounts held by US residents and US citizens—including US citizens that are residents or citizens of Canada—or face a 30% exaction.
Ultimately this means any Canadian resident with an RDSP that is also a US citizen is required by the US to pay income taxes to the US on any plan growth. It should be noted that the US typically considers children born of a US citizen to also be US citizens, even if they were born in Canada and have never set foot in the United States. In addition, this rule would affect the accounts of any Canadians with a US spouse or other family member, with whom they may hold assets jointly, as well as Canadians who may have temporarily lived or worked in the States.
On February 5, 2014, Finance Minister Jim Flaherty and National Revenue Minister Kerry-Lynne D. Findlay announced that they agree to meet the objectives of FATCA, much to the concern of many Canadians. Starting July 1, Canada Day, the Canadian Revenue Agency will voluntarily hand over the financial accountholder information of any US resident or citizen, and their families, living in Canada, directly to the United States government.
Although the Canadian government has negotiated for a number of registered accounts to be exempt from the private information CRA is giving to the United States under FATCA , including RDSPs, these savings accounts remain subject to taxation by the United States and would still need to be reported annually on a US tax return, or the plan holder will face serious penalties.
Compounding the issue, the complex international reporting requirements of the U.S. can be difficult and therefore often require the expensive services of a professional tax advisor—possibly negating any benefit a person with a disability had earned in his or her savings plan.
Naturally, there are many Canadians not in support of this decision by the Conservative government.
Leading Canadian constitutional expert Peter Hogg warns that an Inter-Governmental Agreement (IGA) to implement FATCA signed with the United States, or legislation to bring it into force, would likely be unconstitutional and in violation of Section 15 of the Canadian Charter of Rights and Freedoms. Prominent constitutional lawyer Joseph Arvay of Vancouver is also working to provide a legal opinion on whether FATCA legislation violates Canada’s Constitution including the Charter of Rights and Freedoms and, if so, how a constitutional challenge might be mounted.
If you or any individuals you know have any close connection to the United States and are also eligible for an RDSP—before you conclude that it may not be worth it to open or maintain the disability savings plan, know that there are certain federal party leaders who are working to reverse this law and protect your rights in Canada.
We invite you to read the following piece by Elizabeth May, Leader of the Green Party of Canada and Member of Parliament for Saanich-Gulf Islands BC.
IRS Tax Collection: Evasion of the US or Invasion of Canada?
The Green Party of Canada is calling on the government of Canada to stand on guard against the demands of the United States (US) for extraterritorial enforcement of a [US] American law: the Foreign Account Tax Compliance Act (FATCA). The Government of Canada must protect our citizens and residents from FATCA’s invasive violations of individual privacy, and refuse to make Canadian consumers and taxpayers pay the significant costs to enforce a unilateral [US] American mandate that does not benefit Canada in any way.
This US law, whose staggered regime is set to come into effect through 2013 and 2014, demands Canadian financial institutions report to the United States’ Internal Revenue Service (IRS) the confidential account information of a large number of Canadian residents regarded as “US persons” under [US] American regulations, most of whom are Canadian citizens. The Department of Finance gave notice in November that an Inter-Governmental Agreement (IGA) on FATCA was being negotiated, and the proposed terms have not been made public. The IRS has only recently issued the final FATCA regulations on 17 January 2013.
The United States government wishes to ignore the fact of Canadian citizenship in pursuing people who were born in the US or to a [US] American parent but who are Canadian citizens, as well as others with US “indicia” (Canadians with a [US] American spouse or other family member, with whom they may hold assets jointly; Canadians who may have lived or worked in the US and acquired a Social Security Number, and so forth).
For example, the US recently required such Canadians to file with the IRS annual federal income tax returns on their financial accounts in Canada, including TFSAs, RESPs, and RDSPs, which are considered foreign trusts under US law. They face exorbitant penalties for failing to report the balances of these accounts even if they have no tax owing.
While no one disputes the need to combat international tax evasion, serious concerns have been raised by the Canadian Civil Liberties Association and others about FATCA’s impact on the rights of Canadian citizens and residents. There are also concerns about the costs FATCA would impose on Canadian institutions and consumers, as well as about the bigger question of why a US law should be enforced in Canada at all.
There are major concerns about the legality of changing the terms of the US-Canada tax treaty without legislative amendment and attendant public and parliamentary review, with the potential for major ramifications for Canada’s sovereignty.
The Government must not rush into signing an IGA with the US until public comments have been thoroughly evaluated and Parliament has had a chance to examine and debate whether an IGA and FATCA are in Canada’s interest.
| “Clearly, any person with earnings or part-time residence in the US should file tax returns and pay US taxes in keeping with current bilateral agreements. However, our government must stand up for Canadian citizens who are neither working under nor representing any burden to the US governmental system”“The majority of these people have spent their lives working and paying taxes in Canada, and were unaware that these laws applied to them. Many are faced with the loss of substantial life savings due to statutory fines and cannot even avoid penalties by retroactively filing tax returns. If this weren’t enough, they are now faced with the prospect of further intrusion into their lives under a FATCA IGA.”–Elizabeth May, Green Party Leader and Member of Parliament for Saanich-Gulf Islands“This is not acceptable. These US laws intended to combat tax evasion by their residents sheltering wealth abroad, should not penalize Canadians who are complying with tax laws where they live.”“It would be a clear violation of our Charter of Rights and Freedoms to have Canadian banks, under the direction of the IRS, violate the privacy rights of some Canadian citizens or residents based on their current or former ties to another country, namely the United States.”–Erich Jacoby-Hawkins, Green Party of Canada’s National Revenue critic |
As Finance Minister Jim Flaherty himself noted in 2011 “Frankly, Canada is not a tax haven. People do not flock to Canada to avoid paying taxes. We have existing ways of addressing these issues with the United States through our Bilateral Tax Information Exchange Agreement. We share the same goal of fighting tax evasion and we already have a system that works.”
The federal government must refuse to sign the Inter-Governmental Agreement to implement FATCA and instead advise their US counterparts that these policies are an unacceptable intrusion into Canadian sovereignty, and work to develop an arrangement that would mitigate the effects of current US tax laws that unjustly target honest Canadian citizens. These measures should be examined by the appropriate House of Commons committees, in consultation with the Privacy Commissioner of Canada.
We must not permit Canadian financial institutions to comply with FATCA in violation of our own privacy laws, and if the US attempts to enforce FATCA against them, we must vigorously respond and seek legal remedy as is our right.
If the US feels the existing Canada-United States Convention with Respect to Taxes is not working, they should provide specific details and suggestions on how to improve it through legislative amendment without sacrificing the rights of Canadians to foreign interests.