U.S. tax law invades Canada

From the Victoria Times Colonist:

Prime Minister Stephen Harper should pay a little less attention to protecting us from incursions on our Arctic territories and focus more on preventing an invasion from the south.

It’s not a military assault, but an invasion of privacy in the form of the U.S. Foreign Account Tax Compliance Act, which requires that foreign banks report to the Internal Revenue Service in the U.S. information about accounts held by “U.S. persons.” The act was passed in 2010, but its disclosure provisions take effect after June 30 of this year.

How that will happen in Canada is not yet clear, as Canada and the U.S. are involved in negotiations about the implementation of the measure here. Presumably, it means banks must ask each client: “Are you or have you ever been a ‘U.S. person’?” That means someone who is a U.S. citizen (even those also holding Canadian citizenship), permanent residents of the U.S., people who have been U.S. permanent residents and even some Canadian snowbirds.

The issue has raised considerable concern among U.S. citizens living in Canada, but it should concern everyone. The aim of the IRS is to catch those trying to evade U.S. taxes, but in doing so, it spreads a wide net and infringes on personal privacy and national sovereignty.

The U.S. is the only major country in the world that taxes income on citizenship, rather than residency. All U.S. citizens are required to file income-tax returns on what they earn, regardless of where they live or where it is earned. Few living in Canada pay U.S. income tax because of a treaty and laws that give credit for income tax paid in Canada, but it still requires an onerous reporting procedure.

The law has been in effect since 1913, but only recently has the U.S. been making a concerted effort to enforce it. The tax compliance act puts teeth into the law.

That comes as a shock to people previously unaware of the law, especially those who have been in Canada for decades or those who are “accidental Americans,” such as a person born in the U.S. while his or her parents were studying there, or someone whose parents immigrated to Canada when the person was a baby.

Murray Rankin, MP for Victoria and the Opposition critic for national revenue, has expressed his concerns to Finance Minister Jim Flaherty about the negotiations between the two countries.

“We are concerned that these negotiations may allow the United States to bypass the established exchange of information between the IRS and the Canada Revenue Agency,” Rankin wrote. “Concerns have also been raised that such a system could potentially violate existing Canadian privacy laws.

“The Canadian government has a responsibility to protect Canada’s tax base, and while we understand the United States’ desire to protect their own tax base, this should not come at the cost of the rights of individuals residing in our own country.”

Canadian banks are preparing to conform to the law, because the U.S. is waving a huge stick — institutions that don’t agree to comply will be subject to a 30 per cent withholding tax on any U.S. transactions. With the two countries’ economies so closely intertwined, that would be a crippling tax.

Flaherty should tell the U.S. to back off, that Canadians and legal residents of Canada should be subject to laws made in Canada, not in Washington.

The two countries should help each other to catch tax cheats, but it should be done co-operatively, not through a heavy-handed, unilateral measure that ignores national borders.

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