I recall as a young banker jealously guarding the contents of a client's file against another young-sounding voice on the other end of the phone from Revenue Canada.
He had no court order, but was trying to coerce me in to releasing information on my client's file. The voice in my head said: "eat my hockey pants!" but instead, my calm Mr. Banker Man voice politely but firmly replied: "We cannot and will not release the file until the law requires us to do so." It was crucial for us to be guided by both privacy and tax law.
In the 1920s, when law enforcement agencies were pursuing charges against the known gangster, Al Capone, he fled to Canada for a brief time. Stories detail him with three of his thugs riding the rails through Prince George and onward to the Terrace area disguised as Catholic priests, reportedly spending an entire month at Lakelse Hot Springs between Terrace and Kitimat in 1928.
Despite deployment of the most intense law enforcement efforts available to U.S. authorities at the time, Capone escaped murder, bribery and other serious charges.
No legal assault would stick until 1931, when the IRS got a ruling enabling them to tax the proceeds of crime. The tax authority sought and won a verdict against Capone resulting in his imprisonment for some ten years.
The tax man is a piece of serious business.
The Foreign Account Tax Compliance Act (FATCA)
The name might invoke yawning, but the details will keep affected persons alert.
FATCA, which was legislated in 2010, seeks to identify U.S. persons who may evade U.S. taxes by placing assets in foreign (non-U.S.) accounts - either in their own name or indirectly through corporations or trusts. The legislation requires non-U.S. financial institutions to report account information regarding assets held by identified U.S. persons.
Who or what is a U.S. person for U.S. tax purposes?
Under U.S. tax law, you are considered a U.S. person if you are:
A citizen of the U.S.;
A lawful resident of the U.S. (including a U.S. green card holder);
A person who resides in the U.S. Although Canadian "snowbirds" may be considered U.S. persons, the treaty may allow them to claim a closer connection to Canada and be treated as a Canadian resident.
U.S. corporations, estates and trusts are also considered U.S. persons.
FATCA update in Canada
In its original form, FATCA required Canadian financial institutions to report relevant information directly to the Internal Revenue Service (IRS). However, on Feb. 5, 2014 Canada and the United States announced the signing of an Inter-Governmental Agreement (IGA) providing a directive to report "U.S. Reportable Account" information to the Canada Revenue Agency (CRA) rather than the IRS.
The CRA will exchange information with the IRS under the agreement and the treaty after taking into consideration Canadian privacy laws.
The first phase of FATCA must be in place by July 1, 2014 and includes new account opening procedures for financial institutions to identify U.S. Reportable Accounts.
The second phase of FATCA includes the identification and reporting of certain pre-existing U.S. Reportable Accounts opened prior to July 1, 2014. This phase is to complete between 2014 and 2016.
I am not a U.S. person. What does FATCA mean for me?
In most cases, FATCA should have little impact. If you have an existing account and there is an indication that you may be a U.S. person, or if you are opening a new account, your financial institution may ask you to provide additional information or documentation to demonstrate that you are not a U.S. person.
I am a U.S. person. What does FATCA mean for me?
U.S. persons may be asked to complete IRS Form W-9 Request for Taxpayer Identification Number and Certification to keep on file.
Your financial institution will report information about you and your account to the CRA on an annual basis.
If you have complied with all of your U.S. tax and information reporting obligations, reporting by your financial institution should not result in any increased U.S. tax liability.
In its original form, FATCA required a 30 per cent withholding tax on U.S. source payments made to persons who are not in compliance. Under the IGA this withholding is not a requirement (however, 30 per cent withholding tax may apply for those who are not in compliance).
The information in this article is only an overview, and not intended to provide legal or tax advice. You should obtain professional advice from a qualified tax advisor before acting.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities, (member CIPF) and can be reached at mark.ryan@rbc.com.
