Tax deal with U.S. opens new doors for CRA
OTTAWA – A new deal with the United States over an American law aimed at rooting out tax cheats north of the border will ensure that Canadian financial institutions won’t be required to report directly to American tax authorities, Finance Minister Jim Flaherty announced Wednesday.
The U.S. Foreign Account Tax Compliance Act, which takes effect in July, would compel Canadian banks to report information about anyone considered to be a U.S. resident or citizen, including dual citizens, directly to the U.S. Internal Revenue Service.
The new arrangement means Canadian banks would report “relevant” information on accounts held by U.S. residents or citizens to the Canada Revenue Agency, which would share it with the IRS under existing tax treaty rules – making it consistent with Canadian privacy laws, said senior government officials.
The IRS will also provide more information on certain accounts of Canadian residents in U.S. financial institutions, they said.
The deal narrows the scope of information that banks would be required to collect and avoids the U.S. imposing a withholding tax to enforce the law, officials said.
Canadian financial institutions won’t have to report on accounts smaller than $50,000, they said. It exempts most federal registered accounts, such as registered retirement savings plans, pension plans and tax-free savings accounts.
Local banks with 98 per cent or more of their account value with Canadian residents, as well as small financial institutions with assets totalling less than $175 million – such as credit unions - are also exempt, officials said.
In an interview with AdvocateDaily.com, Toronto tax litigation lawyer David J. Rotfleisch says news of the arrangement is not necessarily surprising, as talks between Canada and the U.S. have been in the works for some time.
“The U.S. taxes based on citizenship as well as residence. This means that U.S. citizens who have never lived in the U.S. (because their parents resided in another country at the time of their birth and applied for U.S. citizenship for them) or who have not lived there recently are still required to file U.S. tax returns,” says Rotfleisch, founding lawyer at Rotfleisch & Samulovitch Professional Corporation, a boutique tax and business law firm specializing in tax dispute resolution and voluntary disclosures for unfiled returns and unreported income or offshore assets with the CRA.
“Accordingly, the IRS has been aggressively pursuing U.S. citizens who live abroad. As part of the program of going after U.S. citizens living abroad, they have passed domestic legislation that requires foreign banks, such as Canadian banks, to report on accounts of U.S. citizens.”
Rotfleisch says, “The Canadian banks have expressed their concerns about these reporting requirements for some time and it has been discussed by the two governments. The announcement is the culmination of those negotiations.”
U.S. citizens who are residents in Canada are required to file both Canadian and U.S. tax returns, adds Rotfleisch, noting if they have not reported to the IRS, they may be eligible under the U.S. Offshore Voluntary Disclosure Initiative.
Although financial institutions will have to start collecting the information in July, officials say the CRA isn’t expected to start sharing the information with the IRS until 2015.
Canadian bankers had previously said that such an arrangement would be an improvement over what the U.S. initially wanted, but it’s not ideal.
They say current Canadian law does not require banks to ask clients whether they are also U.S. citizens and changing bank procedures could cost tens of millions of dollars in administrative fees.
-With files from AdvocateDaily.com
© 2014 The Canadian Press