Canadian industry claims win in long fight over U.S. crackdown on tax evasion
Canada’s investment and banking industries hailed a key victory Tuesday in five-year fight to dull the impact of onerous new U.S. tax rules expected to affect about a million Canadian residents and dual citizens.
A newly ratified inter-governmental agreement with the United States excludes registered accounts for education, retirement, and disability savings from the client holdings banks must report to tax authorities under the U.S. Foreign Account Tax Compliance Act.
The headache isn’t gone, however, for individuals living in Canada who must file taxes in the United States as a result of their citizenship. According to tax experts, aside from RRSPs, the U.S. Internal Revenue Service has not revealed whether it will grant similar tax-deferred or tax-free treatment to the savings vehicles.
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“How they are taxed depends on their classification under U.S. law which remains unclear,” says U.S. tax lawyer Max Reed. “There is no guidance from the IRS on the tax consequences of having a Canadian RDSP, RESP or TFSA or guidance how to report these.”
But Ian Russell, the chief executive of the Investment Industry Association of Canada, views the exclusion of those investments from the mandatory reporting requirements of FATCA as a victory. In a letter sent Tuesday to members that include the investment dealers of Canada’s biggest banks, Mr. Russell credited years of lobbying and negotiations “to minimize the collateral damage caused by the U.S. legislation” first proposed in 2009.
Before these efforts led to the negotiated intergovernmental agreement this year, he said, “FATCA was extraterritorial in its reach, essentially forcing all financial institutions in other countries to identify and report on their U.S. account holders or face punitive 30% withholding on all U.S. income paid to the financial institutions and all of its clients.”
Maura Drew-Lytle, a spokesperson for the Canadian Bankers Association, said Tuesday that her organization was “involved in many of the joint industry initiatives” with the IIAC and officials at the CBA “concur with their views” on the benefits of the inter-governmental agreement.
Critics of the U.S. methods of cracking down on tax evaders — even inadvertent ones — say the Canadian government should not have agreed to any demands imposed by FATCA, and accuse the industry of being complicit. But Mr. Russell argued in his letter that there was little choice once the new law received bipartisan support from U.S. lawmakers and was passed in 2010.
“Non-compliance with FATCA was never a realistic option for Canadian financial institutions and their clients who have built a significant presence in the U.S. capital markets,” he wrote, adding that the IIAC’s position in no way meant the association is “pro-FATCA.”
Mr. Russell acknowledged in his letter that a large number of “low risk” account holders in Canada have been caught up in a law that was designed to “combat tax evasion in countries with a small number of high-risk account holders.” But with no credible movement in the U.S. to curb the reach of the new law despite an international outcry, the inter-governmental agreement with the United States provides the most “sensible and pragmatic approach for implementing FATCA in Canada,” he said.
Among the notable changes achieved through the industry’s efforts is that Canada’s banks will report on their clients through the Canada Revenue Agency, rather than directly to the U.S. tax authority.
The banks will, however, remain on the hook for the costs of compiling details about the holdings of their clients with American citizenship. Before the inter-governmental agreement was signed, the cost of FATCA had been estimated to be in the tens to hundreds of millions of dollars.
