Alberta online bank first in Canada to shun U.S. clients amid tax rules

An Alberta online bank is believed to be the first Canadian financial institution to deny service to Americans, citing the burden of complying with strict new U.S. tax rules.

Canadian Direct Financial, a subsidiary of Edmonton-based Canadian Western Bank, is refusing to open new Internet accounts for U.S. citizens, even to those living in Canada.

The bank said the decision is “partly based” on the legal requirements of a U.S. law that has forced financial institutions around the world to track accounts held by Americans for U.S. tax authorities.

“The information and documentation required to open and monitor an account within [Canadian Direct Financial] for a U.S citizen or resident outside of Canada is prohibitive to providing the level of service our clients expect and deserve,” explained Kirby Hill, a Canadian Western Bank vice-president and spokesman.

The policy, in place since mid-2014, does not apply to existing account holders or to “in-person” customers of the Canadian Western Bank, according to Mr. Kirby.

“Certainly costs are a factor in any business decision,” he added.

The shunning of U.S. customers is part of the spreading fallout from the U.S. Foreign Account Tax Compliance Act, which came into force this year. The law is the centrepiece of a concerted U.S. effort to crack down on overseas tax evasion by identifying all offshore American account holders.

Under an agreement reached last year between the Canadian and U.S. governments, Canadian banks and other financial institutions must provide details about their U.S. account holders to the Canada Revenue Agency, which the shares data with the U.S. Internal Revenue Service.

Canadian financial institutions have complained loudly about steep FATCA-related compliance costs, which can reach as high as $100-million for each of the Big Six banks.

It’s also caused extreme stress for hundreds of thousands of Americans and dual Canada-U.S. citizens living in Canada, many of whom have never filed U.S. taxes. The new reporting rules mean they find it much trickier to avoid filing U.S. taxes and other required forms. Under U.S. law, Americans must file U.S. taxes every year, regardless of where they live.

A number of financial institutions in Europe and elsewhere are already balking at doing business with Americans.

But Canadian Direct Financial is believed to be a Canadian first.

Canadian Bankers Association spokeswoman Maura Drew-Lytle said she was unaware of any Canadian banks refusing to do business with Americans.

“It’s discrimination based on nationality,” said Kevyn Nightingale, a U.S. tax specialist at accounting firm MNP LLP in Toronto. “FATCA has put financial institutions in a conundrum.”

Mr. Nightingale said the steep compliance costs simply aren’t worth the effort for some mid-sized financial institutions.

“I’m amazed this is the first one I’ve seen so far,” he said. “I would expect there would be more.”

Some smaller institutions are exempt from the FATCA reporting rules, including not-for-profit credit unions and cooperatives, those with less than $175-million in assets and those with no accounts exceeding $50,000.

Most other institutions must report all income earned by U.S. citizens. Banks, brokers and mutual funds that don’t comply risk having the IRS slap a 30 per cent withholding tax any income or gains they or their clients generate in the U.S.

Patricia Moon of Toronto, who renounced her U.S. citizenship more than two years ago, said the Alberta bank’s decision not to do business with Americans “demonstrates the harm” caused by Canada’s decision to share data with U.S. tax authorities.

“If all the banks started doing this, where are you going to open an account?” wondered Ms. Moon, a director of the Alliance for the Defence of Canadian Sovereignty, which is suing the Canadian government over its decision to share personal financial information with the U.S.