Americans Making it Tough on Canadians

By: Nick Pantaleo

The Americans are showing Canadians some tough love these days.

There was the recent Keystone pipeline announcement to postpone the go or no-go decision. “Buy America” initiatives threaten to exclude Canadian companies from bidding on US projects and Canadian travellers will soon face a $5.50 tax when travelling to the US.

Another headline maker is actually old news, but it is starting to hit home for Canadians who are also US citizens. This one concerns rules requiring all US citizens, wherever they reside, to report their non-US bank and other financial accounts – the so-called FBAR filing requirements.

You see, US citizens are subject to US tax on their worldwide income regardless of where they reside. So, the US wants to ensure it is collecting the tax it is entitled to on income generated from foreign accounts if that income is not being taxed somewhere else, like Canada.
So, what’s the problem?

Well, many dual citizens living in Canada were not aware that they had to report their Canadian and other non-US accounts and are even more shocked to discover that they are subject to penalties that can be as high as 50% of the amount in accounts that have gone unreported!!   

This is causing a bit of a stir in Ottawa. While acknowledging the Americans’ right to enforce their tax laws, Finance Minister Flaherty has expressed his concern for Canadians adversely affected by the FBAR filing requirements (see "Read Jim Flaherty’s letter on Americans in Canada"). Even the US Ambassador to Canada has expressed his sympathy advising that Canadians should “sit tight” (see "Ottawa seeks leniency for Canadians in U.S. tax hunt").

Other than sitting tight, is there anything Canadians can do?

How about the Canada-US Tax Treaty – can it help deal with this problem? Good question.

The non-discrimination article in the Treaty is intended relieve nationals of one country from having a tax burden in the other country that is greater than that imposed on nationals of the other country. Strictly speaking, the FBAR penalty is not a “tax” but it does seem to be a “requirement connected” with taxation.

That being said, if you accept the notion that a Canadian citizen living in Canada, who is also a US citizen, is “in the same circumstance” as a US citizen living in the US (i.e., both are subject to worldwide taxation in either Canada or the US), the issue is whether a sustainable argument can be made under the non-discrimination article that the FBAR filing and penalties are more burdensome to the dual citizen living in Canada with respect to their "home country" accounts than they are for the American living in the US who doesn't have to prepare FBARs for their “home country” accounts.

It is a long shot – a novel interpretation of an article that does not get referred to often - but the courts have been asked to deal with more ambiguous interpretations in other situations. 

If not the non-discrimination article, one would think the extensive exchange of information article in the treaty would give the US enough comfort that no US tax is going unreported and they should leave these people alone.

Even the Americans should want a solution. I mean, do they really want 1 million law abiding Canadians, many with little if any connection to the US, clogging their system reporting on bank accounts located throughout Canada?

Something has to give and soon.

Next up are soon to be effective rules requiring Canadian financial institutions to report accounts of US citizens – the so-called FATCA filing requirements. In effect, Canadian financial institutions are being deputized to help enforce US tax laws, at considerable cost to such institutions and ultimately their customers.

FBAR or FATCA – take your pick. Without some reprieve from the US government, Canadians and Canadian financial institutions could be in for a tough ride.

What are your thoughts on this? Leave your comments below.

Comments

[Petros]

Hi, I think that the situation is very complicated because FBAR is actually not a requirement “requirement connected” with taxation, except that there is a inter-agency agreement between Treasury and IRS that gives the IRS enforcement abilities, to require filing, to assess civil penalties, and to collect fines. The Treasury Department has delegated this authority to the IRS. If criminal penalties are warranted, the IRS must refer the case to the Department of Justice, but the IRS cannot bring the matter up in criminal court.

Thus, the IRS is hamstringed with regard to Canadian residents. It is not a tax and therefore cannot be collected through the CRA under the tax treaty. Furthermore, criminal FBAR is not covered under the US/Canada Extradition treaty (at least not as I read it).

This is why the Canadian government's official position is that it will not collect FBAR. Just leave it at that. Canadian accounts are off the hook, unless you happen to be travelling in the states and they decide for some reason to arrest you.

[Michael O'Connor]

Nick, well done. Some might fear that taking a position that FBAR is is "a requirement connected with taxation" would make it a tax covered by the treaty. This would not, in my view, be the case under the definition of tax, since it is first a penalty, but more importantly not levied under the US Internal Revenue Code. Further, Article XXVI-A specifies that a "revenue claim" applies to "interest, costs, additions to such taxes and civil penalties" related to taxes referred to in paragraph 9. The definition in paragraph 9 would not include, by any stretch of he imagination a penalty under FBAR.

People should remember that this is one angle to seek an agreement with the US Competent Authorities to simplify FBAR compliance and it should be the Government of Canada that presses the US Government on this approach. It does not mean that US Citizens don't have to file 1040s, or file FBARs for non-US, non-Canadian accounts. So, absent a repeal of FBAR, let's see what relief we can get the competent authorities tom come up with in the context of home country accounts, and then move a similar exemption for FATCA.