Canadian financial institutions won’t be required to report directly to American tax authorities, Finance Minister Jim Flaherty announced Wednesday.
Canada’s reached an agreement with the U.S. about FATCA. Canadian banks would report relevant information on accounts held by U.S. residents or citizens to CRA, which would share it with the IRS under existing tax treaty rules — making it consistent with Canadian privacy laws, said senior government officials.
Even better news is, Canadian financial institutions won’t have to report on accounts smaller than $50,000. It also exempts RRSPs, RDSPs, RESPs, RRIFs and TFSAs.
Today’s deal puts additional pressure on Americans living in Canada who, intentionally or not, haven’t been filing to the IRS, says Kevyn Nightingale, a tax expert at MNP LLP.
“The IRS has two main programs for people in these circumstances. The main one, which applies to the overwhelming majority of Americans in Canada, is called the streamlined approach. It requires three years of returns and six years of FBARs. There’s no guarantee there won’t be penalties, but it’s incredibly rare for the IRS to apply penalties to an American living in Canada using the streamlined approach.”
The deal means the odds of showing up on IRS’ radar just rose dramatically for those who don’t make good with Uncle Sam.
“You know the information in your Canadian bank is going to be transmitted to the IRS. Up until now you’ve been able to believe that they’re not going to know about you. If you come forward there’s a good chance of having little or no penalties; if they find you, you can expect penalties. And they’re going to find people to make examples of.”
Nightingale adds that clients of investment advisors “are good targets. They don’t want a low-income single mother to make an example of.”
The Investment Industry Association of Canada (IIAC) welcomes the deal. “This agreement will greatly reduce the burden of compliance for financial institutions and the risk of unintended consequences to Canadians by requirements imposed under [FATCA],” it said in a statement.
“FATCA alone would have required Canadian financial institutions to close client accounts [and] could have imposed U.S. tax withholding and penalties on persons with no connection to the United States.”
The IRS will also provide more information on certain accounts of Canadian residents in U.S. financial institutions, it said.
Local banks with 98% 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.
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.
The U.S. Foreign Account Tax Compliance Act, which takes effect in July, would compel Canadian banks to report information about anyone considered a U.S. resident or citizen directly to the IRS.