Archives

Tax Evasion vs. Personal Privacy?

As the Canadian government prepares to announce a deal with its American neighbors, it also faces a debate over combatting tax evasion and protection of personal privacy. This agreement potentially allows Ottawa to ease into compliance with the more controversial aspects of an important new US law that will come into effect January 1, 2014.

The FATCA

The Foreign Account Tax Compliance Act (FATCA) was signed into law March 2010, while many of its provisions are set to begin January 1, 2014. Basically, it requires financial institutions in other countries to inform the US Internal Revenue Service about Americans’ offshore accounts that are worth more than $50,000.

FATCA was created to prevent “US persons” from evading US tax using financial accounts held outside of the US. Beginning in 2013, non-US financial institutions have been required to enter into agreements with the IRS to report relevant information to the IRS regarding financial accounts held by identified US persons. If a non-US financial institution does not enter into an agreement with the IRS, the IRS can impose a 30 percent withholding tax on US source payments (and potentially certain non-US source payments no earlier than 2017) paid to the financial institution or their clients.

In the middle of negotiations

Canada and the US are currently negotiating whether Ottawa or the financial institutions are responsible for sending the information, but time is running out. If no agreement has been reached, banks operating in Canada will have to provide the data directly to the IRS.

Canada and the US already share financial information to track potentially criminal activity, such as money laundering and terrorist financing, but this new act creates a need to determine exactly what kind of information will be shared and how.

Canadian banks have asked Ottawa to take on the reporting duties through the Canada Revenue Agency, which could ensure that privacy laws are respected when information is sent south of the border.

Over the past year, the US has entered into bilateral deals to enforce the act with countries including Germany, Japan, Spain, Norway, Switzerland, Ireland, Mexico, Denmark and the US. The FACTA has created serious concerns for Americans living in Canada, especially given that many have long ignored a US rule requiring citizens to file their annual tax returns, even if they aren’t earning an income in the US.

International Support

G8 leaders have recently given their support for the automatic transfer of financial information to crack down on global tax evasion.

Although the pledges were vague, more concrete proposals are in the works via the G20 and OECD. G20 finance ministers and central bankers are set to meet in July and September of this year.

The FATCA – which would affect all financial institutions except for the smallest banks – creates a sense of urgency to push for a global tax exchange system, and it is becoming a more prevalent model.

Responses

According to spokesperson Kathleen Perchaluk, acting on behalf of Canadian Finance Minister Jim Flaherty:

“We continue to work with our U.S. counterparts to develop an approach that both countries will find agreeable, with a view towards concluding an agreement in the near future. Canada supports the statements in the G8 summit communiqué to develop and adopt a multilateral standard for the automatic exchange of tax information and that the standard be based on the FATCA model.”

Canada’s Privacy Commissioner Jennifer Stoddart is keeping a close watch on the issue, as there has been little word of it to the public. Valerie Lawton, spokesperson for the Commissioner commented:

“The privacy implications of FATCA in Canada will depend on the details, which have yet to be determined. Many of the people who have contacted us have expressed concern about their personal information being shared with U.S. authorities.”

This concern is warranted, agreed Queen’s University law professor Arthur Cockfield, specialist in tax law. He said:

“No foreign government should be able to come into our country and demand personal information about our own citizens and residents. There’s really been a conceptual shift around FATCA in the last, say, three or four months. It was mainly hated by Canada and at least some European governments.”

However, only time can tell if the privacy-invasive provisions proposed by the FATCA will actually be implemented, or if the cost will be too insurmountable for the financial institutions to tackle.

Summary

This article takes a look at the Foreign Account Tax Compliance Act (FATCA), first signed into law by the US government March 2010, with many provisions beginning January 1, 2014. US and Canadian governments are negotiating the terms, attempting to determine if Ottawa or Canadian financial institutions are responsible for sending banking data on Americans’ offshore accounts worth more than $50,000.

CIPP Exam Preparation

In preparation for the Certified Information Privacy Professional/Canada (CIPP/C) and the Certified Information Privacy Professional/United States (CIPP/US), a privacy professional should be comfortable with topics related to this post, including:

  • Office of the Federal Privacy Commissioner (CIPP/C; I.A.c.i.1.a.)
  • Types of personal information (CIPP/C; I.B.a.)
  • Banking regulators (CIPP/US; I.A.d.v.)
  • Cross-border enforcement issues (CIPP/US; I.B.g.)
Share

Leave a Reply

 

 

 

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>