Despite intense pressure from lobbyists, Canadian banks have agreed they must obey the controversial US FATCA laws aimed at smoking out American expats with offshore bank accounts and financial holdings.
The Foreign Account Tax Compliance Act (FATCA) will come into force from July 2014 and requires any foreign financial institutions with American customers to disclose details of their finances to the US Internal Revenue Service (IRS).
From that date, any of the estimated 6 million Americans living overseas with more than $50,000in offshore holdings must tell the IRS about their cash.
The two-way reporting process will allow the IRS to track down any undeclared earnings or income.
The US and the tiny African country of Eritrea are the only two nations that require expats to file tax returns in their home countries.
No working outside FATCA
The Canadian Bankers Association, the trade body for the country’s banks and credit unions, fears the repercussions of not complying with the FATCA despite the protests from US expats living in the country.
Effectively, the US can block them for trading in US dollars by withholding 30% of every financial transaction passing through the American financial system.
President Barak Obama has made clear that the US will act against financial institutions failing to comply with FATCA.
He is on record as saying if financial institutions do not co-operate, the US will assume they are havens involved in tax avoidance and act accordingly.
Marion Wrobel, vice-president of policy and operations at the Canadian Bankers Association said: “Everything considered, however much a bank may like or dislike FATCA, there is no way a modern financial institution could work outside FATCA.
“We believe FATCA is an extra-territorial application of US law and have battled against the law ever since the US first put the idea forward.
“America can do this because it is a huge economy with integrated financial markets that are important to global finance. It’s impossible for any large bank, credit union, insurance company of securities dealer to avoid the net because of the way global finance is structured.”
Wrobel also warned anyone in Canada who even refused to confirm that they were connected with US could face their non-compliance reported to the IRS.
The Canadian government is close to signing a FATCA agreement with the US that will let financial institutions report to the government, which will transmit the information on to the IRS.
Joining FATCA is likely to see amendments to the Canadian constitution to overcome difficulties in reporting personal information to a foreign government