My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Thursday, June 30, 2011

Privacy Laws in Canada and the Income Tax Implications


Privacy of Banking Information


Many individuals throughout the world have utilized traditional banking-secrecy strongholds, such as Switzerland, to avoid paying taxes. In 2009, the Internal Revenue Service (“IRS’), fully aware of such activity, coerced UBS AG (a Swiss bank) to turn over information on 4,450 accounts held by US persons.

Canada, which is also trying to clamp down on tax evasion is supposedly also prepared to take UBS to court to gain access to Canadian accountholder details. Ottawa has been pressing UBS since early September 2009 for the names of Canadian bank accountholders, but has had limited success to my knowledge.

However, many Canadian clients of UBS AG have contacted the Canada Revenue Agency (“CRA”) to voluntarily disclose income they previously failed to report. According to press reports, at one point in 2010, thirty-two of those customers reached settlements with the Canadian government, allegedly reporting over twenty-five million dollars in income. Canada has had some success obtaining information from domestic financial institutions as noted in this article.

Personally, I have no issue with the IRS or the CRA breaching privacy laws where there is clear evidence of tax evasion. I pay my taxes - why should I care about the privacy of someone evading taxes using the secrecy of the Swiss banking system?

However, as discussed in Barrie McKenna’s article “Privacy Commissioner eyes the long arm of the U.S. tax law" , the U.S. tax authorities want to force all foreign financial institutions to identify Americans and their bank account information. This violates my personal boundary for invasion of privacy in regard to tax evasion.

It is my experience that Americans living in Canada are not “evading” income taxes, but are what I will call non-filers. As discussed in my recent blogalthough the IRS expects to find a significant number of Americans who have not filed income taxes returns (required because the US income tax system is based on citizenship not residency), these people are usually (a) unaware they have a U.S. filing obligation, or (b) are aware and just do want the hassle of filing. As noted in my blog, whether a U.S. citizen falls under scenario (a) or (b), in most cases if their income is not US source, they will not owe any income taxes to the U.S.

Tax Evasion or Non-filing?


Thus, the $64,000 question: is the act of not filing income tax returns tax evasion, even if no income tax will be owed? And, if it is tax evasion in your opinion, does it even compare to the blatant income tax evasion of those who hide their assets for income tax purposes in Switzerland? It is interesting to note that even Finance Minister Jim Flaherty argued that Canada is not a “tax haven” in Barrie McKenna's article.

In my opinion, there is such a clear distinction between the tax evaders and the non-filers that I feel the breach of privacy is justified in the Swiss tax evasion scenario, whereas in the case of non-filers, the breach of the privacy laws is unjustified.

I seem to recall that the IRS has in the past, considered or used a tax clemency for foreign non-filers. I would suggest that the IRS have a clemency or tax amnesty program for any year prior to say 2011 where an individual has income tax of less than say $1,000 owing in regard to a prior year not filed.

There should also be a highly publicized move-forward position that tax returns are required for all U.S. citizens (and green card holders) living outside the U.S. and that there is a standard penalty for non-compliance. Something along those lines would solve the non-filer issue and avoid the invasion of people’s privacy where there is no “true” tax evasion.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

7 comments:

  1. As a dual US/CDN citizen I have never been asked by any bank as to my citizenship. They've always been happy to get a copy of my drivers license and be done with it.

    On the US side though, I have to file a list of foreign (Canadian)bank accounts and balances each year.

    I wonder what will happen if the US ever wants to look at my President's Choice checking account....?

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  2. Anon, you are not who the US is looking for. You have already complied with your US filing obligations by filing your US return and providing the list of Canadian accounts requested by the IRS. They are looking for people who have not filed the required US tax returns by virtue of citizenship or holding a greeen card.I assume the IRS will cross reference US citizens with Cdn accounts and see if they have filed US tax returns or not.

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  3. Good post Mark. I was reading looking for ties to the overall changes in privacy that are occurring all around us. Obama continues the Patriot Act which lets FBI go data snooping without warrants etc The world is becoming smaller - there is no place to hide anything anymore.

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  4. Rob, excellent point regarding the Patriot Act; hopefully the question of whether certain US citizens living in Canada are not filing tax returns does not require the FBI's assistance.

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  5. Yikes! This is all to big-brotherish for me! I have held dual citizenship since 1993, and still carry a US passport. I have not filed a US tax return for the last 15 years, as it became so difficult to get into the US consulate in Toronto to get tax forms that I simply quit filing. I would not owe the IRS any money, anyway, and since I have never paid into the US social securtiy system, I would not be eligible for receiving Social Security payments. The implications of this is very disturbing.

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  6. Anonymous #2 here. I just discovered that as my father was US citizen so am I. I've never filed anything to IRS, but am completely compliant with Revenue Canada (I've only ever lived in Canada). Some lawyers are telling me that the tax amnesty ending on Aug. 31 is my best bet. Others are saying I don't need the amnesty as long as I voluntarily start filing. I am very confused and terrified of the penalties I'm hearing. Any advice would be greatly appreciated!

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  7. Hey Anon

    I no longer file US tax returns, however, I did up until last year and it was my experience with several people in your situation that if you owe no US income tax and have just been unaware of your filing requirement, that if you file 3-6 years returns (there are differing opinions on the number of years to be filed) the IRS is satisfied in that you are back in the system and I have not had them assess any penalties in these situations.

    I am not fully aware of the details of the amnesty, so it may be more conservative to use the amnesty to ensure you avoid the penalties.

    In any event I would not be terrified, just engage a US tax preparer and have them make the decsion whether you need to file the amnesty or just file a few years catch up.

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