Income Tax Resources

I know this is the best written, wittiest and most informative tax blog you could read, but I figured today I would give the other guys some notice :). Seriously now, here are some other great income tax related resources you may want to check out:

 

Blogs and Websites

Below are some excellent websites and blogs. I am sure there are many more blogs and websites with great information, however, either I am not aware of them or do not access them often; so if you are not listed below, do not send me a hate email.

Tax Tips.ca - This is probably the best tax resource in Canada. This is not a blog in the typical sense, but more of a resource centre.

Moodys Gartner Tax Law - This is one of my favourite tax blogs. Some topics may be a bit technical, but very well written and great info for any tax junkie.

Canadian Tax Resource - Written by Dean Paley, CGA, CFP, who now posts on his own site. The Canadian Tax Resource blog is really a historical resource at this point, as Dean does not blog here anymore. However, the older posts often show up when I search a tax topic.

John Loukidelis Professional Corporation – Written by tax lawyer John Loukidelis, who wrote a long-running blog at his prior law firm. His blogs tend to be a bit technical, but he has some great information for those who are willing to read technical material.

Tax Enforcement Agencies

Canada Revenue Agency - I must say, the CRA does a very good job with their site. There is lots of information and it is usually fairly easy to read. Although, keep in mind; these are the CRA views, which are not necessarily always the view of the courts.

Internal Revenue Service - This site is more technical and not as user friendly as the CRA’s site; but if you have U.S. tax issues, it is a very good resource.

Estate Planning

Estate Law Canada - The person behind this blog is Lynne Butler an estates lawyer. Very readable and informative.

Toronto Estate Law Blog - Written by the estate lawyers at Hull and Hull LLP.

E$tate Debate - Written by various experts in the estate and trust fields.

Tax Treaties

Tax treaties  - A useful site if you want to know the withholding tax rate of foreign sources of income.

Large Accounting and Law Firm Websites

 

The following are links to the tax publications by some of the "big boys' of the accounting and legal world.

BDO
PWC
Deloitte 
EY
KPMG
Dentons
Thorsteinssons LLP

Twitter

Unlike many people, I only follow a small number of people on Twitter. Here are the Twitter handles of the tax people I follow, some already noted above:

1. @moodysgartner - Moodys Gartner Canadian and US tax lawyers and Chartered Accountants discuss tax strategies and tax issues.
2. @JamieGolombek – Managing Director, Tax and Estate Planning at CIBC Private Wealth Management and well known tax columnist for the National Post writes about all things tax & estate.
3. @Xyste – Tax lawyer Greg Ducharme
4. @taxtips.ca - Canadian tax, financial and investing info, tax and other calculators, tables of tax rates/tax credits.
5. @IRSnews -IRS news and guidance for the public, the press and practitioners.
6. @CanRevAgency - Canada Revenue Agency (CRA) administers tax and benefits programs, and ensures compliance with Canada’s tax laws
7. @WayneBewick -U.S. Certified Public Accountant and Chartered Accountant specialising in U.S. and Canadian tax services.
8. @DeanPaleyCGACFP - Accountant & Financial Planner.

Newspapers

The two best known tax columnists are Jamie Golombek with the National Post and Tim Cestnik with the Globe and Mail.

Winners of the 4 CD Audio Set of Tom Deans Every Family's Business

 

The winners of the giveaway are Stephen L. and Michael G. You will be contacted to obtain your mailing information. Thanks to all who entered.

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.

Update on IRS Amnesty Provisions for U.S. Citizens Living in Canada

On June 27th, I wrote about the proposed Internal Revenue Service ("IRS") amnesty procedures for United States ("U.S.") citizens living in Canada, who have not previously complied with their U.S. income tax filing requirements and are considered "low compliance risk". Today I will provide an update of the amnesty procedures.

To briefly review, in contrast to Canada, the U.S. imposes a requirement to file income tax returns and information returns based on citizenship rather than residency. This requirement has caught many U.S. citizens living abroad (especially Canada) off guard who believed that their U.S. tax filing obligations would cease once they departed. In the past, the penalties associated with catching up on late filings were very severe despite the fact many filers would owe little to no tax; therefore, many individuals were deterred from filing.  

On August 31st, the IRS announced a new streamlined filing program to allow qualifying U.S. citizens living abroad to catch up on outstanding U.S. tax returns and related information returns without penalties being imposed. Under this new program, which came into effect on September 1, 2012, individuals who qualify must:

1. File tax returns for the 2009, 2010, and 2011 and pay any balances owing plus arrears interest. Each return must show no more than $1,500 of taxes owing.
2. File Foreign Bank Account Reporting (“FBAR”) forms for the six previous years (a separate disclosure form to be filed if the balance of all the non-U.S. bank and investments accounts is more than $10,000 at any time during the year).
3. Complete an IRS questionnaire that will be used to assess your “compliance risk”.

In order to qualify for the streamlined filing program, affected U.S. citizens (including dual-citizens) must have been living abroad since January 1, 2009, have not filed U.S. tax returns for 2009, 2010, and 2011 and are considered low-risk based on the completed questionnaire in #3 above. The IRS will look at the following non-exhaustive list of factors to determine if an individual is considered low- or high-risk:

· If any of the filed tax returns claims a refund.

· If there is any significant economic activity in the U.S and/or has U.S.-based income.

· If the taxpayer reported all their income in Canada.

· If the U.S. citizen is under audit or investigation by the IRS.

· If FBAR filing penalties have been previously assessed or if a warning letter was issued.

· If the U.S. citizen has bank accounts or investments outside his/her home country.

· If there are indications of sophisticated tax planning or avoidance.

The compliance risk is an estimate by the IRS of an individual’s risk that there may be additional taxes owing and/or disclosures required that may not have been captured based on the required filings above in #1 and #2.

Individuals identified as high-risk will not be eligible for the streamlined filing procedures. They will likely be subject to a more detailed follow-up from the IRS and may be asked to file returns for earlier years. In this situation, the IRS does have the ability to impose penalties and even pursue criminal prosecution if the high-risk individual’s package is not accepted.

A benefit of this streamlined program is that U.S. citizens in Canada with Canadian RRSP and RRIF accounts will be able to file the appropriate forms to elect to defer the income in the event that these forms were not filed on time in the past. Canadian registered accounts that allow the deferral of income are not treated the same way by the IRS.

For U.S. citizens, it is about time the IRS put in place a well-publicized and documented tax amnesty program, under which U.S. citizens are not treated like Al Capone. The program should be effective for the vast majority of Americans living in Canada, although, the arbitrary nature of the risk assessment will leave some U.S. citizens wanting. The cost of preparing the required U.S. tax returns and FBAR forms will be expensive, but the potential of avoiding thousands of dollars of penalties still makes this streamlined filing program very attractive for U.S. citizens that want to come clean with the IRS.

Bloggers Note: I am posting this blog to update U.S. citizens living in Canada. I am not a U.S. income tax expert and may not be able to answer many questions you may have on the amnesty.  

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.

Should the CRA Reward Tax Snitches?

John Greenwood of the National Post recently wrote a two-part series contrasting how the Internal Revenue Service (“IRS”) and the Canada Revenue Agency (“CRA”) deal with income tax evaders and cheaters. In my opinion, the CRA should implement a "whistleblower program" similar to that of the IRS.

In Mr. Greenwood's first article titled, “UBS Whistleblower gets $US104-million award from the IRS”  he details the astronomical $104,000,000 settlement paid by the IRS to UBS whistleblower Brad Birkenfeld; whose detailed information provided the IRS with enough ammunition to cause UBS of Switzerland to pay the IRS a $780,000,000 cash settlement and to hand over details on thousands of U.S. citizens holding offshore bank accounts. As the Swiss have always protected their banking secrecy (bankers can be criminally charged for revealing a client’s identity), one can only imagine the devastating information Mr. Birkenfeld (who was sentenced to 40 months in prison and was only recently released) provided the IRS to cause the Swiss to breach their historical secrecy.

Mr. Greenwood in his article also discusses how the IRS uses financial rewards to catch tax evaders (the reward can be as high as 30% of the income tax collected) and then uses that information to prosecute and/or go after the tax evaders. In comparison, the CRA provides no financial incentive to step forward, and in some cases punishes the whistleblowers. Critics of the CRA suggest the agency rarely pursues tax fraud even when provided with detailed information and names.

In Mr. Greenwood’s second article,  he alleges that Mr. Birkenfeld provided the CRA with copious notes, even though Mr. Birkenfeld had no incentive to do so. When asked what it had done with this information, a spokesman for the CRA states "the agency does not comment on specific cases, and nor does it discuss investigations it may be conducting". However, it appears the CRA has yet to prosecute anyone criminally.

I suggested in one of my most popular blog posts titled Will I be Selected for a CRA Audit, that “there is nothing worse than a scorned lover, a business partner you have had a falling out with or a dismissed employee to trigger a CRA audit.” However, the aforementioned whistleblowers are typically snitching about “small potato” tax evaders and in some cases, they may be more concerned with being vindictive than in providing honest information. So how can the CRA find multi-million dollar business evaders?

Mr. Greenwood suggests that “the best way to infiltrate the greed business, is by greed itself” and by offering whistleblowers financial incentive to turn in their colleagues and clients.

The CRA would argue otherwise and states that 611 Canadian taxpayers have come forward under the voluntary disclosure program and declared income relating to offshore UBS accounts and that 531 of these cases have been processed revealing $109 million of unreported income.

Personally, I think Mr. Greenwood and the IRS have it right; financial reward trumps loyalty or morality. The only reason the CRA has 611 voluntary disclosures is because the IRS broke down the Swiss secrecy wall and this caused Canadians with Swiss bank accounts to become concerned that their information was not safe with the Swiss.

So, what type of person would snitch out a “tax evader” given that many people seem to condone tax cheating or evasion as a national pastime in both the U.S and Canada?

In this CNN Money article, titled Rat out a tax cheat, collect a reward, Tim Gagnon, an academic specialist of accounting at Northeastern University, suggests that “the most common informants tend to be dissatisfied middle-ranking employees in big companies”. Gagnon states that "I think it happens more in middle management than upper management, they're workers in the middle ranks who feel frustrated about what's going on and are not advancing or don't think they have a shot of moving up, because otherwise, it's hard to break loyalty."

Based on the discussion above, we know vindictive ex-spouses, former business partners and middle management employees fit the whistleblower profile, but how about my own kind, accountants?

Accountants know the most intimate financial details of their clients and even where their clients have hidden the details of an offshore account from their accountant; their accountant may have a sixth-sense and suspect possible evasion.

It is interesting to note that the first person to make a claim under the whistleblower program was an accountant in public industry, as detailed in this article. In this case, the accountant tipped off the IRS about a tax lapse his employer ignored and he received a $4.5million award.

The in-house accountant's tip netted the IRS $20million in taxes and interest from the company. The IRS paid the tipster, $3.24million, net of 28% for tax purposes. Nothing like giving a reward and then taxing back 28%.

Buy the way, if you ever get such a reward, you report the income on line 136 of your income tax return under "snitch income" and report the expenses relating to personal protection under line 236, under "bodyguards".

So, should the CRA go to a whistleblower program? Would you turn in your employer or client if you could receive 15-30% of the evaded taxes?

As a tax accountant, I have no issue in assisting people minimize their income taxes in a legal manner. However, I feel all Canadians should pay their fair (even if minimized) share of income taxes and I cannot condone tax evasion. That being said, I would have a hard-time becoming a whistleblower if I found out a client was evading income tax. I would feel that I was breaching the confidentiality of my relationship with the client and I would probably just fire the client. Nevertheless, whistleblower legislation of any kind would surely change the accountant/client dynamic.

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.

IRS Sets Forth Amnesty Procedures for U.S. Citizens Living in Canada

Over the last year or so, I have written blog posts on the requirements of U.S. citizens to file both Canadian and U.S. income tax returns and the outrageous penalties that could be assessed for not filing Internal Revenue Service ("IRS") information forms. In addition, I posted on the possibility of a true amnesty for Americans living in Canada after Finance Minister Jim Flaherty jumped into the dual tax filing fray.

Well, that amnesty may now be close at hand. On Tuesday, IRS Commissioner Doug Shulman announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues. As he said in the press release "Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues,".

While some of the details are still forthcoming, the IRS set forth a new procedure in which taxpayers who are considered a "low compliance risk" will be required to file three years of income tax returns and six years of Foreign Information Returns. All submissions will be reviewed and for those low risk taxpayers, the review will be expedited and the IRS will not assess penalties or pursue follow-up actions, although any tax owing must be paid.

Higher compliance risk returns are not eligible for the procedure and will be subject to a more thorough review and possible full examination. In these cases, tax, interest and penalties may be imposed.

The press release says this about compliance risk determination:

“The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and based on certain additional information that will be required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk. In general, the risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include any additional history of noncompliance with United States tax law and the amount and type of United States source income. Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be presented in the submission, will be released prior to the effective date of the new procedure.”

The above procedure will also provide for retroactive relief for failure to timely elect income deferral on certain retirement and savings plans (Canadians who have RRSP’s are required to elect to defer the yearly RRSP earnings) where deferral is permitted by relevant treaty will be available through this process. The proper deferral elections with respect to such arrangements must be made with the submission.

Although the concept of “compliance risk” seems to leave the IRS with significant discretion, the new procedure should allow the majority of U.S. citizens living in Canada to comply with U.S. income tax regulations without a significant financial cost. For those with a high compliance risk, the press release does not appear to provide much relief or if it does, you are rolling the dice with the IRS and are at their mercy.

Finally, there is no discussion about whether Canadians who complied with the earlier amnesty programs and paid interest and penalties, can apply to have those funds refunded.

Bloggers Note: As I have no knowledge of how this amnesty will work other than what the IRS press release and procedure states, I will not answer any questions in relation to this blog.

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.

The IRS, Partnerships, Altruistic High Schoolers and Happy Holidays

A few housekeeping matters before we begin. This is my last blog for 2011, so I would like to wish my readers a Merry Christmas and/or Happy Holidays and a Happy New Year.

Last week I had a bit of a moral dilemma in relation to the Bloggers for Charity contest when I received a bid of over $1,000 from Sarah a grade 11 student and Founder of the Me to We club at Oakridge Secondary School in London. Sarah bid on behalf of the club, to be a Blogger for a Day, to blog about the schools charity of choice. The club has raised $1,076 to date to go towards building a school in Kenya through Free the Children. Although I appreciated the bid, I felt it was not in the spirit of the contest; that being the donation should be a donation that was only made because of the opportunity afforded by being a guest blogger and not a pre-ordained donation. I thus decided against accepting the bid. However, since the Bloggers for Charity contest mission was to raise awareness for charitable giving and I was so impressed by what the students at Oakridge have done, I decided post an excellent mini-blog by Sarah. The blog politely admonishes us adults and discusses the clubs charitable efforts. Sarah's blog post follows below.

Thus, after all that, Tim Penner hangs on with a bid of $250 and will be my Guest Blogger on January 17, 2012. I have decided to match Tim's winning bid and will donate $250 to the Make-A-Wish Foundation of Canada.

Finally, I have recently experimented with some technical income tax posts, however, I will return to less technical posts in 2012. That is not to say I will not have any income tax blog posts, but the discussion will just be little less technical in nature. I have some great tax and non-tax topics on my agenda for 2012.

Corporate Partner Alignment Election

The 2011 Federal budget proposed rules to eliminate the income tax deferral for corporate partners. Many partnerships were unaware they had a time constraint to make an "alignment election" so that the partnership would have the same year-end as the corporate partners. Last Friday, the Minister of Finance Jim Flaherty announced the government will consider late alignment elections as filed on time if filed on or before January 31, 2012.

IRS Relief for Canadians- Far from absolute Relief

As noted in a prior blog the Globe and Mail was reporting the IRS was considering waiving filing penalties for US Citizens who live in Canada and had not filed the required U.S. income tax returns. Last week the IRS posted this Information for U.S. Citizens or Dual Citizens Residing Outside the United States. 

Assuming there will not be further specific special relief for Canadians; penalties will only be waived where the IRS feels there was "reasonable cause" for the initial non-filing. Reasonable cause is discussed in the link above and appears very subjective.

If you are a U.S. citizen or dual resident living in Canada and have not filed prior U.S. income tax returns, I urge you to engage a U.S. tax specialist to advise you moving forward. If you filed previously and were subject to penalties, you will want to touch base with your tax preparer to see if the reasonable cause provision can be used retroactively to obtain a refund of penalties already paid.

Oakridge Secondary School-High Schoolers Engaged in their Community

A guest post by Sarah, On behalf of the Me to We Club, Oakridge Secondary School, London, Ontario

The Blunt Bean Counter initiated bloggers for charity as a means of promoting charitable giving. Although my school club’s fundraiser did not fit the qualifications for the bid, Mr. Goodfield has generously offered space for this guest posting.

Today’s youth are often criticized for being apathetic and disengaged, but I am writing today to demonstrate that this stereotype is not true. This year, a group of students at Oakridge Secondary School founded a Me to We club. We were inspired by the Me to We organization, an international movement of socially aware and involved youth. As a club we didn’t just want to meet at lunch, we wanted to make a real difference! We set achievable goals for both local and global initiatives.

Our first event was Halloween for Hunger. Most adults roll their eyes when they see teenagers on their doorstep on Halloween, but we weren’t asking for candy for ourselves; we were collecting food. Our club collected 2741 pounds of generously donated food for the local food bank!

As students we are particularly motivated by the plight of less fortunate children around the world. Recently we participated in the Vow of Silence. We had two goals, the first being to raise awareness of children who are silenced by poverty, exploitation, and the denial of their basic rights. Our second goal was to kick off our year long campaign to raise money to build a school in Kenya, to help give youth an opportunity to receive an education and create a better future for themselves and the world.

Our Me to We club was formed out of our passion to be the change and make a positive difference in the world. Remember this success next time you are approached by your son, daughter, or neighbour, and be generous with your support. We are not just the leaders of tomorrow; we are the leaders of today!

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.

The IRS may have a true Amnesty for Americans living in Canada

As discussed several times in my blog, citizens of the United States must file yearly income tax returns and numerous forms even though they live in Canada. A recent quiet amnesty program (quiet since no one really heard about it until the newspapers started reporting it) stirred up a hornet’s nest, into which Finance Minister Jim Flaherty jumped saying that “U.S. authorities are spreading unnecessary stress and fear among law-abiding Canadians in their aggressive pursuit of offshore tax cheats.” 

Many U.S. citizens living in Canada filed U.S. income tax returns for prior years under the recent amnesty program, paying thousands of dollars in penalties, while often paying as much to income tax preparers.

However, there may be good news on the horizon. Barrie McKenna reports in today’s Globe and Mail that it appears that the IRS may have a final well publicized amnesty program where they may waive penalties for U.S. citizens who come clean and don't owe any U.S. taxes. Mr. McKenna reports the new rules will be announced within weeks.

Finally, Mr. McKenna reports that Americans who took part in the earlier amnesty program this year or one in 2009, may be able to reapply and get back penalties they paid.

The devil will be in the details, but stay tuned; U.S. citizens living in Canada may now have one last shot to come clean without any punitive financial cost.

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.

The Outrageous Penalties that can be assessed for not filing IRS Information Forms

The recent U.S. tax amnesty program that concluded in September was controversial to say the least. Even Finance Minister Jim Flaherty weighed in saying that “U.S. authorities are spreading unnecessary stress and fear among law-abiding Canadians in their aggressive pursuit of offshore tax cheats.”

In the last week or so there have been a couple articles stating that the IRS may be softening its position in regard to Canadians, however, in the meantime, the filing requirements remain unchanged.

There has been much written about the requirement to file U.S. returns. However, in this blog I want to discuss other U.S. forms that may be required for Canadians who have to file U.S. tax returns whether as U.S. citizens or deemed U.S. residents.

As I noted in prior blogs, I used to file U.S. tax returns, but have not done so for almost two years. Thus, this blog is just for information purposes; please see your U.S. advisor to ensure compliance with your filing requirements and confirm any penalty provisions applicable to you.

Form TD F 90-22.1

This form was front and centre in regard to the amnesty filing program. This form is required to be filed by any U.S. citizen or resident who has a financial interest in, or signature authority on, a foreign bank account (i.e. any account in Canada, whether a bank account or investment brokerage account).

Failure to file this form could result in penalties ranging from $500 for a negligent violation, to $10,000 for a non-willful violation to a maximum of $100,000 or 50% of the value of the account for a willful violation. The potential penalties seem absurd for not filing an information form. Some think the hidden agenda of this form is to provide the IRS full disclosure should you die and be subject to U.S. estate tax.

Form 8891

This form is used to report any Registered Retirement Savings Plan (“RRSP”) or Registered Retirement Income Plan (“RRIF”) you hold in Canada and the related income from your RRSP or RRIF. Before you have a heart attack, the income does not need to be reported if you elect to defer recognition of the income on your RRSP or RRIF until the time you receive it. By making this election you should be able to offset any U.S. tax by claiming a foreign tax credit for the Canadian income tax you pay upon the withdrawal of funds from your RRSP or RRIF. This form must be filed each year for each RRSP or RRIF you hold.

There is interestingly no penalty set out on Form 8891. I have been told by some that the penalty for not filing this form is up to 35% of the value of the RRSP or RRIF, however, I have seen others speculate that since no penalty is specified, the penalty could be as low as $135. In either event, I would file the form and not chance the higher penalty.

Form 5471

This form must be filed by Canadians filing U.S. returns who own at least 10% of the stock in a Canadian corporation. There are different filer requirements, so speak to your advisor as to which category you fall into. Under some filer requirements, you are basically required to translate your corporation’s Canadian financial statements into U.S. financial statements. This is a lengthy and very expensive exercise.

The penalty for non-compliance is $10,000 per missed filing and a reduction of foreign tax credits.

Form 3520

This form is required to be filed by any U.S. person who received a distribution from a foreign trust. For estate planning purposes many Canadians create family trusts that include themselves or children who are U.S. citizens or residents and thus fall under this filing requirement.

In addition, and more relevant for most Canadians, some U.S. tax specialists think that this form must be filed to report both Registered Educations Savings Plans (“RESPs”) and the Tax-Free Savings Accounts (“TFSAs”).

The penalty for not filing this form is equal to the greater of: (1) $10,000, (2) 35% of the property transferred to the trust, (3) 35% of the gross distributions from the trust, and (4) 5% of the gross value of the trust assets.

The above discusses some of the U.S. information forms U.S. citizens and residents may be required to file. The penalties do not seem proportional to the importance of the forms, so for the sake of Canadians required to file U.S. returns, let’s hope the IRS truly does soften its position on penalties for at least past transgressors.

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.

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 blog, although 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.