U.S. FATCA tax law catches unsuspecting Canadians in its crosshairs
Carol Tapanila is worried about the savings she's put aside for her son, who is developmentally disabled and thus unable to renounce his U.S. citizenship. CBC
A Calgary woman's developmentally disabled son is caught in a U.S. tax quagmire that she fears may cost him the money she spent years setting aside for his financial future.
"He's entrapped," said Carol Tapanila, the 70-year-old mother. "There's no way out. He is entrapped into U.S. citizenship."
Her 40-year-old son was born in a Calgary hospital, but automatically received U.S. citizenship because both his parents were American. That simple fact may soon create financial woes for the Tapanila family.
Starting in July, a new U.S. tax law, the Foreign Account Tax Compliance Act (FATCA), goes into effect. It requires banks around the world to sift through client accounts to find anyone with U.S. connections and send that information to the U.S. Internal Revenue Service.
The law is aimed at Americans who are hiding offshore accounts, but the information sharing is likely to unearth many unsuspecting Canadians with U.S. citizenship, like Tapanila's son, who didn't realize they were required to file U.S. taxes.
Tax law expert Allison Christians calls the Tapanila case "ridiculous" and a "classic example of why the law is unjust."
The law "was intended to find rich American tax cheats hiding out in Switzerland," said Christians, who teaches tax law at McGill University, but it "will now punish poor, disabled Americans living in other countries, who are only American by birth."
These so-called "accidental Americans" also include an Ottawa woman who was born in the U.S. to Canadian parents and moved back north at one year of age.
This woman, who asked to remain anonymous, said her husband is livid that their joint account information will soon be shared with U.S. tax authorities.
Both fear that FATCA will reveal her U.S. citizenship and saddle them with hefty penalties for failing to file U.S. tax returns that will eat into their retirement savings.
"It's stressful. I think about this every day," said the woman. "It's like a big weight over your head that never really goes away, and I'm starting to wonder when and if it's ever going to go away?"
In advance of the law taking effect, more than a dozen countries have inked intergovernmental information-sharing agreements with the U.S.
These arrangements allow either for banks to hand over information directly to the Internal Revenue Service, or indirectly via their national tax agencies.
Canada is currently in negotiations with the U.S. The banking industry notes that FATCA will affect many Canadians indirectly because of the extra costs of industry compliance.
"We have to comply with FATCA," said Marion Wrobel, vice-president of policy and operations at the Canadian Bankers Association. "While we don't like it and we've lobbied against it, FATCA is going to be a reality."
If banks refuse to comply, they face severe financial penalties — a 30 per cent withholding tax on all American-sourced income or sales of American-based assets.
But financial institutions also face costs to comply. Some estimate the manpower and administrative systems required to find clients with U.S. connections could cost up to $100 million per institution, said Wrobel.
"It is expensive, and as far as we see it, it adds nothing," said Wrobel. "It doesn't make the banks any safer or sounder."
Thousands on legal advice
For Tapanila, the financial burden has already been costly. She spent thousands of dollars seeking legal advice on how to renounce her son's U.S. citizenship. Under the law, a parent, guardian and trustee cannot renounce on someone's behalf.
She refuses to file U.S. taxes for her son, fearful that it would chip away at the funds she's stashed in a Registered Disability Savings Plan (RDSP) and a Tax Free Savings Account (TFSA).
"I see no common sense in it," she says. "Put me in jail. I don't care. But I'm not going to do that."
RDSPs as well as TFSAs are considered "offshore trusts" by U.S. tax authorities. That makes any gains from these plans — which include contributions from Tapanila and matching ones from the government — taxable by the IRS.
The CBA's Wrobel said that, based on his talks with the federal government, he's hopeful that the U.S.-Canada agreement will include exemptions for registered savings accounts.
That would provide some relief, but Tapanila notes that the cost of filing U.S. taxes every year could actually be the largest drain on her savings.
Accounting firms estimate that personal tax filings can cost from $500 to $5,000 a year because of the complexity of U.S. tax law.
"I wanted my son to have something when I was gone from this Earth and so I was a saver," said Tapanila. "And now I don't want the U.S. to take one penny that should go to my children.
"I want my hard-earned Canadian money that I've saved to go to my children, not to the U.S. or some compliance tax lawyers year after year after year after year."
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