Does anyone really need to state the painfully obvious -- that "Canada is not a tax haven"? Apparently so, and to his credit, Canadian Finance Minister Jim Flaherty did just that the other day. And I'm glad he did.
"Back off our taxpapers, Flaherty tells U.S.," read the recent headline in Canada's Financial Post after Flaherty fired off an angry letter to the Washington Post, The New York Times, and The Wall Street Journal blasting a new Internal Revenue Service tax crackdown that could ensnare tens of thousands of innocent Americans living in Canada. Stop targeting "innocent and law-abiding people" who owe no U.S. taxes, added the angry Conservative Cabinet minister.
'Stress and fear'
The simmering cross-border battle over new rules applying to dual-citizen Canadian residents is spreading "unnecessary stress and fear," wrote Flaherty, referring to a little-known IRS proviso that requires all U.S. citizens to file annual returns with the IRS, regardless of where they live and work. Many transplanted Yanks had no idea of this requirement. The Toronto Globe and Mail reports there are roughly a million Canadian-American citizens living in Canada. (That figure seems a bit high to me, coming from a country of 34 million, but it's possible.)
"Most of these Canadian citizens, many of which have only distant links to the United States, have a very limited knowledge of their reporting obligations to the U.S.," Flaherty added.
Flaherty also addressed pending U.S. legislation that would compel Canadian banks to turn over their information on American clients to the IRS, a giant headache Canadian banks have resisted. Because of their objections in July, the IRS agreed to delay enforcement of that new rule until 2014. It was originally scheduled to kick in a year earlier. Canada banking authorities say this battle is not over.
Flaherty noted that many of the transplanted Yanks are not the real targets of a crackdown on tax evasion -- "high rollers with offshore bank accounts."
Maybe not, but they're still feeling the revenue heat from a country desperate to vacuum up money wherever it can -- anything to avoid raising taxes on the wealthy and upset the dismal House Speaker John Boehner bunch.
"These are people who have made innocent errors of omission," said Flaherty of the dual citizens affected.
Bridges, roads still being maintained
If most of the people the IRS is targeting wanted to dodge taxes, this one-time Canada resident can testify, they certainly wouldn't have come to Canada, which has a tax rate -- federal and provincial -- considerably higher than does the U.S. Then again, Canadian residents expect to have to pay for things like schoolteachers, firefighters, and keeping parks open and roads and bridges maintained, and so they pay higher taxes than Americans.
The concept of "there is no free lunch" hasn't really sunk in down here in the U.S. yet.
What's especially ludicrous and galling about this new IRS directive, say Canadian tax experts, is its "one-size-fits-all" provisions that lump Canada with countries like Panama and the Bahamas.
Canada not only -- let's say it once more -- is NOT a tax haven , it's also not a banana-belt country, climatologically or politically. Just the opposite. And, it has a stronger banking system than the U.S. does.
Flaherty added that "to impose FACTA (the Foreign Account Tax Compliance Act) on our citizens and financial institutions would not accomplish anything but to waste resources on both sides." That pretty much sums it up. Flaherty also points out that there's already a bilateral tax treaty to deal with tax evasion.
The deadline passed two weeks ago for Americans who hadn't filed income-tax forms in the past to throw themselves on the mercy of the court -- i.e., the IRS. I can't find any reports -- yet -- about the IRS prosecuting any malefactors in Canada, but I'll be watching this carefully.
The last word on this ridiculous policy today goes to Jamie Golombek, the director of tax and estate planning for CIBC Private Wealth Management.
After noting in the Financial Post that Canadians affected by the tax crackdown would take comfort in the Canadian government finally stepping up with objections to the misguided tax-enforcement cross-border battle, he added that this all comes down to the fact that the U.S. -- having come close to defaulting on its debt this summer -- "is in dire need of revenue."
The IRS needs to send its enforcement bloodhounds in directions other than north.
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