The (U.S.) Taxman Cometh

Q3 | August 2020

Topic: Tax Planning

R. Denys Calvin CFA

August 26, 2020

Image used with permission: iStock/Natalia Bratslavsky


Print & Share

Print

The (U.S.) Taxman Cometh

Q3 | August 2020

Like the medical patient who expects to endure a fair bit of poking, probing and prodding from the doctor, clients of financial providers have had to get used to answering a raft of increasingly penetrating and personal questions when opening a new account.

In the investment world, most of these questions are intended to equip the firm with a clear understanding of the client’s circumstances and objectives that will inform the account/portfolio management process.

However, there’s no denying that many questions arise more from the firm’s legal or regulatory obligations than because the answers will truly help the firm “know the client” and serve them better. Moreover, it seems the number of such questions is increasing. For better or worse, financial services businesses have surveillance and quasi-policing roles in such diverse realms as tax collection, anti-money laundering, and securities law compliance. In principle, the privilege of being a part of the financial system comes with a responsibility to protect that system from those who abuse it.

One realm where the number of these “legal questions” has grown steadily may surprise you: foreign tax compliance. It started with the United States’ Foreign Account Tax Compliance Act (“FATCA”) 10 years ago as the U.S. broadened its tax enforcement efforts in two directions: to ensure U.S. taxpayers report earnings on all their financial assets, including foreign ones; and to ensure U.S. persons living abroad file U.S. tax returns and pay any taxes owing. (Unlike Canada and most other nations, the United States taxes based on citizenship, not just residency.) Subsequently, other nations around the world have joined the parade under the moniker of the “Common Reporting Standard” – what some refer to as “FATCA for the rest of the world”.

For FATCA to work, the Internal Revenue Service in the U.S. needs information from foreign financial institutions about the accounts they maintain for U.S. nationals. Tax treaties between the U.S. and various other countries are the mechanism for gathering that information. In Canada’s case, domestic tax laws were revised to oblige Canadian financial institutions to provide the requisite information to the Canada Revenue Agency, and CRA gives it to the IRS.

FATCA has been like a steamroller: moving slowly, but inexorably. It started by requiring firms like Nexus and custodians like RBC Investor Services Trust to determine if holders of new accounts are or might reasonably be U.S. persons, so that information about their (non-registered) accounts could be reported to the IRS via CRA. The requirements subsequently broadened to include holders of so-called “large” accounts existing when the new rules came into force, and then broadened again to include holders of all existing accounts.

As you might imagine, the accompanying reporting and record-keeping obligations are not trivial, and, they, too have expanded over time. A U.S. taxpayer is obliged to provide Nexus with their social security number, if they have one, and obtain one if they don’t. Initially, Nexus’s only obligation was to ask for it, and to follow up periodically to obtain it. There were no dire consequences to firms like Nexus or custodians like RBC for not getting an accountholder’s social security number.

However, that has now changed. Thanks to recent little-noticed amendments to FATCA and the bilateral treaty that governs Canada’s tax reporting obligations, starting this year, Canadian financial firms can be fined for continuing to operate an account without a social security number for a U.S. person. There are only two “escape routes” to avoid financial penalties: obtain the social security number or close the account.

This is not an enviable position for either Nexus or the client. Both face a dilemma. Consider the following. By maintaining an account for a client who committed no offence greater than simply being born in the U.S., Nexus has become a vehicle for transmitting U.S. tax law – part of the IRS police force, if you will. The client is unlikely to view Nexus in a favourable light in the circumstances, even though the requirements to have a social security number and file a U.S. tax return are not new – wishful thinking to the contrary notwithstanding.

To comply, the client faces a stark choice. Close the account entirely. (It may not be possible to transfer it to another financial institution without a social security number as all firms are subject to the same obligations and potential penalties as Nexus.) Or obtain a social security number and undertake the arduous and potentially expensive process of filing back tax returns with the U.S., perhaps to incur penalties, despite possibly not owing any actual income tax to the U.S. Add into this unpleasant mix the fact of exploding U.S. fiscal deficits, and it’s easy to imagine the IRS ramping up its enforcement efforts and having little appetite for leniency.

The (U.S.) taxman cometh.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

More Like This...

See another Human Interest blog post that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

More Like This...

See another Inside Nexus blog post that may be of interest to you.

Embracing the Golden Years: A Journey of Reflection and Wisdom

Topic:
Human Interest, Inside Nexus
Excerpt:
It was an otherwise slow mid-afternoon trading session on the “old” floor of the Toronto Stock Exchange at 234 Bay St. The dog days of summer had

More Like This...

See another Investments blog post that may be of interest to you.

From Vineyards to Portfolios: Cultivating Long-Term Wealth

Topic:
Investments
Excerpt:
My wife and I have been stymied so far this summer in getting to the Niagara region for our annual weekend of cycling through the vineyards and

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Dentists Get Their Financial Check-Up: Nexus attends the 2022 Ontario Dental Conference

Topic:
Wealth Planning
Excerpt:
In early May, we had the opportunity to attend the Ontario Dental Association’s (ODA) Annual Spring Meeting (ASM) in Toronto. Now in its 157th year,

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

Worth 1,000 Words

Topic:
Human Interest
Excerpt:
A little humour makes the world a better place.

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

Where Have All the Boutiques Gone?

Topic:
Inside Nexus
Excerpt:
Many small, once independently managed, firms have fallen into the clutches of larger organizations such as banks, institutional money managers and

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

Don’t Worry, Be Happy

Topic:
Investments
Excerpt:
A recent article by David Brooks in The Atlantic magazine argues that, despite the heavy shroud of pessimism that envelopes most of our current

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

Pearls of Wisdom

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

A Nexus Feature on: First Home Savings Accounts (FHSA)

Topic:
Tax Planning
Excerpt:
The FHSA is a registered plan to help Canadians save for their first home and could play a role in either your or your adult child’s overall wealth

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

From The Editor: Planning for Long-Term Care

Topic:
Wealth Planning, Living to 100
Excerpt:
As part of our Living to 100 series, Nexus hosted a client event in June featuring guest speaker Karen Henderson, an expert in long-term care planning