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Is Ottawa stalling on FATCA tax crackdown because U.S. isn’t ready?

THE ASSOCIATED PRESS

Several major world governments have signed on to the U.S. Foreign Account Tax Compliance Act, which would require financial institutions outside the United States to identify and report their American customers.

But as the July 1 deadline approaches, Canada remains a holdout.

“We continue to work with our U.S. counterparts to develop an intergovernmental agreement that both countries will find agreeable,” Marie Prentice, a spokesperson in Finance Minister Jim Flaherty’s office, explained in an e-mail. “We believe we are close to a proposed agreement and we are hopeful that we’ll be able to announce further details in the future.”

But statements from senior U.S. officials have cast doubt on whether the IRS can meet its own deadline:

  • On Dec. 5 the U.S. Treasury Department published an audit criticizing the FATCA systems development process as wasteful and disorganized. (In a response, the IRS said that it had been trying to respond to last-minute regulatory changes.)
  • On Jan. 9 U.S. National Taxpayer Advocate Nina Olson warned in a report to Congress that the computer systems necessary to implement FATCA are “still in the early stages of development,” with components “not scheduled for release until 2016 at the earliest.”
  • On Jan. 13 an IRS advisory committee, calling the implementation of FATCA “an enormous task,” urged a further postponement until Jan. 1, 2015.
  • On Jan. 17 a Forbes published article on FATCA delays by Washington-based lawyer Eileen O’Connor, who headed the tax division of the U.S. Justice Department for much of the Bush administration. “The Administration has time and again delayed effective dates that were set in the [FATCA] statute,” O’Connor wrote. “Nobody is complaining, though, because nobody can comply. Not the government, and not the financial institutions subject to the law.”

(The U.S. administration was humiliated last fall when the Web portal supporting Obamacare, the ambitious plan to reboot the U.S. medical insurance system, failed very publicly.)

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Compliance with FATCA has no upside at all for Stephen Harper’s Conservatives. The government is under pressure from banks to come to an agreement with the U.S. but would face a nationalist backlash – the NDP seems to be positioning itself for the debate – and anger from the estimated million people in Canada affected by the law.

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FATCA also stands a good chance of being struck down by the Canadian courts – at least as far as its implementation in this country is concerned –  with disruptive effects on the financial system. Retired law professor Peter Hogg, an expert on the Charter of Rights, wrote in 2012 that an agreement would be “discriminatory in a way that would not withstand Charter scrutiny.”

Flaherty has been chilly about FATCA since it was first proposed. In a 2011 letter, he said that “to rigidly impose FATCA on our citizens and financial institutions would not accomplish anything except waste resources on all sides.”

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