Tax penalties on U.S.-Canadian citizens in Canada "outrageous," MP Don Davies says

American rules a "tax grab" on people living here -- and Ottawa should intervene, critic says.

For over a month, NDP MP Don Davies has been receiving worried calls from constituents with U.S. citizenship who fear the American government will impose severe penalties on them -- up to 50 per cent of a major asset -- if they don't file their U.S. taxes by August 31, 2011. 

"It's outrageous," said Davies. "Ninety-eight per cent of the people we've talked to are not trying to avoid paying U.S. taxes, but they have just had so little connection to the States so far that they didn't even know they had to report to the IRS."

Unlike Canada, taxes in the U.S. are based on citizenship rather than residency, which means that all U.S. citizens living abroad are obligated to declare their income to the IRS. That means that even if the U.S. citizen in question has never worked in the U.S., the individual is required to declare all Canadian accounts, or potentially face hundreds of thousands of dollars in fines.

Since 2009, the IRS has increased efforts to get U.S. citizens living abroad to file FBARs (Report of Foreign Bank and Financial Accounts) on all their accounts based outside of the U.S. -- including checking accounts, savings accounts, RRSPs, RESPs and mutual funds. Individuals who fail to report by the deadline may be subject to a penalty of $100,000 or 50 per cent of the total balance of the foreign account. People who apply for an "amnesty" via an Offshore Voluntary Disclosure Initiative may have the penalty reduced to 5 per cent. 

Davies, however, feels that even a 5 per cent is overly severe for long-term Canadian residents and dual U.S.-Canada citizens.

"Some people are technically U.S. citizens simply because they were born in the States, but they grew up in Canada and work in Canada and don't have a penny of U.S. income," he said. "Other people have moved here decades ago, and identify completely as Canadian." 

Many dual citizens living in Vancouver were alarmed when they heard about the August 31 deadline for declaring their Canadian accounts, and are conflicted about whether to disclose their assets to the IRS or keep quiet, hoping to go unnoticed. 

"It's just a big cash grab, (the U.S.) is just being desperate for some money now since the financial crisis," said one West Vancouver resident, who wished to remain unnamed.

"What they really want is to go after all the big guys with the Swiss bank accounts, but a lot of average people get caught up in the process."

The dual citizen, who has lived in Canada for 35 years, said that he felt "stuck in a tight spot" because he may face a late penalty if he reported to the IRS, or face a crippling penalty if he didn't disclose and was later found out. 

Tax accountant Steven Flynn of W.L. Dueck, a company in Richmond specializing in U.S. and in cross-border taxes, said that while he has never seen people punished with heavy fines for failing to file taxes, it would be better to be safe rather than sorry. 

"I hear the term 'cash grab' being used, but it is the law, and this applies to people equally, everywhere ... and the penalty, if you qualify for amnesty, is 5 per cent of your financial accounts, which doesn't include your home or your business."

Flynn said that while people can call their MPs to seek a political resolution to their concerns, they shouldn't expect to see themselves exempt any time soon.

Davies said that many MPs have received calls from similarly fearful dual citizens and long-term Canadian residents, and said that the NDP is urging the Harper administration to intervene.

"We've all been writing letters to (Finance Minister) Jim Flaherty, saying Canadian government needs to work out another deal that's a more fair to everybody," said Davies. 

"This is about a transfer of wealth from Canadian citizens to the U.S., and it's affecting hundreds of thousands of people in Canada."

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