To combat the problem of international tax evasion, Canada and USA have signed an agreement recently. USA and Canada have consented to share tax information about the bank accounts which are being held by the citizens of the United States in Canadian banks. This has helped them use backdoor tactics by freeing them from compliance to a law which was to come in force shortly after the agreement was signed.
This recently signed agreement contract allows the Canadian banks to avoid reporting the information directly to the Internal Revenue Service It now allows the banks in Canada to report to the CRA which will work in collaboration with the IRS in the USA. This has worked well for tax evasion as the banks have got off the hook for complying with the Foreign Account Tax Compliance Act which was passed few years ago.
In absence of this agreement, Canada would have been subject to the laws of the United States and that requires the banks in the United States to charge a thirty per cent withholding tax on the payments which are made to foreign financial institutions. These institutions do not agree to provide or identify information about the tax evasion from account holders from the United States of America.
Now, the governments of United States of America and Canada are supportive to apply the policy objectives of the FATCA on reciprocal basis to make sure that there is an improvement in the tax compliance. The Canadian financial institutions will be able to protect the ability of the Canadian citizens to access financial services while facilitating compliance.
The tax law is being focused at those account holders who are placing their funds in foreign bank accounts so that they can practice tax evasion in the United States of America. The US government is working extra time to crack down hard on tax evasion by taking strict measures against the foreign banks that are harboring the United States Dollars without identifying or reporting them. The amount of deposits involved was $50,000 or more.
Earlier, it was argued by the Canadian banks that the large number of United States-Canada citizens who have dual citizenship would make it almost impossible to establish which deposits should be identified and reported and which should not. Now, the IGA is allowing Canadian tax authorities like the CRA to gather information from the banks in Canada and then share that information on tax evasion with the Internal Revenue Service under this current bilateral tax treaty. The Canadian banks will begin the collection of information and the Canadian Revenue Agency will start reporting to the Internal Revenue Service from the beginning of 2015.
The United States Department of Treasury has also announced that it has signed inter-governmental agreements (IGAs) with Canada to prevent offshore tax evasion in the Caribbean and other countries through the implementation of the FATCA. Other similar agreements have been signed with countries like Hungary, Italy and Mauritius on the issue of tax evasion.