FATCA

On July 1^st, the destructive Foreign Account Tax Compliance Act (FATCA) becomes law.  Twelve countries, including Canada, have agreed to hand over to the IRS all personal information requested.  By 2017, 47 countries will “automatically exchange information once a year dealing with bank balances, interest, dividends, and sales of goods which can result in capital gains taxes”.  No warrants or court orders will be needed under FATCA. 

FATCA will affect anyone who has the slightest connection to America even if they have never stepped foot in the country.  For example, if a parent was born in the U.S. and a child was born in Canada, that child for tax purposes is both an American and a Canadian.  It is expected this law will affect roughly 20 million people from across the globe.  In Canada, there will be roughly one million citizens affected, most of whom do not know it will.  The effects of FATCA will not be so noticeable for a few years but a significant change is coming.  Specifically, it will scare away investment. 

Just on estate taxes alone, which more than 1m Canadians will now have to pay, could see a large chunk of one’s estate handed over to the Internal Revenue Service (IRS).  U.S. estate tax varies between 18 and 40 percent, depending on one’s net worth.  Those who have a net worth of over $3m will be taxed at 40%.  Penalties for not reporting under FATCA can be double the amount owed, plus any interest charges that have accrued.  These Canadians will also have to pay estate taxes to Revenue Canada.

One of the worrying aspects of FATCA is that every Canadian bank has agreed to give up all information on any citizen who falls under FATCA to the IRS if requested.  Failure to do so could result in a $100 million fine and a chance of losing their U.S. banking license.  Not one bank has filed a court case to block this invasion of privacy.  We wonder who Ottawa represents; it certainly is not Canadians.

We have come across some people who will get caught up in FATCA.  They have said that they are not worried because they have small estates of under $1m.  This is probably true for now because the IRS will go after those with larger ones.  However, once the wealthy are taken care of, the IRS will then begin to move down the ladder.  It could take years but everyone on the list will eventually be checked.

As the world becomes more aware of FATCA, we believe one will see more individuals selling off their U.S. assets, especially real estate.  Our reasoning is that it is very easy for the IRS to put a lien on any property within their borders.  There is no point in investing in the U.S. if the IRS might confiscate the assets you have spent a lifetime accumulating on their soil.  People fail to recognize the fact that Washington is bankrupt and desperate for cash so they are taxing everything and everyone. 

Money always flows to where it is most welcome.  The U.S. wants all foreigners’ money but they have neglected to make taxes fair.  This is why so many American corporations have moved trillions of dollars offshore.  Having favorable tax laws would bring this cash home and result in huge tax revenue.  However, after July 1^st we expect a slow but steady selling of U.S. securities and homes owned by foreigners.  European countries, Canada, New Zealand and Australia will become net benefactors of FATCA as these countries will be considered tax havens compared to the U.S. 

Beginning next week, a new era of tax grabs will begin.  It will be the taxpayer who will end up losing because governments will just waste any money found.  Investment will slowly leave America causing American debt to grow out of control even faster.  There are plenty of examples throughout history that shows tax grabs, (which FATCA is), affect governments negatively over the long term.  America has set itself on course to become poorer much faster than the one it was already on.

We suggest all American real estate be sold whether an individual falls under FATCA rules or not.  One should also limit their investing in U.S. shares.  If one owns American shares already, you should plan on selling the majority of them over the next few years. 

FATCA might have a temporary positive effect on the Greenback because it has the potential to lower the budget deficit over the short-term.  However, FATCA should force the Greenback lower against all major currencies over time because it will scare away investment dollars and will force down the value of U.S. assets.  It also supports our belief that Western Canada is, and will be for years to come, the number one place to invest in and live.  Western Canada will easily outperform the U.S. for many years to come.